Value Added Tax — Time of Supply

Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 16th July 1974.

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Photo of Dr John Gilbert Dr John Gilbert , Dudley East 12:00 am, 16th July 1974

I beg to move Amendment No. 2, in page 3, line 42, after 'effect' insert: 'and be deemed always to have had effect'. The amendment seeks to restore to the clause its original intention by reinstating words deleted from it in Committee on an amendment moved by the hon. and learned Member for Dover and Deal (Mr. Rees). I will not detain the House for long, but it is desirable that I should explain briefly the background of the amendment to hon. Members who were not present in Committee.

It is fair to say, in the light of what was said on both sides of the Committee and of the House in the debates on the 1972 Finance Bill—which is what got us into these difficulties—that it was Parliament's clear intention at the time that VAT should be applied—[Interruption.]—

Photo of Mr George Thomas Mr George Thomas , Cardiff West

Order. The hon. Gentleman is entitled to be heard in silence.

Photo of Dr John Gilbert Dr John Gilbert , Dudley East

—it was Parliament's clear intention that VAT should be applied from 1st April 1973 to charges for the hiring of goods whether or not hire agreements had been concluded or the goods delivered to the customer before that or any other date. That was the proposal put before the House by right hon. and hon. Gentlemen opposite, and it will be within the recollection of the hon. Member for Worthing (Mr. Higgins) who introduced the 1972 Bill.

The proposal was not readily accepted by those of us who were in opposition at that time, because it involved an element of double taxation on those hired goods which had previously borne purchase tax. After two debates and a Division, the proposal was carried, and both sides understood it to be the intention of the Bill. That intention has been largely fulfilled.

I assure the House that the great majority of traders have been fully accounting for and paying tax on those supplies. The impression was given by some speeches in Committee and else-here that there had been widespread seeking of legal advice and widespread withholding of tax as a result of legal advice received. Those impressions are quite unfounded. Indeed, I go further and assure the House that since the debate in Committee I have received representations from certain quarters of industry, namely, the Equipment Leasing Association, which positively urged that the words I have moved should be restored to the clause, because tax has already been paid on that basis, and the unscrambling of the situation between suppliers and customers would be troublesome and an extremely unwelcome process.

It will be within your recollection, Mr. Deputy Speaker, that in February this year the London VAT Appeal Tribunal gave a decision on appeals brought by three large television hire concerns that in its interpretation of the wording of Section 7(8) of the 1972 Finance Act VAT was not chargeable on goods supplied on hire and delivered to customers before 27th July 1972, the date of the Royal Assent to that Act.

It can be reasonably assumed that a distinction between hirings before 27th July 1972 and hirings on or after that date was not in the minds of anyone who participated in the 1972 debates in respect of VAT either in Committee of the whole House or in Committee upstairs. Hon. Members who were present will recall that a measure of relief on double taxation on television sets was provided after full debate on the basis that rental under all agreements entered into before 1st April 1973—not the relatively small proportion of cases in which the agreement was made and the set installed between 27th July 1972 and 31st March 1973—would be liable to VAT from 1st April 1973 onwards. That relief was provided in Section 48 of the 1972 Act and reduced the tax base to which, as was understood on both sides, the tax was to apply.

What is now Clause 5 of the Bill was introduced as the only feasible course to restore the original intention of the legislation brought forward by the Conservative Government and to validate what had been happening since April 1973, in the great majority of cases affected, in the belief that the legislation had achieved its Intention.

9.30 p.m.

If the amendment passed in Committee is allowed to stand, the effect will be that the tax will not become chargeable on these supplies until the date of Royal Assent to the current Finance Bill. The cost of that to the Exchequer would be substantial. Apart from television rental, hiring charges for other kinds of goods, such as motor vehicles, computers, office equipment, domestic appliances, furniture, carpets, linen, gaming machines and many other items, would be affected. At a rough estimate we would say that in respect of hirings to non-taxable persons from 1st April 1973 to date about £50 million of tax could be involved. If it is not possible to resist the proposal that the tax will be relieved retrospectively from services, the amount could be more than double—namely, about £120 million. If we take into account hirings to taxable persons who deduct as input tax the VAT charged to them, the amount involved becomes substantially greater.

