Clause 17 - Requirement of evidence or security
Finance Bill
3:00 pm

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 84, in

clause 17, page 15, line 28, leave out subsections (4) and (5).

Photo of Mr John McWilliam

Mr John McWilliam (Blaydon, Labour)

With this it will be convenient to discuss the following:

Amendment: No. 1, in

clause 17, page 15, line 42, at end insert—

'(6) If the Commissioners enforce their security to secure payment of any VAT that is due from a person other than the taxable person, the taxable person may recover the amount of that VAT from that other person.'.

Amendment No. 85,

in clause 17, page 16, line 6, leave out subsection (7).

3:15 pm
Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

Having moved so rapidly, we come now to VAT. I think it is only fair to say that that subject will need to be considered in a little more detail, because there are a number of points to be made.

I shall be economical in introducing the amendments, and it may be helpful if I deal with amendment No. 1 first, and then amendments Nos. 84 and 85. The clause is intended to enable Customs and Excise to require the deposit of a security from a business involved in the VAT supply chain, the operation of which places the revenue at risk. That provision is intended to come into effect on 10 April, and it also includes a provision for Customs and Excise to accept evidence, other than that contained in documents, to support a claim to deduct input tax. It is that second evidentiary point to which amendments Nos. 84 and 85 are addressed.

Amendment No. 1 would add a further provision. The clause raises issues of concern as to the general balance—this is an important constitutional issue, and one of general rights—between achieving the aim of protecting Customs and the revenue it is able to raise, and preserving the rights of individual taxpayers. It goes further than the existing provisions, in that it extends to supplies to the taxable person and supplies by other persons. The key point is that the clause places no limitations on Customs and Excise, as the security provisions can be invoked whenever it thinks it necessary for the protection of revenue.

The provisions could be onerous, particularly for newly formed businesses. It has been noticeable throughout the consideration of clauses by the whole House during the past few days that that sector of our economy has exercised hon. Members from all parties. It is an important point, and the hon. Member for Sheffield, Heeley (Ms Munn) made a very clear speech about small businesses in her constituency. The provision is particularly onerous for newly formed business. That is why we have tabled the amendments, which I hope the Economic Secretary will find appropriate and proportionate, and will accept as the solution to the problem.

There should be a right of recovery from third parties if VAT on supplies by them is collected through enforcement of the security. That logic

reflects what I believe was in the minds of the draftsmen. I do not think that we are asking for something beyond what they have contemplated, but it is not in the Bill. Very revealingly and helpfully, in that it discloses the mind of the Government and those who have sought to put their instructions into words, there is such a reference is in paragraph 1 of the explanatory notes on the clause:

''This clause extends the powers that Customs and Excise currently have to require the provision of security where it is considered that a business is associated with other businesses whose pattern of trading poses a real threat to the proper collection of VAT.''

The reference to associated businesses in the explanatory notes should be reflected in the clause. That does not seem to be asking too much or doing anything other than making the clause clear.

Amendment No. 1 would also ensure that there are limitations to the circumstances in which the provisions can be applied. It is not as though I am raising this point for the sake of it. I have received representations on the matter from the most respected institutions. Those bodies take a deep interest in such affairs, and have a wide collective client base, which is aware of what the measure means on the ground. The Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation and the Institute of Indirect Taxation have all written in stronger terms than I have used to the Economic Secretary and in the amendments. Some of those bodies would have had the clause struck from the Bill on the basis that it represents a serious potential problem.

For the sake of the Committee's efficiency, I shall refrain from reading out the Law Society's long brief, which I commend to those who are concerned about the matter. As Members of Parliament, we are all concerned to protect the interests of our constituents as citizens and taxpayers, which is part of our duty in examining all provisions in legislation proposed by Governments of all colours. It is also obviously our duty to examine the Government's proposals in order to protect the revenue that they can raise.

Subsection (2) broadens the powers of Customs of Excise to require the production of documents ''or other information'', which may give rise to unreasonable, irrelevant or inappropriate requests for information that have no direct bearing on the transaction with which the inquiry is concerned.

Amendment No. 1 addresses the important point about an appropriate, proportionate and fair settlement. Above all, we should seek to enshrine in statute a sense of justice on which taxpayers, citizens and constituents can properly rely without concern and doubt that there may be a clause that enables Customs and Excise to act inappropriately—I am not suggesting that it will. The taxpayer should not be subject to the enormous concern, worry and expense of having to prove their position in the civil courts at a cost risk. Putting a benchmark in statute would set the standard that we expect, which is why amendment No. 1 seeks to address that point.

If, much against my hope and expectations, the Government are not minded to accept the amendment,

given that the group of amendments clearly and sensibly relates to one clause, I shall seek recognition that amendment No. 1 deals with a slightly separate point from amendments Nos. 84 and 85. Under your guidance, Mr. McWilliam, I may want to vote separately on amendment No. 1 and to take amendments Nos. 84 and 85 together.

The next problem with the clause is the requirement for evidence and security. The issues on subsections (2) and (3) are not very different from those in the existing provisions. I want to make it clear that the clause has been genuinely thought through and filleted to establish where the problem lies. I do not seek to amend subsections (2) and (3), which are part of the intended tightening up by Her Majesty's Customs and Excise of input VAT refunds to traders who do not hold VAT invoices. That is made clear in the consultation paper ''VAT Strategy: Input tax deduction without a valid VAT invoice'', which was published in April 2003. Customs and Excise intends to be tougher on computers and associated equipment, telephones and associated equipment, alcohol and road fuel rather than on other goods and services, which is not objectionable.

