Finance (No. 3) Bill (Sixth sitting)

Jonathan Reynolds Excerpts

Tuesday 4th December 2018 Public Bill Committees

[Anneliese Dodds]

I am willing to withdraw amendment 91, given the Minister’s clarification, and I am grateful for his willingness to write to me about the issue that I raised. I make the general point that it is important that we consider these interactions between the social security system and the taxation system. It is particularly important for people on low incomes that we always bear that in mind. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 49 ordered to stand part of the Bill.

Clause 50

Duty of customers to account for tax on supplies

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

I beg to move amendment 92, in clause 50, page 33, line 11, at end insert—

“(9B) An order made under subsection (9) for the purposes of subsection (9A) must be accompanied by a statement by the Treasury of the expected impact of that order on—

(a) the number of traders who are expected to benefit from the reduction of a burden, and

(b) the supply chain in respect of the description of goods or services.”.

This amendment would require an order made under the new provision of Clause 50 to be accompanied by an impact statement.

[The Chair]

With this it will be convenient to discuss clause stand part.

[Jonathan Reynolds]

We now turn to the part of the Bill that addresses value added tax, which is always a much-anticipated part of a Finance Bill. There is a lot to look forward to. Clause 50 relates to the duty of customers to account for VAT on supplies. It is designed to give the Government the flexibility to mend some items of anti-fraud legislation so that there does not end up being an undue burden on small businesses. It works in conjunction with an order of the Value Added Tax Act 1994, specifically section 55A, which aims to prevent so-called missing trader fraud.

I will provide some context about the ongoing challenges presented by VAT. These appear to fall into two categories, which I believe overlap: fraud, and the complications that administering and reporting VAT poses for businesses. Tackling those challenges is impossible if they are considered to be mutually exclusive. Fraud continues to be a major issue for the Exchequer in collecting the level of VAT that is owed, and VAT fraud costs the UK at least £1 billion a year.

That was discussed at length in last year’s Finance Bill Committee, in October 2017, when the Government introduced a clause to place new obligations on fulfilment houses to help to tackle VAT fraud, which has, understandably, worsened with the rise of online sellers that obtain goods through third-party sellers based abroad. As my hon. Friend the Member for Bootle said at the time:

“Many small businesses find themselves outcompeted and outpriced by overseas traders, which not only have lower operating costs but artificially lower their prices by failing to pay VAT on the goods they sell to UK consumers through fulfilment houses based here.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 117.]

That is something that we will all recognise.

My hon. Friend further highlighted that we will all have received casework from small businesses

“that found themselves severely disadvantaged when filling out their VAT returns when they were unable to obtain VAT receipts from either their overseas supplier or the fulfilment business in question. In one case, the reason for the problem was simple: there were no VAT receipts because the seller had not charged VAT, unbeknownst to that particular British business. The online fulfilment house involved simply washed its hands of the matter and blamed a third-party seller that it supposedly has no control or influence over.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 117.]

That flags just one of the multiple VAT issues that small businesses face. The Opposition believe that they need more support in getting to grips with the tax if we are ever to close the VAT gap. The situation has been worsened by the Government’s disaster-stricken attempts to transition to “Making tax digital”, which have thankfully been delayed to next year to give businesses some chance to adapt.

HMRC believes that there is a £3.5 billion VAT gap resulting from mistakes made by businesses when they submit VAT returns. Tax professionals, via the Chartered Institute of Taxation, said in written evidence to the Treasury Committee’s VAT inquiry earlier this year that HMRC must improve its VAT guidance and show a greater willingness to provide rulings where businesses want certainty over VAT treatment. It also echoed the Opposition’s repeated warnings over the diminishing resources and capacity of HMRC, which has been subject to a series of cuts resulting in staff reductions and office closures. That was admirably highlighted by my hon. Friend the Member for Oxford East in her summer tour of HMRC office closures, which was well received across the country. I should say that the cuts were not well received, but the attention that she was able to bring to them was.