In moving the amendment in Committee the hon. and learned Gentleman pointed out that the Commissioners of Customs and Excise had an appeal pending and said that it would be improper for the Executive to over-ride the decision of the courts in relation to a particular case before the possibilities of appeal were exhausted. With respect, the position is not as simple as the hon. and learned Member has represented. The Commissioners are unavoidably placed in some difficulty. If they won their appeal to the Divisional Court, the television rental companies might be expected to take the matter further and the issue might not be finally resolved for another year, or possibly longer. If, on the other hand, the Customs and Excise lost the appeal, they might feel entitled to take the matter to a higher court. This might well be the outcome of our proceedings here this evening, and I shall not conceal that from hon. Members.

The hon. and learned Gentleman criticised the official statement and particularly the statement that the effect of the clause—and I quote from the statement— … is to correct the uncertainty created by a recent decision of the London Value Added Tax Tribunal. I make clear that we make no apology for that statement. The tribunal's decision must have had the effect of creating uncertainty in the minds of many traders who were accounting for tax on hiring charges in the way in which they and the House had all along intended the 1972 Act should operate. Traders were bound to be uncertain whether the decision extended as widely as it appeared to do and whether, if it did, it could be reconciled with equitable treatment, for VAT purposes, of hirings as compared with other transactions which had taken place from 1st April 1973.

Furthermore, legal processes could be expected to last for a year or more. At that time if the final decision were given to sustain the VAT tribunal decision, the administrative operation, which is already extremely formidable, in collecting arrears would be further complicated.

The right hon. Gentleman in good humour this evening suggested that before long he might introduce a Budget. I do not seek to trade jests with him for this is a serious matter. If he finds himself responsible for a Finance Bill in the near future, he will face a serious problem in seeking to administer the relief afforded in Standing Committee. I assure him that it is no joke.

The hon. Member for Cornwall, North (Mr. Pardoe) implied in Committee that there would be no serious administrative burden regarding the making of payments to traders because it would be left to individual companies to make their claims and that would virtually be the end of the problem. The hon. Gentleman suggested it would be almost a self-policing operation. I assure him and the House that if the amendment were allowed to stand the operation would be formidable, even if no further complications were to ensue from subsequent appeals, which I do not rule out, to divisional and higher courts.

The majority of traders have already been accounting for tax—I want to make that clear to the House—in accordance with the original intention. It is likely that if the matter is left on its present basis a large number of claims for repayment will be involved. The formulation of the claims for the traders would not be a simple matter. It would mean calculating the tax on each charge made between 1st April 1973 and the date of Royal Assent to the current Finance Bill under hiring contracts in which the goods had been delivered before the date of Royal Assent to the Finance Act 1972.

Hon. Gentlemen may look mystified. Therefore, it is only right that I should repeat that precisely to the House so that it is clear. It would mean calculating the tax on each charge made between 1st April 1973 and the date of Royal Assent to the current Finance Bill under hiring contracts in which the goods had been delivered before the date of Royal Assent to the Finance Act 1972.

That would be a burden in the first place not on Her Majesty's Customs and Excise but on the individual traders who were seeking to make claims under the provisions of the clause as amended. There would be additional transitional problems in determining the tax payable on supplies which span the date of the Royal Assent to the current Finance Bill.

In view of the large amounts of revenue involved—I have already suggested a minimum of £50 million and it could be considerably more—the Customs and Excise—I am sure that I carry hon. Gentlemen with me on this at least—could not be expected to accept traders' claims without official verification. It would be the height of irresponsibility if it were to do so.