Subsections (4), (5), (6) and (7) are an entirely different matter and give rise to real concerns. In addition to the concerns that we have outlined, which we have sought to address through amendment No. 1, there are the problems addressed by amendments Nos. 84 and 85.

Ever since VAT was introduced, Her Majesty's Customs and Excise has had the right to demand security from a supplier for his future output VAT liabilities—he has a limited right of appeal against that—or in case input of VAT refunds are incorrectly made to him. The security is normally a cash deposit or bank guarantee.

I sought with sleepless effort to distil the serious issue contained in the pages of representations that I have received, but I thought it might be easier for hon. Members to follow my argument if I referred to parties A, B and C. For those who like drawing diagrams, this may be the moment. The new provisions state that if A makes supplies to B and B makes supplies to C, B can be required to give security not only for any VAT that becomes due from him to Customs and Excise, but for any VAT that becomes due from A or C. There is no restriction to goods or services of any particular sort. Customs and Excise must show under subsection (7) that there has been or is likely to be some evasion or attempted evasion of VAT in relation to some goods or services supplied to or by B. That might have been at any time in the past, it might have been trivial and it might not have been by B. Enforcement of the security is not restricted to VAT on supplies when there has been or is likely to be evasion.

That is extraordinarily widely drafted and could impose a crippling—I am not using the word lightly—obligation on small businesses for VAT liabilities that are essentially not their own. The provisions should be deleted. Under existing legislation, Customs and Excise can demand security from A or C for their

own output VAT liabilities. If A or C find it difficult to come up with that security, B can help them out if he believes that it is in his commercial interest to do so. That is why our amendments Nos. 84 and 85 would omit subsections (4), (5) and (7).

I have done my best to explain the issue clearly in a complex but important area involving taxpayers' rights versus the state's interests. We could be discussing a more fundamental interface of the interests and duties that we, as Members of Parliament, must tackle.

Photo of Mr Rob Marris

Mr Rob Marris (Wolverhampton South West, Labour)

Does the hon. Gentleman share my surprise that in new section 77A there is a knowledge test, but clause 17(7) to which amendment No. 85 refers contains no such knowledge test for person B?

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

I am grateful to the hon. Gentleman. He has put his finger on a fundamental issue, not least because knowledge of evasion or attempted evasion is fundamental to whether a citizen is likely to attract a penalty and difficulty. The hon. Gentleman's helpful and pithy contribution demonstrated the problem better than I could, having compared the different parts of the clause, taking it as a whole and examining the intended mischief that the Government seek to address. It is not a matter of dispute in the Committee that the Government must tackle tax evasion wherever and whenever it arises. We would support clauses that were designed and targeted to achieve that.

The clause is extraordinarily widely drafted. There is disparity in the application of a knowledge test, and there could be a significant financial penalty and a major impact on a person's reputation, even though he has not taken the action or had the knowledge that is causing the problem. Therefore, the Government must reconsider the matter. I recognise that a great deal of work goes into these Bills and that there must be pride of authorship—I do not accuse the Minister of that.

I hope that the Government will accept the amendments, because the provision could create a mischief that can easily be spotted now that it is on the record, given what I have said. I hope that we will not find this debate quoted in courts around the land when it comes to costs assessments and whether it was right for Customs and Excise to be able to recover costs when it had to take somebody through the courts who had not done anything wrong and may not have had knowledge of the mischief that it was trying to prevent. Those are the issues at stake.

3:30 pm
Photo of Mr John McWilliam

Mr John McWilliam (Blaydon, Labour)

It may be for the convenience of the Committee if I explain exactly where we are now. At the moment the only question before the Committee is amendment No. 84. If the hon. Member for Eddisbury wants to put amendments Nos. 1 and 85 separately to a vote, I shall invite him to move them formally at the appropriate time. However, if the amendments essentially eat the clause, and they do, it is my view that we are having a clause stand part debate at the same time.

Photo of Mr David Laws

Mr David Laws (Yeovil, Liberal Democrat)

Welcome to the Committee, Mr. McWilliam, and I welcome your guidance on the debate. It is extremely useful and will

allow us to deal with many issues at the same time and more crisply than would otherwise be possible.

We support the argument developed very effectively by the hon. Member for Eddisbury and the amendments. Clause 17 and the related clause 18 seem to have been two of the most controversial in the Bill and are probably two of the more controversial clauses that we shall debate. The hon. Gentleman was correct to say that there has been widespread criticism of them—I shall try to focus on clause 17, as that is the one before us—which has ranged across the principal bodies with expertise in tax matters, including the Law Society, the Institute of Indirect Taxation, the Institute of Chartered Accountants and the Chartered Institute of Taxation. All those bodies have been extremely critical of the way in which clauses 17 and 18 have been drafted and all have made points that appear to underpin the hon. Gentleman's arguments.

The background is well understood by all members of the Committee, who understand that the Government are concerned about the loss of large amounts of indirect tax revenue—possibly billions of pounds a year—and are responding by closing some loopholes used to evade tax that could be used to cut tax burdens on business or to invest in public services. Therefore, this is clearly an important issue.

