New Clause 4 — Duty on HMRC to expedite VAT registration and repayment applications

Orders of the Day – in the House of Commons at 5:45 pm on 25 June 2007.

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'(1) It shall be the duty of HMRC to determine applications for—

(a) registration for VAT, and

(b) repayment of VAT by HMRC

within a maximum period of days from the receipt by them of the relevant application.

(2) The Treasury must by Order specify the maximum period mentioned in subsection (1), having first consulted HMRC and persons representing small businesses.

(3) If an application of a kind mentioned in subsection (1) has not been determined by HMRC before the expiry of the maximum period specified by the Treasury in accordance with subsection (2), the applicant may apply to the Special Commissioners for a declaration that the application is deemed to have been approved by HMRC.

(4) The Special Commissioners must grant an application for a declaration under subsection (3) unless they are satisfied that HMRC has reasonable grounds for having failed to determine an application in accordance with subsections (1) and (2).

(5) Grounds shall be treated as reasonable under subsection (4) only if they relate to circumstances beyond HMRC's control.'.— [Mr. Gauke.]

Brought up, and read the First time.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I beg to move, That the clause be read a Second time.

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this it will be convenient to discuss Government amendment No. 2.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

Before I deal with new clause 4, let me say a few words about Government amendment No. 2 and return to the comments made by the Financial Secretary earlier. As he said, on my debut on the Front Bench in Committee, he generously agreed to amend the Bill to require an affirmative resolution where the joint and several liability requirements are to be extended, as in clause 97. He has been as good as his word, and I welcome the amendment.

New clause 4 would require that the Treasury, in consultation with Her Majesty's Revenue and Customs, specify a maximum period for HMRC to determine an application for VAT registration or VAT repayment. If it were not determined within the period specified, the applicant could apply to the special commissioners for a declaration of approval to be granted, unless the commissioners determined that HMRC had reasonable grounds for failing to determine the application. The reason for tabling the new clause is the widespread and growing concern that VAT applications, whether for registrations or repayments, are taking substantially longer than previously, and substantially longer than the target times specified by HMRC.

I should say at the outset that I recognise that part of the reason for the delays is action that is being taken to try to tackle missing trader intra-Community—MITC—fraud, which has a substantial cost. We recognise and support the Government's view that action needs to be taken. We also accept that, in fighting MTIC fraud, there is a role for ensuring that only legitimate companies become registered for VAT and only companies with clean hands receive VAT repayments. I have received some representations stating that the VAT registration process should have been tightened at an earlier stage in order to address the issue.

It is not our intention to disrupt attempts by the Government to tackle MTIC fraud. Indeed, new clause 4 is so drafted that if HMRC had good reason for delaying a registration or repayment it would be able to do so, and of course tackling fraud is a good reason. However, I hope that the new clause will give us a chance to explore whether the problems with registration and repayment are entirely due to MTIC fraud, and whether the balance is right between tackling fraud and ensuring that legitimate businesses are not harmed and that their activities are facilitated. I also hope to explore the question of whether there is any prospect of an improvement in performance by HMRC in this area. I will listen carefully to what the Financial Secretary says when he responds, and if he persuades me that the new clause would harm efforts to tackle MITC fraud, I will not press it. None the less, we wait to hear those arguments.

Essentially, there are two closely related problems: VAT registrations and VAT repayments. This is not a new issue. I raised the question of VAT registrations last summer in the Standing Committee on last year's Finance Bill. I subsequently raised it with senior HMRC officials when I was a member of the Treasury Committee and they gave evidence on HMRC's performance to the Treasury Sub-Committee. It is worth looking at the evidence that they provided. Paul Gray, the chairman, stated that VAT registrations was

"one of those areas where we have had probably the greatest degree of pressure and the performance certainly was not as good as I might have hoped".

His colleague, Mike Eland, added:

"it is trying to get a balance between facilitating legitimate business and tackling fraud. We did not get that quite right. We put the emphasis on tackling the fraud. We are now looking to correct it the other way by simplifying some of the procedures and also getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly".

Mr. Gray and Mr. Eland stated that HMRC was improving but was "not there yet".

Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend is making a good case. Could he give me some idea of the length of time for which he thinks it reasonable for Revenue and Customs to delay considering an application?

