Finance Bill (Fifth sitting)

Stella Creasy Excerpts

Committee Debate: 5th sitting: House of Commons
Tuesday 24th October 2017 Public Bill Committees

[Kirsty Blackman]

I appreciate the Minister’s point. In an earlier sitting, he mentioned the positive timelines when people phone HMRC for advice; apparently the phone is answered very quickly. I get that he says the statistics show that, but people are walking into my surgeries and into my constituency office saying that they have tried for hours to phone HMRC and have really struggled to get through. Despite him saying that the statistics show one thing, the lived experience of my constituents is very different. That is why I have these concerns, and even if one person or a handful of people cannot get through on the phone and fill in their form on time because they are not able to answer the question, it is a concern. I implore the Minister to continue working on call times and to ensure that, when people phone, they get through as quickly as possible and that the calls are answered, and that the advice provided is correct so that people can make the correct choice, particularly with online forms.

Labour Members have tabled a number of amendments to the clause. We were clear in the SNP manifesto that we supported a phased move to digital reporting, so what the Minister has proposed is now much more in line with what we were thinking. I ask that Labour Members, in speaking to the amendments, explain why they chose 2022, and I will make a call after that on whether we think supporting them is relevant. One Labour amendment suggests that we should not move towards digital reporting, which would be a concern for us because our manifesto commitment was positive about digital reporting. I look forward to hearing the comments from the Opposition and the Minister.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

As ever, I am eager to serve under your chairmanship, Mr Howarth. I come to the Committee with a series of amendments on what digital reporting might offer us to resolve some of the challenges faced by employers and employees in our country. There are two issues in particular, which I will come to in turn, because as ever with the Finance Bill, they are technical.

First, I will deal with the treatment of the lowest-paid staff in our country—Office for National Statistics data show that, of all low-paid people, waiters and hospitality staff get paid the least—and what we can do to help them with their incomes. Secondly, I will look at how digitisation could help us to address compliance, which is one of the biggest issues for small businesses. To prefigure the Minister’s comments, I know he will say that that is for another Bill, but given how important it is for the systems to work together, I think this is an issue for this Bill. I hope he will bear with me.

I turn first to amendments 7 and 8—amendments 8 and 39 are identical—which concern the treatment of waiters and hospitality staff. Many Members may be familiar with campaigns on the treatment of tips, service charges and gratuities and with evidence showing that some employers were using those to top up people’s wages and to avoid paying the national minimum wage. Members might therefore be relieved that legislation was brought in to prevent that, but it has become clear that many employers still use tips, service charges and gratuities to avoid paying their staff properly. The amendments go to the heart of how we can address that.

In particular, Members might not be aware that people are supposed to pay tax and national insurance on their tips. If an employee is paid their tips through a tronc, where their employer collects the money usually using an online system, which is what we are debating today, the employer is supposed not only to pool the tips and share them out—after all, I think we would all recognise that as well as the person who serves a meal, the people who work in the kitchen deserve recognition of their work—but to check that the employee has paid national insurance and tax.

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[Stella Creasy]

Yes, that is the concern. There is a lot of evidence that the exemption, which lets staff run their own tips scheme—it is like staff in a small café sharing the money in the jar, but across a large restaurant chain—is being used by major employers to avoid paying national insurance and, indeed, pension obligations further down the line, especially given auto-enrolment.

Another issue to which the amendments relate is the variations in charges that employers apply to employees for administering such schemes. Some restaurant chains will pass on 100% of the tips paid to a member of staff, while others will charge up to 20% in administration fees for doing it through an electronic system. Clearly, that is not fair and I warrant that customers have never had a restaurant explain to them how much they will charge the employee to pass on the tip that customers want to give them. The amendments are designed to help us understand what is going on.

I hope that the Minister will have strong words with his colleagues in the Department for Business, Energy and Industrial Strategy, because if, as we fear, a tax take is being avoided and the lowest-paid people in our country are being exploited as a result, surely we all agree that we need to do something about that. That is why I tabled the amendments. Indeed, 18 months ago, many of us took part in a Government consultation on precisely those issues—that is, how to ensure a fair system for administering tips, service charges and gratuities. I have to tell the Minister that, 18 months on, the Government have not even published the results of that consultation, let alone looked at what could be done to make sure that neither the Exchequer nor the employer is being short-changed.

The Bill offers the Minister an opportunity to make progress on an issue that his ministerial colleagues have kicked into the long grass. If we are digitising records, we can ask employers to clarify precisely what is being collected in tips, service charges and gratuities, and what is income. The amendments address exactly that point: they simply propose that an employer should record the different forms of income—with electronic systems that should be a relatively easy thing to do—and an employee would then be able to access that information.

