Philip Dunne (Ludlow, Conservative)

The hon. Member for Wolverhampton, South-West (Rob Marris) was saved by the bell at the end of this morning’s sitting, having introduced the subject of sport into the debate. He was trying the patience—I imagine deliberately—of Opposition Members in a rather uncharacteristic attempt to suggest that they had been asleep during the Budget debate. He must have erased from his memory the entire debate in Committee on the Floor of the House in which the Opposition raised matters of great significance.

Edward O'Hara (Knowsley South, Labour)

Order. Is the hon. Gentleman speaking to amendment No. 2?

Philip Dunne (Ludlow, Conservative)

I am grateful to you, Mr. O’Hara, for bringing me on to the point of my remarks. However, having been unable to speak earlier, I could not resist responding to the point made by the hon. Member for Wolverhampton, South-West.

I support what was said by my hon. Friend the Member for Rayleigh (Mr. Francois) when he moved what is a pragmatic and sensible amendment. As we heard this morning, it is entirely supported by the art market. I want to make a practical observation to the Paymaster General if she is not aware of the way in which the art market works. It is a seasonal market. There are markets, typically in the summer months of June and July, that require a great deal of preparation, not least of which is the publication of extensive catalogues. Due to the complexity of the VAT regime in the art market, the catalogues have to refer to specific VAT rates and regimes that apply to each piece of art that is up for auction.

Helen Goodman (Bishop Auckland, Labour)

Like the hon. Gentleman, I have a rural constituency and can understand seasonality in agriculture. However, can he explain why the art market is particularly seasonal?

Philip Dunne (Ludlow, Conservative)

I do not profess to having any specific expert knowledge. I receive rather too many e-mails from art auctioneers for reasons that I cannot really understand, but they make me aware when sales are coming up. They have sales at times of the year when there are many visitors to London—London being the centre of the art market in Europe and a world centre—and they tend to be in June and July, months when other occasions, such as major sporting events, draw people to this country. The other popular seasons tend to be in the pre-Christmas period—in November and December—which again may be partly related to the fact that people enjoy buying Christmas presents at that time of year. There are well established seasons and because of the lead time for drawing up the necessary publications to make the market work properly, the provision cannot be introduced overnight without having significant repercussions on the normal working of the market. For that reason, I support the amendment.

David Gauke (South West Hertfordshire, Conservative)

I merely have a few questions for the Paymaster General about the clause, all of which relate to the amendment. What assessment has the Treasury made of the impact on the art market, as a consequence of the changes in VAT on auctioneer’s commission? What revenue will it gain as a consequence of the changes? Has it taken into account any harm that may be done to the art market in the United Kingdom?

Sadiq Khan (Tooting, Labour)

Does the hon. Gentleman accept that, rather than the change having an impact on the art market, issues such as rates of exchange may have more of an impact than seasonal variations?

David Gauke (South West Hertfordshire, Conservative)

That may well be the case, but as we are debating changes in VAT, I thought that I would raise that matter rather than any other factors.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

Will the hon. Gentleman accept that the issue is about compliance with a European Court of Justice ruling? The issue is not the negative impact that there may be on the market, but the fact that compliance is necessary.

David Gauke (South West Hertfordshire, Conservative)

The hon. Lady is absolutely right. Compliance is necessary, but we should none the less know the costs of that compliance. That is what I am asking about and, indeed, I may return to that subject later in our proceedings should I catch you eye,Mr. O’Hara.

Given that the changes are a consequence of a European Court of Justice judgment, what legal advice have the Government received saying that they were correct in their application of VAT rules? I ask that, because several Conservative Members have referred to legal advice in other contexts. Perhaps Ministers were a  little dismissive by saying that they had always taken legal advice, but it seems that it is frequently wrong or at least a different interpretation is taken by the European Court of Justice. Will the Paymaster General explore that matter further?

George Young (North West Hampshire, Conservative)

I welcome the speech made by my hon. Friend the Member for Rayleigh when he moved the amendment. I am sure that it will make him even more welcome in Sotheby’s and Christie’s on his regular visits to those two great auction houses.