We also understand why the Treasury wants to draw the clauses as widely as it has, as such a body would always do. It enables it to catch many types of offences without having to come back in one Finance Bill after another to introduce increasingly tough measures, as has happened in some areas of tax evasion. This time, the Treasury seems to seek to catch a whole area of evasion in one go, but in doing so, it is asking us to trust it to administer that in a way that is safe and reliable for the interests of taxpayers. I hope that the Economic Secretary will not mind my saying that businesses across the country and Members on this side are concerned about giving the Treasury powers to the extent that it seems to seek in this and other clauses—the power to make judgments itself on whether businesses have acted reasonably in particular cases.

I draw the Economic Secretary's attention to much of the evidence provided and many of the points made by the leading tax advisory groups, and to the issues that the hon. Member for Eddisbury picked out so well in his discussion of the amendments. The Institute of Chartered Accountants has distributed an analysis on clause 17 to us all. It has drawn serious concerns to public attention. The first is the potential for some of the measures to apply to businesses that are innocent as well as to those that are clearly guilty and need to be dealt with. The second is that, as the hon. Gentleman said, there do not appear to be adequate safeguards for many of the businesses that could fall into that category. Many would undoubtedly be smaller businesses, those just getting off the ground, perhaps with shaky finances, or those in a fragile position that could fall victim to some of the measures proposed in the clause. In less favourable circumstances than the economic growth of the past 10 years, a large number of businesses could be in such a position.

As the hon. Gentleman pointed out, another serious concern in relation to his helpful notion of the four entities, A, B, C and D, is that the Treasury is essentially asking to be able to police the entire supply chain, rather than holding businesses accountable only for the immediate transactions with which they are involved. If taken to its logical conclusion and not implemented in a sensitive way, that could in practice require some legitimate businesses to cease trading. The Institute of Chartered Accountants sums that up well when it says:

''The legislation should be properly targeted and not drafted so widely that it applies to innocent taxpayers. It is not acceptable for a wide class of taxpayers to be taxed under the law, only to be untaxed by internal safeguards within Customs which have no legal effect. Limited experience of similar, but more restricted, laws in other countries indicates that tax administrations tend to pursue the legitimate businesses in the supply chain, since these are the ones who remain after the fraud has taken place.''

That is a well-put case and concern.

Not only the Instituted of Chartered Accountants, but the Institute of Indirect Taxation and the Chartered Institute of Taxation have expressed concerns on whether clause 17 is consistent with the sixth VAT directive or the Human Rights Act 1998. The Chartered Institute of Taxation has said:

''The provisions will inevitably lead to situations whereby the VAT due from a taxpayer falls to be discharged by another person. This appears to be contrary to the express provisions of article 21(1)(a) of the Sixth VAT Directive.''

As that concern has been fairly widely expressed, I hope that the Economic Secretary will return to it.

We entirely understand why the Economic Secretary is trying to frame the clauses as widely as possible. We understand the good intentions in the Treasury over trying to ensure that only businesses that have been complicit in VAT fraud should be held to account. However, we do not feel that the safeguards here are sufficient to give businesses comfort that they will not fall into a situation in which the concerns that have been expressed, and to which I have referred, will come about.

Perhaps I could list some of the detailed concerns, which the hon. Member for Eddisbury has already brought to our attention. Those concerns are set out by the Institute of Chartered Taxation in its paper about clause 17, and are precisely the points the hon. Gentleman raised. First, it finds it unacceptable in principle that one business could under clause 17, and clause 18 to some extent, be held liable for the actions of another in a circumstance where it cannot be proven that it is acting in collusion. We require some assurances from the Economic Secretary if we are to contemplate supporting the clause.

The second salient concern is that the clause appears to apply whether business is required to provide the security, or was aware of the existence of the other potentially fraudulent business. The provision is likely to bear down hardest, as the hon. Member for Eddisbury mentioned, on smaller businesses, which in many cases will be able to provide a security from their own resources. There are some very serious concerns, and we are worried that the Treasury, in trying legitimately to close a loophole that means the loss of an enormous amount

of tax revenue, is going over the top. We urge the Economic Secretary to balance the desire to ensure that we do not lose excessive amounts of revenue to tax evasion with the requirement that tax law should deal fairly with all entities and should not bring in a significant area of injustice for some businesses in order to police those who are acting in a responsible way outside the law.

Photo of Mr Jonathan Djanogly

Mr Jonathan Djanogly (Huntingdon, Conservative)

My hon. Friend the Member for Eddisbury said at the outset that there was a series of complicated issues, but he explained the position extremely well and made it sound relatively straightforward. At base, it is a question of rights. There is always a balance of rights to be considered between authorities and individual taxpayers, and my hon. Friend made an excellent case in saying that, in this situation, the balance is much too onerous on the taxpayer.

The provisions go well beyond the concept of giving people security for their own liabilities. We are talking about one person being made to suffer because of the wrongs of another, whether or not the first person has done anything wrong, and in some cases, whether or not he knows what went wrong with the other person. That seems onerous in the extreme.

