HC Deb 06 July 2004 vol 423 cc729-41

'Schedule (Overseas pension schemes: migrant member relief) contains provision about migrant member relief in respect of contributions under overseas pension schemes.'.—[Ruth Kelly.]

Brought up, and read the First time.

The Financial Secretary to the Treasury (Ruth Kelly)

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

With this it will be convenient to discuss the following: Government new clause 13—Non-UK schemes: application of certain charges.

Government new clause 14—Appeal against decision to exclude recognised overseas pension scheme.

Government amendments Nos. 111. 114 to 116, 118, 126 to 131, 133 to 137 and 149.

Government new schedule 1—Overseas pension schemes: migrant member relief.

Government new schedule 2—Non-UK schemes: application of certain charges.

Ruth Kelly

The new simplified regime for taxing pensions will provide a more flexible regime that is much less heavily regulated than the existing eight regimes. That should prove attractive to individual pension savers and reduce costs and increase flexibility for the industry. Our aim is to make saving within the new simplified regime as simple, fair and attractive as possible for all pension savers. However, there will be some groups—individuals who come to the UK from overseas—for whom it makes sense not to move into the UK's tax-favoured regime. For example, individuals may prefer to continue to contribute to their home state pension schemes, or might even be obliged to continue to be members of such schemes.

Under the current regimes, there is provision for individuals to get UK relief for contributions made to their home state schemes. Those provisions are important in maintaining the UK's competitiveness as an attractive place to come to work. Briefly, individuals may currently claim relief for contributions to overseas schemes that correspond to UK schemes either under a double taxation agreement, or the existing corresponding relief rules.

It is, of course, important to maintain the UK's competitiveness as an attractive place to work and do business. We will therefore be keeping these two routes to relief in the new regime. However, we will simplify and rationalise the conditions for getting relief under the new corresponding relief, which is to be known as migrant member relief in the future. The rights to relief under a double taxation agreement will, of course, remain as they are under the terms of existing agreements. The new rules will ensure that the relief under both routes will have an appropriate fit with the new regime. Government new clauses 12 and 13, which introduce new schedules 1 and 2, and amendments Nos. 111 and 115, provide for these two routes to relief and set out how certain tax charges will apply to overseas schemes.

New clause 12 and new schedule 1, which it introduces, make provision for individuals and their employers to claim tax relief on contributions to certain overseas schemes. The migrant member relief that they introduce will be available to relevant individuals and their employers. The new rules are more generous than the existing ones for corresponding relief and match the new rules for relief in respect of contributions made to registered pension schemes. We are extending the qualifying criteria, both in terms of the individuals who can qualify for relief, and what constitutes a qualifying overseas pension scheme.

Internationally mobile overseas individuals who come to the UK to work for a period of time and continue to be members of an overseas pension scheme will be able to claim migrant member relief on pension contributions up to the level of their UK chargeable earnings. Employers will be able to claim tax relief on contributions paid in respect of these employees, and employees will not be taxed on the benefit of an employer's provision of retirement benefits in an overseas scheme. Individuals will be entitled to claim migrant member relief against earnings chargeable to tax in the UK, providing that they come to the UK as a member of a qualifying overseas pension scheme and that they joined that scheme when they were not resident in the UK.

Additional conditions are that such persons must have been UK residents when they paid the contributions on which relief was claimed, and that they were eligible for tax relief on the contributions in the country in which they were resident immediately before coming to the UK. Finally, individuals must notify scheme managers that they intend to claim migrant member relief. That is important because obligations are placed on scheme managers of qualifying overseas schemes to notify the Inland Revenue that a scheme is such a qualifying scheme. The scheme manager must also notify the Inland Revenue if that stops being an overseas pension scheme, and provide it with information about benefit crystallisation events relating to the individual.

New clause 13 and new schedule 2, which it introduces, will ensure that certain tax charges will apply in respect of overseas schemes when UK tax relief has been given on amounts in the fund. That will occur when there has been migrant member relief or relief under the terms of a double taxation agreement, or where a transfer has been made from a UK registered scheme to an overseas pension scheme. It is right that if UK tax relief has been given on funds in an overseas scheme, either directly or because funds have been transferred from a UK registered scheme, the same tax charges that apply to relief for UK registered pension schemes should also apply. That meets our objective of maintaining the UK's competitiveness as an attractive place to work and do business while preserving the integrity of the new regime.