That is important because if someone is self-employed and working in restaurants—my colleagues from north of the border have mentioned people administering their own tax records—they ought to know what their liabilities are. At present, however, someone who is part of a tronc system does not necessarily know what they are being paid in tips, gratuities and service charges. These simple amendments ask the employer to set out precisely the different streams of income, which their computer systems will easily collate for them, so that our tax system acts more efficiently.

If the Minister is not prepared to accept the amendments and acknowledge the need to make progress—we are, after all, talking about the poorest-paid employees in our country—will he commit to asking his ministerial colleagues in BEIS why it is that, 18 months on, when so many people have provided information about how we could solve the problems, nothing has happened? Indeed, I have regularly asked when the consultation results might at least be published, but the answer has always been, “Sometime in the future.” I am sure that the Minister would agree that the people who serve him a cup of coffee in a restaurant deserve better service from us in making sure that they are not exploited.

Amendment 10 relates to an issue that has come up very little in this Committee—we should correct that—namely the Japanese knotweed that is Brexit, which has taken up so much of our time. I appreciate that the Minister will say that the amendment is not needed because he has published a White Paper on how customs and VAT should fit together. However, having read that White Paper, I must draw attention to an omission from it.

I am sure that Government Members will judge me because I have become slightly obsessed with things such as the 13th directive on VAT, and I am sure they would all like to do a pub quiz on it too. Normal VAT rules allow that businesses registered in the UK can recover UK VAT. People understand that: for most businesses, VAT compliance is one of their biggest pieces of work. The issue with the 13th directive, which the amendment addresses, is the question of what happens when businesses trade in Europe. After all, Europe is still the primary market for the vast majority of businesses: 63% of members of the Federation of Small Businesses have said that Europe is their priority market. That means that if a salesman goes to Sweden and stays in a hotel, the hotel might charge VAT and there is no way that that business would be able to deduct Swedish VAT on its UK VAT return. At the moment, however, under the single market procedures, there is a process by which foreign VAT can be recovered directly from the country in which it was incurred.

For those Members who are VAT geeks, that provision is in articles 170 and 171 of Council directive 2006/112/EC, the prime VAT directive. I will, of course, pass that detail on to Hansard. The detailed rules are in Council directive 2008/9/EC. That is implemented in our own domestic legislation, in section 39 of the Value Added Tax Act 1994 and regulation 20 of the Value Added Tax Regulations 1995. In practice, that means that each European state is obligated to make a VAT refund. Obviously, there are rules on that, but it works pretty straightforwardly through an online electronic system, which is why it is relevant to the charge under discussion. I can see the Whip wondering where I am going with this, but there is a direct connection.

A similar scheme applies across the EU to businesses that are not established in the EU. That is the 13th VAT directive, which is implemented by section 39(2)(b) of the 1994 Act and is a more complicated system. The amendment is simple. When we leave the EU, we will no longer be able to rely on the simplicity of the intra-country VAT collection scheme that has helped businesses in Britain to trade and provide services, particularly in Europe. We will, therefore, need to move to the 13th directive, or we may move to something else. The customs White Paper, for instance, mentions an “innovative” scheme, but I am pretty sure that other countries, for which the intra-country scheme works well, would not be particularly willing to undertake such innovation. I think they would be happy for us to move to the 13th directive.

I am concerned that there is a lot of evidence that the 13th directive and its administration is not very effective for countries outside the EU. In particular, the 13th directive states that member states must refund VAT to foreign traders. It also states:

“Member states may make the refunds…conditional upon the granting by third states of comparable advantages regarding turnover and taxes.”

One could argue that the Bill’s introduction of an online electronic system provides a comparable advantage, but my amendment asks the simple question being asked by many businesses, including local businesses in my constituency, which are starting to panic about how they will manage their VAT returns in future. How will the proposed electronic scheme fit in with regard to both the current regulations relating to intra-EU VAT refunds and the 13th directive?

Having looked at the Minister’s document, I am concerned that, although it talks a lot about what the UK will do, it does not talk a lot about the 13th directive and what it will mean for British businesses. Page 19 refers to contingency in case there is no deal—of course, we all know that that is a sensitive question for the Cabinet—but what British businesses need to know now is, if they are going to continue to trade in Europe, how they can do that in a cost-effective and red-tape-free way?

