Finance (No. 2) Bill (Fifth sitting)
(1 day, 10 hours ago)
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The Chair
Good morning, ladies and gentlemen. Before we continue our line-by-line scrutiny, let me remind the Committee of the usual housekeeping arrangements. Please switch all electronic devices to silent mode. No food or drinks, except the water provided, are permitted during sittings of the Committee. Hansard will be grateful if Members can give their speaking notes to the Hansard colleague in the room or send them by email. Please do bob; the Chairs do not have second sight, so it helps to know who wants to speak.
The selection list for today’s sitting is available in the room and on the parliamentary website; it shows how the clauses, schedules and selected amendments have been grouped for debate. I hope that by now you are beginning to get used to the process by which that is done, but, as always, if you have any questions please do not hesitate to ask them.
Clause 112
Excise duty: charge
Question proposed, That the clause stand part of the Bill.
The Economic Secretary to the Treasury (Lucy Rigby)
It is good to be back, Sir Roger.
The vaping products duty is a new excise duty on vaping products manufactured or imported into the UK from 1 October 2026. The changes made by clause 112 will create a new charge to excise duty and set out the rate, which is £2.20 per 10 ml, rounded down to the nearest penny. The changes made by clauses 113 and 114 will define a vaping product and what constitutes production for the purposes of the vaping products duty. The changes made by clause 115 make clear the powers under which regulations on the vaping products duty will be made, in anticipation of its entry into force on 1 October 2026. Finally, the changes made by clause 116 will allow HM Revenue and Customs to manage and collect the vaping products duty and provide administrative powers around the storage of vaping products before duty has been paid, as well as penalties.
Together, clauses 112 to 116 will establish a coherent and enforceable framework for the vaping products duty and will ensure that vaping products are taxed appropriately. I commend them to the Committee.
James Wild (North West Norfolk) (Con)
Good morning, Sir Roger and members of the Committee. As the Minister says, clauses 112 to 116 will introduce the UK’s excise duty on vaping products and set out the legal and administrative framework for its operation.
Clause 112 will establish the new vaping products duty, setting a flat rate of £2.20 per 10 ml, rounded down to the nearest penny. Clause 113 sets out what counts as a vaping product; the definition is drawn deliberately widely to encompass any liquid that contains nicotine and the solvents used with it, and even liquids without nicotine if they are intended for vaporisation. That means that the apparently popular zero-nicotine shortfills used by smokers who are trying to quit or taper down will be taxed, too. I am advised that shortfills will be the hardest hit by the new duty; Vape 360 reports a 203% price increase. That raises an interesting public health question about the rationale for taxing zero-nicotine liquids in the same way as addictive nicotine-containing liquids. I am interested to hear the Minister’s response to the concern that by adopting this taxation approach we might be discouraging people from switching to less harmful or nicotine-free alternatives.
Clause 114 defines when a product is regarded as produced for duty purposes, not just when liquids are mixed but when they are packaged, labelled or marketed as suitable for vapes. Clause 115 leaves it to future regulations to set out when duty becomes payable and who is liable. Clause 116, the final clause in this group, gives HMRC new powers to control vaping products before duty has been paid. The Opposition will not oppose the clauses, but we do want to probe the Government’s thinking.
Vaping has become increasingly common across the UK. According to the Government’s own tax information and impact note, approximately 5 million people in the UK vape. For the first time, according to the Office for National Statistics, more over-16s in Great Britain are using vapes or e-cigarettes than are smoking cigarettes: 5.4 million adults vape, compared with 4.9 million who still smoke.
The duty was first announced by the then Conservative Government in the spring Budget of March 2024. Alongside the announcement, a consultation was launched on how the duty should work in practice. The Government have since opted for a flat-rate duty rather than the three-tiered structure originally proposed, which would have varied the rate according to nicotine strength. Having read the responses to the consultation, I know that that decision clearly reflects the bulk of the evidence provided and will create a system that is simpler to administer. As the Exchequer Secretary might say, that is evidence of consultation working and the Government listening, which we are becoming very used to.
The tax will raise significant amounts: £400 million in 2027-28 and £465 million in 2028-29, with revenue then increasing further. When introducing a new tax, implementation matters. The Government’s own impact note shows that HMRC expects to spend £140 million just to deliver this measure, of which £20 million will be spent on IT systems, while the other £120 million will be for staffing and compliance costs. I will be grateful if the Minister can clarify whether the headline figure includes the £32 million contract that HMRC is currently advertising to deliver the vaping duty supply contract for five years.
As Border Force will also receive up to £10 million to prepare, delivering the new duty will cost about £150 million, all in. That is a pretty significant sum, so we need to be sure that it will provide proper value for money. Can the Minister give a little more clarity and break down the costs, particularly the £120 million on staffing and compliance? How many people will that involve bringing into HMRC? What exactly will they be doing? Why is the figure seemingly so high in comparison with the take?
Some consultation respondents have questioned whether the new duty will actually shift behaviour. If producers simply absorb the cost, as tobacco firms once did, prices may barely change, which will undermine the public health rationale behind the policy. What consideration has the Minister given to that point? Will the duty rate remain under review if outcomes fall short of the expected impact?
We can also look at the experiences of other countries such as Italy, where vape sales reportedly fell by 70% when a similar duty was introduced—not because consumers quit, but because purchases moved to the black market or unregulated online sellers. That takes us back to one of this Committee’s themes, which is about how raising taxes to a certain level drives people into the black market, and about where the sweet spot is for raising revenue without driving illegal behaviour. We will come on to the enforcement powers in some detail shortly, so I will not get into them now.
This measure will play a useful role in regulating a growing sector, but the Government need to strike a balance between discouraging youth vaping, supporting smokers to quit and maintaining a workable, enforceable tax regime that does not cost the taxpayer a lot of money. I hope that the Minister will respond to the points that I have raised, and particularly the point about zero-nicotine vapes being treated in the same way as nicotine vapes.
Lucy Rigby
It is good to hear that the shadow Exchequer Secretary will not oppose the clauses. He is right about the policy impetus behind what we are doing. For the first time in the UK, more people vape than smoke. The chief medical officer has been clear that vaping is not risk-free, and those who do not smoke should not vape.
Martin Wrigley (Newton Abbot) (LD)
Vaping is a difficult issue, particularly when it comes to recycling. I understand that vape shops are expected to take them back, but local authorities have real problems with the disposal of used vape canister things—I do not know what they are called—with batteries in them. Will the Minister consider helping local authorities with vape recycling, and providing funds to give them more facilities and a way to dispose of them?
Lucy Rigby
I am grateful for the hon. Member’s intervention, which I will come to in a second.
On the shadow Exchequer Secretary’s central point about the definition of vaping and the inclusion of nicotine-free liquids, the definition is deliberately broad to reflect how the market operates and to support what we hope will be effective enforcement. Most liquids used in vapes contain nicotine and either glycerine or glycol. The clause therefore focuses on those ingredients and on whether the liquid is intended to be vaped. Bringing into scope liquids that need to be mixed before use closes a potential loophole in a manner that I am sure we all want, because products could otherwise be sold in separate components to avoid their duty. Nicotine-free liquids are included because it would be easy to misdescribe or mislabel liquids and, in doing so, evade the duty.
The approach that we are taking will give Border Force and HMRC clear rules to work with, enabling quick decisions at the border. That is in line with how other excise regimes define products to minimise avoidance.
As to the cost of implementation, the cost of the duty stamps contract was considered in the shadow Exchequer Secretary’s beloved TIINs, but the industry will pay for it through the stamps.
Finally, the hon. Member for Newton Abbot raised a fair point about recycling. We are considering the impact of recycling and existing Government contracts, so this will be considered in the round.
Question put and agreed to.
Clause 112 accordingly ordered to stand part of the Bill.
Clauses 113 to 116 ordered to stand part of the Bill.
Clause 117
Stamping of vaping products
Question put, That the clause stand part of the Bill.