The verification of individual claims would be far from straightforward. Individual transactions between claimants and their customers would need to be verified to ascertain whether the supplies were made to business customers entitled to deduct input tax. It would also be necessary to confirm that business customers who had been credited with a tax charged to them had properly adjusted their deductions of input tax. The dates of original supply agreements and installations would have to be checked, and also the dates when payments would be made. It would be nothing short of a nightmarish situation.

I have indicated that in some cases there would be a substantial problem about passing on repayments effectively to those people, the customers of taxable suppliers, who have borne the burden of the tax.

I understand that the television rental companies in general did not increase their charges to their customers in 1973–74 on account of value added tax. I would judge that their reason for not doing so was not that they all along took the view taken by the London Value Added Tax Tribunal, but rather that the value added tax on television rentals was a much reduced charge by reason of the concession given in Section 48 of the 1972 Act and that the rental companies felt that they had sound commercial reasons for refraining from passing it on at that time.

Even so, they have in most cases been paying amounts of value added tax to the Exchequer, and I think it likely that it will be open to their customers to argue that the charges were that much higher than they would have been if there had been no value added tax and that refunds should, in effect, be made to the end customers as well.

Where charges have been increased since April 1973 on account of value added tax, the customer unquestionably has a moral claim and may have a sound legal claim—this would remain to be settled in the courts—for a refund from the supplier. Some contracts may have terminated. Customers may be difficult to trace. Therefore, I very much doubt whether repayments could or would be effectively passed on to all customers. If they were not, they would constitute a clear bounty to the suppliers.

That apart, there are the administrative problems for the small supplier confronted with a procession of aggrieved customers who learn of the proceedings in Standing Committee and are under the impression that, if the decisions there were not reversed, they would be entitled to a refund of their value added tax on hirings covering this period. The fall-out for the individual suppliers in having to deal with disgruntled customers and process their claims, if they threatened action or became legally entitled to repayment of value added tax, would be enormous.

As I said in Standing Committee, this is not at all a happy situation. Its origins are not of this Government's making. I make no criticism of Conservative Members as to the drafting of the 1972 Act, because my hon. Friends and I accepted the intention of the Bill. We are seeking merely to restore the intended effect of the 1972 Act. We are not seeking any element of retrospection in the sense that we are legislating afresh by removing an ambiguity in the legislation. We understand all the arguments against the principle of retrospective legislation. I have used them myself more than once.

We must consider not only the abstract principle but the practicalities of the situation, which potentially affect thousands of businesses and millions of custo- mers. The Standing Committee is asking the House to accept an administrative monstrosity with the clause as unamended. For the reasons I have given, I hope that the House will accept the amendment.

Photo of Mr Robert Carr Mr Robert Carr , Sutton Carshalton

To what sectors of industry, individual companies, trade associations and so on has the Customs and Excise explained all the difficulties and complexities? I have not received a single representation from industry that it is in any way aware of them or that it supports the hon. Gentleman's view that industry would like this retrospective element to go forward.

Photo of Dr John Gilbert Dr John Gilbert , Dudley East

I cannot tell the right hon. Gentleman to what extent representations have been made to industry by Customs and Excise. We have not solicited support for our view. The representations to us from the Equipment Leasing Association, an extremely responsible body of companies, were completely unsolicited. The association asked us to restore the position as it was intended to be under the 1972 Act.

Photo of Mr Robert Redmond Mr Robert Redmond , Bolton West

Would not it be worth mentioning the Radio and Television Retailers Association, which made representations to the hon. Gentleman?

Photo of Dr John Gilbert Dr John Gilbert , Dudley East

I am happy to discuss the meeting I had with that association. Its concern was not with the clause but with the relief under the two-thirds/one-third arrangement, which it considered inadequate. I will not embarrass the hon Gentleman or the hon. Member for Worthing by discussing its comments on the precise form of the 1972 legislation. The thrust of the association's complaint was that the one-third relief would run out at the end of this year, and it was seeking an extension. Its complaint was in no way addressed to the clause.