I want to pursue two points. I have no difficulty with the United Kingdom responding to the judgment of the European Court of Justice. Of course, we must do that. Will the Paymaster General say whether the speed at which we respond to such a judgment and this one, in particular, is comparable to the speed with which other countries respond when they are found tohave acted unlawfully? The date of the judgment was 25 February last year and we are putting the matter right under the Finance Bill. Can the right hon. Lady assure me that other Governments respond with similar alacrity when they are found to be acting outwith the remit of the European Court of Justice?

Edward O'Hara (Knowsley South, Labour)

Order. It is not within the terms of reference of the debate to ask the Paymaster General to speak for other Governments.

George Young (North West Hampshire, Conservative)

I understand that, but the amendment would delay the date on which we respond to the judgment. If we delayed, would that mean that we were more in line with the speed at which other countries respond to the European Court? Will it bring us ahead? I see that the right hon. Lady has the answer at her fingertips.

If we respond as proposed, will we be on a level playing field with other auction houses in Europe? In other words, have they also responded to any judgments against them? Will there be a level playing field in the auction house market within Europe when the clause is enacted?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I think that I can help the Committee. The matter needs to be put into context. It has not arisen simply because of an ECJ ruling, although that is part of the chain of events that led to the amendment. In 1973, when VAT was introduced in the United Kingdom, the Government at the time went for the option of not charging VAT on the importation of certain works of art, antiques and collectors’ pieces. However, when accepting the dossier, the then Government in negotiations on the seventh VAT directive, which was concerned mainly with the harmonisation of VAT treatment, agreed that, for a short time, the rate of VAT on works of art should be 2.5 per cent., rising automatically to 5 per cent. That is the position that we are in, and it was negotiated by the previous Conservative Government. Unfortunately, they failed to raise the issue of VAT treatment of auctioneer’s commission, the very subject that we are debating, when seeking a derogation. They missedthat out.

When this Government was elected, we automatically inherited the international agreement established by the previous Government, including their failure to apply for a derogation in that specific area. This Government agreed with the art market that auctioneer’s commission should be subject to the same rate. Unfortunately, the Commission did not.

A very long set of negotiations and disagreements then ensued between the Government and the Commission. A series of changes were also made in Finance Bills to try to ease the art market’s position, particularly in recognition of London’s importance on the international scene. We were taken to court, and we lost. We have an ECJ ruling against us now. The reason that we are here in the first place is a failure to apply for—a failure even to think to apply for—a derogation.

The British Art Market Federation does not support the amendment. It recognises the difficult position that it and the Government are in. The BAMF has suggested in its discussions and negotiations—bearing in mind all the points made by the hon. Member for Ludlow (Mr. Dunne)—that 1 September would be a sensible starting date for the arrangement. [Hon. Members: “That is what the amendment says.”] No, the amendment does not say that.

A difficulty then arises, as the hon. Gentleman pointed out, with regard to how speedily the UK will be required to comply with the requirement that we have been disputing—we have lost the dispute at each point—since 1997. Technically, the starting date should be on Royal Assent, but having negotiated with the industry, we have made it 1 September. That is what the industry has asked for.

The amendment is not acceptable because it opens up a possibility that the Commission might interpret it unfavourably. It says,

“not before 1st September 2006”,

which implies that it could be later. Because it could happen on Royal Assent, the BAMF does not support the amendment, and did not ask for it to be tabled. The BAMF has an agreement with the Government, and that is the most sensible way to proceed after long and protracted negotiations. I pay tribute to art market representatives, particularly Anthony Browne, whom I have met. I am familiar with the brief because it has been on my desk since 1997.

Brooks Newmark (Braintree, Conservative)

I am curious as to why the same Anthony Browne said:

“If this comes into force it will make the tax situation, which is already complex, even more complicated. Something that this country is good at is being thrown away by half-baked ideas in Europe.”

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

It is not surprising that Mr. Browne is against the changes. The Government and the art market have fought hard over the issue. It is a shame that the Conservative Government did not work as closely with the art market, a market that they now profess to support on the derogation.

I have said why it needs to be done within that period, and I have dealt with the matter of legal advice—and our advice is the same as the art market’s. I turn next to what the cost is likely to be to the art  market. The only figures that I can provide are those provided by the British Art Market Federation, but we have absolutely no reason to dispute them.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

As a matter of fact, the British Art Market Federation was aware that we had tabled the amendment. I discussed it with the federation in some detail.