There are three types of charges that might apply to an overseas scheme. First, member payment charges will apply to payments that would give rise to a UK tax charge if they were made from a registered scheme in the UK, such as an unauthorised payments charge, a special lump sum death benefits charge or a charge in respect of trivial commutation. Those charges will apply if individuals are resident in the UK in the year in which the payment is made, or resident in the UK during any of the immediately preceding five years. They will apply only to the extent that the payments are made out of funds that have benefited from UK tax relief. We have provided against double taxation by allowing credit against UK tax for foreign taxes paid in respect of those payments.

Secondly, the annual allowance provisions will apply to an overseas scheme as if it were a registered scheme to the extent to which the annual increase in individuals' pension rights under the scheme had benefited from UK tax relief. Thirdly, lifetime allowance provisions will apply to funds in an overseas scheme that benefit from UK tax relief on or after 6 April 2006. Additionally, individuals may elect for a benefit crystallisation event to occur when tax relief is no longer claimed, thus allowing individuals who leave the UK permanently to be sure that all UK taxation issues in respect of their overseas schemes are completed.

2.45 pm

Amendments Nos. 114, 116, 118, 126 to 131 and 133 to 137 are merely consequential amendments to the new clauses and schedules. To provide continuity, transitional provisions introduced by amendment No. 149 will ensure that individuals who claim corresponding relief on 5 April 2006 may continue to claim that relief even if either individuals or the scheme would not qualify for relief if applying for the first time under the new rules. However, the scheme manager must comply with benefit crystallisation information requirements in respect of contributions paid after 5 April 2006.

The new rules are flexible and transparent, and will ensure that the UK remains a competitive place for internationally mobile companies and their employees to do their business and work. They will maintain the integrity of the new regime by creating a level playing field between UK and overseas pension schemes, so I commend the new clauses, new schedules and amendments to the House.

Mr. George Osborne (Tatton) (Con)

The Financial Secretary said that the measures were simple, fair and attractive, but anyone who has tried to plough through new schedule 2 over the past couple of days would not agree that they were simple. It was not especially fair that the provisions were it introduced at the last moment because that meant that the industry did not have the chance to comment on them at all. As for whether they are attractive or not, we will have to take the Financial Secretary's word that they are more generous than the current arrangements.

My colleagues have already made the point that it is unsatisfactory for new clauses and amendments to be introduced on Report, but it is especially unsatisfactory when they relate to the aspect of the Bill that deals with reform of pension taxation. As the Financial Secretary well knows, that matter has been subject to lengthy consultation over a couple of years, which I praised in Committee as a good example of the way in which to consult because the Government listened and changed their proposals on various occasions in the light of what the industry said. Unfortunately, she has blotted her copybook right at the end of the process by introducing a substantial change to the situation regarding overseas pension schemes without any consultation. The provisions were tabled on Friday and we are discussing them a couple of days after the weekend, so the industry has thus had no chance to have its say. The situation is especially unsatisfactory because we discussed the matter in Committee only a couple of weeks ago. Will the Financial Secretary tell us why the proposals have suddenly appeared on the doorstep so late in the day?

Will the Financial Secretary tell us something about the missing details? For example, amendment No. 111 is important because it defines an overseas pensions scheme as a pension scheme … which … is established in a country … outside the United Kingdom"— one might have guessed that about an overseas pension scheme— and … satisfies any requirements prescribed for the purposes of this subsection by regulations made by the Board of Inland Revenue. Are those regulations available so that we can look at and discuss them? Will the Financial Secretary tell us the requirements that will be imposed on those schemes, apart from the fact that they must be overseas pensions schemes?

Turning to the substance of the Government's proposal and the new concept of migrant member relief, the Financial Secretary implied when discussing new clause 12 and new schedule 1 that the measures were designed for non-UK citizens who came to work in this country. Does she anticipate that they will be used by UK citizens who go to overseas countries in which they enter into pension schemes before coming back to the United Kingdom? She seemed to be talking only in terms of non-UK nationals.

