The Financial Secretary to the Treasury (Jane Ellison)
It is a pleasure to serve under your chairmanship, Mr Davies. Good morning, colleagues. I am pleased to be here to discuss the European Commission communication on an action plan on VAT, “Towards a single EU VAT area—Time to decide”, which my hon. Friend the Member for North East Somerset outlined. I apologise that it has taken so long to schedule this debate and, indeed, has spanned two Ministers. We are here now, and we will have a chance to look at these issues and cast our minds ahead to the new challenges, as circumstances are very different from when the debate was first called for.
The action plan on VAT provides an update on progress and identifies the next steps to be taken to improve the system. As we have heard, the Commission’s Green Paper on the future of VAT, published back in December 2010, launched an EU-wide consultation on the future of VAT in the EU. The subsequent White Paper in 2011 set out the Commission’s vision of a simpler, more efficient and robust VAT system that is tailored to the single market. The White Paper was presented to this Committee in an explanatory memorandum in December 2011 and the Committee debated it in 2012. The Commission’s communication, published in April last year, is the continuation of that work.
Like the preceding Green and White Papers, the action plan contains no legislative proposal, but sets out the Commission’s vision for the future of VAT—in the Commission’s words:
“A VAT area that can support a deeper and fairer single market, and help to boost jobs, growth, investment and competitiveness. A VAT area that is fit for purpose in the 21st century.”
The overall approach in the plan is aligned with the UK’s approach of reducing burdens on business and developing a practical and workable system. The plan identifies the areas in which the Commission feels that further reform is necessary and presents a range of ideas for future EU work.
The ideas are grouped under four headings, as has been mentioned. Under the heading, “Recent and ongoing policy initiatives”, the plan highlights the shortcomings of the current EU VAT system in dealing with cross-border e-commerce. It outlines the Commission’s intention to present legislative proposals that would modernise and simplify VAT rules for cross-border e-commerce, and highlights the Commission’s intention to produce a package of legislative proposals this year, with the aim of improving the VAT environment for small and medium-sized enterprises to facilitate growth and encourage cross-border trade.
Under the heading “Urgent measures to tackle the VAT gap”, the plan proposes improvements to co-operation between EU member states and between EU and non-EU countries. It suggests that such changes would improve the efficiency of tax administrations and improve levels of voluntary compliance and co-operation between businesses and tax authorities. The plan also identifies potential measures to improve co-operation between tax administrations and customs law enforcement bodies and to strengthen tax administrations’ capacity in the fight against fraud, which I know has been at the forefront of the Committee’s thinking over the past few years.
The plan then focuses on moving towards a robust single European VAT area. As has been alluded to, the current VAT system is technically a temporary one. As members of the Committee know, when VAT was first established the aim was for goods to be taxed in the country of origin. At that time, however, an origin-based system was not possible for technical and political reasons, so transitional systems were adopted. Various attempts have been made to move towards an origin-based VAT system, but all have been unsuccessful. The Commission’s 2011 White Paper concluded that the origin principle remained unachievable and confirmed that the destination system would instead be pursued. The action plan committed the Commission to produce a legislative proposal for a definitive VAT system based on that principle this year.
The final section of the plan focuses on moving “Towards a modernised rates policy”. Parliament has a particular interest in that and in some of its implications. It highlights the constraints of the existing VAT directive in limiting member states’ freedoms to set VAT rates. Those rules were designed for a VAT system based on the origin principle and were therefore intended to guarantee the neutrality of the system. Given the agreement to pursue a final system based on the destination principle, the plan highlights that there is now an opportunity for member states to be given greater autonomy in setting rates.
The plan outlines two possible options that would give member states that additional flexibility. The first involves extending the current range of reduced rates legally applied in any member state to all member states; the list of goods and services eligible for the reduced rates would then be regularly reviewed. The second involves removing the existing reduced rate list and granting member states much greater rate-setting power.