The Chartered Institute of Taxation makes six recommendations to help address the VAT gap, which it estimates at a shocking £12.6 billion. I will focus on just one today, which is its request that the Government resist the temptation to

“introduce widespread changes that are disruptive to the majority of compliant businesses”.

That is tied to concerns around the clause, despite what appear to be quite laudable intentions behind it. The clause relates to so-called missing trader fraud. It is a huge problem, and not only in the UK; it is perpetrated across the EU in several different ways. Europol estimates that the cost to the EU is about €60 billion. Fraud is carried out in supply chains, sometimes by organised criminal gangs. They take advantage of the VAT exemption across borders, charge VAT in the UK when the product is sold on and subsequently disappear without relaying it to the Exchequer. As referred to earlier, section 55A of the Value Added Tax Act 1994 helps to prevent that by making the customer, rather than the supplier, responsible for declaring the VAT on certain goods and services, thus taking the benefit of VAT away from the seller.

--- Later in debate ---

[Mel Stride]

I think that issue may be outside the scope of the clause, tempted though I am to be drawn into the issue of childcare and vouchers. The hon. Lady will have noted the delay that we implemented in that respect, to make the transition that little bit easier for some of those who might have been impacted.

The clause transposes new EU law, which we pressed the European Commission to introduce, to help combat tax avoidance. The new law has to be in place by 1 January 2019 and the Provisional Collection of Taxes Act 1968 will give the measure effect until Royal Assent of this Finance Bill.

From a VAT perspective, vouchers are unexpectedly complex. That is because, for one payment, a buyer gets two things: a voucher and an underlying good or service. Without special rules, we risk taxing twice: once for the voucher and a second time for the underlying supply. Gift vouchers could be used to buy products with different VAT rates. It is therefore often difficult to apply VAT at the time the gift voucher is bought. Furthermore, gift vouchers are now often sold at a discount to the face value, via distributors to businesses, which give them away for free in business promotion or staff incentive schemes. It is then not always clear to the shop accepting the voucher exactly what has been paid.

Finally, trading vouchers across borders resulted in problems of double and non-taxation, as different countries have different rules. The changes made by clause 51 and new schedule 16 will standardise these rules. First, the legislation specifies the type of voucher covered. Quite a few things nowadays look similar to vouchers, but are not recognised as vouchers under the VAT system—for example, the type of card many of us store money on to go on holiday or give to our children. We are not talking about vouchers that are totally free from when they are issued to when they are used to buy something, such as discount vouchers found in magazines or toothpaste money-off tokens.

The legislation identifies two distinct types of voucher and sets out specific VAT treatments for each. If we know what the voucher can buy and where, that can be charged at the point of issue and at any subsequent transfer of a voucher through its distribution network. If these details are not known at the time of issue, because it is a general gift voucher, we must wait until it is used to be able to apply the correct VAT. Therefore, the law identifies single-purpose vouchers, such as a traditional CD token that can be used only to buy CDs, which are limited to specific products, and multi-purpose vouchers, such as a WHSmith gift voucher, which can be used to buy many things,.

To avoid charging VAT twice, single-purpose vouchers are subject to VAT throughout distribution, but no VAT is charged on redemption. In contrast, multi-purpose vouchers are VAT-free through distribution, but are subject to VAT at redemption. For the multi-purpose voucher, the redeemer—the shop—must account for VAT. If they know the amount paid for the voucher, they should account for the VAT on that value. If they do not know the amount paid, they should account for VAT on the face value of the voucher.

Because the activities of any distributor of multi-purpose vouchers are disregarded for VAT purposes, there will be certain restrictions on the extent to which they can reclaim VAT incurred on related costs. I hope that the Committee is following this very closely, because it is an extremely important series of elaborations on how these vouchers work. HM Treasury and HMRC have consulted with the relevant businesses represented, and HMRC will be clear in guidance on how the rules will work.

The two new clauses would require two reviews by the Government within three months of the passing of the Act. New clause 8 concerns the impact of the provisions on the circulation and distribution of vouchers in the UK and the EU. New clause 9 concerns potential revenue and other impacts that could arise if UK law were to diverge from EU law.