Lucy Rigby
As I stated in our debate on the previous group, the vaping products duty is a new excise duty on vaping products manufactured or imported into the UK from 1 October 2026. Clause 117 is important in setting out what a duty stamp is for the purposes of the vaping products duty and the conditions under which a vaping product is considered sufficiently stamped and compliant with the vaping duty stamps scheme.
The changes made by clause 118 will allow HMRC commissioners to appoint an approved supplier to produce and distribute vaping duty stamps. In addition, the clause allows a fee to be charged for the duty stamp, separately from the liability of vaping products duty, and explains that that charge may not be offset against duty liability.
The changes introduced by clause 119 will establish a formal approval requirement for UK businesses to purchase duty stamps under the vaping duty stamps scheme, which will allow HMRC commissioners to maintain control over the scheme and ensure compliance.
Clause 120 will ensure that overseas vaping manufacturers have a representative in the UK who is legally and financially responsible for their compliance with the vaping duty stamps scheme, to ensure robust oversight. We are safeguarding compliance by requiring overseas manufacturers to operate within the framework of UK law, strengthening control and accountability across the supply chain. There will be impacts on all overseas importers and manufacturers of vaping products, who will be required to appoint a UK representative in the manner that I have described.
Together, the clauses will ensure that the vaping products duty is robustly enforced through a secure duty stamps regime and that all manufacturers, whether they are based in the UK or overseas, are subject to clear accountability. I commend clauses 117 to 120 to the Committee.
James Wild
Clauses 117 to 120 will introduce the new vaping duty stamp scheme. The Opposition welcome the Government’s decision to move forward with a duty stamps regime for vaping products: it is, after all, a measure that can help our enforcement agencies and responsible businesses alike to distinguish legitimate duty-paid products from those that are illegitimate and being traded illicitly and illegally. We know that there is a substantial illicit market for vapes across the country; without a credible system of verification and traceability, it will continue to undercut legitimate producers, harm public health and cost the Exchequer millions of pounds in lost revenue, so we need to address it.
Clause 117 will establish the legal framework for the duty stamps system. It defines when a vaping product is considered to be stamped, and it sets out that the duty stamp, whether affixed to the product or to its retail packaging, must comply with regulations made under the Bill. Importantly, the clause will enable each stamp to be digitally linked to the product that it marks, and will allow HMRC to collect specified information about those goods, marrying the physical and digital trails of compliance. That is a positive step, and I am pleased that the Government have adopted at least some of the approach for which the Opposition argued during the passage of last year’s Finance Bill when we considered the introduction of the duty stamp regime.
In essence, these measures will bring to the vaping market a track and trace model that is similar to what already exists in the alcohol and tobacco sectors. Clearly, when used properly, such tools can be an effective enforcement system. They allow officers, retailers and consumers alike to verify legitimacy at a glance, building confidence in compliant businesses and exposing those who seek to cheat the system and the taxpayer.
We should be clear, however, about the scale of the challenge that could be created for smaller manufacturers and importers. In implementing this approach, we should ensure that the practical burden of stamping, activating, tracking and reporting, alongside new IT infrastructure, is proportionate for the many businesses that may not previously have had to operate at such a level of compliance. We cannot allow a regime that is intended to fight the black market to end up driving responsible producers to consider joining it.
Clause 118 will give HMRC the authority to issue and manage the duty stamps and to charge administrative fees. It also allows a third-party issuer to be appointed, as I referred to in my comments on the previous group of clauses. I hope that the Minister can confirm how those fees will be set. Will HMRC consult on the level of those fees? What safeguards will exist to ensure that the fees are proportionate and transparent so that businesses do not find themselves paying unpredictable charges that bear little relation to the cost of the compliance regime?
Clause 119 will establish who can hold and use duty stamps: only approved stamp holders may do so, and they must operate from a fixed location within the United Kingdom. That makes sense in principle—it limits the opportunity for diversion or counterfeiting—but the practical implementation will matter greatly. Subsection (5) grants HMRC wide powers to restrict transfers, to define what counts as a fixed place and to cap the number of stamps issued to a business. If the system becomes too bureaucratic or opaque, small UK producers could find themselves struggling in the market while larger incumbents consolidate their position.
The Minister referred to the logic behind clause 120 and the concept of a UK representative for overseas businesses that lack a domestic base. Clearly, there needs to be someone within UK jurisdiction who can be held responsible for compliance and any penalties that may be applied.
Mr Joshua Reynolds (Maidenhead) (LD)
It is a pleasure to serve under your chairship, Sir Roger. I welcome the Economic Secretary to the Treasury back from her visit to China, which I am sure was slightly more exciting than the Thursday we had in Committee in her absence—although obviously we will never be short on excitement.
Duty stamps are proven anti-illicit trading measures. Digital tracking can enable supply chain monitoring, support enforcement and ensure that black market products are easier to identify, which makes it easier for trading standards officers and consumers to catch illegal products. However, as we have seen with duty stamps on spirits, there is significant counterfeiting within the market, so it would be interesting to hear what the Minister and the Government have learned from duty stamps on spirits that they have been able to apply to duty stamps on vaping products.
It is interesting to see, in clause 118, the potential cost that will be associated with these duty stamps. We have already debated the additional duty that would be applied to vapes and the closing of the gap between the price of vape liquid and the price of cigarettes in our discussion on previous clauses. How much further does the Minister think that gap will close?
Additionally, on duty stamps and being able to track sales from a specific product or potentially even from specific stores, many people in this House and among the wider public believe that quite a lot of vaping shops have links with money laundering scams. Does the Treasury have an understanding of how tracking could be used to compare the money going through on the duty stamps with the store data to see if any money laundering is going on? That may be able to help trading standards in future.
Lucy Rigby
I am grateful to the shadow Exchequer Secretary, the hon. Member for North West Norfolk, and the Liberal Democrat spokesperson, the hon. Member for Maidenhead, for their comments. I think we are all aiming for the same thing: a robust and tight enforcement of all the measures. On the shadow Exchequer Secretary’s point about moving towards a purely digital system, the reality is that that would be harder for consumers and for trading standards officers to use on shop floors, and consultation responses highlighted that it could impose greater burdens on small retailers than a visible stamp.
The scheme is designed to have a physical label with embedded digital features, and that two-factor design is central to the compliance strategy. A visible, secure stamp gives retailers, consumers and enforcement officers an immediate way to spot non-compliant products at a glance, without the need for specialist equipment. As I said, however, the digital element is very important; it is similar to a secure QR code, allowing stamps and products to be scanned and verified in real time. That two-factor design is central to the compliance strategy.
On the question of fees, they have been set to cover the cost of operating the scheme. The Government conducted a competitive tender process for the broader scheme. The shadow Exchequer Secretary is absolutely right that HMRC has promised clear guidance in this area, and that will be published in due course.
The Liberal Democrat spokesperson fairly raised a comparison with alcohol duty stamps. HMRC consulted the alcohol industry and enforcement authorities and determined that alcohol duty stamps now play a minimal role in tackling alcohol duty evasion and that more effective controls now exist. HMRC is introducing duty stamps alongside the vaping products duty because of the distinct and significant non-compliance risk associated with the vaping market; it is about the utilisation of modern technology and digitalisation to support the delivery of the vaping products duty. I hope I have explained to him that we have examined the alcohol duty comparison and do not see a direct read across.
The Liberal Democrat spokesperson also raised an important point about money laundering and anti-money laundering, which the Government take extremely seriously—in fact, we are reforming the supervisory function and compliance on AML.
Question put and agreed to.
Clause 117 accordingly ordered to stand part of the Bill.
Clauses 118 to 120 ordered to stand part of the Bill.
Clause 121
Forfeiture
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Anyone selling illicit vapes puts the public at risk and undermines legitimate businesses. One million illegal vapes were seized by trading standards in the last full year for which statistics are available, so we know that this is a significant enforcement challenge.
