Clause 19 - Face-value vouchers
Finance Bill
8:55 am
Mr Stephen O'Brien (Eddisbury, Conservative)
I am clearly being encouraged to proceed with the amendments to schedule 1. The stand part debate on clause 19 will be wrapped up into my discussion of the amendments to schedule 1.
This is a complicated subject, with quite a history. As the Economic Secretary says, a company such as Marks & Spencer may sell a gift voucher to a customer for £10 with a face value of £10. However, members of the Committee will be aware that it sometimes sells such vouchers at a discount to another business, which will then sell them on at the face-value price or even give them away. For example, M&S might sell to the intermediary business a £10 gift voucher for £9. I dare say that we have all had offers through the post in which an M&S voucher is part of the deal if we are tempted by the products or services on offer in the envelope—never a wise move.
Under the old law, M&S had no VAT charge when it issued the voucher. When the voucher was redeemed for £10-worth of goods or services, M&S would be liable to VAT on only the amount for which it had sold the voucher. Therefore, it would be only £9 if the voucher had been sold for £9. The intermediary's profit of £1 escaped VAT. I am sure that the Economic Secretary will correct me if that analysis is erroneous, but I believe that that is how the scheme has worked.
Some businesses—presumably not M&S—were abusing the system by issuing vouchers to an associated intermediary at a big discount; for example, selling a £10 voucher for £6. The intermediary would sell it on for £10 to an ultimate recipient, who would use it to acquire goods or services worth £10, but VAT was only ever collected on £6.
As the Economic Secretary said, Customs and Excise issued a consultation paper entitled ''Modernising the VAT Treatment of Face Value
Vouchers'' in June 2002, which ventilated various ways in which the problem might be tackled. I hope that the question of what changes were made to the Government's original proposals as a result of the consultation will not be contentious, not least because it appears that there may be some technical difficulties, which I shall discuss as I now come on to specific amendments to address the problems that I have identified. It is important to understand where the Government started and where they ended up as a result of consultation.
The Government have chosen not to levy VAT on the issuer at the time of issue. I shall call the issuer party A. We may keep M&S in mind, but I would not want it to feel that I was touting it, particularly as it has announced better recovering profits this morning. The intermediary, or party B, must pay VAT on the £10 when it sells the voucher on, and party A would be liable to VAT on £6 when the voucher is redeemed—so far, so clear. That is achieved by paragraphs 4 and 6 of new schedule 10A, which will be added to the Value Added Tax Act 1994 by schedule 1 of the Bill.
Of course, that would be overkill, because Customs would collect VAT on £16. The missing piece of the jigsaw is that party B is meant to be able to deduct input VAT as if—those two words are very important—party A's sale of the voucher to it were standard rated. Such a provision is not in the Bill at present, although presumably the Government intend to introduce it. By that, I pray in aid paragraph 5 of VAT information sheet 03/03 entitled ''What is the position with regard to input tax recovery?'', which was published at the time of the Budget. It states:
''Intermediate suppliers will be entitled to recover input tax, subject to the normal requirements. The liability of the sale is deemed''
—hence, the importance of the phrase ''as if'' that I used earlier—
''to equate to the underlying supply of goods or services. If it is known that the FVV''
—the face-value voucher—
''has been redeemed for zero-rated goods or services then the intermediate supplier can make an adjustment to both the output tax and the input tax to reflect the liability of the final supply. Adjustments can be based on retail scheme percentages or other overarching calculations rather than tracking individual FVV.''
Note 5 of the document goes on to say:
''Where an intermediate supplier is purchasing an FVV from the issuer who takes on the obligation to accept it, and is not required to account for VAT until the FVV is redeemed, the intermediate supplier may treat the amount of VAT that will be due on the supply as their input tax at the time the purchase is made.''
Finally, note 5 says:
''It is suggested that the issuer should produce an invoice to facilitate an intermediate purchaser's input tax recovery. However, to ensure the issuer does not account for output tax on this invoice (because issuers who undertake to redeem the voucher do not have to account for VAT until the voucher is redeemed) it is suggested that the invoice is annotated with the following wording, 'the issuer of the voucher will account for output tax under the face value voucher provisions introduced in Budget 2003'.''