Collecting VAT when vouchers are used is always complex, and it will inevitably take some time for the new rules to bed in. Throughout the negotiations about the changes in the underlying EU law, the Government were in regular contact with the UK businesses affected by the changes, and it was generally felt that this option was the best of the various options identified. Officials have worked hard with businesses to ensure as smooth a transition as possible, and HMRC has offered to be pragmatic as businesses get to grips with the new system.

I can reassure the Committee that the Government will continue to monitor the effects of the change and other developments in this area, including impacts on revenues. With regard to divergence from EU law, it is far too early to consider such impacts, given that we do not yet know the future agreement with the EU and what it will look like in respect of the VAT system more generally. However, I stress to the Committee that a key advantage of this measure is to ensure a level playing field across the EU, so that UK businesses are not disadvantaged by different rules in other EU member states, which they would need to understand and which could result in double taxation or—in terms of Exchequer impact—no taxation at all. I therefore ask the Committee to reject the new clauses, and I commend the clause and schedule 16.

[Jonathan Reynolds]

I begin with a word of apology to the hon. Member for Aberdeen North for mixing up my Aberdeen constituencies. I can only say to her that in a former Parliament a former Member for Aberdeen South and I were both shadow Energy Ministers, and that at some level I must be missing him and I cannot bring him back. However, that is no excuse for mixing up the two parts of Aberdeen.

Clause 51 relates to gift vouchers and the transposition of an EU Council directive clarifying the consistency of treatment of vouchers. I thought that this was more interesting than it sounded in the explanatory notes; the Minister has done a very good job on that. As he said, this Christmas, when people are out shopping, not many of our fellow citizens will understand that vouchers pose a challenge to HM Treasury in charging VAT, because when a customer buys a voucher, should we charge the VAT on that, or should we charge it when they spend the voucher?

As the Minister said, the discrepancy is further complicated because there will be some stores that sell gift vouchers that then offer zero-rated VAT items, such as children’s clothes. I understand that there have been mismatches in the way that different member states have approached these questions, and that this situation has potentially led to double taxation or no taxation at all across borders. That is the background to the introduction of the EU vouchers directive agreed in June 2017.

The Minister outlined the new regime of single-purpose vouchers and multi-purpose vouchers; I do not think that anyone wants me to repeat that. However, it makes sense that there is clarity on vouchers, finally, and that the risk of there being either double taxation or intra-EU taxation is avoided.

However, professional bodies have raised a number of issues, which I would appreciate some further detail from the Minister on. It is my understanding that there is still no new guidance available from HMRC on this measure, even though implementation is from 1 January 2019. As I mentioned in relation to the previous clause, VAT is a complex and time-consuming area for businesses, so they need as much advice and notice about it as possible. The timing of this implementation, in January, will also coincide with one of the peak times of the year for voucher redemption—hopefully, all of us will get a voucher for Christmas—and that could create a further burden. Gift vouchers are an important part of revenue for UK businesses.

This is a very challenging time for the high street, so the Opposition are mindful that we do not want to create any additional administrative barriers for smaller shops as they develop their businesses. As the Chartered Institute of Taxation has highlighted, shops will need to be able to identify the date of purchase for vouchers, to assess whether they need to declare VAT, given that the rules will be changing. It is surely important, therefore, that they receive as much support as possible from HMRC through the process and receive as much guidance as they can. Those technical details are a concern, and I would appreciate further context from the Minister on how they might be mitigated.

Clause 51 also raises a wider issue, given that it relates to the transposing of EU laws into the UK and our future compliance with EU VAT regulations. Historically, it has not been possible for the UK to fully diverge from the EU on setting rates for VAT. VAT revenues to the Exchequer are a crucial part of the UK’s tax landscape, and we need to know how crashing out without a deal or abruptly pulling out of the customs union will affect how we set VAT rates in future. That is why Labour has tabled new clauses 8 and 9, in relation to schedule 16, which is associated with this clause. New clause 8 would oblige the Government to

“commission a review of the expected impact of the provisions of Schedule 16 on the circulation and distribution of vouchers in—

(a) the United Kingdom, and

(b) the European Union.”