[Mr. Mark Hendrick in the Chair]

Have the Government reviewed the matter from the point of view of compliance with human rights legislation? I appreciate that that has been stamped on the front of the Bill, but I can only imagine that in respect of the clause there must have been some debate about the issue; I hope that there was. If the Minister would explain the Government's thought processes, I would be grateful. I support the proposal introduced by my hon. Friend that it is only fair that the unfairly penalised person should have the ability to claim recourse through the courts for the wrong done to him or her.

Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

Thank you for calling me, Mr. Hendrick, and I welcome to the Chair.[Mr. John McWilliam in the Chair]

[Mr. John McWilliam in the Chair]

I am still trying to cope with the enormity of the canvas covered by the clause and the amendments tabled by my hon. Friend the Member for Eddisbury. I would like to follow the very sage observations of the hon. Member for Yeovil by saying that we would not be debating the amendments before us if we had not had a range of representations of concern about the practical operations of the clause. I find regrettable, particularly in respect of the notes on clauses, the lack of what I call the real-world dimension. We all understand that there are practices of a commercial nature by which people seek to avoid paying their just desserts as far as VAT is concerned. However, the tenor of the representations that members of the Committee have received indicates that Customs appears to have taken a disproportionate approach in the exercise of some pretty onerous powers. Subsection (3) states:

''If they think it necessary for the protection of the revenue, the Commissioners may require, as a condition of making any VAT credit, the giving of such security for the amount of the payment as appears to them appropriate.''

Those are extremely wide powers that enable Customs and Excise seemingly to make judgments without challenge. In that context, my hon. Friend the Member for Eddisbury was right to challenge large parts of the clause, which deal with the way in which things operate, as a way of probing and seeking further protection for the VAT payer.

Interestingly, in the press notice about the matter there is some indication that a warning is supposed to be given to a trader who may be trading with somebody who is about to default on their VAT requirement, but there is no mention in the Bill of any kind of warning being legally required. I struggle to see how traders in a linked chain would necessarily have the prescient knowledge about what was happening. In the United States, there would have been many companies trading with Enron who thought that they were dealing with a copper-bottomed outfit. Little did they know just how quickly that seemingly impregnable financial edifice was going to collapse in reality. I venture to suggest that other legitimate traders in the United Kingdom might be in a similar position if somebody they were trading with was about to go out of business.

3:45 pm
Photo of Mr Jonathan Djanogly

Mr Jonathan Djanogly (Huntingdon, Conservative)

My right hon. Friend mentioned traders having knowledge. I think that under the provisions of the clause—the Economic Secretary may wish to clarify this—that knowledge would not necessarily be required at all.

Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

I take my hon. Friend's point. One of the points made by the Institute of Indirect Taxation, to which the hon. Member for Yeovil (Mr. Laws) referred, is that it is not necessarily a question of whether a company might be illegally conducting its activities; there may be a judgment as to its commercial solvency.

I should be grateful if the Economic Secretary would comment on what is almost insider dealing. Customs and Excise has privileged access to a company and its books and could form a view from that standpoint. Quite clearly, somebody trading with that company might not be in that position. I would be interested to know whether, in the operation of the clause and the formation of views by Customs and Excise, there is an absolute guarantee that it will not also be fed information about companies from other sources such as, principally, the Inland Revenue and members of the security forces. Where are the Chinese walls for protection? People could go on fishing expeditions to find out bits of information to make demands on legitimate traders for deposits against the anticipation that something in company A is going to happen, visiting all that, unknowingly, on company B simply because Customs and Excise has access to a vast amount of potentially privileged information.

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

Without having to cite cases, which I could not do from memory, I am sure that my right hon. Friend is as aware as I am that the courts have

found that it is the right legal precedent to consider what Parliament intended when there is an accusation that Customs and Excise or the Inland Revenue, or any other public authority, has gone on what has been termed a fishing expedition—something that we would all find abhorrent in terms of the balance of rights between taxpayers or other citizens and public authorities. Hence the importance of the debate that we are having—our words, sentences and beliefs—and the Government's intent in relation to the legislation. As a statutory reference, that would be regarded as admissible and appropriate for a court to consider. My right hon. Friend's point was right.

Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

I am grateful to my hon. Friend for further amplifying some of the real world dangers of the powers, because all the representations that we have received address the balance between the way in which the powers will be used and the nature of the problem that they are meant to solve. When the Economic Secretary replies, he will be able to explain to us in some detail how the provision will operate in the real world and what checks and balances will be put in place to deal with the concerns that are reflected in my hon. Friend's amendments.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

The debate has been a useful one. The hon. Member for Eddisbury kicked it off in precisely the right way by recognising the importance of protecting the revenue due to the public purse and by saying that a provision such as we are examining in clause 17 requires the detailed scrutiny of the Committee.

I shall try to deal with the points that have been made and explain my objections to the amendments, and the purpose and importance of clause 17. [Interruption.]

Photo of Mr John McWilliam

Mr John McWilliam (Blaydon, Labour)

Order. Before the hon. Gentleman gets too deeply into his remarks, can I say that I find it unacceptable that a Minister cannot get to a place because the way is blocked? I have the power to remove any civil servant from this platform and I shall not hesitate to do so if anyone has any difficulty getting past again.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

Thank you, Mr. McWilliam.

