Taxation (Cross-border Trade) Bill

Lord Hannay of Chiswick Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords
Tuesday 4th September 2018 Lords Chamber

[Lord Hannay of Chiswick (CB)]

My Lords, the powers of this House in respect of this Bill are, as many speakers have said, limited by convention as it is brought forward, rightly or wrongly, as a supply Bill, so there is no power to amend it. For practical purposes, our scrutiny is limited to this Second Reading debate, so it is important that the Minister, who is well known for giving serious and clear answers to questions, does precisely that to the important points that have been raised from all quarters of the House, particularly given the chaotic circumstances that marked the passage of the Bill in the Commons and that have led to many of the questions posed today. There is no lack of them.

I will first raise a point that has not been raised much in the debate hitherto—perhaps not at all. If I have understood the matter correctly, and the Minister will certainly correct me if I am wrong, under the Government’s preferred option for the outcome of the Brexit negotiations—namely, a deal struck this autumn which would include a withdrawal treaty containing a 21-month effectively standstill period—there will be no question of raising any supply under this Bill before January 2021 at the earliest. We should not forget that the 21-month period is likely to prove grossly inadequate—most people now think that it is—and will need to be extended in one way or another by some means or another.

During the transitional period of however long, be it 21 months or longer, the UK, as I understand it— the Government are in agreement with this—will remain within the EU’s customs union and be subject to the EU’s budgetary rules and procedures. So the scope for using the powers in this Bill will be nil. The only circumstances in which the Bill would be used earlier would be if there was no deal, which would give rise to the need for the powers in it. But the Government say that it is not their preferred option to have no deal and that they fervently wish to get a deal—and they had better get one, because the consequences of going over the cliff in March 2019 are dire indeed. So why not bring forward this Bill in the early months of 2019, and only if by then it is clear that the transitional period will not be available—a period during which we are debarred from using the powers in the Bill, if I have understood it correctly? Could the cause for this haste be explained largely by the Government’s doubts as to whether, in circumstances where there was no deal, there would be a majority in Parliament to pass the Bill at all? In any case, legislating now for a no-deal outcome sends the worst possible message to our EU partners about whether we really are negotiating in good faith.

That is made all the more problematic by the next set of questions that I will put, relating to the amendments to the Bill that the Government accepted in extremis in the Commons. The amendments were put forward by the rather oddly named European Research Group—odd because I cannot remember it ever having done a bit of research. They were put forward quite explicitly as amendments designed to wreck the Cabinet’s Chequers negotiating position. That was stated quite clearly in the full light of day. The Government clearly shared the view that they were wrecking amendments—otherwise, why on earth did they put on a three-line Whip to vote against the amendments? Then, suddenly, the clouds cleared, the sun shone and the Government decided that they were not wrecking amendments after all and were acceptable. As Dr Johnson said, impending execution concentrates the mind remarkably. Will the Minister give some account of the thought processes behind that volte-face?

Two of the amendments in particular require further detailed explanation. Several noble Lords have gone over them and I shall do so briefly again. The first relates to the collection of customs duties on imports, both on imported goods coming to the EU via the UK and on goods coming to the UK via an EU member state. Under the Government’s Chequers plan for a facilitated customs arrangement, we would hand over to the EU duties on goods merely transiting the UK, but we would not expect the EU to do likewise for goods arriving to us, for example, via Rotterdam. That latter requirement has now been spatchcocked into the Bill by the European Research Group amendments, and will therefore be on the statute book: that is what we are being asked to agree this afternoon. Has that amended proposal—the one that requires reciprocity—been put to the EU 27? That is a quite simple question: yes or no? If it has been put to them, have they rejected it, accepted it or just cleared their throat? Or are the British Government’s post horses still labouring between Aix and Ghent? Perhaps the noble Lord can say where we are on that.

I will ask him again: was it not, and is it not, a wrecking amendment with respect to Chequers? I think that it is. Or are the Government perhaps hoping to get agreement in Brussels on their original proposition, without reciprocity, and then return to Parliament to repeal the amendment that they were forced to accept in July? That would be a pretty gruesome situation.