I accept what the Minister is trying to achieve in new clause 13. The schedule that it would introduce is complex, but explanatory notes have not been produced. When I was dealing with the Pensions Bill many new clauses were introduced on Report—indeed, parts of the Bill were virtually rewritten—but the Department for Work and Pensions produced explanatory notes to clarify what they were doing. There are no explanatory notes, however, for the Finance Bill or, if there are, I have not seen them.

Government new schedule 2, as the Financial Secretary made clear, is an attempt to ensure that a member of an overseas scheme eligible for UK tax relief cannot evade the rules on, for example, the annual allowance, short service refunds and trivial commutations, and is charged as if the scheme were a UK one. I accept what the Financial Secretary said about protecting the country's tax base, the Exchequer's interests and so on, but what would happen if the Inland Revenue's rules conflicted with the rules of the host country? That is unlikely to be the case with the annual allowance—presumably one would just look at the lower annual allowance in the other country—but the rules on trivial commutation or short service refunds may be substantially different elsewhere. There may be a requirement, for example, to provide a trivial commutation, which in the UK would push the member above the 1 per cent. limit on trivial commutation. How would conflicts between the rules or laws in this country and those in the host country be resolved?

What reporting requirements will be placed on overseas schemes? Government amendment No. 115 deals with that, but the Government are proposing to introduce a much lighter-touch regime for all pension schemes that will focus on registration rather than approval. There is concern that that is too light a touch for the UK, but there will be an even lighter-touch regime for overseas schemes. Is the Inland Revenue in a position to police the regime? Will it poke its nose into overseas schemes to make sure that they are providing accurate returns? How on earth will it know whether someone has received a trivial commutation or a short service refund? One hopes that operators of the scheme are honest about the requirement and that members are honest about their refunds, but there is no mechanism for the Inland Revenue to police the proposals. It may rely on the Exchequers of overseas Governments or on pensions regulators in other countries, but is the Financial Secretary satisfied that those safeguards will be adequate and that the Treasury will be on top of the situation?

The Financial Secretary and the Treasury are anxious to prevent the possibility of the new pensions taxation regime from being used as a tax avoidance mechanism. The annual allowance, she explained in Committee, was introduced for precisely that reason, as there was scope for people to come here, set up a scheme, put a lot of money in and then depart. I assume that she is satisfied with the measures that she has introduced to tackle that problem but, as we have not had an opportunity to question her about them, is she content that they will not be open to abuse? How do the proposals relate, if at all, to the EU pensions directive, or, to give it its proper name and get the snappy EU jargon on the record, the directive on the activities of institutions for occupational retirement provision?

The Opposition welcome attempts to create more of a single market in the financial services industry, and believe that the UK financial services industry is well placed to do extremely well and sell its products to other European countries. There are, however, great concerns about the directive. For example, it could cost UK schemes up to £300 billion—that is an extraordinary figure, but I have checked it, and the industry assures me that it is correct. Christine Farnish, the chief executive of the National Association of Pension Funds says that the directive is very dangerous and very costly to UK schemes, and because the rules cannot be scheme-specific, will no doubt lead to endless battles in the courts. It is ridiculous; it is not in the real world. The directive attempts to allow people to build up a pension as they move between member states. Many new clauses added to the Pensions Bill on Report were meant to ensure that we complied with the directive. Do the present proposals belong to the same category, and can the Financial Secretary clarify whether they are an attempt to make sure that we comply with the directive? As I said, on a first glance—the Government tabled them only on Friday—the amendments do not appear to be unreasonable. We do not want people to come and work here and build up pension provision—we want people in this country to be able to go and work abroad and build up their pension provision. We are not against the principle behind the proposals, but I should be grateful if the Financial Secretary would provide us with assurances about their practicality and the reporting requirements on overseas schemes and their policing. How will she deal with conflict, if it arises, between the rules in this country and the rules of host countries? Will she explain to the House why the proposals have been made at the last moment, and why we still do not have many important regulatory details?

Mr. Quentin Davies

I shall start with negative strictures and concerns before making some positive points.