Vouchers are an important part of business for UK retailers. As we leave the EU, questions should be raised about whether this decision on compliance will still work best for both sides, as it has been drafted on the basis that the UK is a member of the customs union. Given that circumstances will change quite dramatically in future, we must be mindful of how this will impact on ongoing changes.

Subsequently, new clause 9 mandates the Government to produce a review of the potential divergence from EU policy of the VAT treatment of gift vouchers, so that we can properly assess its implications. Supporting our high street in today’s challenging environment is a priority for all of us. I therefore urge Members to vote for our new clauses, to make sure that we create the best possible taxation framework for vouchers and help our retailers to succeed.

[Mel Stride]

I will be brief, but will hopefully answer the questions that the hon. Member for Stalybridge and Hyde has posed. First, as regards guidance, these measures were consulted on widely with UK businesses and stakeholders, and HMRC has recently shared draft guidance with stakeholders for comment. HMRC’s guidance was published yesterday, so that is now in the public domain. Of course, if the hon. Gentleman has any particular observations on that, I would be happy to take representations from him. The Government have also given businesses advance notice of the changes. A consultation document was published last December, HM Treasury and HMRC have been in constant discussion with businesses, and we published the draft legislation last July on L-day, with an impact assessment last month.

My final point relates to the hon. Gentleman’s comments about future VAT arrangements in the context of our departure from the EU. Of course, at this stage, we do not know exactly what those will look like. However, the Government have made a general statement that we are seeking to have arrangements that are broadly in line, so that we do not have very dramatic changes when we depart from the European Union.

Question put and agreed to.

Clause 51 accordingly ordered to stand part of the Bill.

Schedule 16 agreed to.

Clause 52

Groups: eligibility

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Jonathan Reynolds]

I will speak briefly to clause 52, schedule 7 and our related amendments. As the explanatory notes say, UK VAT grouping already allows for two or more bodies corporate, such as limited companies or limited liability partnerships, to register collectively as a VAT group if they are both established in the UK and under common control. Their VAT return is considered as one and, therefore, supplies between the individual subsidiaries are disregarded for tax purposes.

However, a judgment from the European Court of Justice in September 2015 on a case relating to a shipping company widened this definition beyond bodies corporate. After consultation, this has been extended to a wider definition, including non-corporate entities such as partnerships and individuals that have a business establishment in the UK and control a body corporate.

We are awaiting further guidance from HMRC in relation to non-corporate entities, which we are told by the Government will be published after Royal Assent. Outstanding issues remain that the guidance will urgently need to address. The Chartered Institute of Taxation, which has been helpful in providing briefings on the VAT-related issues in the Bill today, has outlined a number of these questions already. We need to know whether partnerships could have partners that were both UK and non-UK resident, and whether a partnership that had UK business premises with entirely non-resident partners would be eligible. How would the ongoing challenge of the physical presence test be monitored and policed? That is especially pertinent given HMRC’s constrained resources.

Equally, it is important to understand how ongoing eligibility for partnership will be assessed. Questions that need to be answered include whether there should be an annual declaration or tick box on the VAT return to encourage regular self-assessment. Will VAT groupings be cross-referenced with partnership or sole trader tax returns within that group to ensure accuracy? Another issue raised by the Chartered Institute of Taxation is whether partnership and sole trader tax registration details should be used to tag and monitor which partnerships or sole traders were within a VAT group, both for HMRC administration and for taxpayers’ reference when dealing with such entities and checking VAT registrations.

The Government’s 2017 consultation document stated:

“The government recognises that any widening of grouping will come with a revenue cost unless it excludes businesses that make exempt supplies. This is not something that the government is planning to do, so any potential change must be assessed to fully understand the effect on UK revenue.”

I appreciate that the Minister’s comments appeared to contradict that, but that also appears to be contradicted by the wording in the consultation document last year.

The consultation also says:

“Whilst we agree that there may be implications with joint and several liability for certain entities, the government has no immediate plans to make any changes to joint and several liability rules.”