Then there is the amendment relating to the systems for charging value added tax. This amendment, if I understand it correctly—again, the Minister will correct me if I am wrong—forbids the UK remaining in any EU system for charging VAT. But that will surely inevitably introduce a new element of friction, a new element of bureaucracy, into UK-EU trade. If so, it will cut right across the main objectives of the facilitated customs arrangement. Another wrecking amendment, perhaps? Perhaps the Minister can explain how that is to be managed.

Finally, how satisfied are the Government that the provisions of the proposed facilitated customs arrangement are, in reality, compatible with WTO rules? Have they consulted the WTO on the matter? Normally, exporters expect to know which rate of duty they will pay when dispatching their goods. That will not necessarily be the case under the proposed arrangement.

I apologise for raising some rather detailed questions, but these are important matters that need clarification before the Bill passes, as it necessarily will, on to the statute book. In any case, I fear that, in the absence of fully satisfying explanations, I shall be supporting either or both of the amendments that have been put before the House.

--- Later in debate ---

[Lord Bates]

The noble Lord says that, but I am not suggesting what he has just accused me of suggesting for one minute. I am placing this in context. There has been substantial scrutiny and time for debate on the issues. The Trade Bill will follow; it has its Second Reading on 11 September, as referred to by the noble Lord, Lord Stevenson. We hope that an agreement with our European friends will take place this autumn, and there will then be a meaningful vote. Following that, there will be an agreement and implementation Bill. Following that, a piece of legislation on the future economic framework will have to come before your Lordships’ House. Placed in that context, this Bill represents the fact that at the moment our customs, trade and tariff policies are hardwired into the European Union, so there is a legislative necessity for us to have a standalone trade and customs arrangement, legislatively underpinned, so that we can prepare for any eventualities that the negotiations throw up. We have been clear throughout that it is in the best interests of this country and of the European Union that we conclude in an orderly way, with an agreement, and that we move to frictionless trade as far as possible.

The debate has focused essentially on the following issues; I will summarise them as a way of trying to work through and answer as many questions as I can in the time available.

[Lord Hannay of Chiswick]

Since the noble Lord is moving on from the point about timing, could he answer the question as to whether the powers in the Bill have any practical applicability in the context of an agreement with the European Union which provides for a 20-month transition period, during which we will not be able to exercise any of these powers because we will still be following the decisions of the customs union and the single market? I accept that, if there is no deal, these powers will have applicability. Am I correct in thinking that the only circumstance in which they will have applicability before 1 January 2021 is if there is no deal?

[Lord Bates]

That is correct. Obviously I defer to the noble Lord, who has immense experience in this area—I believe that he was one of the team of negotiators who negotiated our entry into the European Economic Community—and knows it substantially. In his question, he gave the reason why the Bill is necessary: because we are not guaranteed a deal. However, we are guaranteed that business will need to trade, because we are a trading nation. Therefore, we need to be prepared for every possible outcome or eventuality.

The headings under which this debate has taken place are: the economic impact of Brexit, raised by the noble Baroness, Lady Kramer, and the noble Lord, Lord Fox; trade remedies, which the noble Lords, Lord Kerr, Lord Stevenson and Lord Davies, referred to; the Northern Ireland border and the Bill’s relation to ports more generally, raised by the noble Lords, Lord Hain and Lord Adonis; the progress of the negotiations, mentioned by the noble Lord, Lord Tunnicliffe—and following this debate, my noble friend Lord Callanan will repeat a Statement to update the House on that; the impact on supply chains, mentioned by my noble friend Lady Altmann; and the impact on free trade, mentioned by my noble friend—I underscore the friend element—Lord Trenchard, although the noble Lord, Lord Stevenson, also placed his remarks in the context of the Trade Bill. I have tried to address the constitutional concerns raised by the noble Baroness, Lady Kramer, and the noble Lords, Lord Kerr and Lord Browne. There were also points on rules of origin, which the noble Lord, Lord Whitty, raised, as he did in the take-note debate last December. The noble Lords, Lord Purvis, Lord Whitty and Lord Hannay, referred to the application of duties and the methodology of the tariffs; the noble Baroness, Lady Kramer, raised the important issue of VAT and the way it will continue; and the noble Lord, Lord Hannay, referred to WTO status. I put that on the record just to give those who read these concluding remarks some sort of structure in terms of how I will try to work my way through the debate.