It is unsatisfactory that the Government should introduce legislation at the last minute without consultation. There are only two acceptable excuses for introducing substantive new clauses on Report. First, the Government might have to respond to events that they could not have anticipated. The Paymaster General made that excuse—it sounded reasonable, given the background that she described—when she introduced Government new clauses 9 and 10, and the House accepted it. The second reason is if the Government for once take account of debate, discussion and consideration in Committee and have a genuine rethink in the light of Parliament's reaction to their original proposals. That is how Parliament should work, and how it did work for hundreds of years before 1997. I hope that it will work that way again as soon as possible.

Unfortunately, however, neither of those excuses is available to the Financial Secretary, but if she proves me wrong I shall be pleasantly surprised. It is unsatisfactory, as my hon. Friend the Member for Tatton (Mr. Osborne) said, that explanatory notes are not available—at least, they were not half an hour before our proceedings began this afternoon, when I went to the Vote Office in the hope of finding them. Of all the epithets that the hon. Lady could reasonably use of her new clauses—I shall use some nice ones in a moment—"simple" is not one of them, as they consist of seven or eight pages of complex measures, including equations and so on. Explanatory notes would have helped our debate, and Parliament has been treated with something less than courtesy. Indeed, insufficient consideration has been given to the importance of our role. I hope that we receive an apology, and that in future the Treasury will try to do a bit better on both those fronts.

I have a more technical concern that is linked to the points made by my hon. Friend the Member for Tatton about the annual limit and the way in which it will be monitored or enforced. What is the position of people who are in danger of exceeding their lifetime limit because they are highly paid and have substantial pension provisions? Would it not be sensible for them to go abroad to join a qualifying foreign scheme, and then return here? A multinational company will have work forces and pension schemes in different countries—certainly in the European Union and north America—so in principle it should not be too difficult for someone who is transferred to another country to join another scheme. The person could presumably return to the United Kingdom and accumulate any amount up to another lifetime limit and enjoy the benefit in retirement.

3 pm

How will the lifetime limit be monitored? Perhaps the answer is that a separate lifetime limit will be applied to contributions to overseas schemes while people are in this country. I am sure the Financial Secretary has thought about that. She did not deal with it in her introductory remarks, but perhaps she will do so.

Let me make some more positive comments, as I said I would. Despite my earlier remarks, it would be churlish not to praise the Government for having tried to move in the right direction. It is economically important that there should be no undue obstacles to people coming to work in the UK. In theory, the more highly paid they are, the greater the value they will add to our economy while they are here. It is important for high-tech industries, the City and so on that they should come to the UK to work. We all know that pensions can be a major obstacle to labour mobility. The Government are to be praised for trying to remove some of the obstacles.

The Financial Secretary, to give her her due, clearly set out the purpose of the new schedule. I thoroughly agree with that, but perhaps we could look at the other side. It is true that the British economy will benefit from the removal of obstacles, and individuals coming from abroad and supposedly returning abroad before they take their retirement pension will also benefit. There seems, therefore, to be a basis for reciprocity and for negotiation with countries especially those in the EU, with which there is a reasonable exchange of labour, particularly highly paid professional labour. We should try to negotiate some reciprocal benefits for UK residents or citizens who go to other countries, especially in the EU, and wish to continue to contribute to a UK scheme on the basis that their contributions will be tax deductible, to allow them to enjoy the mirror-image benefits of those being introduced under the new schedule.

The Financial Secretary did not say anything about that dimension, but I should be interested to know whether an attempt has been made to generate some reciprocity and whether—this point was rightly made by my hon. Friend the Member for Tatton—the measure contributes to the emergence of a European pensions directive, which would be highly desirable. It is a major obstacle to labour mobility within the EU—a cause to which we all strongly subscribe—that differential pension regimes exist. In some countries, contributions are tax deductible, but in others they are not. In some countries, there are limits to tax deductibility, whereas in other countries there are not. In some countries, pensions in payment are relieved of tax, but in other countries, such as the UK, they are not. The situation is immensely confusing.

No doubt there are many opportunities for clever arbitrage—building up one's pension in a country where tax deductibility is high, and taking the pension in a country where the tax regime for pensions in payment is the most favourable—but there are also ample opportunities for getting it wrong in both directions. People who are in danger of doing that will not move, so our labour resources are not used as efficiently as they could be if the obstacles were removed.