The Commission has recently produced a number of the proposals that were trailed in the plan. In the context of the digital single market initiative and the May 2016 conclusions on the plan, the Commission published a proposal on e-publications in December last year. That was presented to the European Scrutiny Committee in explanatory memorandum 38344. Helpfully, that proposal has generated some discussion on VAT rates more generally and on the level of flexibility and autonomy that should be enjoyed by member states in setting domestic rates. That is important in the context of the wider rates review trailed in the action plan, which is expected by the end of the year. That is specifically relevant to the UK’s pursuit of the legal changes necessary to allow the introduction of a zero VAT rate on women’s sanitary products. We explored that issue in detail during Report stage of last year’s Finance Bill, and I know that Members across the House feel strongly about it.
As Members will be aware, the Government broadly welcome the action plan, most of which follows the UK approach to reducing the burdens on business and developing a system that is practical and workable, as seen in a number of the changes in the digital single market proposals presented to the European Scrutiny Committee in explanatory memorandums 38341/2/3, and specifically the introduction of a threshold for cross-border supplies of digital services and the “soft landing” easements for small businesses.
Of course, these and any other legislative proposals emerging as a result of the action plan are and will be subject to scrutiny in the normal way. They will also be subject to negotiation, and the unanimous agreement of member states will be required before any legislative changes can be made. As always, the key will be in the details of further work and proposals. The plan provides a basis for member states to explore the future of the EU VAT system and, in particular, a basis for a way forward on key UK priorities on simplification and on VAT rates.
The Chair
We now have until 9.55 am for questions to the Minister. Although I may allow the shadow Minister some leeway, I remind hon. Members that questions should be brief. Subject to my discretion, it is open to a Member to ask related supplementary questions.
Peter Dowd
I have raised the issues of tax avoidance and the green tax. On the optimism about getting the measure through, do we believe that we will be able to introduce it within the next two years? How long is a piece of string in relation to this matter? I hope that we do not have to hold our breath for too long.
Jane Ellison
I will make a general point and then respond with a bit more detail on fraud. I could not disagree more with the shadow Minister, although I thank him for his kind words on the state of my voice—I apologise to colleagues. It is certainly not the case that the vote to leave the European Union makes the debate “obsolete” and our participation in and engagement with the agenda pointless. For a start, there are UK businesses that have EU subsidiaries that will continue to be affected by the VAT rules within the EU, so it is important that the rules work well and are subject to sensible reform. The UK has always been a good influence for pragmatic reform in all such regards.
The precise arrangements under which we operate outside the EU will be subject, as we all know, to detailed and complex negotiation once article 50 has been triggered, but the EU will remain a major trading partner. We are leaving the EU; we are not leaving Europe. It will be an extremely important commercial relationship. The extent, therefore, to which the direction of travel on EU VAT rules aligns with our own priorities regarding simple and pragmatic regulation that is not burdensome to small businesses is, and will remain, extremely important.
Before we came into the debate, I asked my officials about how we will influence policy once we are outside the EU. The reality is that there are people who are not in the EU now who will influence and have a view about the EU’s VAT proposals. Equally, the OECD does a lot of work in that respect. There is a broad alignment of direction of travel between that organisation and the EU, and to that extent we are an important influence within the OECD. I reject the idea that the debate is obsolete and that our interest ceases once we are outside the EU. It remains the case that we need the rules to function sensibly and in a way that is as unburdensome as possible and addresses fraud, to which I now turn.
No system will be entirely fraud-free, and the concern for the UK and member states more generally about any move to a new system is that any change could introduce a new type of VAT fraud. In all aspects of the tax system, we have to consider where people might look to exploit the gap created by a change. In the UK, the level of VAT fraud attributable to criminal attacks on cross-border trade has fallen from a peak of between £2.5 billion and £3.5 billion in 2005-06 to between £500 million and £1 billion in 2014-15. The Commission has done various studies, and the one from 2013 estimates that such supplies amount to about €184 billion-worth of VAT for the UK alone, in terms of intra-EU supplies. Any change to the VAT rules on intra-EU supplies that would introduce a new type of fraud has, therefore, the potential for huge losses and it is important that we tread carefully. Within any proposal for a definitive VAT system, that will be an area for great scrutiny. We welcome the Commission’s engagement with us and its acceptance that member states will need to work very closely together to explore and evaluate.