First, on the amendments to Clause 31 and the charge that they have restricted the Government’s options, we have been clear that as we leave the EU, we will also leave the EU customs union. Therefore, the Government have no objection to an enhanced level of scrutiny related to the use of Clause 31. The Chequers agreement does not envisage a customs union with the EU as part of a future economic partnership. Therefore, the amendment is consistent with the White Paper.

The noble Lord, Lord Tunnicliffe, asked whether HMRC has the necessary resources. There was a full response from the chief executive of HMRC, Jon Thompson, to Meg Hillier, chair of the Public Accounts Committee, which did a very detailed report on this subject earlier in the year. He responded as to where they were, including in terms of independent reports by the National Audit Office on the infrastructure project assessments that had taken place.

We have committed an extra £260 million to ensure the UK’s new tax and customs arrangements with the EU, including compliance and customer services staff to resolve the design of the new IT requirement. Also on that note, it was pointed out—a number of noble Lords referenced the fact—that there will potentially be a requirement for the number of customs declarations generated electronically to rise to some 250 million. There are currently 55 million. The capacity of the system that has been designed is for up to 300 million.

The noble Baroness, Lady Kramer, asked about the business impacts of the facilitated customs arrangement. There will be no new routine checks or controls for UK businesses trading with the EU under the FCA model. There will be a range of facilitations to help UK businesses which export to the rest of the world. For UK businesses importing from the rest of the world, they will benefit from the UK’s own tariffs. We estimate that up to 96% of UK goods trade will pay the right or no tariff on the UK border. I note the point made by the noble Lord, Lord Purvis of Tweed, and I will come to it later. The remaining 4% of UK goods trade is most likely to pay the UK’s tariff through the repayment mechanism, which we will make as simple as possible by introducing a range of facilitations.

The noble Lord, Lord Kerr, asked about the Trade Remedies Authority, on which there are provisions in the Bill, but which gets its structure and overarching powers from the Trade Bill to come. The Trade Bill establishes the TRA as a non-departmental public body. It will have an independent chairman. There will be recruitment processes for people to form a shadow Trade Remedies Authority ahead of its being ready for our exit from the European Union. The upcoming Trade Bill provides an opportunity to explore those issues further.

The noble Baroness, Lady Kramer, asked about the impact on supply. The Bill establishes a stand-alone customs regime in relation to taxation. For this reason, it was introduced in the other place on a ways and means resolution. Bills introduced through such resolutions are Bills of aids and supply which, in accordance with established practice, are not amended by this House. There is nothing in this Bill that could not have been in a Finance Bill.

A number of noble Lords, including the noble Lords, Lord Browne and Lord Kerr, referred to Clause 54, saying that, as amended, it prevents the Government implementing the facilitated customs arrangement. The Government have been clear in their White Paper that, under the FCA, the UK would seek to agree a mechanism for the remittance of relevant tariff revenue. The UK has proposed a tariff revenue formula taking account of goods destined for the UK entering via the EU and goods destined for the EU entering via the UK. Clause 54 is therefore consistent with the White Paper.

The noble Lord, Lord Hain, claimed that this contradicts the UK’s commitment to the backstop, and therefore a hard border would be inevitable. This point was also made by the noble Lord, Lord Adonis, who invited me to give a one-word response. I am still working on that, but, if I may, I will give him the lengthy answer first. Clause 55 seeks to avoid a fiscal customs border between Northern Ireland and Great Britain by preventing Northern Ireland forming part of a customs territory separate from GB. That was the backstop arrangement negotiated in December. Since then, both the European Commission and the UK have made their positions clear. The concept of a hard border between the Republic of Ireland and Northern Ireland is simply not acceptable to the Government.

This clause is therefore a straightforward statement of government policy. The Government have always been clear that there will be no hard border between Northern Ireland and the Republic of Ireland and have committed to protect the constitutional integrity of the UK in the joint report in December.