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I am grateful to my right hon. Friend. I will deal with some of these points in more detail in a few moments. HMRC's standard target is 21 days —15 working days. There may well be circumstances in which additional time is necessary, but at the moment there are regularly delays of three, four, five or six months. That is unacceptable.

Let me consider some of the performance figures. HMRC accepts that last summer's performance was unacceptable. In June 2006, 109 complaints were made, and in July 2006 the figure was 96. I have the most up-to-date figures from answers to parliamentary questions, which show that the number of complaints had increased to 131 in April 2007 and 133 in May 2007.

Perhaps the most important figure is the percentage of applications that were processed within 21 days of receipt. In May, June and July 2006 it was 56, 57 and 57 per cent. respectively. Again, the most up-to-date figures that I have are from parliamentary answers. Although in January HMRC officials were looking for a substantial improvement, and recognised that there had been a problem the previous summer, the figure was still a mere 60 per cent.; anecdotal evidence suggests that it may have declined since then. However, even if 60 per cent. of applications are tackled within the 21-day target period, that means that of approximately 280,000 VAT applications a year, some 112,000 are not tackled in that time. That is a substantial number. Given that I believe that the target has been missed by some margin, we are talking about a reasonably major issue.

The concern was further highlighted last week in an article that John Arnold, the chairman of the tax faculty of the Institute of Chartered Accountants in England and Wales, and Neil Gaskell, its technical manager, wrote. Their introductory remarks are worth quoting:

"At the Tax Faculty we know that the continuing and unacceptable HMRC delay in processing new VAT registrations is the biggest single VAT issue facing our members and their clients.

Some registrations are taking over six months to obtain. Smaller businesses are faced with cash flow problems because, without a VAT number, they have difficulty in getting their invoices paid. Larger businesses find restructuring or acquisitions held up; and for everyone, property transactions are delayed if the purchaser needs to become VAT registered".

They go on to argue that accountants have been running up approximately £100 million worth of chargeable time as a consequence of trying to deal with HMRC's inefficiencies and errors. They estimate that only 20 per cent. is passed on to clients. None the less, the problem affects accountants and clients.

How bad is the problem according to HMRC? Mr. Arnold and Mr. Gaskell state in their article that HMRC claims that 95 per cent. of applications are processed within 30 days; I remind hon. Members that the target is 21 days. Let us consider the assessment that the accountants make of the various VAT registration offices. They note that Newry takes 30 days, and Wolverhampton takes 34 days to open applications. Performance appears to be slightly better in Carmarthen, but there are no details. Hon. Members should note that we are considering the time taken simply to open applications.

The accountants' article refers to HMRC's figure of 30 days, although an article in last week's Financial Times cited 38 days. Does that figure mean that processing takes place 30 days from receipt, or 30 days from opening applications? If it is taking more than a month simply to open applications, we are contemplating serious problems. As Mr. Arnold and Mr. Gaskell say, it suggests that the 30-day claim is somewhat "misleading".

One of the problems that the tax faculty article identified is the large increase in the number of applications for VAT registration, which the Government's legislation on managed service companies has caused. I am sure that we will revert to that subject later because it has caused a substantial increase—approximately 20,000—in applications. The VAT application officers have simply been unable to cope with that.

The issue raises several questions, and I would be grateful if the Financial Secretary could answer them. Do the Government accept that performance in dealing with VAT applications is declining? Does the Financial Secretary have any further up-to-date figures? Does he maintain that 95 per cent. of cases are tackled in 30 days, or 38 days? Does that time run from receipt of applications or opening of applications?

The accountants have raised concerns about the closure of the Newry VAT office. What will be the effect of that? HMRC appears to have acknowledged that it will cause further delays. What steps did HMRC take to mitigate the problems that the proposals for the managed service companies caused? Was it anticipated that they would cause an increase in VAT applications? What was done to tackle that? Are the problems exacerbated by attempts to reduce HMRC staff? Is that a wider problem in HMRC? Are legitimate companies that are trying obtain a VAT registration feeling the impact of attempts to reduce staff? How targeted are the problems relating to VAT registrations at companies that are in high-risk areas for missing trader intra-Community fraud? The problem appears to be much greater than simply a handful of companies in key high-risk areas, such as mobile phones or specific electronic goods.