The Government have made an unprecedented commitment to reducing the revenue losses that have historically affected the VAT system, in particular to tackling the serious problem of missing trader fraud. Missing trader fraud exploits the basic rules that allow VAT-free transactions between businesses in different European Union member states. The fraud, which has been a feature of criminal operations throughout the EU, relies on a fraudulent business buying in a large consignment of high-value, low-volume goods, such as mobile phones or computer chips, VAT-free from another member state, selling them on at a VAT-inclusive price and then disappearing without paying the VAT to the tax administration. In answer to the right hon. Member for Fylde, that is the real-world problem that we face.

The fraud relies heavily on the ability of fraudulent businesses to undertake trade in goods with other apparently legitimate businesses. There is no getting away from the fact that this type of business activity

results in massive amounts of VAT going unpaid. We believe that it is supported by businesses that perhaps turn a blind eye or, at the very least, are not sufficiently circumspect about their trading connections.

For several years, the VAT system in this country has been under a concerted and extremely costly attack from organised criminal groups concentrating such operations in the UK. This is deliberate tax avoidance—it is not a marginal activity that is part of a more legitimate business activity. Customs has succeeded in stopping the previously rapid growth in the scale of the fraud, but our latest estimates still put the cost to the public purse at some £1.7 billion to £2.7 billion a year. That is the real-world dimension of the problem.

Let me give members of the Committee some examples to illustrate the type and scale of the operations that are perpetrated as part of missing trader fraud. Last November, the director of an Irish-based company was arrested in a joint operation between British Customs and the Irish authorities for missing trader fraud involving a staggering £160 million of stolen VAT. In February, two men were sentenced to a total of 16 years and three months imprisonment for a £38 million series of VAT fraud involving the importation and onward sale of mobile telephones. That fraud involved a network of companies based in Spain, the Irish Republic and Staffordshire in the UK. One of the men was sentenced to nine years in prison, the longest sentence ever given in a case involving VAT fraud.

Photo of Mr Paul Farrelly

Mr Paul Farrelly (Newcastle-under-Lyme, Labour)

I understand that some of that activity was centred on Stoke-on-Trent, which borders my constituency of Newcastle-under-Lyme. I particularly welcomed the Chancellor's commitment to regionalism in the Budget statement. Have my hon. Friend the Minister and my right hon. Friend the Paymaster General considered relocating Customs and Excise to Stoke-on-Trent, so that we could benefit from a Government Department and cut down on VAT fraud?

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

Both the Inland Revenue and Customs and Excise have a strong staff presence throughout the United Kingdom and that is part and parcel of their effectiveness.

In addition to the sentence handed down being the longest ever for VAT fraud, a solicitor was sentenced to five years for laundering £8 million of the proceeds of that fraud. The money was used for the usual purposes and activities: expensive cars, properties, yachts and so on.

We have had some significant successes in arresting the growth of and clamping down on missing trader fraud, but we must do more to reverse the enormous cost to the Exchequer.

Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

I am most grateful for the Minister's real-world examples. Given the prosecution's success, which he has just described, can he explain to the Committee what were the missing elements that the clause now provides to enable further stemming of the loss of VAT?

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

If the hon. Gentleman will forgive me, I do not want to go any further into the details of those cases, but I will answer the general point in a moment.

We must do more to deal with the massive criminal, organised, international VAT fraud. In addition to the extra resources that we announced in the pre-Budget report, we said that we would consider what further legislative steps could be taken to tackle the problem. The Bill takes two such steps and the provisions in clause 17 are part of that. They attack that fraud at its financial heart by targeting the supply chains for the missing trader frauds.

The clause ensures that if, despite warnings, a business is repeatedly engaged in transactions with other businesses whose pattern of trading suggests a high risk of revenue losses, Customs and Excise will be able to require security to be deposited on the transactions.

Photo of Mr Rob Marris

Mr Rob Marris (Wolverhampton South West, Labour)

Perhaps my hon. Friend could tell me where the phrase ''despite warnings'' appears in the Bill.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

The hon. Member for Eddisbury pointed out the significance of our proceedings this afternoon. I am in the process of explaining precisely how we will put into operation the legal provisions proposed in clause 17 and I hope and trust that my hon. Friend will take what he needs by way of reassurance from what I am in the process of saying.

The clause revises and extends Customs and Excise's existing and well-established powers to require security payments. As at present, it will apply those powers in a way that is proportionate to the value of the tax at stake and targeted at the areas of greatest risk. I understand the concerns that businesses and advisers have made known to all members of the Committee. I understand the concern voiced by hon. Members in this debate that the powers are significant, but we are dealing with serious fraud organised on an almost unprecedented scale. The powers are necessary to attack the unprecedented loss of revenue to the public purse.

4:00 pm
Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

Does the Minister agree that the tenor of the representations that we have received is not antagonistic to the objective that he has just described but reflects the concern that legitimate traders would find themselves caught up in disproportionate processes in a business environment in which they would not have the knowledge to be able to protect their own activities? I hope that he understands the point that I am making. Our main concern relates to the legitimate trader rather than the illegitimate trader.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

I well understand those concerns. The provision and the way in which we intend, through Customs and Excise, to put it into practice are intended to protect, wherever possible, legitimate traders. We are talking about traders who are part of a supply chain that is systematically defrauding the public purse of millions of pounds of revenue each year.