Clause 121 introduces enforcement powers to protect the integrity of the vaping duty stamps scheme. The changes made by clause 122 support robust compliance efforts under the vaping products duty and the stamps scheme, ensuring that only legitimate vaping products are supplied in the UK and penalising those who do not comply with the law. The changes made by clause 123 penalise those who lose stamps or attempt to use invalid stamps on illegitimate products to circumvent the rules. Clause 124 ensures that those who do not comply with the relevant regulations for the duty and stamps scheme are liable to penalties. Finally, clause 125 provides for the forfeiture of legitimate vaping products to complement the penalties imposed under the previous clauses. I commend the clauses to the Committee.
James Wild
I rise to speak to clauses 121 to 125, which set out the framework on forfeiture and civil penalties for the new vaping duty regime. As the Minister said, this is a very important part of the new regime, given the impact that illicit vapes could have.
Clause 121 establishes a general liability to forfeiture for three categories of non-compliant goods, namely: an unstamped vaping product that should bear a duty stamp, any invalid duty stamp along with the product that it is attached to, or any unused duty stamp not affixed or returned within 12 months of issue. In plain terms, it gives HMRC the power to seize non-compliant vaping products. An invalid stamp is defined broadly, and includes any stamp that has been altered, forged or voided by HMRC. Other forfeiture triggers are linked to the wider civil and criminal offences contained elsewhere in this part of the Bill, which I am sure we will come on to. These powers are designed to allow both HMRC and local enforcement bodies to remove illicit or suspect products and counterfeit stamps from circulation. That is clearly an important deterrent against the black market in vaping products.
Can the Minister assess the risk of the 12-month rule on unused stamps, and the broad definition of invalid stamps, inadvertently capturing legitimate business activity? For example, operators may over-order stamps as a contingency or make administrative errors. How will the Government ensure that, in those circumstances, genuine stock is not caught up and lost alongside contraband products? Once forfeited, what will happen to those goods? Will they simply be destroyed? It would be helpful to get clarification on that point. Crucially, what safeguards will ensure that forfeiture powers are used proportionately, and that any minor administrative mistakes by otherwise compliant firms do not result in legitimate products being seized and destroyed at the first opportunity?
Clause 122 introduces a civil penalty regime for those who sell, offer for sale or deal in unstamped vaping products packaged for retail sale. The penalties set out are banded according to scale and repeat behaviour, rising to a maximum of £10,000 for 500 or more units, with escalating amounts for repeated contraventions within a rolling two-year period. It provides a strong financial penalty and a disincentive for retailers and wholesalers to stock unstamped products, and it complements the criminal provisions that follow later in this part of the Bill.
Clause 123 creates penalties for approved stamp holders who lose stamps or fail to use, return or destroy them within 12 months of issue, unless they can demonstrate that they took all reasonable steps to prevent loss. In those circumstances, the penalty is set at five times the monetary value of duty per lost stamp, equating to £11 per stamp when the scheme goes live. That comes alongside the existing Finance Act 1994 penalties for altering or misusing stamps. The intention is clear: to encourage tight control of duty stamps, treating them almost as cash equivalents, and to discourage casual or insecure handling that might enable diversion or counterfeiting, which is welcome.
Clause 124 introduces a broad, catch-all civil penalty for failure to comply with the vaping products duty regime using section 9 of the Finance Act 1994 as its legal framework. That is intended to ensure that HMRC can act where non-compliance occurs, but no specific penalty is written into the legislation, reinforcing the need for accurate record keeping and full compliance with operational rules. I can see why a general power may be convenient for HMRC, but for smaller businesses it could increase the risk of innocent mistakes attracting financial penalties. How will HMRC ensure that this general power is used proportionately? Will education and guidance be issued to firms?
Mr Reynolds
I have few points to make about clause 122, which refers to a
“person who sells…unstamped vaping products”.
I would be grateful if the Minister could confirm whether that person is the shop owner, the shop manager or the shop worker who is physically behind the till on that day. Could an 18-year-old shop assistant be charged the £10,000 fine? The phrase “a person” needs a definition. If that person leaves the business in which they serve, will the fine stay with the individual, or will it be on the business? Could somebody get around this clause by closing down their limited company and opening a new one tomorrow, so the offence would then be their first?
Lucy Rigby
The comments of the shadow Exchequer Secretary, the hon. Member for North West Norfolk, refer to the deliberately tough nature of the enforcement regime; there is a real emphasis on deterrence, and there are penalties that apply. It includes the forfeiture powers, which are targeted at serious non-compliance. Where retailers are found selling unstamped products outside duty suspense or breaching key obligations under the scheme, HMRC and Border Force will have the power to seize associated vaping products, including legitimate duty-paid stock. As I said, that is part of a deliberately tough enforcement regime and is a strong deterrent aimed at those who choose to mix illegal products with legitimate ones on the same premises. I am sure we all understand that without such powers, rogue traders can treat penalties as simply a cost of doing business while continuing to profit from illicit trade, and I am sure we all want to avoid that.
The shadow Exchequer Secretary made a number of points about ensuring that the use of powers is proportionate. Given the judicial or criminal processes associated with the use of these powers, it is entirely fair to say that all the usual processes around charging, in a criminal sense or otherwise, will apply. Inherent within those processes are balance and fairness, including taking into account the rights of the accused.
It is good to mention the draft guidance, which will be shared with HMRC-run industry groups well ahead of the go-live date on 1 April, which I hope is sufficiently specific for the shadow Exchequer Secretary. He will be pleased to know—he may already know—that the interim guidance is already on gov.uk, if he is stuck for things to do this evening. I think I am right in saying that the points raised by the Liberal Democrat spokesperson, the hon. Member for Maidenhead, as to liability under these offences will be made explicitly clear in the guidance, such that there is no doubt in those circumstances.
Question put and agreed to.
Clause 121 accordingly ordered to stand part of the Bill.
Clauses 122 to 125 ordered to stand part of the Bill.
Clause 126
Dealing in duty stamps
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Clause 126 introduces two new criminal offences, to which we have already alluded, for possessing or transferring duty stamps in contravention of the scheme rules. Clause 127 introduces the two new criminal offences that I have just described, and sets out a defence for the purposes of those offences. Clause 128 introduces the power for a court to ban the sales of vaping products, along with an associated criminal offence for non-compliance with the order. Clause 129 sets the level of the penalty associated with the offences, according to the respective legal systems of the devolved nations. Clause 130 introduces additional powers to allow HMRC to enforce the new rules around vaping products by taking illicit products off shelves.
In summary, the clauses represent a comprehensive suite of enforcement tools that support the Government to address the illegal trade and support the legitimate industry. I therefore urge that clauses 126 to 130 stand part of the Bill.
James Wild
Clause 126 creates new criminal offences relating to the possession and transfer of unstuck duty stamps. In plain terms, it becomes an offence for anyone who is not an approved stamp holder to possess a duty stamp that has not been affixed to a vaping product, or to transfer such a stamp to someone else. As the Minister says, the Bill allows a defence where the person did not know or have reason to suspect that they were handling an unstuck stamp, and carves out sensible exemptions, such as transfers between UK representatives and overseas principals, or during commercial delivery and returns.
I would be interested to know what assessment the Treasury has made of the level of abuse that it expects under this regime. HMRC and trading standards are being given a budget for enforcement. Underlying that, there is presumably some assumption about the level of abuse of this system, so it would be interesting to have a flavour of that, given that all of us will be familiar with vape shops and associated issues from our constituencies.
Clause 127 creates criminal offences for possessing, transporting, displaying, selling or otherwise dealing in unstamped vaping products. It also criminalises managers of premises who “cause or permit” the sale of unstamped goods. Under the definition in subsection (4), a manager of premises
“is a person who…is entitled to control their use…is entrusted with their management, or…is in charge of them.”
To pick up the example raised by the hon. Member for Maidenhead, if an 18-year-old is in charge of the premises such that they are unlocking on the day and will be locking up, are they the person, the individual, who could get the fine for dealing in the product, even though they may have had no role whatever in securing the stock and are simply there, getting their minimum wage payment to look after the shop? I would be grateful if the Minister could unpack what subsection (4) means in that sense.