The second cause of concern is VAT repayments. In Committee, I provided several examples of difficulties with VAT repayments. Again, there is clearly a relationship with MTIC fraud; indeed, it is even stronger. The system of extended verification, which has caused delay in several cases, is undoubtedly an attempt—on the face of it, a successful attempt—to tackle MTIC fraud.

Two statistics are wheeled out. First, in 95 per cent. of cases in which traders are subject to extended verification, participation in or profit from MTIC has been found, or sufficient suspicion exists to warrant further investigation—"sufficient suspicion" in the opinion of HMRC, presumably. There is a distinction between cases in which someone subject to the extended verification system has been found to participate in or profit from MTIC fraud and those in which sufficient suspicion exists. Is it possible to break down the figure of 95 per cent. to ascertain how many traders fall within each category?

The second figure that HMRC uses is the 1 per cent. of withheld VAT, which is subsequently found to have been correctly claimed and properly payable. The test of "correctly claimed and properly payable" is higher than that for being involved with MTIC fraud. I sought further clarification through parliamentary questions without success about whether it could be argued that an element of the VAT funds that are not being repaid do not relate to MTIC fraud but to a technical, perhaps minor, breach of the claim form. I should be grateful for that further clarification.

There is a concern that staffing underlies many of the problems, especially those with VAT registration. In Committee, I raised the case of Viking Garages, and a professional adviser to the company pointed out, in connection with VAT repayments:

"HMRC are putting woefully inadequate resources to the team responsible for authorising repayments" .

Do the Government recognise that there is a problem, and a staffing issue? If so, what steps will they take to improve the position?

Both issues hamper legitimate business. There is concern that the delays are preventing us from dealing accurately with MTIC and from taking well-targeted action, but there is broader anxiety that the legitimate needs of legitimate business have not been facilitated by HMRC. New clause 4 highlights and attempts to address those concerns. For 12 months, professional bodies and members of the Conservative party have sought to improve something that HMRC has recognised is a serious problem. I hope that the Financial Secretary accepts that there is a problem, and will provide reassurance that those concerns will be addressed.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 6:15, 25 June 2007

I support the powerful case made by my hon. Friend Mr. Gauke for new clause 4, particularly on the repayment of VAT. Some 1.8 million businesses are VAT- registered, and they submit 7.6 million assessments each year. In the year ending March 2006, 85 per cent. of those assessments were paid on time, which means that a substantial number were not. The new clause would assist the Revenue in sharpening up its act, and would both help it to catch up with those who have not paid their VAT bill on time and ease the burden on businesses that have not received their repayments on time. In the absence of such a provision, the Revenue has paid insufficient attention to the efficiency improvements that are needed following its combination with Customs and Excise.

The Revenue is quick to fine businesses that do not submit their returns on time. Indeed, if a business is two weeks or more late in filing its return, a default fine is automatically imposed. In the year ending March 2006—the latest year for which figures are available—the Revenue issued 250,000 late filing penalties, which is an increase of 10,000 on the previous year. The total value of VAT-related penalties earned by the Revenue that year was £270 million. That is a significant source of tax revenue, which HMRC could clearly increase, given the proportion of fines that have not been paid. However, there is an imbalance, as HMRC's performance in refunding overpayment is not subject to anything like such rapid equivalency. Indeed, businesses can apply for compensation only once an inquiry launched by HMRC into VAT irregularities is completed. As we heard from several hon. Members in Committee, that may take a very long time indeed, even for businesses that trade legitimately and supply the information requested by HMRC. They do not receive such payments as a result of HMRC's inefficiencies.