Photo of Mr Jonathan Djanogly

Mr Jonathan Djanogly (Huntingdon, Conservative)

I want to back up the point made by my right hon. Friend the Member for Fylde. We remain concerned about the innumerable, more legitimate traders than about the handful of fraudsters. The Minister gave one or two examples of fraud where the existing law was successful in bringing prosecutions. He has not yet given us proper examples to show the need for these powers, which everyone, including himself, is beginning to agree will prejudice legitimate traders.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

I shall give way again.

Photo of Mr Howard Flight

Mr Howard Flight (Arundel and South Downs, Conservative)

No one could be keener on recovering wasted expenditure than I, but surely the hon. Member for Wolverhampton, South-West made the crucial point in terms of the law: there needs to be knowledge and warning if a democratic system is to accept the sort of powers being proposed here.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

If the hon. Gentlemen will forgive me, I shall come later to precisely these points: knowledge for the trader of doubts and concerns before action is taken, warning before action is taken and redress, if action is taken by Customs to require this extended security provision. Hon. Members will have to judge whether we got the balance right.

We are putting in place not only powers for extended security but powers giving the tribunals extended scope to challenge the decision and actions of Customs in relation to the clause. Customs will always review any decision that may be challenged. A trader then has the right to take the decision to tribunal. That tribunal will have full appellate jurisdiction. Therefore, it will not only be able to decide whether the decision to require the security is reasonable but will have additional powers to decide to require less security or remove the security altogether. It is therefore not the case, as the hon. Member for Eddisbury asserted, that there are no limitations on Customs and Excise's powers in invoking the provisions. Those powers will be invoked only when a warning has been given. The trader will always be given a warning before the powers requiring security are used.

In addition, VAT-registered businesses that are known to have dealt with high-risk businesses in the past will be contacted by Customs and given advice on the steps that they should take to avoid dealing with such types of business in the future. Only if they continue to do so will Customs invoke the power to require security payments. In answer to the hon. Member for Yeovil, it cannot therefore be the case that action will be taken against a firm that is not aware of the problem with the companies and supply chain with which it is involved.

There are safeguards in the provision. I believe that they are sufficient, and if a business takes reasonable steps to establish the legitimacy of the business with which it is trading, the legislation should not affect it. As with clause 18, this should help to protect the competitiveness of such a business in relation to others in its industry that are cutting corners, colluding with fraudsters and not paying and operating in the way in which they should.

Photo of Mr John Burnett

Mr John Burnett (Torridge and West Devon, Liberal Democrat)

Who will act for Customs in the tribunal process? Will it be its own internal lawyers?

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

I propose to go through a number of detailed points that hon. Members have raised. I shall deal with that one in the course of my remarks.

Amendments Nos. 84 and 85 would remove our proposed new power to require the security. To that extent, they would render the clause toothless. They would allow unscrupulous individuals and businesses to continue to work together to evade tax by playing the system. Amendment No. 1 would introduce a provision for the business on which the security was enforced to recover the amount involved from the business that was first liable to pay the VAT.

I can tell the hon. Member for Eddisbury that there is already recourse for the recovery of debts through the civil litigation process. The person on whom the security is enforced should seek to prove a debt against the other business and gain redress through the courts in the normal way. In addition, there is no legal vires in EU law to introduce a measure such as that which he seeks. To do that in the UK would therefore be illegal. I shall urge my hon. Friends to vote against amendments Nos. 84, 85 and 1 if they are pressed.

On the point raised by the hon. Member for Huntingdon on compliance with human rights legislation, that statement is on the frontispiece of the Bill and we have taken a judgment that this clause is compliant. It may help him if I go a little further. The use of the measure will be compatible with human rights legislation if it occurs in appropriate cases, in a proportionate manner and with the safeguard of an appeal, at which the commissioners will have to establish on the balance of probabilities that there has been fraud evasion.

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

On the point that the Economic Secretary is seeking to address, it would be helpful to cite what the Chartered Institute of Taxation has said:

''It is difficult to reconcile the new VATA 1994 Schedule 11 paragraph 4(2) with the requirements of article 21(1) of the Sixth VAT Directive, which deals with the persons liable to pay VAT.''

If I may crave your indulgence to quote a little further on this complicated matter, Mr. McWilliam, the institute says that

''under the internal system, the person liable to pay VAT is 'the taxable person carrying out the taxable supply of goods or services'. In the absence of a specific derogation, a requirement to secure the tax due from another person—which may result in payment of that tax—sits uneasily with the clear terms of article 21(1)(a).''

The institute goes on to cite the case of Balocchi v. Ministero delle Finanze dello Stato. Hon. Members may read that reference in the record in the usual way.

This is a serious matter, and while no issue has really been taken with the endorsement on the frontispiece of the Bill, many professionals have raised the issue on numerous occasions. It seems that there is a challenge to the Government's judgment.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

We always take the views and representations of such bodies seriously, but our judgment is compliant with the legislation, as is confirmed in the frontispiece to the Bill.

Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

Can the Minister satisfy the Committee that the legislation is compatible with the sixth VAT directive?

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

The right hon. Gentleman and the hon. Member for Eddisbury posed the question whether the clause is ultra vires in relation to the sixth directive as well as in relation to the Human Rights Act 1998. The vires is in article 22.8 of the EC sixth directive, which means that it is entirely in order and that we obviously have the vires to take the provision.

