Clarke in U-turn on mortgage 'shambles'

Chancellor unaware of tax on insurance protection schemes

Kenneth Clarke admitted he did not know about a tax on mortgage protection for the unemeployed and long-term sick after quashing plans to impose the tax yesterday.

Tony Blair accused the Government of being in "utter chaotic shambles" after the Chancellor appeared at odds with the Prime Minister when he blocked plans to tax mortgage protection payments for the sick and unemployed.

The volte-face was ordered by Mr Clarke after an intervention by the Prime Minister who wanted to kill the policy before it could inflict further damage on the Tories in tomorrow's local elections.

The Chancellor was chairing the Cabinet's public spending committee (known as the EDX committee) reviewing the spending round when he was told to intervene by No 10. "Ken was in EDX and went ballistic," one minister said.

The Chancellor said later he had not known about the tax until 11.30am. "It's an obscure piece of tax law which I didn't know about ... having discovered what they were talking about, simply sorted it all out. It's all nonsense," he told ITN.

That flatly contradicted John Major, who told MPs in the Commons the Chancellor had been reviewing the policy "for some months". The disarray in the Downing Street destroyed the Government's attempts to defuse the row. "The Chancellor clearly doesn't know what is going on," Gordon Brown, the shadow Chancellor, said.

Mr Clarke's announcement means that homeowners will not be expected to pay up to £10 a month more - on an average £60,000 loan - to protect themselves, which would have been necessary to cover the amount lost in taxes.

Ministerial panic began after it was disclosed that Roger Evans, junior social security minister, had written to mortgage lenders saying insurance payments to the unemployed and long-term sick would be taxed. The Prime Minister looked embarrassed as ridicule was heaped upon him by Mr Blair in the Commons.

Mr Blair gave this timetable for the retreat: at 10.30am at a Tory election press conference, Jeremy Hanley, the party chairman, and Stephen Dorrell, Secretary of State for National Heritage, denied any change in tax policy. At 11am, the Prime Minister's office said there was a policy but it was under review. Mr Blair added: "At 12.03 Nicholas Winterton (Con, Macclesfield) described the policy as 'lunacy'. And at 12.42pm the Chancellor issued a statement saying he had now completed the review and was ditching the policy. Doesn't that indicate the utterly chaotic shambles that is this government?"

Mr Major retorted: "There is only one party in this country that truly supports homeownership and it sits here on the government benches." He said the position had been under review by Treasury ministers for "some months".

Cabinet colleagues blamed Mr Clarke for refusing to defuse the row more than seven weeks ago when it was discovered the payments could be taxed.

Senior Treasury sources said last night that the Chancellor did not realise the insurance benefits would be taxed when he announced, in the Budget package last November, that from October this year income support to help with mortgage payments would be withdrawn for the first nine months of unemployment or sickness.