It is right that deliberate participation in the illicit vape trade is met with serious, fierce sanctions. We must also make sure that any junior staff who are wholly innocent—who do not know anything about the matter and could not reasonably have been expected to—are not prosecuted for the actions of others. We need some clarity from the Minister on how responsibility in those cases would be apportioned, and we must again ensure that enforcement authorities are operating with clear guidance.
Clause 128 will enable courts, when convicting under clause 127, to make an order prohibiting the use of premises for the sale of vaping products for up to 12 months, and will create a further offence for managers who breach such an order. The power is of course intended to shut down problem premises that are repeatedly used for illicit trading. That is a tool that local authorities and trading standards officers—and, I suspect, Members of this place and our constituents—will very much welcome. There are many examples in constituencies across the country of illegal vapes being sold, and the communities near them suffer the impact of those criminal enterprises.
We support action to deter such enterprises, but we are also familiar with examples in which trading standards, HMRC or others go in and seize the illegal vapes—the police may be involved as well—and in a matter of hours, that same premises will reopen, selling more illegal vapes. It is great to have a power to shut down such premises, but how will it be enforced? Will the resources be in place to do that? Will there be clear criteria on when the powers will be used, and how a change of ownership of a premises could affect a ban? We may effectively see fake transfers of ownership to try to get around it, so it is important that HMRC and trading standards have robust systems in place.
Clause 129 sets out the penalty framework. On summary conviction, in England and Wales the maximum is the general magistrates limit—imprisonment, a fine or both; in Scotland, the maximum is 12 months and a statutory fine; and in Northern Ireland, it is six months and a statutory fine. So there is a little discrepancy there. On conviction on indictment, the maximum is two years’ imprisonment, an unlimited fine or both. That clearly allows for flexibility to distinguish between serious organised criminal offending and smaller scale non-compliance with the law.
Of course, in the Sentencing Act 2026, the Government are effectively legislating to abolish sentences of up to 12 months, with a presumption that those will become suspended sentences. That is still a penalty, but it will mean that people are in the community rather than in jail serving their punishment, as they should be. The reality is that most people breaking this law are unlikely to actually go to prison; they may simply get a fine. Will the sentencing guidance make clear distinctions between organised criminality and smaller-scale offenders?
The final clause in the group, clause 130, deals with the issue of forfeiture. It goes beyond the general rules in clause 121 by allowing all unstuck stamps or unstamped products linked to offences under clauses 126 to 128 to be seized. In some cases, all the stock on the premises—the Minister made this point—may be forfeited if HMRC believes that it is used in a business connected with the offence. That could be a welcome measure, but we need to have some clarity about how unnecessarily broad powers could potentially be used. Will there be a clear route for traders to challenge such forfeiture of legitimate products where they consider that they have inadvertently breached the rules?
Taken together, the clauses introduce serious new powers, which is why it has been worth spending a few moments considering them and how they will actually be used. I think particularly of the power to shut down a premises for 12 months; we must ensure that that is effective, and that people are prevented from seeking to get around it by pretending to sell the business or list a new owner of the business. I look forward to the Minister’s responses to the points that I have raised.
Martin Wrigley
I am afraid that my training was as an engineer, rather than as a lawyer, so I apologise if I get points of standard law wrong. However, it is fascinating to read the Bill in such detail. In clause 126(3), it says,
“It is a defence for a person charged with an offence under this section to prove that they did not know”
I am interested to hear how the Minister thinks that somebody might prove that they did not know something. It strikes me that it is something that a person cannot actually prove.
Secondly, in relation to clause 128, when a premises has been banned for 12 months, is there anything that prevents someone opening up the next-door premises and continuing exactly as before?
Lucy Rigby
The shadow Exchequer Secretary raised a point about the strong penalties associated with the regime. I have already set out the Government’s aim: that the enforcement mechanisms in the Bill are deliberately tough and are aimed at being a strong deterrent. We believe that the strong penalties, including custodial sentences, are justified due to the size of the illicit vaping market in the UK. Indeed, that goes to the shadow Exchequer Secretary’s point about our assessment of the illicit market and the assessment of abuse. We understand that there is a large illicit market in this area. The powers are deliberately tough, with the aim of ensuring that there is no circumvention.
I will now address the fair points that were made previously by the hon. Member for Newton Abbot and raised again in the context of these clauses. All prosecutions, as hon. Members will know, must meet the public interest test. The test that the Crown Prosecution Service must meet has two limbs: the evidential and public interest elements. Both limbs must be met for prosecutions to be brought. The hon. Member for Newton Abbot referred, fairly, to clause 126(3) and 127(3), which outline the defence that is applicable to both offences. As he helpfully mentioned, it is a defence for a person charged with offences under sections 126 and 127 to
“prove that they did not know, suspect or have reason to suspect”
that they were possessing or transferring a duty stamp that had not been affixed to a vaping product. In that regard, on the question about proof of knowledge, I return to the CPS’s test and to the burden of proof that applies in proceedings in the UK.
Question put and agreed to.
Clause 126 accordingly ordered to stand part of the Bill.
Clauses 127 to 130 ordered to stand part of the Bill.
Clause 131
Publication of information
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 132 to 136 stand part.
Schedule 14.
Clause 137 stand part.
Government amendments 13 and 14.
Clause 138 stand part.
Lucy Rigby
Clauses 131 to 138 and Schedule 14 set out general provisions to ensure the effective implementation of the duty and the scheme.
Clause 131 allows for the publication of information to ensure effective enforcement of the duty and the scheme. Clause 132 details the instances in which information may be shared between the commissioners and any persons with functions relating to the duty. It will allow information to be transferred in both directions, ensuring successful implementation and the proper joining up of compliance efforts. For any unauthorised disclosure, the clause includes an offence under section 19 of the Commissioners for Revenue and Customs Act 2005.
The changes made by clause 133 provide a definition for local enforcement authorities and allow them to investigate whether businesses in their local areas are compliant with the duty. Clause 134 ensures that HMRC can make regulations and publish notices to make further provisions in relation to both the duty and the scheme. Clause 135 provides that regulations must be made by statutory instrument and sets out circumstances in which the made-affirmative procedure must be followed, including any provision that extends the cases in which vaping products are required to be stamped.
Clause 136 allows for schedule 14 to the Finance Act 2020 to make changes to the Finance Acts of 1994, 2007, 2008, 2017 and 2021. Clause 137 does not make changes to legislation but merely ensures that the Bill is interpreted correctly. Clause 138 provides that the duty and the scheme will commence on 1 October 2026, and that vaping products manufactured or imported before that date will be liable if a duty stamp is affixed to that
product.
Two technical amendments are proposed to clause 138. Amendment 13 clarifies the drafting to ensure elements of the regulations can come into force at the proper time. Amendment 14 puts beyond doubt that the criminal offences under these schemes can apply to vaping products, regardless of the date that they were produced or imported. The amendments ensure that the duty can be successfully administered, and neither one reflects any change in Government policy.
James Wild
We come to the final group of provisions on the important issue of the new vaping duty. I speak to clauses 131 to 138, which concern the general provisions underpinning the new vaping products duty regime. Clause 131 authorises HMRC to publish information about stamped vaping products, for the purposes of enabling retailers, consumers and other persons to assess whether a duty stamp has been activated in respect of a duty product. That is clearly a sane, sound aim, which gives retailers a way to distinguish between legal stamped products and illicit ones. However, that will only work if the data HMRC publishes is accurate and accessible. Mislabelling would harm legitimate firms, and if the system is cumbersome it will put people off using it.
Can the Minister tell us when HMRC will make available a practical, user-friendly checking mechanism—whether that is a public database, an app or some other technology—so that retailers and consumers can verify stamps quickly and easily? What safeguards will exist to correct errors swiftly where inaccurate data risks unfairly damaging a compliant business?
