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 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.
Again, I stress that there are good intentions behind the clause, but I seek clarification on some areas. Does not existing legislation require record-keeping in all businesses? How does the clause extend HMRC’s powers? How does it meet the proportionality test of businesses? Does it ask companies to keep records not only on their own businesses, but, in some cases, on other businesses? Is it reasonable to ask them to do that? Of course it makes sense, when businesses are undergoing an appeal process, to have records to hand, but can the Minister confirm that the burden of proof will remain with HMRC rather than being shifted to businesses? Will there be a full right of appeal that will give the courts unfettered jurisdiction? Those are our key concerns about proportionality and record-keeping.
With respect to the penalty and the issue raised in proposed new section 69B(4) of the Value Added Tax Act 1994, what circumstances constitute changes to the value of the penalty? The paragraph mentions
“a change in the value of money”,
but how will the Treasury assess that? Will it be through simple indexation, or is it purely at the discretion of the Treasury to change the order of magnitude to whatever it considers appropriate? Those are the two key areas of concern that I would like the Minister to address.
HMRC’s powers to direct a business to keep additional specified records are, as we have heard, extended by the clause. As my hon. Friend the Member for Rayleigh implied, the powers in the measure can be exercised only when HMRC has reasonable grounds to believe that the additional records might assist in identifying supplies on which VAT might go unpaid. The measure is intended to deter MTIC fraud.
HMRC began a wide consultation on its powers, deterrents and safeguards in March 2005 following its creation in the Commissioners for Revenue and Customs Act 2005, and the responses to the consultation were published in July 2005. A further consultation document was published on 30 March 2006, but neither document covers the specific proposals in the Bill. The Government could usefully explain why these measures have not been consulted on. A regulatory impact assessment has been published, however.
It might be useful if the Government explained why there is a need for legislation to make these changes, and why it would not be possible for HMRC to suggest that firms should keep records, as that would help them to defend themselves against accusations of MTIC fraud. They might also explain why those powers can be applied more widely than just to goods that are usually involved in MTIC fraud—primarily computers and mobile phones—and why it would not be wiser to restrict the power to those goods for the time being.
I hope that my right hon. Friend the Paymaster General can help with this small point. I understand that subsection (6) would add paragraph 6A to schedule 11 to the Value Added Tax Act 1994. Paragraph 6(1) of schedule 11 already confers powers on HMRC to make regulations requiring records to be kept. What additional powers will paragraph 6A insert?
First, I want to assure the Committee that HMRC has no plans to use the powers for purposes other than to counter large-scale fraud, such as MTIC fraud. In that context, any additional burdens imposed under the measure are, in my view, entirely proportionate given the serious revenue losses that arise from such fraud. We had a constructive debate earlier on exactly what the challenges were.
I was also challenged by hon. Members to explain what the Government are doing now. The record-keeping requirement is part of that. It is a well-established principle that VAT must be administered in a proportionate fashion, so I turn first to the question whether the power is drawn too widely.
I have given the undertaking and made it clear that the power should be used specifically to combat large-scale fraud, such as MTIC fraud. It is totally impracticable to try to limit the scope of the measure by attempting to have a legal definition of MTIC fraud. Given everything that has been said about how it mutates and what the challenges are, I was a little taken aback that Members could flip so quickly from a discussion recognising the complexity of the challenge to providing a legal definition that says, “This is MTIC fraud; everything else you do is okay as long as you manage to legally get outside the definition.” In order for the clause to be effective, it needs to be applied in this way.
HMRC will have to demonstrate reasonable grounds to believe that additional records might assist in identifying supplies on which VAT might not have been paid. The whole purpose of the measure is to assist HMRC in detecting and challenging fraud, and that would be seriously undermined if HMRC had to prove knowing involvement in a specific fraud before using the direction, particularly given the point made by the hon. Member for Dundee, East. By the time HMRC had sufficient evidence to prove a fraud, the business concerns would be long gone. That is the nature of such fraud.
I want to deal with what constitutes reasonable grounds for deciding the direction, in practical terms. The Department will exercise its discretion carefully. It has to do so, as the area is complex and litigious. As the hon. Member for Rugby and Kenilworth pointed out, we can end up consuming huge amounts of resources for no gain and we have still lost the revenue.
The main criterion is likely to be the previous involvement of the business or persons associated with the business in transaction chains that have led to a VAT loss through MTIC fraud. Anyone who receives a direction and does not believe that HMRC has acted reasonably in issuing it will have the right of appeal to the VAT and duties tribunal.
The direction would require the business to keep records that identify the goods it bought or sold, such as mobile phone serial or batch numbers, or the lock numbers for computer chips. The direction notice will set out clearly the records to be maintained. In order to apply the measure, HMRC must have reasonable grounds. I have explained what those reasonable grounds are and, given the magnitude of the problem that we want to deal with, that is entirely proportionate.
The final point was with regard to the penalty. The whole point of these clauses and the penalties that support them is not to use the penalties but to hope that they have a deterrent effect and that businesses keep better records in the first place to ensure that if they are in a sensitive area they can always demonstrate the facts of the case and that they complied with the legislation.
The scale of the fraud could be up to £1.9 billion of stolen VAT. It is theft, not business. It is like robbing a bank; it is just a different bank that they are robbing currently. They are doing it against the Exchequer. In the light of this, the level of penalty must be appropriate to act as a deterrent. I do not know whether £6,000 is high enough. However, within the range of penalties that the Department operates across the piece, that is the appropriate level and that is how we will back it up.
If businesses keep the correct records they always know to whom they have sold and from whom they are purchasing. If they have kept the batch numbers and they can demonstrate that, it helps to pave the way exactly to the point made by the hon. Member for Rugby and Kenilworth. Where somebody within a chain took all possible steps and could not have reasonably known, or have had access to the knowledge, and can demonstrate the facts with the records, it will take them outside consideration for MTIC fraud. That seems very important.
The Paymaster General suggested that businesses should keep correct records of goods, numbers, customers and so on. That is reasonable. But in a previous debate it was suggested that tobacco manufacturers should not supply to people who they believe will smuggle; they should not supply to businesses, possibly illegal ones, which may then resupply to smuggling operations. Would it be reasonable under proposed new section 6A(1) for the commissioners to direct a company to keep records, not only of its immediate customers, but perhaps of the customers’ customers? That is the implication of the tobacco smuggling issue. If that became impossible, because a business simply could not identify it, and the commissioners thought that it was reasonable in order to try to stop major fraud, would the penalty then apply?
We are talking about an entirely different case here. As I made clear to the hon. Gentleman, the requirement for the direction to keep more records is because of involvement in, or suspected involvement in, a previous chain. This has operated perfectly well. The legislation depends and has depended in other areas on this definition of reasonableness and then the test at the tribunal. It is entirely appropriate in this area. The question that we still have to deal with as Members of this House, and I have to deal with as the Minister responsible for this area, is whether the combination of these clauses, the reverse charge and the increased activity, will have the required deterrent effect on MTIC fraud, or whether further steps will need to be taken. That is a matter that we can resolve only when we see the exact details of the reverse charge and the derogation we may be granted by the Commission.