Peter Dowd
I was trying to make a point about the obsolete nature of this debate. Would the Minister agree that there is a big difference between having a debate when a member of the European Union, with access to the single market and so on, and when outside the Union? We have been discussing it for several years; we are moving out and the EU know that, so this debate is to some extent pretty obsolete.
Jane Ellison
Without rerunning the referendum campaign, those issues were explored. I do not accept the basic premise, for the reasons I have given. Many businesses will continue to trade within the EU and have EU subsidiaries. The EU will remain a hugely significant trading partner and, as with all our trading partnerships around the world, we would look to bring UK influence to bear in a way that would support our own economic goals. There is a mutual benefit in having rules that work for everyone. We will also be a major trading partner for many EU members when we are outside the EU. Those are also important trading relationships. To that extent, there is mutual interest in making sure that we continue to move in a broad direction of travel and that we bring UK influence to bear.
When I was Europe Minister in the Department of Health, my experience was that the UK perspective on regulation, particularly with regard to the burden on business, was always felt to be a pragmatic and valuable contribution. I have no reason to think that that will change afterwards, albeit that relationships are clearly going to be in flux over the coming period of negotiation.
Peter Dowd
I take the Minister’s point, but the first sentence in the document is:
“This action plan sets out the pathway to the creation of a single EU VAT area.”
That is in the context of the single market. Does the Minister not agree that she is putting her head in the sand in the way that she is continuing to discuss this matter?
Jane Ellison
I am not sure I can add a great deal more. No, I do not have my head in the sand. I am being practical, as many of us now have to be. As Ministers, many of us are engaged on a day-to-day basis with the practicalities of how we move forward.
To reiterate, when we are outside the EU, it is probably going to remain our most important trading relationship. Therefore, it is vital that we continue to be good EU members while we are in, and that we continue to be engaged, practical and positive once we are out.
Mr Steve Baker (Wycombe) (Con)
To level-set people’s expectations, when in the process of the next few years do we expect to regain sufficient control over VAT so as to be able to end, for example, the hated tampon tax?
Jane Ellison
On Report of the Finance Bill last year, we included provisions to legislate by this spring or by the time that we had left the EU, whichever was legally possible and feasible. We have continued to engage with the Commission at official and ministerial level quite extensively since that debate. We are not likely to be in a position to move this spring, for the reason I spelled out in my comments, but we have given a commitment. We have the same view on this matter in all parts of the House; we want to deal with this long-standing anomaly. I am sure Members of all parties would also support the fact that we are equally committed to abiding by the rules for as long as we are in the club. We will not, and cannot, act outside the rules—that would be counterproductive to a negotiation in good faith—but we have included legislative provisions to move on this matter as soon as we are legally able. The clock is ticking on it. We are not moving towards a distant and unsighted point—we have a sense of the backstop date.
Kate Green (Stretford and Urmston) (Lab)
I have two questions. The Minister said a few moments ago that she looked forward to European Union alignment, after we have left, with our own VAT successor system, but that is surely the wrong way round. We will want to look at the opportunities to align our systems with a very large trading bloc sitting on our doorstep. First, to what degree does the Minister accept that the Government will wish to continue down a route of as much harmonisation as possible post-Brexit between our VAT system and whatever is developed in the European Union?
My second question is a prosaic one on behalf of my constituents who are trying to understand how their travel arrangements and holidays in the European Union might be affected after Brexit. Does the Minister envisage it will be possible to reclaim VAT paid in European Union countries as consumers leave the European Union to return from their holidays to this country?
Jane Ellison
On the first point, I did not express a specific aspiration about harmonisation. I said there was a clear national interest in continuing to engage with the EU. As I said before, the OECD and the EU are moving broadly in the same direction around VAT systems. There is therefore a wider interest in the UK’s continuing to pursue some of its key objectives around simplification and making the arrangements less burdensome, particularly for smaller businesses. The precise aspects of VAT arrangements are, as with so many things, a matter for the detailed negotiations ahead, once article 50 has been triggered.