Clause 132 sets out a new information-sharing framework specific to the duty, letting HMRC exchange data with other bodies involved in enforcement. This is a legitimate and useful tool, but can the Minister give assurances about how the data will be logged, audited, and subject to clear internal controls?
Clause 133 delegates day-to-day enforcement to local authorities and trading standards teams, which makes sense. Last year trading standards seized over a million illegal vapes inland and detained 1.2 million at ports in England. Those powers need to be properly resourced if they are going to be effective in stamping out illegal trade, as we know that trading standards is already under considerable pressure to deliver on its various legislative requirements. It is fair to say that there is patchy implementation across the country.
What support will Government provide to local authorities to ensure consistent enforcement and genuine deterrence everywhere, not just in well-resourced areas? Counties, such as my county of Norfolk, have suffered as a result of the revised local government funding formula that the Government have put in place. I want to see them able to deal with the threat of illicit vapes in the same way as the metropolitan areas that benefit from the new formula that the Labour Government put in place.
Clause 134 gives the Treasury wide discretion to make supplementary transitional regulations under the regime. In practice, it is a broad power to fill in the blanks. Can the Minister give some confidence that it will not lead to a complex, rapidly changing rulebook? The Minister referred to the parliamentary procedure for such regulations under clause 135. To be clear, those regulations include the ability to amend an Act of Parliament, which is a considerable power. If such measures came forward, it would clearly be right to properly consult and debate them before they took effect. Will the Minister commit to formal consultation in such cases?
Clause 136 simply implements consequential amendments so that vaping products are recognised across the existing excise framework. Clause 137 deals with the definitions that determine which products fall within scope—clearly, they need to be kept up to date.
Finally, clause 138 sets the commencement and transitional arrangements. As we have discussed, businesses are expected to register from 1 April, with liability beginning from October. That is an ambitious timetable, but I am pleased to hear from the Minister that the interim guidance is available on gov.uk. I was not aware of that, so I will look it up later this evening, as she suggested.
We do not oppose any of these clauses, but I look forward to the Minister’s response on whether there will be formal consultation, particularly where Acts of Parliament will be changed by regulations. That is something every member of the Committee should expect.
Lucy Rigby
The shadow Exchequer Secretary asked about HMRC making compliance-checking methods available. There will be an app for access based on scans of products. It will be available before 1 October, and no scanning will be required before that date. He, fairly, asked a question about the flow of information. That is covered by subsections (3) and (4) of clause 132, which ensure that information can be used only for the purposes for which it was disclosed. Indeed, any other purpose would require further permission from the commissioners. Subsection (4) sets out the penalties that would apply for contravening the preceding provisions.
The shadow Exchequer Secretary also asked about the resources available to trading standards and local authorities. He mentioned Norfolk, is that right?
Lucy Rigby
Beautiful Norfolk—I know it very well. He compared Norfolk with more metropolitan areas. Local enforcement authorities, particularly trading standards, play a central role in tackling illicit vapes on the high street, and as has been mentioned, over 1 million illegal vapes have been seized in a single year under existing powers. Clause 133 gives local authorities the powers they need to conduct inspections and checks relating to both the duty and the scheme, to ensure that compliance work can be carried out effectively at retail level. That will complement the work of HMRC, which happens upstream.
We have already announced additional funding for trading standards in the context of wider tobacco and vaping measures, alongside £10 million for Border Force and the recruitment of over 300 HMRC compliance officers focused on this area. Giving these powers to local authorities, backed by additional resource, will help to ensure that the new regime is enforced on the ground and that compliant retailers are protected from what would otherwise be unfair competition.
Question put and agreed to.
Clause 131 accordingly ordered to stand part of the Bill.
Clauses 132 to 136 ordered to stand part of the Bill.
Schedule 14 agreed to.
Clause 137 ordered to stand part of the Bill.
Clause 138
Commencement and transitional provision
Amendments made: 13, in clause 138, page 146, line 24, at end insert—
“( ) Sections 114(4) (production only in accordance with regulations) and 117(1) (duty to stamp in accordance with regulations) come into force on such day as the Treasury may by regulations appoint.”
This amendment would allow the requirements to produce and stamp vaping products in accordance with regulations to be brought into force at the same time as the regulations.
Amendment 14: in clause 138, page 146, line 27, after “2027” insert
“, and have effect in relation to vaping products irrespective of when they were produced or imported”—(Lucy Rigby.)
This amendment would clarify (in light of the fact that stamping requirements are to be set out in regulations) that the criminal offences can apply to vaping products produced or imported before the Act is passed or the regulations are made.
Clause 138, as amended, ordered to stand part of the Bill.
Clause 139
Introduction to CBAM
The Chair
With this it will be convenient to discuss the following:
Clause 140 stand part.
Schedule 15.
Clauses 141 to 145 stand part.
Government amendment 15.
Clauses 146 and 147 stand part.
Dan Tomlinson
The shadow Exchequer Secretary invited the Economic Secretary to his constituency. Last week, he invited me to come on Valentine’s day to enjoy the bumper cars. I know the Economic Secretary is glad for the invite, but I am particularly glad for the one I received.
Turning to the matter at hand, clauses 139 to 147 and schedule 15 establish the core framework of the carbon border adjustment mechanism, otherwise known as the CBAM—[Interruption.]
Oliver Ryan
If the Minister is not otherwise engaged on Valentine’s day, he is always welcome in Burnley for the bumper cars.
Dan Tomlinson
Thank you. Burnley is a fantastic place to visit, and I hope to come before too long.
These clauses create the charge to CBAM, define the goods and emissions in scope, identify who is liable, and set out how the tax rate is calculated and how the relief operates. Together they form the substantive charging provisions that will underpin the operation of CBAM from 1 January 2027.
Clause 139 introduces CBAM as a new tax and signposts the structure of part 5 of the Bill. Clause 140 establishes the charge to CBAM, which applies to the emissions embodied in specified CBAM goods when they are imported into the UK. Schedule 15 defines the goods in scope, initially covering the aluminium, cement, fertiliser, hydrogen, iron and steel sectors. Clauses 141 to 143 set out when goods are treated as imported for CBAM purposes, and who is liable for the charge. In line with established customs principles, liability rests with the importer, with detailed provisions to ensure that the correct person is identified across different importation scenarios, including goods entering via Northern Ireland or subject to special customs procedures.
Clause 144 provides relevant exemptions from the charge. Clause 145 defines “emissions embodied in a CBAM good” and provides powers for the Treasury to specify, in regulations, how those emissions are determined and evidenced. Clause 146 sets out how the CBAM rate is calculated, and clause 147 provides for carbon price relief, allowing the CBAM charge to be reduced where a relevant carbon price has been incurred overseas in relation to the same emissions. That avoids double taxation while maintaining the integrity of the mechanism. Amendment 15 will ensure that the CBAM rate functions as intended, and that CBAM goods face a carbon price comparable to what would apply if the goods were produced in the UK.
The clauses are central to mitigating carbon leakage, and supporting the UK’s path to net zero.
James Wild
I am not clear from the Minister’s comments whether he has accepted the Valentine’s invitation, but I am sure I am not alone in not expecting a member of the Committee to corpse on CBAM, which some might say is a rather dry topic.
While CBAM can play a role in ensuring a level playing field for UK manufacturers and producers, it also highlights the levies and taxes applied by the Government on energy, which means that our energy prices are much higher than our competitors. I think we all want to see that burden reduced.
At the 2024 Budget, the Government confirmed the UK will introduce this new CBAM from January 2027, covering broadly the same types of highly traded carbon-intensive basic materials, and putting a carbon price on emissions embodied in certain imported goods, so that they face a comparable cost to that paid by domestic producers. Different countries clearly regulate industrial emissions to very different standards.
UK manufacturers already have to follow obligations to measure, reduce and pay for their emissions, which are costs that we think need to be ameliorated. Extending that principle to imports should, in theory, help to prevent carbon leakage and ensure it results in real global emissions cuts, rather than simply offshoring production and pollution.