I am dealing with a constituency case that involves a company whose VAT payment for March 2006 is under investigation. It was not notified of the investigation until six and a half months later, in mid-October. An overpayment had been made, so the Revenue may have suspected MTIC fraud—indeed, it transpires that that was the case—and it launched an inquiry. Fourteen months later, the company is still waiting for the inquiry to conclude. There is a catalogue of errors in HMRC's systems, with which I will not bore the House—but to illustrate the challenges facing companies I should explain that that business, having failed to receive a refund of the significant overpayments in its March return and its subsequent May return, received a demand from the Revenue regarding the non-payment of corporation tax. The Revenue decided to pursue the company through the courts for the tax, which amounted to roughly 20 per cent. of the VAT overpayment due to the company. The company got into cash flow difficulties as a result of the Revenue retaining its funding, and business more or less ceased. It was only as a result of my intervention with Mr. Gray at HMRC that the Revenue backed down from its demand for corporation tax and stopped pursuing the company into liquidation through the courts. Fourteen months later, however, despite repeated correspondence with Mr. Gray on the company's behalf, there is no resolution in sight.

If the Government accepted the new clause, the Revenue would be obliged to report regularly on its performance, so it would have a salutary effect both on the way in which HMRC chases up people who default on payments and on cases in which overpayments have not been refunded. As a final illustration, may I rehearse for the House a point that I made in Committee about online filing and HMRC's woeful performance in meeting its own targets? By March of this financial year, HMRC aims to achieve a target of 50 per cent. of VAT returns filed online. As of March—the end of the last financial year—only 9 per cent. of returns were filed online. The new clause would encourage substantially greater efficiencies in HMRC, so it should be supported.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I shall be brief, because Mr. Gauke outlined very clearly a significant problem in VAT registration and repayment. It is important to underline the impact of such problems on businesses. Hon. Members have given examples of businesses that have ceased trading as a result of delays, so we should not underestimate the problems on the ground. As always, it is difficult to balance the interests of law-abiding businesses with the need to tackle the fraudulent endeavours of people trying to cheat the system. Liberal Democrats have always made it clear that they are sympathetic to the Government's efforts to tackle the issue. MTIC fraud is a significant problem that costs the Treasury billions of pounds a year, so we support the Government's efforts to introduce a reverse charging system to overcome it.

I am sympathetic to the intention behind new clause 4, but I wonder whether it is too bureaucratic. If HMRC officials are already struggling to deal with repayment applications, the provision might make the spiral even worse. If I have any hesitation, it is about the fact that the proposal may be more time consuming for officials who are struggling to cope with the new measures that have been introduced as a result of reverse charging and the verification process. They are trying, too, to cope with restructuring and staff cuts, which have had a wider impact on the system. I should be grateful if the Minister told the House the average time that it takes an HMRC official to process applications for repayment and to deal with verification.

Finally, I do not know whether the Minister will accept the new clause, but businesses are seeking genuine assurances from him that the wider HMRC reforms and efficiency changes will not have a negative impact on their ability to complete the VAT verification process or to seek repayment. Efforts to counter MTIC fraud should not affect law-abiding businesses. Above everything else, with respect to the hon. Member for South-West Hertfordshire, who tabled the new clause, ultimately that is what small businesses seek from today's debate.

Photo of John Redwood John Redwood Conservative, Wokingham 6:30, 25 June 2007

Business is looking for greater speed and greater co-operation from all parts of Government, and I am delighted that my hon. Friend Mr. Gauke has highlighted the need for improved performance in the important area of VAT refunds and VAT registration. The asymmetry has already been illustrated in one respect. If a business files late, there is an automatic penalty. If the Revenue and Customs is late in returning, that is bad luck on the business concerned.

There is another asymmetry that is relevant and extends more widely across Government: the asymmetry between the standards now expected of a world-class business in terms of error and delay, and the standards that we have grown used to expecting from Government. A world-class business would think it bad to have an error rate as high as 0.1 per cent., and it would expect very little delay in service or product delivery to its customers, yet we are discussing an organisation where 40 per cent. of the initial registrations and 14 per cent. of the refunds are delayed. Those are massively large figures representing millions of cases of late refunds over a reasonable period, which would not be acceptable in the private sector.

It is the Government's job and a Minister's task to engage with senior officials and administrators to try to lift Government standards to something like those that world-class competitive businesses must hit or go out of business. As we have heard, small businesses and some big businesses can be extremely embarrassed if an important refund is much delayed, because they budget their cash flows to very fine tolerances. If a large cheque from Revenue and Customs is missing, that can make a big difference to the business's future and therefore to the jobs represented by that business.

