Taking Control of Goods (Fees) (Amendment) Regulations 2021
(Limited Text - Ministerial Extracts only)
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Baroness Boycott (CB)
My Lords, what we have here is a very serious issue. We already know that, since 2014, debtors have been incorrectly charged VAT when it has been ruled that this should instead be charged to the creditor. Although the Ministry of Justice clarified in its March 2020 and November 2021 guidance that if the creditor is VAT-registered, debtors should not be charged VAT, it did not clarify the actions it would take to look into giving the money back. For this reason alone, I am supportive of the Motion in the name of the noble Baroness, Lady Meacher, to regret the taking control of goods statutory instrument.
Also, to put it simply, time is running out. Some noble Lords may be aware, but many will not, that there is only a six-year window in which debtors can rightfully claim for this money to be repaid. This means that many debtors, many of whom will not even be aware that this money belongs to them, have unjustly missed out on their opportunity to reclaim VAT. Therefore, the time for action is now. With every passing day of delay, more and more debtors will continue to miss out.
We have come out of a busy Christmas period, the time when many families’ budgets become overly stretched and more financially challenging. The truth is that it is expensive to be poor in this country at the moment. For the average poor family, the poverty premium—a horrible expression—means £490 extra to pay because of meters, being unable to buy in bulk and paying individually for things that other people could pay for in excess. For one in 10 people, that poverty premium is £780 a year. Will the Government ensure that the debt enforcement sector notifies all debtors who may have overpaid VAT? Will they conduct an impact assessment to understand exactly how much has been overpaid? Finally, will they ensure that the debt enforcement sector sets up a scheme to refund this money?
The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Wolfson of Tredegar) (Con)
My Lords, I am grateful to all noble Lords who have contributed to this debate, in particular the noble Baroness, Lady Meacher, whose Motion gave rise to it. The Motion highlights concern about whether debtors have been overcharged in respect of the VAT that attaches to the fees charged by High Court enforcement officers.
The statutory instrument before the House sets out how the VAT that attaches to enforcement agent fees should be collected. The burden of the noble Baroness’s Motion is to criticise the Government for not going further by applying that retrospectively. A number of noble Lords asked what we propose to do to provide compensation to debtors who were charged VAT wrongly prior to the date on which the instrument took effect. I will seek to explain why the use of “wrongly” is itself subject to question.
Let me set out the purpose of the SI and why we have decided that it is necessary to provide clarity and explain why it would not be possible or fair to legislate retrospectively in this area. We decided that it was necessary to legislate because in the summer of 2019—I accept that the issue was floating around earlier—we were made aware that there were dramatically diverging views and practices within the High Court enforcement industry about who the VAT on its fees should be collected from. We initially sought to provide clarity by working with HMRC to draft guidance about the correct approach.
With apologies to the House, I would point out gently to the noble Lord, Lord Thomas of Gresford, that we must be careful when we talk about collecting VAT. There are two different issues here. The first is who is responsible for paying the VAT. The second is can you, as the creditor, recover through the enforcement agent a sum equivalent to the VAT. When the debtor pays that sum, the debtor is are not paying VAT; the debtor is paying a sum equivalent to VAT. That sounds like a legal technicality, but it is not; it is a fundamental distinction that it at the heart of this issue.
An important point to make is that neither the guidance nor the SI seeks to change underlying VAT law. In all circumstances, the creditor is liable for the VAT. That is because the creditor is the recipient of the service of the High Court enforcement officer. The guidance and the SI set out the circumstances in which a sum equivalent to the VAT charged to the creditor can be recovered from the judgment debtor as an enforcement cost. We designed that guidance to ensure careful and fair operation of the law so that creditors would not be out of pocket as a result of enforcement costs, while also ensuring that an amount equivalent to VAT was collected from debtors only in cases where the VAT represented a real cost to the creditor. In other words, an amount equivalent to VAT would be collected from the debtor only in cases where the creditor was not able to recover the VAT from HMRC as an input tax. If the creditor was able to recover the VAT from HMRC, the VAT would not be a real cost to the creditor and therefore a sum equivalent to the VAT should not be collected from the debtor.
In March 2020, we consulted interested parties about the draft guidance. Views remained mixed about whether VAT should ever be recovered from the debtor because the debtor was not the recipient of the service. We considered then, as we do now, that it is fair for the creditor to be able to recover the VAT as an enforcement cost in cases where it will represent a real cost to the creditor. That approach is in keeping with the overarching principle that the debtor is responsible for the costs of enforcement. Some consultees questioned the legal basis for our draft guidance. They noted that the regulations setting out the fees that High Court enforcement agents can recover from debtors do not refer to VAT, so we have accepted that it would be helpful to set out the position in legislation to put the matter beyond doubt. That is what this SI seeks to do.
We have listened to the feedback that we received about the draft guidance and taken on board the dangers that a system that is too complicated or nuanced will make it even more difficult for a debtor to understand whether they were paying the correct enforcement costs and, as a consequence, to know whether to challenge an account of the charges they are presented with. The feedback also highlighted how, in a very complicated system to address this issue, more mistakes are likely to be made.