The hon. Member for Eddisbury tried to make the case for restricting the companies within the supply chain to which those extended security powers could be applied and suggested that the restriction should be on the basis of an association established by Customs and Excise between the companies. I must to say that to attempt to define something as precise as an association would give rise to an argument about degrees of association, which would make the measure ineffective. For the purposes of the measure, the relevant relationship between traders is their position in the same supply chain.

The hon. Member for Eddisbury asked who will represent Customs at a tribunal. It would either be its solicitor's office or, in important cases, Customs might instruct counsel.

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

The Minister has tried to address whether Customs and Excise must establish the associated chain of relationships between companies. When we are considering the clause, it is wholly legitimate to quote paragraph 1 of the explanatory note, which I sought to do, and to which he did not give a specific response. It is therefore incumbent on me to repeat the quotation in the hope that I can get an answer:

''This clause extends the powers that Customs and Excise currently have to require the provision of security where it is considered''.

''Where it is considered'' is in the passive voice: it is not considered by them; it is considered by the authorities. The statement of condition and circumstances is passive, which means that somebody has to make the judgment. Who will make the decision? I assume that it must be those who seek some form of payment or redress from those companies rather than those within the association. The quote continues:

''where it is considered that a business is associated with other businesses whose pattern of trading poses a real threat to the proper collection of VAT.''

We all agree with the final sentiment. However, the issue is that in order to restrict appropriately, the necessary association must be established.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

I have explained how missing trader fraud by which the Exchequer is systematically defrauded out of massive sums of money operates, and that it is rooted in supply chain relationships and trading relationships. The place in the supply chain is the relevant factor. I remind the hon. Gentleman that no company will have the power raised against it without a warning from Customs and without the power and provision to challenge the power in the

courts. Customs will make a judgment, but it can be challenged through the tribunal.

4:15 pm
Photo of Mr John Burnett

Mr John Burnett (Torridge and West Devon, Liberal Democrat)

Given the draconian nature of the provisions, what will be the burden of proof at the hearings? Will it be civil or criminal? If criminal, will the new Customs prosecution service now under the aegis of the Attorney-General be involved?

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

It will be civil.

The clause will allow us to disrupt the supply chains that underpin missing trader fraud. It will give us the powers that we lack to make further progress in stamping it out. Despite the best efforts of Customs, which has managed to control the expansion of missing trader fraud, we now need such powers, just as we needed them at the time of the pre-Budget report. Further action will increase the exposure of the main players and dramatically alter the risk-reward ratio for them. The clause is important and necessary. It is part of the fight against missing trader fraud and part of protecting huge amounts of money that are due to the public purse. On that basis, I urge the Committee to reject the amendments and support the clause as it stands.

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

I shall be completely frank and say that I am genuinely disappointed. I thought that the Government would at least take the opportunity to acknowledge that the arguments made in support of the amendments are genuine and have widespread support. I thought that I had made my opening remarks in a reasonable manner. I am aware that there is pride of authorship and so on in these situations, but I was not out to fight some war of pride about who had it right the first time.

These very serious issues affect the rights of individual citizens and the settlement between them and the public authorities. At the very least, I had hoped that the Economic Secretary might have said, “We do not like your amendments, but you have raised important points. Therefore, we will go away and draft our own amendments.” That might have tempted me to withdraw the amendments. Instead, as we discovered on the Floor of the House, the Government wrap all their arguments in either anti-avoidance speak or the need to address significant tax evasion.

Let us not play games. We all want to avoid stepping into the trap of thinking that we have to present arguments that could prevent the Treasury, Inland Revenue or Customs and Excise from collecting due and proper taxes. We are all responsible for maintaining the settlement between taxpayers and the public authorities, but it may be used as a cloak to stifle legitimate concerns about striking the wrong balance.

The amendments were modestly drafted, given that some representations that we received asked to have the entire clause deleted. They said that the measure was draconian. That word was used by the hon. Member for Torridge and West Devon (Mr. Burnett), who also asked who the prosecuting authority would

be in a criminal as opposed to a civil action. The Economic Secretary sought to defend his position on that matter, because the Attorney-General has had to take the prosecution processes of Customs and Excise under his wing, given the very serious concerns about and abysmal track record of the prosecuting authorities in Customs and Excise, about which the Economic Secretary and I have recently debated on the Floor of the House.

At present, Customs and Excise is not covered in glory over its ability to make judgments about the rights of the citizen and its powers­and that is in an area in which its powers have been properly and more fully qualified. The very guidance that the Government issued has been reissued. We have seen the way that Customs and Excise used its powers to deal with various imports coming into the country in recent months and years.

I would like to have confidence that we are dealing with a public authority in which we can place considerable trust, but it is not actually appropriate that we as legislators, whether in Opposition or in Government, should place such trust in it in any event. Our duty is to stand up for the citizen and for our constituents in order to ensure that they have proper protection. Unless such checks and balances are in place, the state is almighty and is always open to abuse.

Photo of Mr David Laws

Mr David Laws (Yeovil, Liberal Democrat)

I agree with the case that the hon. Gentleman is developing. Does he agree that the minimum that would have been helpful from the Minister would have been an agreement to incorporate in the Bill some of the safeguards on which he touched in his comments? Then it would be clear what they were, and we could debate them, rather than have to rely upon the good faith of Customs and Excise.