Photo of James Duddridge James Duddridge Conservative, Rochford and Southend East

I thought that I had left VAT returns behind when I moved from business to politics, although as the Financial Secretary knows, I maintain a keen interest in VAT issues as HMRC has three main buildings in the constituency that I represent, two of which deal with VAT issues. With reference to my local VAT office, I have had a number of discussions about job cuts in HMRC, and from the Front Bench my hon. Friend Mr. Gauke expressed concerns about the impact of job cuts on already worrying performance figures. I support new clause 3 in particular, as it is right that we examine the performance figures in detail.

My second point involves a recent constituency case. A constituent recently visited me who was concerned that an internet-based competitor was selling goods without paying any VAT. I wrote to the Financial Secretary, who took the matter extremely seriously, although for understandable reasons he wrote back to say that he could not correspond about a third company and reveal details. From my investigation of the matter, there seems to be concern in the industry that, because of carousel fraud, the performance figures of HMRC were adversely affected. That was affecting not only repayments and the processing of applications, but other fraud issues relating to VAT. I should appreciate reassurances from the Minister that non-carousel fraud is being investigated equally and that resources are not being sidetracked because of carousel fraud.

Finally, in my discussions with a number of people about the case that I mentioned, concerns were raised that managed service companies are submitting thousands of new companies for VAT registration on a daily basis. Can the Financial Secretary allay my concerns or put a number on the VAT applications coming through daily and monthly? Will he confirm reports that up to 20,000 applications in bulk have been submitted to HMRC in one day? That would explain some of the performance figures and performance concerns.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

When the issue of timely VAT repayment was raised in Committee in the context of MTIC fraud, the Financial Secretary commended me for speaking with some passion on the subject—at least, I think it was a commendation. It will come as no surprise to him, then, that I want to return to it.

As my hon. Friend Mr. Gauke told the Public Bill Committee, the problems with timely VAT registration and repayment have been a matter of some interest to the Treasury Committee. The acting chairman and the director general of enforcement and compliance at HMRC both admitted to the Treasury Committee that VAT registration was an area in which HMRC was under considerable pressure.

However, my interest, or rather my passion, stems from the fact that I have seen the effect that the pursuit of MTIC fraud can have on a business when it causes significant delay in VAT repayment. I therefore welcome new clauses 3 and 4, because they both improve parliamentary oversight and introduce some form of benchmarking in HMRC's treatment of VAT. However, the first depends on the second if it is to be effective. The value of scrutiny depends, to a large extent, on the existence of benchmarks and standards of reasonable behaviour. That is particularly important in respect of MTIC fraud.

First, there is a consensus that tackling MTIC fraud is necessary and beneficial. However, the unintended consequence of that consensus is that scrutiny becomes more challenging, because we must be careful that an attack on the effectiveness of the repayment system is not construed as an attack on anti-avoidance itself.

Secondly, the Government are fond of telling the House how fiendishly complicated MTIC fraud is and how HMRC is engaged in a running battle to outwit its perpetrators. The reasoning is that complication justifies delay. The logical outcome of the endless race between fraudsters and HMRC is that as complication increases, so must delay. That was the essence of the Financial Secretary's argument in Committee. He told me:

"Given the complexity involved, it is not surprising that the process of focusing on the trading patterns or traders that we suspect are most at risk can take some time." ——[Official Report, Finance Public Bill Committee, 7 June 2007; c. 492.]

Nevertheless, there remains a point at which delay becomes unreasonable and unjustifiable, whatever the worthy objective behind it. The Financial Secretary cited a figure of 12 months for the completion of verification checks which had been accepted by the courts. If that is truly a reasonable and justifiable delay, let the Treasury specify it in an order, or let HMRC print it in a glossy brochure so that businesses know what to expect.

Thirdly, the Financial Secretary argued that HMRC's record on MTIC fraud is very good, showing that the Government's strategy on MTIC fraud is well focused. He cited the figure that we heard earlier, that only 1 per cent. of the VAT that had been withheld because of verification was found to be correctly claimed and repayable, but that statistic will be of little comfort to those who are caught up in investigation, and it has no direct bearing on whether HMRC can agree a timetable for verification and then stick to it.