We do not want that to happen. We want to try to have a simple and comprehensible but fair system. We therefore decided that this SI should allow an amount equivalent to the VAT to be recovered from the judgment debtor only in cases where the creditor is not VAT-registered and cannot therefore recover the VAT from HMRC. We think that approach is simple and properly supportable in principle. We think that it is right to allow creditors in those circumstances, although only those who are not VAT-registered, to recover an amount equivalent to the VAT from debtors as it would represent to them a cost of enforcement. We must remember that the creditors may themselves be suffering from financial vulnerability. For example, the creditor may be an individual who has lost their job, sued their employer and got an award of damages for wages. If we do not have this regulation, it is the creditor who will be out of pocket because they will have to pay the costs of enforcement. So I say with great respect that we cannot approach this matter a little simplistically by assuming that the debtor is always the small person, so to speak, and the creditor is always the grasping outfit. That is not the case.
We must also remember that under this SI an amount equivalent to VAT will not be recovered from the debtor in the vast majority of cases as most creditors will be VAT-registered. I should acknowledge that, as we set out in the Explanatory Memorandum, some VAT-registered creditors may make both taxable and exempt supplies. They will be able to recover only a proportion of the total VAT from HMRC. However, we think that putting them together with VAT-registered creditors is the appropriate policy option. We therefore think that this SI strikes the right balance to ensure that an amount equivalent to VAT is recovered from debtors only where it represents a real cost to the creditor.
I accept that we could have acted faster to clarify this matter. We consulted on draft guidance in March 2020. The work to finalise that guidance was delayed as a result of the department’s response to the pandemic. For example, in this area, we diverted resources and introduced legislative bans on enforcement action by enforcement agents in order to protect public health, so the coronavirus pandemic had an impact on this area as well.
I certainly do not want disagreements about what should have happened in the past to delay any further clarification of future practice, so I am grateful to the noble Baroness for amending the Motion to one of regret.
I understand the concerns expressed about whether in the past debtors have paid more than they should have done. I have great sympathy for the wish, expressed by a number of speakers, to ensure that debtors can have their concerns addressed in legislation. However, limits on retrospective legislation are an important safeguard in a just society as well as being a principle of the rule of law. There must be strong reasons to test those limits even where there is the power to do so. This issue is not one of those exceptional cases.
The issues raised in the Motion are largely matters of private law as between debtors, enforcement agents and creditors, and the interpretation of the legal position between those private parties is a matter for the courts. As we have heard, the issue is currently before the High Court in litigation. It is tempting but slightly inaccurate to say that the Government were taken to court, with all that implies. That case is in fact about a declaration being sought from the court as to what the law is. It is fair to say that there are widely divergent opinions on what the correct legal position prior to this SI in fact was.
To pick up the point made by the noble Lord, Lord Thomas of Gresford, the common law position is simply this. My friend in the other place was not saying that the common law imposes VAT but that it is a basic principle of the common law that when you enforce a debt, you can recover the debt and the costs of enforcement of the debt. If VAT is to you a real cost of enforcement, an amount equivalent to that VAT is recoverable from the debtor. That ties in with basic principles of enforcement of debts, whether it is VAT or indeed your solicitor’s costs in bringing the matter to court and enforcement. To pick up another point, if the enforcement agent is not registered for VAT, they cannot charge VAT on their fees, so the point does not arise in the first place.
We do not think it would be appropriate to legislate for the past. I respectfully disagree with the noble Baroness when she assumes that debtors who paid VAT or a sum equivalent to VAT in the past were wrongly overcharged. That is a point of law which is in dispute. However, we think that debtors must pay the costs of enforcement of a judgment debt. At the same time, we want to ensure that debtors are fairly treated, not just in relation to the process of enforcement but to the costs of the process.
I do not want to give the House a history lesson, but if one goes back to the high sheriff and undersheriffs of days gone by, the predecessors of the High Court enforcement officers, there is an interesting analysis of whether VAT would or might have applied to their fees. Were they acting on behalf of the creditor or on behalf of the court? It is not always very easy to analyse.
VAT itself is not an uncomplex system, so it is easy to understand why successive Governments were perhaps less prescriptive than they might have been as to how it would impact on the fee rates. None the less, where VAT imposes an additional sum and that sum cannot be recovered by the creditor as an input tax, it is an enforcement cost and should be recoverable from the debtor. That said, given that the matter is seized by the High Court, obviously we will keep a close eye on that litigation. We will look at any findings of the court extremely carefully and will consider whether any further action in this area is necessary.
Before I sit down, I should pick up an important point made by the noble Lord, Lord Best, about the enforcement conduct authority. We are strongly supportive of the work that is being done by the Centre for Social Justice, in partnership with the enforcement and debt advice sectors, to set up an enforcement conduct authority to provide independent oversight of firms and to consider complaints. We believe that the proposed authority will make a real difference by raising standards in the industry to protect vulnerable debtors while improving the effectiveness of enforcement. We remain committed to reviewing the new body within two years of its operation and then deciding whether it is necessary to put it on a statutory footing.
The noble Lord, Lord McNicol, referred to PPI. With respect, I am not persuaded that this is a like-for-like issue. The point with PPI is that people were paying sums which they should not have paid and which went into the pockets of the insurance companies. What has happened here is that VAT has been paid, but there is no suggestion that the enforcement officers have not been remitting the VAT which they collected to HMRC. We should look at each issue on its own merits.