One of the more bizarre elements of Brexit is that we seem to be arguing about red tape as though the other side wants more of it, and those of us who wanted to stay in the European Union are bad for wanting less of it. This issue is a great example of that challenge, where being part of the European Union had simplified a process for British businesses. A quarter of FSB members have said that the introduction of any tariff or complication with trading with Europe would put them off trading altogether. We need this Bill to match what is going to happen in future, so that businesses using an online system will not have to change it very quickly as a result of the rules of the 13th directive implemented by other countries making it harder for them to use.

If the Minister will not accept my very simple amendment asking him to set out just how this Bill will impact on the 13th directive, will he commit to discussing with British businesses what the directive might mean for them in terms of VAT compliance and recouping their costs, and what the consequences for them will be in terms of administering the scheme? All small businesses in our constituencies that are looking at that future trading relationship will want to know how much additional paperwork they are going to get, and they deserve an answer.

[Peter Dowd]

I will to speak to clauses 60 and 61, schedule 14 and clause 62 together, as they represent a package of measures that would introduce powers and regulations surrounding digital reporting and record keeping for both VAT and income tax.

The Opposition’s concerns about the Government’s plans for making tax digital are well-versed. We raised them on Second Reading of the March Finance Bill, before they were dropped, and raised them again in the debate on the Ways and Means resolution for this Bill, as well as on its Second Reading. We fully support digitalised tax reporting, which we can all agree has the potential to drastically reduce the amount of time individuals and business owners will have to spend filling out long and complicated tax returns. We could also free up some of HMRC’s time, so that it is better spent clamping down on tax avoidance.

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[Stella Creasy]

I am a little surprised, given that we have presented evidence today that tax may be being avoided by using HMRC’s E24 guidelines, that the Minister says that we have to wait. We have been waiting 18 months for the consultation even to be published. If he will not accept the amendments today, can he just tell us how long he is prepared to wait and how many people he is prepared to see exploited by the regulations before the Government act?

[Mel Stride]

I thank the hon. Lady for what is a slightly loaded question, if I may say so. I am certainly not prepared to wait for abuses of any kind, but I am prepared to wait, and it is right to wait, for a deep and considered consultation, as opposed to a short debate in the context of the Finance Bill. That is the critical point to bear in mind on this matter.

The clauses before us provide for making tax digital for business. That concerns the way in which businesses record and report their tax liabilities. The hon. Lady made some powerful points about the treatment of service charges, but I believe that they would be better pursued through the Department for Business, Energy and Industrial Strategy. It has responsibility for this area and is best placed to ensure that tips, gratuities and service charges are treated in line with the principles of clarity and transparency set out in its recent consultation. Dealing with the matter through legislation on digital taxation would risk missing crucial elements for employees or businesses that have been captured in the submissions to the consultation.

[Mel Stride]

The hon. Lady raises an extremely important matter, which is those employers who do not adhere to the requirements of the national minimum wage. HMRC and the Treasury take that extremely seriously, and we have mechanisms in place, as she may know, for reporting instances of that where they occur. I can assure her that the Treasury is the Ministry directly responsible for strategic oversight of HMRC and that HMRC takes any abuse of the national minimum wage requirements and regulations in this country extremely seriously, and pursues and brings to book those who commit abuses.

[Stella Creasy]

Will the Minister therefore commit today to investigating the use of the E24 guidelines and the tronc schemes, to which we have referred? He may not accept our wider point about protecting people and the tips that they have rightly earned, but HMRC’s E24 guidelines fall directly within his remit, and it is precisely that scheme that we are worried employers are abusing, so will he commit today, given that he has just explained to my hon. Friend the Member for High Peak that he cares very much about this matter, to an investigation and to publishing the results, so that we can all be confident that no one is being exploited in that way?

[Mel Stride]

HMRC can already investigate when it suspects the kind of abuse to which the hon. Lady alludes. To be specific, if HMRC opens an inquiry into whether PAYE or NICs are being operated correctly, it will be able to ask the employer or the troncmaster how they have recorded service charges and tips and how those have been allocated, and trace them back even to which customers paid for them. The tools are there, the willingness is there and the evidence is there that HMRC is doing precisely what the hon. Lady would expect it to do in pursuing this matter.

[Stella Creasy]

Just so that we are all clear, because I can see that Government Members are also concerned that there may be abuse of the E24 guidelines—this is not about individual companies—will the Minister commit today to his officials doing an investigation on whether the E24 guidelines are being abused in the way that has been described and to reporting back to all of us in the House?