It is important to achieve a European directive on pensions. It has been under consideration for an enormously long time. I do not remember when the idea was first mooted, and it is a major failure of the EU's efforts to build up an effective single market that a pensions directive still has not been agreed. I do not want to attribute blame—I would not know how to do so. I have not studied the matter sufficiently in respect of the Council of Ministers, the Commission and so on, but I am happy to allocate blame in general and say that the present position is not good enough and that progress ought to be made.

My question to the Financial Secretary, which is germane to the new clause, is to what extent the new clause has been considered in that context, as a basis for negotiating bilateral reciprocal arrangements with relevant other countries, and as a contribution to solving the enormous difficulties in finally getting agreement and launching the European pensions directive. If the hon. Lady has made a contribution to that, she will have done a very good day's work indeed for the economy.

Ruth Kelly

There has been an extremely interesting exchange covering all sorts of issues. I can only apologise to the House for the fact that the new clauses were introduced at such a late stage. Clearly, it would have been desirable to introduce them in Committee. The new rules for migrant member relief are based on proposals that were set out in the December 2003 consultation paper, so they should not come as a complete surprise to hon. Members.

It was clear that the main rules for the new simplified regime were of most concern to employers, scheme providers and scheme members in the UK, but the migrant member rules are important to admittedly smaller numbers of people, and we wanted to introduce them during the current year, albeit at a late stage, to make sure that the people affected by the rules would have certainty in the run-up to the introduction of the measures in 2006.

I believe that the explanatory notes are available on the Treasury and Inland Revenue websites, and they were placed in the Library in the standard way. I have not checked personally, but I am assured that that happened. I apologise if there was any difficulty in getting access to them.

The draft regulations will be published over the summer and, as with the other pensions regulations, interested parties will be able to comment on them at that stage. Again, it is unfortunate that it was not possible to finalise the draft regulations in time for the debate, but the industry and others affected by the proposals will have ample opportunity to contribute to their formulation in due course. I am happy to summarise what the regulations made under the two new overseas schedules will do.

There will be four aspects to the overseas pensions regulations. First, the regulations will set out the detail of the conditions that must be met for an overseas scheme to be a scheme in respect of which an individual may claim migrant member relief, or a scheme to which funds from a UK-registered scheme may be transferred. Secondly, the regulations will set out the information reporting requirements that an overseas scheme must comply with in order for its members to be eligible for migrant member relief, or in order to receive funds transferred from a UK-registered scheme.

Thirdly, the regulations will set out the way in which the tax rules for registered schemes will be modified for application to overseas schemes. Finally, the regulations will provide detailed rules for identifying which part of the funds in an overseas scheme has benefited from UK tax relief. That is important for identifying, for example, which part of an overseas fund an authorised payments charge may apply to. Some of the questions raised by the hon. Member for Tatton (Mr. Osborne) touched on issues that will be covered in the draft regulations.

Mr. George Osborne

Will there be a restriction on the countries in which an overseas scheme could be registered?

Ruth Kelly

As I understand it, the regulations will cover all overseas schemes. To get it absolutely right for the record, I will write to the hon. Gentleman specifying the countries to which they apply.

On the hon. Gentleman's point about whether the provisions could be used by UK nationals, there would be no bar to UK nationals claiming migrant member relief, provided they met the relevant conditions in the way set out in the Bill—for example, that they were not resident in the UK and were a member of an overseas scheme and eligible for tax relief in their country of residence immediately before coming to the UK. UK nationals can benefit in exactly the same way as with other schemes.

The hon. Members for Tatton and for Grantham and Stamford (Mr. Davies) were interested in how we could enforce the tax charge in overseas schemes. I understand that that is an area of particular concern, and I have considered it in some detail. There are two ways in which that might be done, depending on how individuals benefit from migrant relief.

First, a UK-registered scheme might be transferred into an overseas scheme, which is by far the simplest case. In that case, a migrant worker comes to the UK, benefits from UK tax relief, transfers money from a UK-registered scheme into a scheme in a different country and, after benefiting from that tax relief, returns home. A UK-registered scheme will be able to transfer a member's fund to an overseas scheme under the new regime. The overseas scheme must be regulated as a pension fund in its country of establishment and undertake to comply with information reporting requirements regarding payments made to the member.