As the Minister said, the new charge will initially apply to five sectors: aluminium, cement, fertilisers, hydrogen, and iron and steel. Fertilisers, which are one of the sectors brought within the scope of CBAM, are clearly a critical input for British agricultural producers, particularly for arable farms, where fertilisers already account for around 40% of crop-specific spending and around 12% of total farm costs.
The National Farmers Union has warned about what it calls a fertiliser tax, and has said that using domestic production as the baseline for CBAM levies, despite the UK no longer producing ammonium nitrate at scale, risks a wholesale increase in fertiliser prices at a time when farm confidence, as we all know, is at rock bottom.
The direction of travel is clear. Over time, both the EU and UK will raise the cost of high-carbon fertilisers, making lower-carbon alternatives more competitive as carbon prices tighten. Applying higher taxes where the UK is not a significant producer increases input costs for our British farmers. There is a risk of downstream leakage where UK farmers pay more for fertiliser due to CBAM, while competing with imported food from non-CBAM regimes that are still benefiting from cheaper, higher-carbon inputs, again undermining British producers and our food security.
This all lands on top of the other provisions within the Bill, namely the family farm and family business tax, as well as the cuts and delays we have seen in the sustainable farming incentive and the land management payment schemes and, of course, the additional pressures that are coming through in the cost of employment.
Will the Minister set out what specific assessment the Treasury has made of the impact of CBAM on fertiliser prices, on different farm sectors and on UK food security? How does he intend to prevent downstream carbon leakage, which simply shifts emissions from factories to fields?
Some industry groups, as recently reported in the Financial Times, warn that they think the Government’s current design has flaws and could accelerate de-industrialisation rather than prevent it. A major concern is that the Government plan to apply a single sector-wide rate, based on average emissions, instead of differentiating by product type and country of origin, as I understand the EU scheme does. UK Steel, the Mineral Products Association and the Chemical Industries Association have warned that, without changes, the mechanism will leave domestic producers worse off than their overseas competitors and undermine planned investment and decarbonisation. Has the Minister modelled the impact of using a single sector-wide rate rather than a more granular approach, as well as the impact on investment, jobs and emissions in each of the covered industries?
The Chartered Institute of Taxation, which has provided considerable help and input on all the provisions of the Bill, has flagged that further uncertainty will be caused by questions about the UK and EU emissions trading schemes being linked before the implementation date. The Government and the EU announced last May that they intend to link their ETSs, with mutual exemption from CBAM as part of the package, but I understand that formal negotiations have yet to begin. Perhaps the Minister can give us an update. There are also ongoing political discussions with the EU on the interaction of the two schemes, and the EU’s CBAM is undergoing some delays. That impacts on certainty for some transactions involving Northern Ireland, so I would be grateful if the Minister provided some clarity on where those discussions have got to.
Clause 139 establishes CBAM as the new UK tax on emissions, where a broadly equivalent price has not already been paid overseas. That is the foundation of the new charge. Clause 140 defines CBAM as
“charged on the emissions embodied in a CBAM good”
when it
“is imported into the United Kingdom.”
Those goods are defined by reference to the detailed tariff codes set out in schedule 15.
Schedule 15 focuses on the initial regime for aluminium, cement, fertiliser, iron and steel products, and hydrogen, and it gives HMRC powers to keep the schedule updated in line with tariff changes. Could the Minister elaborate on why those five sectors were chosen for inclusion from 2027, and on when the Government will set out a clear timetable and test for extending CBAM to other sectors, such as glass or ceramics?
Will there be a competitive disadvantage for high-carbon sectors left outside the first tranche, as they will still be exposed to cheaper, higher-emissions imports without any corresponding border adjustment? That point has been made to me privately by some of the Minister’s colleagues who would like to see a wider scope. Has the Treasury modelled how many businesses fall just above the £50,000 annual import threshold, and is it confident that it is capturing those that have substantial business and not imposing a burden on others?
Clause 141 sets out when a good is treated as imported into the UK for CBAM. It covers standard imports and goods under special customs procedures, such as warehousing and movements between Great Britain, Northern Ireland and the Isle of Man. The clause intends to dovetail CBAM with existing customs laws. In Committee, I have repeatedly highlighted the importance of practical guidance: the hands-on support that HMRC will give to smaller and medium-sized importers —I suggest that the £50,000 limit is fairly low.
Clause 142 ensures that where
“a CBAM good has been declared for a special customs procedure,”
processed into a non-CBAM good and then imported, CBAM is still charged on those emissions. This anti-avoidance provision aims to prevent companies from avoiding CBAM by doing limited processing to move a good out of the product list before releasing it into free circulation. The provision is welcome, as it would prevent people from dodging the rules.
Clause 143 places the liability for CBAM on the importer, broadly mirroring customs law by tying liability to the person in whose name the customs declaration is made, or on whose behalf it is made. That is intended to provide certainty, which is important, by aligning CBAM with established customs concepts and practices. Will HMRC give simple template wording or clear guidance so that businesses know how to declare who is responsible for CBAM and for sharing information throughout the supply chain?
The Chartered Institute of Taxation has also raised an important question. As the Minister will know, some businesses operate within VAT groups. If they import goods, they hold an EORI—economic operators registration and identification—number, which anyone who lived through the Brexit negotiations and debates will be familiar with. Under HMRC guidance, one VAT group member with an EORI number can make a customs declaration on behalf of another member. However, this group of clauses does not appear to allow for the formation of a CBAM group similar to a VAT or plastic packaging tax group.
It is unclear how the measures affect those liable under the clause where one VAT group member uses another’s EORI number. If the current easement does not apply to CBAM goods, each member may need its own EORI number, which would add some complexity and administrative burden. Will the Minister clarify the position and understanding on that? If an issue needs to be addressed, will the Government introduce legislation to allow for CBAM grouping to maintain the existing simplifications, as I am sure is their intention?
Dan Tomlinson
I thank the shadow Minister for his questions and engagement. This is one of the largest parts of the Bill, and sets out a significant change to taxation and the treatment of imports in order, as he says, to support domestic businesses that may face higher prices than companies seeking to export to the UK that have cheaper prices and higher emissions.
To go through some of the questions that were asked, the criteria that were looked at internally—over many years and starting under the previous Government; it has taken five years of work to determine which sectors will be in scope—were whether sectors were already in scope of the UK emissions trading scheme, because it is important that those are aligned; whether there was real risk of carbon leakage; and whether it was feasible to implement in 2027. That is why these five sectors were chosen, after significant engagement across Government and with stakeholders. The sectoral scope will be kept under review, and there are some sectors that the Government will continue to have conversations with in the coming weeks to understand their concerns and the benefits that there may be to widening the scope in future. We will keep it under review because, at the moment, the focus is on making sure that we can implement this significant change. It is a long piece of legislation and there are lots of good questions, but we want to get this in as drafted first.
The shadow Minister made several points regarding the sectors that are already in and the extent to which, in his words, they might be made “worse off”. It is important to note that they will be better off than without a CBAM in terms of competition and fairness in imports. At the moment, there is no CBAM, so the imports that come to the UK in these five sectors are, in a sense, undercutting domestic production if we have higher costs. With the introduction of CBAM, that undercutting will be significantly reduced. The prices faced by importers will be brought into line with those faced by those companies in the UK. There is a valid point to make about the detail and specificity with which the carbon prices that are used within CBAM are set, and that is something that I certainly want to keep under review, but it is good and it is right that we make progress with CBAM as set out in the legislation.
John Cooper (Dumfries and Galloway) (Con)
The Minister talks about people being better off, but my farmers are very concerned about the fertiliser impact. Four or five years ago, fertiliser was around £180 a tonne; today it is about £400 a tonne, and the introduction of CBAM might put another £100 on top of that. Farmers’ margins are so narrow that they simply have to pass that on, which will have a direct effect on food prices in this country. The Minister says that there will be talks about that. Farmers should be front and centre of those talks, because this is really worrying.