It is reasonable to say that we would look to have arrangements in future that allow us to continue to trade easily and successfully with all our major trading partners, of which the EU will be an incredibly important one. It remains the case that it is sensible for us to stay engaged with the debate, but the detail of all of those things once we are outside the EU, including issues around things such as harmonisation, are for the negotiations. We cannot be clear yet, but I assure the Committee that the Government will seek the best deal, obviously. It is clear that, after we have left the EU, VAT will continue to be a major contributor to the Exchequer. In the UK we estimate we will raise £120 billion this year, which is important revenue for the Treasury.
Although the exit from the EU will offer the UK greater flexibility, it is important to manage expectations just a little. Colleagues might be interested to learn that requests for reliefs have already been flooding into the Treasury in anticipation of our leaving the EU—to date, a total of more than £30 billion—so the ready reckoner is already ticking over. Colleagues will have done their mental arithmetic and realised that £30 billion is rather a large proportion of the estimated £120 billion that we hope to raise this year. That is on top of the range of zero and reduced rates that have already been applied, estimated to be slightly less than £45 billion in 2016-17.
The issues around future rates for us outside the EU and all other issues have to be carefully considered, not only in terms of our trading relationship with the EU, but in terms of our domestic policy and economic and budgetary constraints. As with all such things, it is a complicated picture, but we will continue to engage with the debate. It is worth putting on the record that UK officials are not only engaged but making an extremely positive contribution to the wider debates on the technical policy-making areas, and we will continue to do that to good effect.
Mr Rees-Mogg
May I take it from the answer given to the hon. Member for Stretford and Urmston that there is at least the possibility that we will get back duty free when we have left the European Union? It would be a wonderful gift to the British people and would increase their joy when they travel.
Jane Ellison
It seems unusual for a Government Minister to draw attention to the fact that she did not answer a question, but since I did not answer that question, I made no such speculation or comment. As I have said, all these matters are for the negotiations ahead and a range of different outcomes are possible.
Mr Rees-Mogg
I merely asked if it were possible, and the answer, being answerless, indicates that it must at least be possible.
Peter Dowd
Just a final question from me. The Minister also did not answer the question from the hon. Member for Wycombe about the tampon tax. Although the Government have legislated to get rid of the tampon tax, depending on whether we are in or out of the Union, does the Minister believe that we will be able to implement a zero rate on the tampon tax before we leave the Union? What is the real possibility of that happening?
Jane Ellison
We have taken the House’s instructions very seriously. There was not just the debate on Report last year, to which I responded; this has been a live debate probably for my adult lifetime, and there have certainly been a lot of debates in the House in recent years, so we have been actively pursuing this issue. I recently detailed in a written answer some of the extensive engagement we have had at ministerial level and through letters at official level.
While we are in the EU, both sides continue to be bound by existing rights and obligations, and EU law allows for a reduced rate of not less than 5% to be applied to those products. We apply the lowest reduced rate, but we cannot apply a zero rate until there is an EU legislative change. We continue to push for it and to engage on the issue very actively, but the EU legislation can be initiated only by the Commission, and to date it has not provided the proposal that it was planning to bring forward before the EU membership referendum. We continue to push for the proposal, and we have tried to find ways of accelerating the prospects of a change, but it is likely that it will feature only as part of the VAT rates review that we anticipate will happen towards the end of this year. We will continue to keep the House updated, and no doubt we will return to the issue in the debates on this year’s Finance Bill.
Kate Green
Irrespective of Brexit, what is the Minister’s assessment of the likelihood that the European Union and its component member states will be able to develop and introduce a modernised VAT system, as the Commission hopes? What difficulties does she envisage for the other member states in reaching agreement on doing so?
