Clause 19 - Disclosure of VAT avoidance schemes
Finance Bill
4:30 pm
Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)
This is an important clause, along with the associated schedule 2. Hon. Members will be aware of the Government's commitment to reduce revenue losses that have historically occurred in the VAT system, and in particular our commitment to tackle artificial VAT avoidance schemes. We set out that strategy in our document ''Protecting Indirect Tax Revenues'', which we published alongside the 2002 pre-Budget Report.
In 2001-02 losses from VAT avoidance were estimated to amount to between £2.5 billion and £3 billion—money that could have been used to support our investment in public services. Alongside these losses to the Exchequer, those engaged in VAT avoidance obtain a significant advantage over their competitors. An effective response to aggressive VAT avoidance is needed, and it is needed without delay.
The clause and the associated schedule introduce measures that target the secrecy and concealment on which avoidance thrives and which make it difficult for the Revenue authorities quickly to identify avoidance schemes and those using them. In future, those who use certain VAT avoidance schemes will be required to disclose the details to Customs and Excise under the provisions of the clause and schedule.
We require disclosure of two types of scheme: first, schemes described and published in a statutory list, and secondly, those schemes that bear certain hallmarks. The measures, in parallel with a new disclosure measure to counter large-scale avoidance of direct taxes, will allow a faster and more targeted response to abuses in the tax system.
It may assist the Committee if I give some examples of the sort of abusive schemes that the measures are designed to help deal with. Let us imagine that a retailer who sells high-value, standard-rated goods—
perhaps furniture—sells some furniture with another item that attracts a lower rate of VAT, or no VAT, such as certain forms of insurance. The total amount that the customer pays is the same as the price of the furniture, but a portion of that price—often an artificially high portion—is attributed to the insurance. By doing that, the retailer avoids VAT on that part of the transaction. The distortion of competition in such a scheme is immediately apparent. The VAT that has been avoided enables the retailer to undercut competitors or take a bigger profit.
Another example might involve a bank that pays VAT on a large purchase of goods for its banking activities. Those activities are, of course, VAT-exempt, so it cannot recover the VAT. The bank therefore contrives to sell the goods on to an associated company and claims that the VAT incurred on its purchase of the goods relates to that contrived, taxable sale, and not to its usual exempt banking activities. It claims back all the VAT. It can go still further: to obtain the effective use of the goods, the bank then contrives to lease them back from the associated company, and although it will incur irrecoverable VAT on that lease, it will typically be spread over several years, so it gets the benefit of full VAT recovery up front, and pays the VAT only in small amounts spread over an extended period.