Is the Paymaster General saying that the likely implementation date is now the date of Royal Assent, or will it be 1 September? She mentioned both, and it would help the Committee if she were to say which of the two is the most likely.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The Government have negotiated with the trade for a starting date of 1 September. That is what we intend. I know that the hon. Gentleman has discussed the amendment with the art market, but I dispute whether the federation supports it. It knows the delicate position that we are in; we, too, have had the opportunity to discuss the matter with them.

I return to the matter of costs. The increase is not on the works of art but on the auctioneer’s commission. The federation estimates that the total implementation costs for UK auctioneers will not exceed £500,000. That is a reasonably large amount of money, but it is not substantial when compared with turnover and profits. The federation’s estimate of the total implementation costs for smaller businesses in the trade sector is about £50,000. As for income to the Government, it will be negligible—so small that no Government would calculate it. Additional support and help to the art market has been put in place under previous Finance Acts—the market already has that help—to try to counter some of the problems.

Philip Dunne (Ludlow, Conservative)

In direct relation to the helpful statistics that the Paymaster General is giving us, has she or the art market calculated the much more significant impact that the measure may have on business forgone—the art business lost to the London market?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

It is clearly difficult to establish. We rely on the market for that information. It is a strong and important market; it is the central market in the European Union, and second only in the world—perhaps not even second. We are advised that the impact will be minimal. That was the Commission’s case; it said that it wanted to ensure a level playing field. The impact was minimal, and we were asked why we were moving heaven and earth to prevent something that would have a minimal effect. None the less, the Government did so.

David Gauke (South West Hertfordshire, Conservative)

The Paymaster General said that it was the Commission’s case that it would have a minimal effect. Was that case accepted by the Government during the hearing before the ECJ, or did the Government argue that it would not have a minimal impact?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The Government and the art market made a wider case than simply the likely cost.  As I said, the Commission’s view was that the impact would be minimal, but that is also the view of the art market. I am not familiar with the issue although over the years I have had the benefit of meeting people such as Anthony Browne. As hon. Gentleman can guess, currency exchange rates and other factors will have a far greater impact on the market than will this tiny change by the Commission.

The Government and the art market argued for the need to maintain global competitiveness—the London market vis-Ã -vis the world market. The Government have moved on that, and I can send the hon. Gentleman details of those changes designed to counterbalance the question of competition, but it would not be appropriate to stray on to that matter now.

David Gauke (South West Hertfordshire, Conservative)

Was it therefore the Government’s case that the measure would have a major impact on the competitiveness of the London art market? To what extent does the Paymaster General still believe that that will be the case?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The Government supported the art market by recognising that it had been an omission not to apply for a derogation at the appropriate time and that there was therefore an obligation to assist in whatever way possible. Given the size of the market, the small change that the measure makes will not have a significant financial impact. However, we were keen to be seen to defend what is a premier market based in London—we believe that the citizens of this country would expect us to do that—and that is precisely what we did.

On that basis, I hope that the hon. Member for Rayleigh will not press his amendment, but if he does, I shall ask my hon. Friends to oppose it.

Edward O'Hara (Knowsley South, Labour)

Before I put the question on the amendment, I should like to say that again it has been difficult to talk to the amendment without talking also to the substance of the clause. I intend therefore to move clause stand part formally without further debate, so if hon. Members wish to make any further points they should make them now.

Philip Dunne (Ludlow, Conservative)

I should like to comment on the clause. There appears to be an agreement on both sides of the House about the fact that this is a regrettable step forced upon the Government by the European Court. Despite the agreement that we should not be implementing the measure, the Paymaster General has ingeniously succeeded in blaming the previous Conservative Government and rubbished my hon. Friend’s amendment, even though she made it clear that she agrees with its substance. As has happened previously, we appear to have lost the battle but won the war.