The best way to tackle the problem seems to be to ensure that that wording appears in the Bill—which will become statute if the Government get their way—through amendment No. 89. That amendment
specifically addresses that point, giving intent to what the Government have set out in their information sheet: that VAT is levied on £10 and £6. Importantly, amendment No. 89 also enables recovery of VAT on the £6. The legislation would therefore give the necessary clarity and a demonstration in law of what is already in note 5 of the VAT information sheet.
Such a measure is supported not only by the Chartered Institute of Taxation but in more direct terms by the Institute of Indirect Tax and the Institute of Chartered Accountants in England and Wales. The Institute of Indirect Tax put it in slightly more blunt terms, saying:
''This is another instance of Customs seeking to collect tax from an innocent third party where they cannot collect it from the person who actually owes it. Paragraphs 3(3) and 4(4) of the new Schedule 10A, introduced by Schedule 1, hold the issuer of a voucher—such as a record token or a phone card—or any intermediate purchaser, liable for payment of the VAT on the supply of the goods or services made by a third party against the voucher.''
Although that institute has identified the problem, it has not identified a solution, which is what amendment No. 89 is intended to do.
The Institute of Chartered Accountants in England and Wales says:
''We believe that the proposed treatment of face-value vouchers in new Schedule 10A ,VATA 1994 is not appropriate. This is because it fails to recognise the true nature of such vouchers as a means of payment for goods or services which are VAT-exempt. The proposals are also likely to impose an unfair liability by requiring the issuer of such vouchers to bear any tax not accounted for by some other person supplying goods or services paid for by their use. This could well be outside the issuer's control''.
The Institute of Chartered Accountants then makes the point that that
''may be an infringement of human rights.''
Finally, it adds:
''The proposals are likely also to result in more tax being collected than is properly due. In many cases where vouchers are used to obtain goods or services chargeable at the zero or lower rate of VAT the proposals will result in tax being due at the standard rate on vouchers supplied through intermediaries. This would appear to breach the fundamental principle of VAT that the tax collected in relation to a particular supply of goods or services should be proportionate to the value of that supply.''
The Minister referred to the Government's view that they are proposing a proportionate position. Clearly that is disputed by those whom the Government sought to consult. That is why I earlier put a question about the changes in what the Government originally proposed and the adjustment made in the light of that consultation. That is an important part of the argument.
Amendment No. 90 relates to another matter arising under clause 19 and schedule 1. Organisations such as Book Tokens Ltd., which have a central issuer that is not a retailer so cannot itself redeem the vouchers, are catered for by paragraph 3 of new schedule 10A. There is essentially no change to the present law. However, certain types of voucher—Marks & Spencer vouchers are presumably an example—may be redeemed for a zero-rated item, such as food. Such a situation is catered for by paragraph 6 of new schedule 10A. If the situation arises, there is retrospective adjustment to B's position. However, implementing the practice could be quite
tiresome if A and B were independent parties, which certainly challenges what the Economic Secretary said in his opening remarks about introducing measures that were ''proportionate to the costs'' to businesses. If A and B were independent parties, the practice would be burdensome.
A flaw in the new provisions is that they could upset existing contractual arrangements. Amendment No. 90 relates to that point. Under paragraph 4 of schedule 1, the new law applies only to vouchers issued on or after 9 April 2003. However, party B, the intermediary, might, before that date, have entered into a contract with party A to buy vouchers in the future for fixed prices. In such a case, B will find that instead of making a profit of £1 when he buys a voucher for £9 and sells it for £10, he will make a profit of 85p after meeting the VAT on the £1. That is why an amendment should provide that, where the parties are independent, the new law does not apply to vouchers issued pursuant to contracts made before 9 April.
Those are the explanations for what I hope are perceived as carefully considered and constructive amendments. Together with those who help and advise me, I arrived at the amendments as a result of many representations, some of which criticised the clause in robust terms. Recognising the Government's arguments, I have tried to find a genuine technical solution and achieve the necessary clarification and balancing of the issues. I hope that the Government will accept the amendments.