Such a transfer would, in itself, count as a benefit crystallisation event, which is a concept that we debated at length in Committee. Any funds transferred in excess of the lifetime allowance will be subject to the lifetime allowance charge at the time of transfer. The UK scheme will, of course, know whether the funds exceed the member's available lifetime allowance, and, along with the member, it will be jointly liable for any lifetime allowance charge. The situation on transfers is straightforward: any excess relief granted over and above the lifetime allowance will be recouped at the point of transfer, so there is no need to worry about collecting a lifetime charge decades after the individual has left the UK.

Secondly, the situation is more complex when funds in an overseas scheme receive migrant member relief, because there is no transfer between schemes at which a benefit-crystallisation event occurs. Again, such an overseas scheme must be regulated as a pension scheme in its country of establishment and undertake to tell the Revenue about any benefit crystallisation event involving the member. The individual will tell the scheme that they are claiming migrant member relief, so the scheme will know the cases in which it must tell the Revenue about benefit crystallisation events. Any contributions that enjoy migrant member relief, including employer contributions, will count towards the individual's annual allowance. The individual will then need to claim migrant member relief and self-assess any contributions in excess of the annual allowance.

The lifetime allowance will also apply to amounts within the member's fund that enjoyed migrant member relief. Those amounts, which are calculated by reference to total pension inputs, are tested against the lifetime allowance on the same benefit-crystallisation events that apply to UK-registered; schemes. The individual, however, will be solely liable for any lifetime allowance charge due.

Mr. Osborne


Ruth Kelly

I intend to elaborate further on how the scheme will operate. If the hon. Gentleman waits for a few moments, I may answer his point.

If an individual comes to the UK, contributes fairly large amounts each year to a UK pension scheme underneath the annual allowance limit and returns to their country of origin, they cease to benefit from UK tax relief, and a benefit crystallisation event will occur some years down the line at the point of retirement. In that case, no annual allowance charge will be imposed, but, depending on the lifetime allowance at the point at which that individual retires, a lifetime allowance charge may be due. The overseas scheme should tell the Revenue about such a benefit crystallisation event, and if it fails to do so it will cease to qualify for migrant member relief. The Revenue will know that a benefit crystallisation event occurred and the total in the fund, so it will be able to risk-assess the situation and concentrate its efforts on larger cases.

The scheme, the Revenue and the individual will have various records of the pension contributions made to the scheme, and the Revenue will be able to call on further information from the member and the scheme. That provision will deal with the problem in normal situations, and I emphasise that it will cover only those who accumulate large sums above the lifetime allowance.

Where a member is resident in a treaty partner country, EU directives such as the mutual assistance directive, the exchange of information provisions or the double taxation agreements will apply, but in the vast majority of cases individuals claiming migrant member relief will get nowhere near the lifetime allowance. The annual allowance limit is designed to slow the rate at which the individual accumulates UK tax-relieved funds. Migrant workers tend to come to the UK for short periods, so it will take them a long time to accumulate a fund in excess of the lifetime allowance.

3.15 pm
Mr. Quentin Davies

I recognise that this point will apply only in a minority of cases, but the Financial Secretary's second approach to monitoring potential breaches of the lifetime limit is premised on the overseas pension scheme arranging its accounts so that it knows not only what proportion of the total fund is due to an individual, but what proportion of that personal element in the fund derives from contributions made during that individual's employment in this country. In the case of a defined contribution British pension scheme, it is not possible to allocate a percentage of the fund to an individual. The only way in which the Financial Secretary can achieve her purpose is to wait until the pension is in payment, and then apply her multiple of 20. Unfortunately, she will not know how much of the total pension in payment derives from contributions made during employment in this country, and how much of it derives from or relates to provisions made in respect of that individual's employment overseas.

Ruth Kelly

Not only the scheme but the individual may hold useful information to deal with that point. The Inland Revenue also holds records, which it obtains in various different ways in the UK, and it can base its risk assessment on them.

Mr. Davies

The Financial Secretary is unduly optimistic, because the Inland Revenue will have access only to contribution records for the period of residence in this country, and it will not know information such as the capital gain and the interest gain accumulated over the 20 or 30 years before the pension is paid. It will not be able accurately to asses the capital gain and interest that accumulates on contributions made throughout the rest of the individual's career, when they are not resident in this country.