The measure in the clause is seemingly innocuous. We have heard that the impact on the art market is likely to be minimal, but I fear that it could be more significant. As I said, I am not an expert, but I have done a little research and as I understand it some£3 billion to £4 billion-worth of transactions are made in the London art market every year. Most of that goes  through Sotheby’s, Christie’s and Bonhams. It is a very mobile market. We are talking about works of art imported into this country to be put through those auction houses. Typically, the consignments of those works of art come from the United States or non-European vendors. They have the opportunity to keep the artworks in the United States and sell them in New York or send them to Switzerland. I suspect that the drip-drip nature of the obstacles to vendors selling their works in London is likely to encourage other markets, such as the one in Geneva.

Just to give hon. Members some idea of the scale of the consignment from overseas that would be affected by the measure, I understand that in January, at the impressionist art sale—which happens twice a year, seasonally, although I cannot tell what the other month is: it may be July—88 per cent. of the lots sold at Christie’s and 72 per cent. of the lots sold at Sotheby’s were bought by Europeans, who will now be caught by this increased rate of VAT. The vast bulk of the buying side of a market—there are always two sides to a market: the seller and the buyer—is based in Europe and will be subject to VAT. A large proportion of the sellers can choose whether they wish to use this market or one that is not caught by the increased charge. That is potentially significant. I do not know whether the Paymaster General had representations from the VAT specialists at Grant Thornton, but Paddy Behan was quoted as saying that he believes that this

“will have a major impact on the standing of UK auction houses.”

We have heard some relatively complacent remarks from the Paymaster General. I hope that she is right and the measure has a minor impact, but I am fearful that it may not. That is yet another example of the European Commission seeking to introduce creeping tax harmonisation through this measure—something that is regretted on both sides of the House—which we should resist at every level. I appreciate what the Paymaster General said—[Interruption.] If the hon. Member for Wirral, West (Stephen Hesford) wishes to intervene, I should be happy to let him. No; he is just making sedentary sniping remarks.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

We have had a useful opportunity to air this subject. I thank the hon. Member for Wolverhampton, South-West (Rob Marris) for complimenting me on being so quick off the mark in getting my amendments tabled. It is always nice to receive a compliment from him; I shall bank it for the future. I am also grateful to the Paymaster General for her reply. At times, her tone was a little unnecessary, but I listened carefully to what she said.

I have heard your guidance, Mr. O’Hara, about this debate effectively becoming a clause stand part debate. I have one further point to make in that context before returning to the amendment. This may appear to some to be a relatively minor measure, but it has to be considered in the context of a number of pressures on the United Kingdom art market in recent years, not least the droit de suite issue, which I do not propose to expand on at length this afternoon. Nevertheless, that has been a major challenge to the art market—or will be in the next few years. It is also, beyond peradventure, an issue on which the market has  absolutely not been at one with the Government—in fact, precisely the opposite. The Government have enraged the art market by the way in which they dealt with that measure and by going beyond what was required to make the problem worse. If the Paymaster General is attempting to intimate that there is a cosy relationship across the board with the market, that is not quite correct—although I concede, for the avoidance of doubt, that on this issue the Government attempted to take a robust view.

I should like to quote again from Mr. Anthony Browne’s letter about the wider issue:

“We consider that the ECJ judgment, unhelpful as it is, is not the fault of the British Government. It is, none the less, a further example of the way in which the international competitiveness of the British art market, by far the largest in the EU and Europe’s only global art market, is being eroded by EU legislation.”

There is an important distinction to make. I reiterate the BAMF’s point that it is grateful for the dialogue with Her Majesty’s Revenue and Customs and its officials. I hope that we have used this opportunity to air the matter responsibly.

Returning to the amendment, I heard the Paymaster General give two commitments in her remarks. First, I am grateful that she reiterated that this change will apply only to auctioneer’s commission, not to the hammer price of the object. She mentioned that, and I listened carefully. We asked her to reiterate that to avoid doubt. She has done so, and I thank her.

We come to the date itself. In some ways, it was a rather curious debate. We tabled an amendment that said that the measures could not come into effect until 1 September. The Minister said, “I don’t want to accept that, because we’re going to bring in the change on 1 September.” We are almost in danger of being in what the Americans call “violent agreement.”

The Minister has assured us that negotiations appear to have progressed successfully and the measures will not come in until 1 September. The market will have time to prepare. The change will not come in mid-season and cause the disruption that we discussed. Therefore, under the circumstances, it seems that the matter is being reasonably dealt with all around. On that basis, I beg to ask leave to withdraw the amendment.