Clause 21
Finance (No. 2) Bill
3:45 pm
Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)
The clause deals with the powers to direct the keeping of records when it is believed that VAT might not be paid. It is, in fact, a broadly drafted clause. It raises questions about where exactly to draw the line in seeking to achieve a difficult balance between, on the one hand, giving the HMRC sufficiently robust powers to tackle organised fraud, such as MTIC fraud, while, on the other, seeking to safeguard legitimate businesses from possibly unnecessary intrusion.
I said earlier that, on this clause, I would be raising the issue of safeguards and I hope that the Paymaster General can respond. Subsection (6) includes a very broadly drafted power to amend schedule 11 to the Value Added Tax Act 1994. It states:
"The Commissioners may direct any taxable person named in the direction to keep such records as they specify in the direction in relation to the goods as they so specify."
In fairness, that power is tempered to some extent by the wording of subsection (6)(3), which states:
“The Commissioners may not make a direction under this paragraph unless they have reasonable grounds for believing that the records specified in the direction might assist in identifying taxable supplies in respect of which the VAT chargeable might not be paid.”
Nevertheless, that remains a very broad power.
So can Ministers explain how they believe that that power will be exercised in practice? What safeguards will be put in place to ensure that in isolated cases over-zealous HMRC officials do not attempt to use that power as an opportunity to go on what is often referred to as a “fishing expedition”, or to seek to obtain all sorts of additional information about legitimate business under the auspices of combating VAT fraud?
Before the Paymaster General accuses me of crying wolf, I should point out that a number of professional bodies have also expressed concern about this issue and specifically about clause 21. The Institute of Indirect Taxation said:
“We would also point out that the only obligation on HMRC is to have reasonable grounds to believe that the records specified in the Direction might assist in identifying unpaid VAT. There is no requirement on HMRC to take any account of the burden that the Direction might impose on the business and no requirement even to weigh up such a burden against the potential loss of tax that HRMC is seeking to recover. We believe that they ought to be required to take account of both these factors. Furthermore because of the potentially draconian”—
its word, not mine—
“nature of these powers outside the context of MTIC fraud, we consider that the VAT and Duties Tribunal ought, on appeal, itself be entitled to consider not only the need to protect the Revenue, but also the need to avoid imposing burdens on a business that are disproportionate to the tax at risk.”
The Institute of Chartered Accountants in England and Wales went further. It said:
“The Government’s strategy should be to work with business and their representatives, the European Commission and other EU Member States to prevent MTIC fraud. This is unlikely to be achieved in the UK if we continue to pass legislation which makes honest businesses responsible for paying VAT misappropriated by others in the chain of transactions.”
It went on to quote a European Commission official’s letter published in the Tax Journal on 24 April 2004, which explained why the Commission had intervened against the UK in the Optigen case, which was referred to earlier by my hon. Friend the Member for South-West Hertfordshire. The Commission’s official, as quoted by the ICAEW, said:
“It is naturally necessary to take vigorous measures to combat tax fraud, but that objective does not justify making innocent bystanders pay for the crimes of others.”
The ICAEW concluded:
“As they stand, the provisions in clause 21 are likely to create further similar injustices, further court cases, and further defeats for the UK”.
To avoid doubt, I should emphasise that I am not in any way trying to denigrate the HMRC’s officials. Unfortunately, however, as Ministers will be aware, there have been problems in the past, particularly in what we used to know as Customs and Excise, which is now the HMRC. It lost a number of high-profile court cases, and many others collapsed. Subsequently, on occasions, there have been investigations into what went wrong by the Metropolitan police.
I do not propose to reprise that now, but my predecessor but one in this job, my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) got into considerable correspondence with the Financial Secretary over that issue and is familiar with it. So I am not seeking to over-egg the pudding, but I am making the point to Ministers that we know empirically that things have gone wrong in the past when Customs and Excise, in some respects, went too far. That being the case, we would like reassurances from the Paymaster General on how those powers will be exercised in practice. I hope that she will understand that I am trying to be responsible and not sensationalist.
In summary, and for the avoidance of doubt, I want to make it clear that we are committed to helping the Government combat fraud such as MTIC fraud. We appreciate that there is a genuinely difficult balance to strike. To some extent, Ministers are being asked to exercise the judgement of Solomon. However, given recent history, we want to ensure that the powers granted to the HMRC’s officials in part 2 of this Bill are proportionate, and that safeguards are in place to ensure that the powers will be exercised both reasonably and proportionately, not least in relation to this clause, so as not to disadvantage legitimate traders or adversely damage their business in the UK economy. I hope that that is a reasonable point to put to the Paymaster General, and I look forward to receiving some meaningful reassurances from her.