Can the Minister confirm that both statements still apply 12 months later, and that there is no intention to change joint and several liability rules now or widen grouping in a way that impacts on revenue?

Ensuring compliance and that revenue is fully collected must be our priority. It is noted that, in the 2017 consultation, the majority of respondents agreed with HMRC’s view that an entity could be excluded to prevent evasion, avoidance and abusive practices. However, given the large VAT gap in the UK, the Opposition believe we must be vigilant to any potential opportunities that arise that can be exploited with regard to VAT treatment by incentivising individuals or businesses to enter into groups for tax purposes when they might not otherwise have done so. That is why Labour has tabled amendment 93; I encourage Committee members to vote for it. It mandates the Government to commission a review on the impact of provisions made on the number of individuals entering into VAT groups for the purposes of tax planning by the end of the tax year 2019-20. That will help us to identify quickly whether a distorting effect has been created by the legislation.

The second, wider issue in relation to the clause and schedule is how our own changes in VAT legislation will be impacted by our departure from the EU. Amendment 94 would require a review of the potential revenue changes if domestic law were to diverge from EU law in relation to VAT groups. As we outlined when discussing clause 51, we must take stock of the full impact as the Government propose our departure from the customs union. That will have a huge bearing on how we collect VAT, and potentially VAT revenues, if we choose to deploy flexibility in what we do and do not accept. This measure is no exception and for the purposes of scrutiny it is critical that we have a full understanding of its impact on the UK.

[Kirsty Blackman]

It is not our position that the UK should leave the common VAT area, but we support both Labour amendments, because it is sensible that we have more information about all these provisions, so that the House can take better-informed decisions.

[Jonathan Reynolds]

I am extremely grateful for the hon. Lady’s intervention and entirely agree with it.

On the access of financial services to the single market once we leave the EU, under the terms of what the Government have negotiated—that single market access will almost certainly be denied unless the equivalence provisions prove adequate, although most people expect them not to be—the Government’s advice to firms in the UK is to set up subsidiaries in the EU. It was reported to me in meetings yesterday in the City that there is concern that when those subsidiaries are created, the connected UK entities will not be able to enter VAT groups in the UK, which would therefore trigger a substantial tax liability in order for firms to comply with the Government’s own advice on market access to the EU. The Minister may not be able to answer that now, but I want to put it on the record.

I call on all Committee members to support both amendments today so that we can get a clear and full picture of the wider impact of the measures on the future VAT policy approach outside the EU and on closing our own VAT gap here in the UK.

[Mel Stride]

The hon. Gentleman raised a large number of questions, most of them very specific and quite technical, not least around the treatment of UK resident individuals in the context of VAT grouping, as opposed to non-residents in a similar situation, where perhaps a business has—my terminology—a permanent establishment here, but is run by non-residents. He also made various points about the administration of VAT groups. I will write to him about those issues and the other points he raised in that part of his contribution. He asked a specific question about whether we are updating joint and several liability rules for these changes. The answer is that we are not. HMRC will continue to monitor the rules, of course, to ensure that they work effectively for UK businesses.

The final point that the hon. Gentleman raised related to our future relationship with the European Union. His specific question, as I understand it, was about compliance with the financial services arrangements that might be in place once we have left the European Union: if, as a consequence of that, a UK financial services business had a subsidiary or another operation within the EU27 as opposed to here, would that prohibit that particular operation from participating in a VAT group with the UK domicile concern? I have absolutely no idea what the answer to that is, but I did at least understand his question and I am happy to look into it and get back to him.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.

Schedule 17

VAT groups: eligibility

Amendment proposed: 93, page 305, line 28, at end insert—

Part 3

Review

16 (1) The Chancellor of the Exchequer shall commission a review on the impact of the provisions in this Schedule on the number of individuals and businesses entering into VAT groups.

(2) A report of the review under sub-paragraph (1) must be laid before the House of Commons before 1 April 2020”. —(Jonathan Reynolds.)

This amendment requires a review of the impact of this measure on the number of individuals and businesses entering into VAT groupings for the purpose of tax planning, and for that review to report by the end of the tax year 2019-20.