Ruth Kelly

The hon. Gentleman is right, which is why in the case of overseas schemes we will calculate the total pension input contributions, rather than the total size of the pot, when testing the lifetime allowance charge. That is the practical response to some of the issues that he raised.

The hon. Gentleman is also interested in EU fundamental freedoms, which dictate that migrant member relief must give relief on the same terms and to the same extent as relief is given for contributions to UK schemes, and he understands why that is the case. We must apply the lifetime allowance at the same time at which it would apply to a registered scheme.

Mr. George Osborne

Before the Financial Secretary turns to the European aspects of the matter, there are a couple of other practicalities. What happens if an overseas scheme transfers to another overseas scheme that transfers to another overseas scheme? Is it possible that the Inland Revenue would lose track of such a pension fund? I know that the Financial Secretary will write to me on the countries in which schemes may be set up, but if a scheme were set up in the Cayman islands and a person became resident there for a couple of weeks, could the Inland Revenue lose track of the situation? In which currency will the calculation be made—presumably the answer is sterling—and when will the exchange rate be calculated?

Ruth Kelly

The rules for collecting debts that leave the country with a foreign national will apply in the usual way. The mutual assistance and recovery of debt directive applies in EU countries, and the information provisions apply in respect of other territories—the hon. Gentleman mentioned the Cayman islands in particular.

The lifetime allowance charge is not a perfect science, and difficult cases involving practical difficulties in recovering debts will occur—difficult cases may occur whenever individuals leave the UK with debts that remain payable. However, the vast majority of people who come to work in the UK—for example, an American national working in the City of London—are here for a relatively short period, and will not be able to accumulate sufficient sums to make them liable for the lifetime allowance charge. For the vast majority of individuals, there is no problem whatsoever; and there are ways of recovering the charges due for a very small number of individuals with extremely large pension pots. However, for the reasons of fundamental freedoms that the hon. Member for Grantham and Stamford espoused, but also to be fair and to retain the competitiveness of the City of London and to maintain Britain's attractiveness as a place to work and do business, we think that this is a reasonable provision.

Mr. Quentin Davies

Before the hon. Lady draws her remarks to a close, will she address the issue of the European pensions directive?

Ruth Kelly

I am not yet drawing to a conclusion, as I still have some points to deal with.

The hon. Member for Tatton asked what would happen if the foreign scheme rules did not match UK rules. I assure him that the regulations will amend the UK rules so that they apply to overseas schemes in a way that broadly corresponds to UK rules. That avoids problems relating to slight differences in rules. Generous UK relief is given on these contributions, and it is right that those who benefit by them should comply with UK rules. The requirements that overseas schemes will have to fulfil are set out in clause 140, which we discussed at length in Committee. The draft regulations that will be published in the summer will be revised to make a small distinction between schemes to which migrant member relief will apply and schemes to which transfers may be made; apart from that, they will be as published in clause 140.

I have already touched on some of the reporting requirements with which an overseas scheme will have to comply in order for its members to be eligible to claim migrant member relief or to receive transfers from UK-registered schemes. For example, a report will be required when an overseas scheme makes an unauthorised payment to an individual who has had migrant member relief.

The UK has a system of double taxation agreements, many of which provide reciprocity for pension contributions. We want to encourage that, because it provides a valuable means of assistance to people who work in different countries and encourages labour mobility.

The EU directive that was mentioned during the debate deals with how pensions schemes are regulated, but not with their tax treatment. We are firmly of the opinion in the UK that it is up to each country to determine how their pension funds are treated for tax purposes, because that is fundamental to national sovereignty. I am sure that Conservative Members would concur with that.

Following that extensive explanation, I hope that Conservative Members will agree that this is a valuable provision that will continue to make Britain and the United Kingdom a very attractive place in which to work. I apologise for the fact that the new clauses have been introduced late in the day, but rather than defer them to the next Finance Bill I thought it wise to give the small number of people who will benefit from the provisions the additional certainty of an extra year; and of course they will have time to comment on the draft regulations as and when they are published.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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