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

The hon. Gentleman puts it succinctly, appropriately and accurately. I am grateful for the support and consensus. I realise that, ultimately, if the Government wish to whip their vote, we are outnumbered. However, it is our duty to challenge attempts to pass other than proper and good law. I sense­perhaps I am overoptimistic­that some of my arguments have struck a chord with Labour Members. I do not say that they agree with me entirely, but they recognise that the issues are genuine and that it would be appropriate for the Minister to acknowledge that there was a chance to look at a review.

In the absence of an offer from the Government to table their own amendments on Report, we must press the matter to a vote for no reason other than to stress the importance of recognising that the Government's case has not been made. We must register our disapproval on behalf of all citizens and taxpayers whom we represent, as well as the professional bodies who have made such thorough representations to us.

Photo of Mr Michael Jack

Mr Michael Jack (Fylde, Conservative)

Does my hon. Friend agree that the Minister could have taken a lot of the steam out of the situation if he had volunteered to produce a note of explanation or to circulate to the Committee

the Customs practice note that will no doubt accompany the operation of the clause, to assuage our concerns about how it will operate in the real world?

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

That would have been very beneficial and, for the Government, an advantageous thing to have done towards persuading us of their argument. Its absence has not been helpful. We are considering the potential legal cost and hassle that individuals will face when they have to defend themselves in the civil courts because things have got out of control due to the fact that they are in a chain­whether or not Customs and Excise, in the absence of an appropriate measure in the Bill, has to make any effort to discover whether they are in association.

Above all, particularly for small companies, it is a matter of reputation. Once company directors or sole traders become engaged in such matters­which are often widely known­their reputation is under threat. That can kill a small company before it has had any chance of redress and that is why it appears disproportionate. The Government are seeking to reverse the natural burden of proof that should exist when we, as democratic representatives, favour freedom under the rule of law. We are dealing with a proposed law in which that freedom is presumed not to exist unless proven. Although that might sound extreme, it looks as though the challenge is to the citizen, rather than to the authority, to make his case. It is incumbent upon us to register our great distaste and disapproval. I hope that the Government will understand that, having read what will now be recorded in the Official Report, not least because under the rules of statutory interpretation, the point that I made in an intervention on my right hon. Friend is correct. Because of the nature of the issues that we have raised, today's proceedings will be relevant and capable of acceptance and statutory interpretation.

Photo of Mr Rob Marris

Mr Rob Marris (Wolverhampton South West, Labour)

I must say that I accept the assurances of the Minister that warnings will be given. Does the hon. Gentleman not accept those assurances?

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

I do not take issue with the personal integrity of the Economic Secretary­of course I do not. Furthermore, it would have been helpful, as my right hon. Friend the Member for Fylde said, to have had a copy, at least in draft, of the intended guidelines. Clearly, the provision will not be included in the Bill according to the Economic Secretary's current thinking, so one would hope that the guidelines would include that. At the very least, we would be left to make a judgment on what is likely to be the behaviour of those practising under those guidelines, as opposed to those who simply have an obligation to do so under statute.

I also argued that we should make sure that the right of recovery from the party that had failed to pay back in the associated chain should be enshrined in the statute. Although the redress is there through the civil court, if it was a statutory expectation it would give rise to a presumption that there was that right of recovery, which would get the whole civil case­if it came to that­off to a more favourable start. That may save costs.

Photo of Mr John Healey

Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

It may be helpful if I make it clear to the hon. Gentleman and his right hon. Friend the

Member for Fylde that the statement of practice is included in the public notice issued by Customs and has been available since Budget day. It is public notice 700/52 and I will leave a copy of it in the Library to help Committee members.

Photo of Mr Stephen O'Brien

Mr Stephen O'Brien (Eddisbury, Conservative)

I am grateful to the Economic Secretary. It would be completely futile to pretend that I had taken that document on board, but it would have been helpful in anticipating the arguments that were adduced today to have had a copy of it on the Table in the Committee Room. It is clearly relevant to our considerations today, and we are being asked to place trust in the operation of that guidance, which was published on Budget day. As the Economic Secretary will be aware, however much this is an important argument, all of us have been under a tremendous work load in order to try and master all that we have to deal with during the coming days and weeks. I am grateful to the Economic Secretary for pointing the document out. I will certainly study it, but in the absence of knowledge of it, I shall continue to press my amendments to a vote.

Question put, That the amendment be made:­

The Committee divided: Ayes 9, Noes 16.

Question accordingly negatived.

Amendment proposed: No. 1, in

clause 17, page 15, line 42, at end insert­{**pa**}

'(6) If the Commissioners enforce their security to secure payment of any VAT that is due from a person other than the taxable person, the taxable person may recover the amount of that VAT from that other person.'.{**pa**}­[Mr. Stephen O'Brien.]

Question put, That the amendment be made:­

The Committee divided: Ayes 9, Noes 16.

Question accordingly negatived.

Amendment proposed: No. 85, in

clause 17, page 16, line 6, leave out subsection (7).—[Mr. Stephen O'Brien.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 16.

Question accordingly negatived.

Clause 17 ordered to stand part of the Bill.