Dan Tomlinson
We will engage, and have engaged, with the industries that are directly affected by this change, including the fertiliser industry, and those for whom there will be knock-on effects from higher import prices. With fertiliser in particular, it is worth noting that UK-based fertiliser manufacturers have received more free allowances in recent years than they needed to surrender to be able to cover their emissions. As such, they are not, in practice, paying a carbon price at the moment. The CBAM rate will therefore be set at a low level to reflect that. It is something that I have been looking at as Minster because of these issues, and we expect the initial impact of CBAM on the fertiliser sector to be very modest. None the less I take the point that the hon. Member raises, and the Government will continue to look at it.
On the point around groupings and EORI numbers, that is not a phrase that I have come across before, but I am glad that I have heard it. I will make sure to remind myself of the torturous Brexit process and will, I am sure, understand the context there in more detail. We engaged with businesses in advance of making the proposal and feedback indicated that group treatment would confer relatively minimal benefits, so we chose not to implement it at this time. We will, of course, keep that under review though.
CBAM is a significant change that has been welcomed by many of the industries in the UK and should go a long way to levelling the playing field for those firms that are producing in these five sectors.
The Chair
The Minister courteously indicated to me that he has another assignation in Westminster Hall. Exceptionally, I will allow him to leave now, although that is unusual in the middle of a series of decisions. The Minister may make his way out quietly.
While I am on my feet, the cold is getting to my brain, but we all know that the heating system is lamentable at the moment. I shall be in the Chair for the first part of this afternoon as well, so if hon. Members feel the need to wear something warmer, I regard personal comfort as more important than sartorial elegance. [Hon. Members: “Hear, hear!”] That is not an invitation to be outrageous—but please ensure that your personal comfort is given attention.
Question put and agreed to.
Clause 139 accordingly ordered to stand part of the Bill.
Clause 140 ordered to stand part of the Bill.
Schedule 15 agreed to.
Clauses 141 to 145 ordered to stand part of the Bill.
Clause 146
Rate
Amendment made: 15, in clause 146, page 154, line 17, at end insert—
“(4A) In determining the ‘baseline free allocation percentage’ in relation to a CBAM sector, ignore any scheme year in which there were no sectoral emissions.”—(Lucy Rigby.)
This amendment clarifies that scheme years in which there were no sectoral emissions should be ignored when determining the baseline free allocation percentage in relation to a CBAM sector.
Clause 146, as amended, ordered to stand part of the Bill.
Clause 147 ordered to stand part of the Bill.
Clause 148
Administration and enforcement
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Schedule 16.
Clause 149 stand part.
Schedule 17.
Lucy Rigby
I appreciate your accommodation of the cold in the room, Sir Roger. I hope this afternoon proves that we can be both sartorially elegant and warm. Committee members may take their own view, but I look forward to this afternoon.
Clauses 148 and 149 and schedules 16 and 17 provide the administrative and enforcement framework necessary to ensure the effective operation of CBAM. They ensure that CBAM can be administered properly by HMRC, complied with by businesses, and enforced where necessary.
The clause introduces schedule 16, which makes detailed provision for the administration and enforcement of CBAM, including requirements for registration, accounting periods, CBAM returns, record keeping, payment deadlines, assessments, penalties and appeals. The schedule aligns CBAM administration with established HMRC processes where possible, helping to minimise additional burdens on businesses while ensuring robust compliance.
Clause 149 introduces schedule 17, which provides for criminal offences relating to CBAM. Those offences apply in serious cases, such as deliberate evasion or fraudulent behaviour, and mirror existing approaches taken elsewhere in the tax system. The inclusion of criminal offences ensures that appropriate deterrents are in place, protecting the integrity of the regime and ensuring a level playing field for compliant businesses.
Together, clauses 148 and 149 provide the necessary administrative and enforcement backbone for CBAM. They ensure that the regime is credible, enforceable and fair, while giving HMRC the tools it needs to administer CBAM effectively. I commend the clauses and schedules 16 and 17 to the Committee.
James Wild
We are sorry to see the Exchequer Secretary disappear. I hope that he comes back this afternoon for our further deliberations.
The clause introduces schedule 16, providing for the administration and enforcement of CBAM. They hand responsibility for managing this new carbon import charge to HMRC, and set out detailed compliance rules, including registration, accounting periods, returns, assessments and appeals. The schedule runs to 27 pages of text. Under these measures, any business importing CBAM goods worth more than £50,000 in a 12-month period, or expecting to reach that threshold within 30 days, must register, report each quarter and keep detailed records potentially for up to six years. HMRC will have wide discretion to make “best judgment” assessments and to counteract any artificial separation of business activities.
Mr Reynolds
The £50,000 threshold imposed as part of schedule 16 is incredibly low. It catches small construction firms importing tonnes of cement or steel, materials that could be consumed in one single medium-sized building project. The businesses importing such volumes will lack the resource of dedicated compliance teams and environmental consultants for quarterly emission verification. Meanwhile, large industrial importers, responsible for the vast majority of imported carbon emissions, face identical per unit compliance obligations, giving them a competitive advantage through their economies of scale.
CBAM introduces entirely new foreign concepts to normal commercial activities, such as calculating the emissions across international supply chains, determining whether carbon prices were paid in origin countries and applying complex fee allocation formulas. A family-run metalworking shop that has successfully filed VAT for 20 years must suddenly become an expert in lifetime emission methodologies and international carbon-pricing verifications. I do not believe that the Government have published any analysis comparing the £50,000 threshold to alternatives such £100,000 or £250,000 thresholds. I am interested to hear from the Minister what verification and changes have been made, and what assessment has been made of the compliance costs for various businesses.
Schedule 16 also introduces a £500 fixed penalty plus a £40 daily charge for failure to notify a change of circumstances, and a £500 penalty for record-keeping failures. While paragraph 40 of schedule 16 includes a reasonable excuse defence, HMRC interprets that quite narrowly as applying to circumstances such as illness, postal strikes or computer failures. The idea that the system or methodology was confusing or, “My supplier could not provide the data,” typically do not fall within the reasonable excuse defence.
The problem here is timings: the comprehensive penalties for CBAM take effect on 1 January 2027, so businesses navigating entirely unprecedented requirements are going to have a challenge. I note that the EU’s CBAM began with a transitional reporting period before enforcement ramped up, whereas the UK’s has no such mechanism.
These are not familiar tax concepts for lots of businesses. They involve new software, new tracking and international verification. These things have not been done in British business before, and I believe that small importers will face penalties while genuinely trying to comply with the regulations. The Liberal Democrats are not against the concept of a CBAM, but we take issue with the way that it has been put together.
Has the Minister considered a 12-month transitional period during which full penalties for deliberate avoidance are maintained but an allowance is given for honest compliance?
James Wild
I share the hon. Member’s concerns about the £50,000 threshold. Has he considered what might be a more appropriate level, in order to reduce the impact on smaller producers?
Mr Reynolds
The EU, for its CBAM, has not set a specific number in that way; it has set a number of tonnes of product. I would be interested to hear from the Government what work has been done to analyse the different impacts of £50,000, £100,000 and £250,000. The Treasury must have done some work on this, but I could not see any. We need the answer to that in order to find out where we stand.
Let me finish by saying that a transitional period may be quite beneficial. It would make sure that we are not setting our small and medium-sized enterprises up to fail and penalising them when they try to do the right thing but unfortunately, because of the complications in the system, they are unable to.
Lucy Rigby
The shadow Exchequer Secretary’s points about the criminal offences are similar to some of the points that were raised earlier in relation to other criminal offences set out in the Bill. I made the point in relation to those other offences, and I make it again here, about the standards that the CPS, or indeed any other prosecutorial authority, has to meet in satisfying both the evidential test and the public interest test. I am not sure that I need to take up the invitation to liaise with the Law Officers in that regard.