I raised the issue in Committee because I was worried that HMRC might lack the resources that it needed to cope with the scale of MTIC fraud. Publicised time scales for VAT registration and repayment would assist resource management within the organisation. It would also be invaluable to businesses that rely on prompt VAT repayment in order to maintain a healthy cash flow.

One of my constituents was a director of a firm that was caught up in an MTIC fraud investigation. My constituent's company supplied mobile phones, and it had exports totalling £60 million in 2006. It waited some 10 months for a VAT repayment claim of £6.7 million to be met while "extended verification" procedures were carried out on its supply chain. Unfortunately, that wait did not have a happy outcome; on 17 January, the company went into administration due to the significant dent in operating cash flow represented by that £6.7 million, which is a substantial sum for a company with a £60 million turnover.

It is unfortunate to say the least that any company should be driven to the wall in those circumstances. I do not wish to second-guess HMRC's judgment on that particular case, but I do question the process. I suspect that the uncertainty of living month to month while investigations were carried out was the final straw for my constituent. He also told me that he did not think that any investigation was going on for much of those 10 months, as few of his suppliers were even contacted.

Proposed subsection (3) of the new clause would ensure that HMRC had an incentive to get a move on, since running out of time would result in a determination in favour of the application. It is better that HMRC should run out of time than a company should go to the wall or go bust having run out of money. What the new clause does not do is prescribe a reasonable time scale. It is quite right that HMRC should, informed by all the relevant operational considerations, advise the Treasury on an appropriate time scale. Once in place, however, that time scale would introduce some accountability and get companies that are being investigated for MTIC fraud out of limbo.

My final word is a note of scepticism on proposed subsection (5) concerning force majeure. As we heard earlier, Mr. Eland, the director general of enforcement and compliance at HMRC told my hon. Friend the Member for South-West Hertfordshire that HMRC was

"getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly."

Given the Government's woeful record on IT projects, I hope that the routine IT failure will not be brought within their ambit under force majeure.

Photo of John Healey John Healey The Financial Secretary to the Treasury

We have had yet another good debate on the challenges facing HMRC and the Government in tackling some of the systematic and very serious fraud perpetrated against our VAT system. I welcome the support that hon. Members in all parts of the House have given us in that regard. We have also had a useful debate, as we have done previously during the Bill's passage, on some of the problems that are evident and that senior HMRC officials and I have recognised and are concerned about in relation to delays in VAT registration and repayments. I shall come in a moment to the provisions in new clause 4, which I do not think will help deal with those problems. Nevertheless, given the scale of the work that HMRC does and the intense impact and difficulties that can be caused for individual companies, it is appropriate that we debate these matters on the Floor of the House.

The hon. Members for Ludlow (Mr. Dunne), for Rochford and Southend, East (James Duddridge) and for Braintree (Mr. Newmark) all mentioned particular constituency companies. If each of them separately would like to give me the names of those companies, I shall consider the cases. I shall check on the present position of the company raised by the hon. Member for Ludlow and ensure that he receives an update, and I shall do the same for the hon. Member for Rochford and Southend, East, whom I can reassure in passing that carousel fraud in the VAT system is a major concern, although our vigilance on other forms of VAT fraud continues. If the hon. Member for Braintree can let me have the name of the company—we have discussed it before and I have caused inquiries to be undertaken, as I undertook to do—for the purposes of taxpayer confidentiality and to ensure that I have the right company, I can, with that confirmation, get back to him on the current position.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I appreciate the Financial Secretary's comments, but the spirit in which I was trying to make my points was not so much about the case itself as about the process that it had to go through, which lasted rather a long time. That was the thrust of my argument, rather than the rights and wrongs of HMRC's judgment on my particular constituent's case.

Photo of John Healey John Healey The Financial Secretary to the Treasury 6:45, 25 June 2007

I appreciate that, and even where the hon. Gentleman has been very critical of the Government in the thrust of his argument, I accept the manner in which he has put it.

Mr. Gauke asked me for specific information on certain important aspects. Let me try to deal with them at the outset, after which I shall come on to the proposals set out in the new clause. First, claims that registration applications have not even been opened are simply not true. Post received by the registration units is opened on the day of receipt. The timetable against which HMRC attempts to manage its operations, which it monitors and then is judged against, counts from the point of receipt of the form.

