Clause 19 - Disclosure of VAT avoidance schemes
Finance Bill
5:30 pm
Mr David Laws (Shadow Chief Secretary, Treasury; Yeovil, Liberal Democrat)
Thank you for that guidance, Sir John. We support the stated objective of Government policy in this area. The Economic Secretary spoke of abusive tax avoidance schemes and schemes that involved contrivance and artificiality, from which we can understand the Government's intent. However, he will be aware that the framing of clause 19 and schedule 2 has caused considerable concern. Business and the tax profession are sceptical about whether the existing legislation is simple enough to be implemented clearly and whether it will impose a significant burden on them.
I am aware that the Minister published the draft order a couple of days ago, which was helpful. I saw it only yesterday, which did not give us much time to ask tax practitioners' advice about whether it helps to clarify some of the outstanding issues. I understand that the order is a list of some of the designated schemes. The feedback that we have received so far is that it is helpful but does not deal with the major outstanding concerns that the hon. Member for Arundel and South Downs set out very clearly. I will not repeat all of them, because that is not necessary. There are, however, several salient issues, to which I would be grateful for a response from the Minister. A very important issue is the legal status of the clause, to which the shadow Chief Secretary referred. There is real concern about whether the Government's measures comply with the EC sixth VAT directive, and whether the Government could be challenged on the basis that that directive deals with tax evasion but that this legislation appears to deal only with tax avoidance. It would be interesting to know from the Minister whether advice has been taken on that point, and whether the Government are confident that they will not fall foul of that element of the sixth VAT directive or whether they believe that they will need a
derogation from article 27 of the directive, as the hon. Member for Arundel and South Downs suggested might be necessary.
I understand that there is also a question about the penalties that the Government propose to implement in relation to the sixth VAT directive, which would be 15 per cent. of the tax in question. Several tax practitioners argue that such penalties could be regarded as excessive in situations in which the non-disclosed scheme would have been perfectly lawful. In the past, the European Court of Justice has taken a dim view of such types of penalties, particularly when the Treasury determines the arrangements and its view plays a large part in determining whether the tax advantage will be granted. There is a major issue of EC legislation in the area and it would be helpful to know whether the Government have taken any definitive advice, not only from their own advisers but from EU VAT advisers. Do they think that there will be any problems?
All the tax representative bodies have set out their concerns about clause 19 and schedule 2. They all relate to the breadth of the Government's proposals to catch all sorts of tax avoidance schemes, which the Government cannot anticipate at this point in time. The introduction to the paper from the Institute of Chartered Accountants in England and Wales sets out the salient concerns particularly clearly. More than anything, the tax practitioners are concerned that the proposals are so widely drawn that virtually anything that appears to reduce VAT liabilities could be regarded as avoidance, even if it is quite legitimate. One cannot imagine from the Economic Secretary's comments that he means to capture those who carry out such activities. It is reassuring to have those comments, but one wonders what the safeguards will be in practice.
The Economic Secretary may be aware that alongside the examples raised by the shadow Chief Secretary to the Treasury, the Institute of Indirect Taxation raised the example of a transaction where a company outsources its IT function. That outsourcing would be a transaction or arrangement that potentially gives a tax advantage: the outsourcing fees attract input VAT whereas the previously paid salaries did not. It is quite possible that the company would not have gone ahead with such a transaction if there were no particular tax advantage. I am sure that the Government do not intend to catch such schemes in the legislation, but the Economic Secretary's reassurance would be useful. Perhaps more importantly, it would be useful to have his reassurance that there will be mechanisms to avoid such schemes being caught.
The shadow Chief Secretary also referred to the lack of evidence supplied by the Government to show that the cost of implementing the tax avoidance legislation will be proportionate to the benefits. It would be interesting to know whether the Government have undertaken any assessment of the compliance and administration costs involved. The greater the
uncertainty about the clarity of the legislation, the greater the administrative burden that will fall on firms and tax practitioners. There is also concern that parliamentary scrutiny will potentially be curbed because of the scope for secondary legislation, and that the Treasury will push through wider schemes in the future without the opportunity for as much parliamentary scrutiny as there would be if the issues were debated on the Floor of the House.
Finally, there is the issue of what appeal rights will be available for individuals and companies whose schemes would be caught under clause 19 and schedule 2. That is obviously a major concern, and it is linked to the issue of whether the penalty payments that would already have been imposed by the Treasury would be recoverable by the entity in question where an unlawful scheme has led to a loss of tax. Those are serious concerns. Although we understand why the Government are introducing the legislation—to avoid the loss of tax that may result, which could be spent in far better ways or used to reduce other elements of tax—we are concerned that its scope is so wide that it is creating uncertainty and concern among practitioners and businesses, and that it would involve additional costs for them.