Questions were fairly raised about proportionality and the burden on businesses. The UK CBAM will operate like a conventional tax, in order to simplify the administrative and compliance burden for those who need to comply without, we think, undermining the environmental integrity of CBAM. However, the Government recognise that alignment with existing regimes—the Liberal Democrat spokesperson, the hon. Member for Maidenhead, referred to the EU CBAM and, indeed, to the ETS—can reduce administrative burdens, so where possible we will align with and build upon existing methodologies for calculating embodied emissions, as well as rules for monitoring reporting and verification under the ETS.
As hon. Members know, CBAM is not expected to have significant macroeconomic impacts or a significant impact on prices for individuals, households and families. CBAM imports make up only around 1% of average UK industry input costs. Therefore, as the Exchequer Secretary said, the Government do not expect CBAM to have a material impact on food prices, and the impact on farmers would be modest.
On the Liberal Democrat spokesperson’s point about thresholds, the threshold will retain over 99% of CBAM imports while removing 80% of otherwise registrable businesses, and over 70% of those removed from CBAM altogether by the threshold will be micro, small and medium-sized businesses.
Question put and agreed to.
Clause 148 accordingly ordered to stand part of the Bill.
Schedule 16 agreed to.
Clause 149 ordered to stand part of the Bill.
Schedule 17 agreed to.
Clause 150
Supplementary amendments
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Schedule 18.
Clauses 151 to 155 stand part.
Lucy Rigby
Clauses 150 to 155 and schedule 18 make the general, supplementary and commencement provisions for CBAM. They are designed to ensure that CBAM integrates properly with the wider statute book, operates coherently over time and comes into force as intended from 1 January 2027.
More specifically, clause 150 introduces schedule 18, which makes supplementary amendments to other legislation to ensure that CBAM operates consistently alongside existing customs and tax law.
Clauses 151 and 152 provide key definitions and interpretation provisions, including the meaning of “emissions”, “carbon dioxide equivalent”, “importer” and “CBAM good”. These clauses are designed to ensure clarity and legal certainty across the regime.
Clause 153 provides a power to make provision in relation to linked emissions trading schemes. This allows imported goods originating in countries with linked emissions trading scheme arrangements to be excluded from CBAM, reflecting international co-operation and avoiding unnecessary duplication.
Clause 154 sets out how regulations and notices under CBAM are to be made, including the applicable parliamentary procedures, to ensure appropriate scrutiny, with affirmative or made affirmative procedures applying where regulations have a significant impact.
Clause 155 provides for commencement and transitional arrangements. CBAM will apply to goods imported on or after 1 January 2027, with powers to smooth the transition during the initial years of operation.
In summary, clauses 150 to 155 and schedule 18 provide the essential supporting framework that allows for the effective functioning of CBAM, and I commend them to the Committee.
James Wild
We come to the final group on the carbon border adjustment mechanism. Clause 150, along with schedule 18, makes the technical but critical changes needed to fit CBAM into the UK’s existing tax and enforcement framework. These measures ensure that the new tax uses the same information gathering powers, collection mechanisms and penalties already in place. It is sensible to integrate CBAM in this way without creating a new process.
Clause 151 defines what we mean by “emissions” for CBAM purposes and firmly anchors the tax in the existing climate policy framework by adopting the definition in the Climate Change Act 2008. Greenhouse gas emissions will be measured in tonnes of carbon dioxide equivalent, which is sensible.
Clause 152 sets out the interpretive rules for part 5 of the Bill, working alongside clause 151 and schedule 16 to ensure that terminology throughout CBAM is coherent.
Clause 153 gives the Treasury the power to adjust CBAM if the UK’s emissions trading scheme is linked to another country’s carbon pricing system. The Minister touched on this briefly, but as I mentioned in the debate on an earlier group, in May the Government and the EU formally agreed to work towards linking their emissions trading systems to align carbon markets. I do not think the Exchequer Secretary responded to me on that point before he left the Committee. I am conscious that this is not the Minister’s portfolio, but can she give an update on where the EU-UK negotiations on the linkage have got to? This is a broad delegated power that could have real implications for competitiveness, trade and treatment of foreign carbon prices. We have expressed concerns previously about the linkage with the EU ETS and the higher charges that might hit UK businesses as a result. I would be grateful for an update on where the negotiations have got to—if they have actually started—and how the Treasury will ensure that there is proper consultation and debate before using the powers.
Lucy Rigby
The shadow Exchequer Secretary referred to some of the points agreed at the EU-UK summit last May. As he knows, the EU and the UK agreed to work towards linking our respective ETSs. He will not expect me to comment on ongoing negotiations, so I will not do that, but I will say that we are committed to working closely with all interested stakeholders, including international partners, through the CBAM policy design process and, of course, we consulted extensively on the design and implementation of this measure.
We have conducted information sessions at the World Trade Organisation and had extensive bilateral engagement with over 30 jurisdictions since announcing our intention to introduce a CBAM in December 2023. The UK will also engage through the UK CBAM international group, which serves as a forum through which the UK Government can understand the views of international partners and share updates.
The shadow Exchequer Secretary will forgive me for reiterating what I know he already knows, which is that all tax policy is kept under review. He rightly refers to our desire to smooth the transition—that is absolutely key. We will ensure that there is sufficient time built in to facilitate that smooth transition, and time to test systems as well.
Question put and agreed to.
Clause 150 accordingly ordered to stand part of the Bill.
Schedule 18 agreed to.
Clauses 151 to 155 ordered to stand part of the Bill.
Clause 156
Prohibition of promotion of certain tax avoidance arrangements
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Clauses 156 to 162 introduce a new statutory prohibition on the promotion of tax avoidance arrangements. If you will forgive me, Sir Roger, I will set out a little more background on these clauses than I have on others, which I think is important.
HMRC already can and regularly does stop people promoting marketed avoidance schemes, where it can identify the person or company doing the promotion. However, the controlling minds behind avoidance schemes often simply close down the company they use to promote the scheme before promoting a very similar scheme from a new company with different directors—everyone will be familiar with that concept of phoenixing. HMRC needs to identify and issue a new stop notice to each new entity and, during that time, promoters continue to sell the scheme and cause harm to taxpayers and the UK tax system. This measure will prohibit certain tax avoidance schemes from being promoted without HMRC first having to notify promoters, and will put a stop to promoters playing a game of cat and mouse with HMRC.
These clauses are about targeting those who continue to promote tax avoidance. They are not intended to be directed against legitimate tax advisers who are operating to a high professional standard but, while acting in good faith, make genuine mistakes. Furthermore, the Exchequer Secretary has asked HMRC officials to work with stakeholders in developing published guidance to address the fine detail of exactly how the prohibition will work in practice.
I turn to the individual clauses. Clause 156 will prohibit the promotion of avoidance arrangements that have no realistic prospect of success, as well as enabling HMRC commissioners to prohibit further arrangements in regulations. Any arrangements specified must have been, or be likely to be, marketed to seek a particular tax advantage, unlikely to result in that tax advantage, and likely to cause harm to taxpayers.
Clause 157 provides for the definition of “promotion” of arrangements. It includes important exemptions, such as where goods and services are provided on commercial terms without the knowledge that they are being used to promote tax avoidance, or where legally privileged advice or information is provided.
Clause 158 requires regulations implementing this policy change to be subject to the made affirmative procedure. That will ensure that the regulations take effect immediately, protecting the Revenue and taxpayers, while also ensuring proper oversight by this House.
For anyone breaching the prohibition or the regulations, civil penalties may apply under clause 159, or a criminal offence under clause 160. Under clause 161, where a responsible person has led an entity or partnership to commit a criminal offence through their consent, connivance or neglect, that criminal offence will also apply to them. Clause 162 contains relevant definitions and commencement provisions.
In summary, this measure will allow HMRC to stop the promotion of tax avoidance and tackle the persistent group of promoters. It will ensure that taxpayers and the UK tax system are protected from the harm caused by these promoters.