Jane Ellison
As I said, this would be a very major change to the EU VAT system. To give colleagues a sense of perspective, it would affect about €600 billion of member states’ VAT revenue, which is a lot of money. We estimate that between 3.2 million and 3.7 million EU firms are involved in cross-border trade. Although this Committee in particular has expressed a degree of frustration at the speed at which events move, it is right that the Commission, member states and business stakeholders work together and take time to assess the impact. Any change has to strike the right balance, in terms of both preventing fraud and of simplicity and ease of operation. Inevitably, there is sometimes an offset between those two ambitions. We probably feel that the Commission’s medium-term timeline looks a bit optimistic, but we continue to monitor these events very carefully and influence them.
The Chair
If no more Members wish to ask questions, we now proceed to the debate on the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 7687/16, a Commission Communication on an action plan on VAT: Towards a single EU VAT area—Time to decide; and agrees with the Government that it provides a basis for a way forward on key UK priorities on VAT simplification and on VAT rates.—(Jane Ellison.)
Jane Ellison
I thank hon. Members for their contributions. I particularly thank the hon. Member for Aberdeen North, who spoke for the Scottish National party, for her wide-ranging contribution. I note that she made a bid with regard to police and fire services to add to the Treasury’s £30 billion and counting of VAT bids. We have explored the issue of the VAT incurred as a result of the changed arrangements, so she will be familiar with the point that I am going to make. That issue was in the business case for the changed arrangements. The Scottish Government were warned repeatedly that that would be the result of the way that they restructured emergency services, so it is surprising that the SNP keeps raising the issue as if the change was somehow imposed from the outside. The Scottish Government were alerted at the time. Our position on that remains unchanged, but as I said, I will add it to the list of things for which people want to see relief, along with the others that she mentioned.
I agree with the hon. Lady more—I think we both perhaps disagree slightly with the shadow spokesman for the Labour party—on her point that it remains very much in our interests to continue to engage with this debate. I will not speculate or second-guess the outcome of our Government’s negotiations or where the EU Commission is going on this, but there is a mutual interest in smooth and competitive trading arrangements. European markets account for around half the UK’s overall trade and foreign investments; around 3.5 million jobs. We will therefore continue to engage extremely actively and constructively while we are in the EU. However, it remains the case that even once we are outside it, the EU VAT system is influential. It is in our interests to ensure, to the extent that we can, that it is aligned with OECD and other international work, to take up the point made by my hon. Friend the Member for Wycombe that this debate is wider than the EU.
We will remain engaged and there is mutual benefit, not just because of businesses that have EU subsidiaries. Because of the cross-border nature of trade, there is mutual advantage in making sure that arrangements make sense, both within and without the EU. I reject the counsel of despair from the Opposition Front Bench that there is no point in doing this—there is every point.
Peter Dowd
I am surprised the Minister has taken that view. It is a complete distortion. We are talking in the context of the document before us. This debate is specifically in relation to the document before us. It has taken years to get to this position. We are only two years from leaving the EU, and the idea that this has to do with post-Brexit negotiations is complete and utter tosh. Does the Minister agree that there is a difference between trying to saddle us, in relation to post-negotiation deals, with this and trying to deal with this specific issue? The two are completely different and the Minister should know that.
Jane Ellison
The Minister does know that, but the point I am making is that we are obviously in the EU until we are not. It continues to be in our interest to influence debate. I think I have engaged very directly with the shadow Minister’s point. The point I have been trying to make is that this is a broader challenge than just within the EU. The international direction of travel on VAT remains important. The extent to which, for example, better co-operation is enshrined within new systems will provide better information on which we can help to shape policies around supplies across borders.
The OECD is already looking at ways to improve international co-operation, so there is every reason to continue to engage with this agenda. It is nonsense to say that it is irrelevant, even though we will be outside the EU in due course. The extent to which we have a degree of alignment in objectives and that direction of travel between the EU and other major trading blocs, and international trading and economic organisations such as the OECD remains fundamentally important because they have at their heart the desire to find some key principles around which we can all agree that will facilitate trade, less fraud and lower burdens on business across the piece.
I end where I began by saying that this is an important issue on which we will continue to engage while we are in the EU, and continue to influence in a number of different ways once we are outside it.
Question put and agreed to.