[Mel Stride]

As I just said to the hon. Lady, we can say in relation to any aspect of HMRC’s operation or any of the rules that it is there to clamp down on that we want regular reporting and all the rest of it. The point is that as a Ministry, the Treasury is there to have strategic oversight of HMRC and to ensure that it is behaving in an appropriate way and chasing down tax avoidance, evasion and non-compliance in whatever form they may appear, including the forms that she has raised. We will continue to do just that.

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[Mel Stride]

I thank the hon. Lady for her further point. I guess it comes down to interpretation. It seems to me that if it is not reasonably practical for a person or company to use electronic communications, the reliability of the service—another way of describing the point she raised—would be an important part of the judgment that would be made.

The clause continues with “Further exemptions”. Proposed new paragraph 15(1) states:

“The Commissioners may by regulations make provision for further exemptions.”

New paragraph 15(1) states:

“The exemptions for which provision may be made include exemptions based on income or other financial criteria.”

There is therefore a recognition in the Bill that not only do we need to get it right for the current circumstances, but we need the flexibility to be ready for any circumstances that might present themselves and which we have not considered at this stage. Those would need to be addressed further down the line.

For those who can go digital but require additional assistance, HMRC will continue to provide a diverse range of digital support, including webinars, helplines and YouTube videos, to help them meet the requirements of making tax digital.

The hon. Member for Aberdeen North also seeks to provide for a phased implementation period, with the commencement of each new stage requiring approval by the House. We have already revised the implementation to start with businesses that report quarterly, and stakeholders are operating on the basis of the new timeline. We are phasing in the implementation by piloting the changes and by starting with mandation only for VAT and those above the VAT threshold. The secondary legislation required to lay out the detailed operation of MTD will be laid before the House in due course, offering Members a further opportunity to scrutinise our plans and consider our proposals.

The hon. Member for Walthamstow has tabled an amendment to require HMRC to publish an assessment of the effect of our exit from the European Union on MTD for VAT for small businesses. HMRC wants to give businesses plenty of time to adapt to MTD and is allowing for a full year of piloting the changes before mandation applies and before the UK leaves the European Union. If businesses wish to begin keeping their records digitally before we leave the EU, they will be able to do so.

The hon. Lady raised specific issues in respect of VAT and the 13th directive. The Government do not consider there to be an MTD issue here. MTD is about how records are kept and reported, rather than the nature of the VAT regime itself. The regulations will be consistent with the requirements of the 13th VAT directive, but if she has specific concerns, HMRC will be happy to look into them.

[Stella Creasy]

I am happy to clarify. At the moment, the intra-country VAT scheme is administered online, which makes it relatively simple for people in the UK to reclaim VAT they have incurred in other countries. As we know, the 13th directive requires every single other country to come up with its own VAT scheme, so there is a question about the compliance of different schemes with our scheme. If we have a digitised system, it needs to be able to interact with 27 other countries’ VAT schemes, rather than one EU-wide scheme. Has the Minister’s Department done any work on how the other 27 schemes will interact with our online scheme, so that businesses can be assured of the frictionless transfer that his Government so often promise on these issues?

[Mel Stride]

The hon. Lady raises a very specific point within what is a large set of negotiations on all the issues of customs, excise and VAT. She will be aware that a customs and excise Bill will be presented to Parliament fairly shortly.

[Stella Creasy]

I have looked at the Minister’s White Paper, and it does not mention the 13th directive at all. If he could clarify that a second White Paper will address this issue with the 13th directive, I am sure that many small businesses would be relieved.

[Mel Stride]

As I am sure the hon. Lady knows, the White Paper sets out that the Bill will be a framework Bill. The purpose of the Bill will be to ensure we can enact through legislation—largely secondary legislation—whatever arrangements we arrive at as a consequence of the negotiations we are in the middle of. It is not my position here today to prejudge exactly where we will end up on VAT, but I can reassure the hon. Lady that all the preparations and legislation will be in place to accommodate in as frictionless a manner as possible—as she rightly says—the exercise of VAT between ourselves and our former European partners, as well as customs at the borders and all the other important issues that will arise once we leave the European Union.

[Stella Creasy]

The Minister is being incredibly generous. I hope he will forgive me; sometimes I must feel like a bear of very little brain on these issues. The 13th directive is the manner by which EU countries deal with non-EU countries’ VAT claims. It is an immovable part of the post-Brexit landscape, as I am sure the Minister agrees. Can he clarify that it is the 13th directive that his Department is engaging with? He said that the White Paper was a framework document. Will the customs union legislation deal with the 13th directive, or does he think there will somehow be a completely different scheme? I know that the White Paper talks about innovation, but it seems a bit pie in the sky to suggest that the 13th directive will not be part of this. Why is he not talking about it?