Cross-border Trade and Accounting

Debate between Lord Mackinlay of Richborough and Luke Graham

Wednesday 30th October 2019 Commons Chamber

[Craig Mackinlay]

I would go against that. I think my hon. Friend will find that the digital trail is more likely to be there than the old paper trail. It is rather like my hon. Friend’s tweet from 10 years ago: it is still there, and it will be with him for a lifetime. This gives us an opportunity to have greater audit accountability. I take his point about the big four auditors, but we are talking about volumes of transactions that are mind-blowing, and to ask an auditor—I declare an interest: I am an auditor, and I still hold registration—to be responsible for every jot of every transaction lacks an understanding of what the audit process is all about.

I will return to the point I was making, because I know that the Minister will want to speak for some time. I was talking about the fact that things are not completely frictionless today. If I sell, as a VAT-registered entity in the UK, to another VAT-registered entity, it is not frictionless. That transaction has to be recorded on both sides, and it will find its way through Making Tax Digital on to a VAT return, so the trail is there. If I sell to an EU company, a level of complication comes into play, because I have to obtain an EU registration number, and I can then zero-rate that transaction. On the other side, they have to do a reverse charge to recreate that VAT for themselves and claim it back. It is a burdensome system, whichever way we look at it. Whether or not a business is partially exempt, at the end of the day, the transaction looks the same, but it is not frictionless; it is far from it.

A big trader with transactions of more than £250,000 going out to the EU and more than £1.5 million coming in enters the ambit of the Intrastat system, which is quite burdensome. A business has to classify each and every commodity that it is selling abroad, according to an Intrastat classification nomenclature. If one were to look on the UK Trade Info website, they would find that there are literally thousands of lines of code. One really must ask whether this is bureaucracy gone mad. I was looking at the website as I was listening to the very worthwhile speech by my hon. Friend the Member for Ochil and South Perthshire. There is a different code for frozen lamb carcases and half carcases from frozen meat of lamb. One wonders why we have such a complex system.

This is all done electronically, and it comes down to trust. When we buy something in a shop, there is not a man from HMRC at the counter making sure that the transaction finds its way on to a VAT return, just as not every single transaction across EU borders is checked. But those records and proof of a good being transferred have to be maintained for six years. Again, this is not a frictionless system.

The issue of trust is very relevant to the Republic-Northern Ireland border. There are massive excise duties across that border. There are different currencies and a different VAT rate. Corporation tax is different, and income tax is different. There are a vast number of different things going on. I always give the example of the Jameson lorry that trundles from the Republic across the border into the north and perhaps then over to GB, and the Bushmills lorry going from Northern Ireland across the border to the south. There is no physical border infrastructure, yet there are hundreds of thousands of pounds of potential differences in the excisable duties. These lorries are never stopped, however, because there is trust, and that is the route to solving this problem.

Many people will say they have concerns about VAT losses across the border. There are such concerns, but again, this is based on trust. I consider that the amount of excise losses even today, during our membership of the European Union, must be of very great interest to the Financial Secretary to the Treasury. Let us just consider the cigarette trade, in which cigarettes come across the border from Poland at £2.50 a packet versus a UK cigarette price of about £10 or more, yet we accept those losses because individuals are allowed to bring in as many of these products as they please. That obviously feeds into a black market, and I can assure the Financial Secretary that those are just the cigarette trade excise losses. We have chosen as a country—for good or evil, but that is a debate for another day—that such evil products should have a very high rate of excise in the UK for health reasons, and we find that a good percentage of cigarettes for sale in the UK come in from other EU countries.

I am very pleased that my hon. Friend the Member for Ochil and South Perthshire mentioned that the US has a federal system. The US is often held up as the land of the free, as it is called, but I do not think that holds very true of Uncle Sam. The level of bureaucracy in running a business in the US is infinitely higher than in running one in the UK. I was quite intrigued to learn that if an individual in California decides to buy goods on eBay or whatever site they please from a low-tax state such as Dakota, they have to do a personal return for a transaction above a certain size monthly or quarterly, and actually return the equivalent of the sales tax—VAT, in other words—that the Californian authorities have lost because they have taken their trade outside California. These things are solvable.

I really wish the hon. Member for Strangford (Jim Shannon) was still in his place, because I understand the Northern Ireland concerns. As with anything in the profession of accounting or of running a business, when there is change, everybody puts their hands up in the air and says, “We’ll never get to grips with this. I’m retiring. I’m giving up. It’s all too complicated.” That applies to the real-time information for PAYE that we imposed some years ago—there were the same concerns—or auto-enrolment for pensions, but we get on with it.

[Luke Graham]

My hon. Friend is making a very strong point about taxation returns and the problems in Northern Ireland. Does he agree with me that some of the simplest solutions can be the best? Some of the best tax regimes are in places such as Hong Kong where there are flat taxes, which are simple and elegant. He talked about some of the complications in the US, which has a tax code that runs to some 75,000 pages, so it is said, whereas the UK’s had about 17,000 pages in 2015.

[Craig Mackinlay]

That is a topic for a wider debate, which I have often considered. The UK tax code does not have 17,000 pages; it has been rather well expanded to 22,000 pages. When we compare that with the tax code of Hong Kong, which runs to 350 pages, we can see the difference. When I was a councillor on Medway Council, we had a document on the localisation of council tax that ran to 370 pages. I wondered how on earth the entire tax code of a very successful and vibrant economy such as Hong Kong could run to 350 pages, yet Medway Council, which I served on, managed to get a 370 page document just to consider the localisation of council tax.

I know the Minister will want me to conclude, Madam Deputy Speaker, and I do not want to take up any more of his time, but the fact is that these things can be solved through the trust that exists today and the digital returns that exist today, including internationally. The concerns that our friends in the Democratic Unionist party have about a future trading bureaucracy are real, but once this is in operation, they will fade away, and people will get used to the new system within a very short time. I thank my hon. Friend the Member for Ochil and South Perthshire for bringing forward this debate, and I look forward to hearing from the Minister.