The noble Lord, Lord Hain, among others, asked what that means for the Northern Ireland protocol. Our proposal delivers all our commitments to Northern Ireland and Ireland. It means that goods and agri-food would flow freely across the border, with no need for any physical border, infrastructure or related checks or controls, so the backstop would not need to be used. We have said clearly that we are committed to agreeing a legally operative backstop in the withdrawal agreement, and we will continue to negotiate on this as we intensify negotiations over the coming weeks.

There has been some criticism in terms of how the White Paper has been received, but there have been a number of positive remarks. Chancellor Merkel has said that we have made progress and that it is a good thing that we have proposals on the table. The Taoiseach said:

“The Chequers statement is welcome. I believe it can input into the talks on the future relationship”.


Kristian Jensen, the Danish Finance Minister, said just a couple of weeks ago that Chequers is a,

“realistic proposal for good negotiations”.

He said that we need to go into a lot of detail but that it is a very “positive step forward”.

The Government understand that the impact and cash-flow implications of the different rates of VAT, whether it is import VAT or acquisition VAT, are a very important concern for VAT-registered businesses. It was announced in the Autumn Budget that the Government will look at options to mitigate any cash-flow impacts for businesses. The White Paper on the future economic partnership, published on 17 July, makes it clear that the Government’s aim is to,

“ensure that new declarations and border checks between the UK and the EU do not need to be introduced for VAT and Excise purposes”.

They therefore propose,

“the application of common cross-border processes and procedures”.

I was asked what happens in the event of a no-deal scenario. The Government are confident that the UK can agree a deep and special partnership with the EU. However, a responsible Government should prepare for all potential outcomes, including the unlikely scenario in which no mutually satisfactory agreement can be reached. The VAT for Businesses if there’s No Brexit Deal technical notice confirms that, if the UK leaves the EU without an agreement, the Government will,

“introduce postponed accounting for import VAT on goods brought into the UK”.

I believe that that will be welcomed by businesses and it was as a result of listening to business that we brought that proposal forward. The noble Lord, Lord Browne, asked about delivery timescales. The UK and the EU will work together on the phased introduction of a new facilitated customs arrangement. The precise timeline will be agreed through negotiations with the EU.

The noble Lord, Lord Fox, kindly referred to my north-east antecedents and interest in that wonderful part of the country, which I share with my noble friend Lord Callanan. He talked about the impact on the economy of the north-east of England. We are currently enjoying the fact that unemployment in the north-east is at record low levels—down to 4.3%. That is the lowest level for 40 years and it compares to 8.3% in the eurozone. Therefore, I think that the north-east has the ingenuity, talent, ability and propensity for hard work to be able to look after itself whatever the outcome, and that goes for the rest of the UK.

I turn to the important matter of Scotch whisky. The Scotch whisky industry is a truly great British success story, and the EU accounted for around a third of the valuable Scotch whisky exports in 2016. The Bill provides the ability to adopt the EMCS after our withdrawal from the EU in order to manage suspended UK internal excise duties. The Government want to minimise burdens on firms while still having the tools to tackle the illicit trade which undermines all legitimate producers and retailers.

I think that I have covered the point about unreasonable powers in the Bill, but I particularly want to cover the issue of the no-deal version that the Government presented last week as being “incompatible” with the Good Friday agreement, to quote the noble Lord, Lord Adonis. That is a very serious charge, and we obviously recognise that successive Governments have placed that at the heart of their policies. The UK Government remain steadfast in their commitment to the Good Friday agreement, in both letter and spirit, alongside maintaining the common travel area and associated rights and avoiding a customs border in the Irish Sea. This will meet all the commitments which have been made to the people of Northern Ireland.

There is still a lot of negotiating to be done, but there are some things that we cannot compromise on because they are at the heart of what people voted for—for example, an end to the vast annual contributions to the EU, an end to the jurisdiction of the ECJ and an end to free movement. Inevitably, there are some who are unhappy with our proposals—people who want to reverse the referendum decision—and some who, rather than compromise, would prefer the most distant relationship possible with the EU. However, the country did not vote for either of those things. It is time that we came together and agreed a pragmatic Brexit that most people can support and get on with, and which is good for us, good for business and good for our European friends. I believe that this Bill represents an important part of the preparations for that aspiration. I commend it to the House.