On repayments, the hon. Gentleman said that he had been pressing for more information and a breakdown of some of the figures that he and I have discussed previously. In particular, I refer to the process of verification of repayments that may have been linked to MTIC loss where there are grounds for further investigation. In a third of those cases—or, if he likes, 95 per cent. by value—there was firm evidence of links to such fraud. In two thirds—by number, but not value—there are strong indications of such links, warranting further investigation. I hope that that helps him with his question.

The hon. Gentleman asked about the closure of the Newry office, and indeed about the proposals to close the Carmarthen office as well. That is part of a long-term process of making sure that, as in other parts of government, we can deliver the services that are required—by taxpayers, in this case—better, but do so more efficiently with the resources that we have. That is part of a long-term process of reducing delays and backlogs. Increasing capacity at Wolverhampton and Grimsby will ensure that there is no need in future for four processing sites. Clearly, however, the capacity is not there yet and Newry will not be closed until capacity in the other centres has been increased.

I welcome the hon. Gentleman's response to Government amendment No. 2, which changes the procedure for this House in considering Treasury orders relating to joint and several liability provisions for VAT. In future, both types of order will be subject to the affirmative procedure.

Let me turn now to the new clause and concerns about registration and repayments. I understand the concerns and I recognise that problems have been caused to some legitimate businesses, but I think that hon. Members on both sides of the House have also recognised the necessity of the action that HMRC has to take to try to counter what is a very serious and systematic form of fraud. We already have a good deal of scrutiny of HMRC's performance in these fields, and there are also well-established arrangements for judicial challenge, should that be required. I hope that the hon. Gentleman will accept that his new clause is not necessary and may risk causing complications and further problems.

There must be agreement across the House that, as well as delivering the highest possible quality of service for compliant and legitimate businesses, it is important for HMRC to guard against the threats of fraud and attack. The House is well aware of the scale of that threat; its impact on VAT receipts was estimated at between £2 billion and £3 billion in 2005-06. The House is also well aware of the range of measures that the Government have taken to stem those losses. I am confident that the combination of those measures, together with the work of HMRC officers in tackling the fraudsters, is beginning to have a significant impact on the scale of MTIC fraud losses.

In 2006-07, 7,100 applications for registration were refused on the grounds that they were suspect, and 2,500 applications were registered with specific conditions such as financial security. It remains the case, however, that the two key components of HMRC's MTIC strategy must be, first, to prevent bogus businesses from obtaining a VAT registration, because without that it is not possible to operate that form of fraud, and, secondly, to verify that VAT repayment claims suspected of arising from the supply chains affected by that type of fraud are properly checked and verified.

VAT-registered businesses submit about 2 million applications for repayment every year, which is worth between £50 billion and £55 billion. The House will accept that it is only right that those returns are subject to certain credibility checks before payment is made. Just 10 per cent. of all repayment returns fail those credibility checks and are therefore selected for further checking—in other words, nine out of 10 returns are not selected for further checking. A tiny fraction of those claims is suspected to be linked to MTIC fraud and is therefore subject to a highly targeted process of extended or in-depth verification.

The verification of suspect repayments that may be connected to MTIC fraud can be complex and time-consuming, not least because such organisations deliberately make it time-consuming to check their complex supply chains. I am glad that Opposition Members accept that only 1 per cent. by value of the VAT withheld under that programme has been found to be correctly claimed and properly payable. In 19 out of 20 cases in which traders have been subject to extended verification, HMRC has found either evidence that traders have participated in or profited from trading linked to MTIC fraud or sufficient grounds for suspicion that further investigation is required to determine the veracity of the claim.

As VAT registration is clearly the entry point to MTIC and other types of serious VAT fraud, it is right that we take stringent action to deny fraudsters the opportunity, where we can. That includes rigorous pre-registration checks, which can cause delay. However, the picture behind the performance of HMRC on VAT registration is rather more complex than that. Historically, the delays in registration have been largely due to incorrect or incomplete applications, and the introduction of a new form in December last year made registrations easier to complete accurately—the number of people who get their applications right first time has increased from 30 per cent. to around 70 per cent. The assessment procedures around registration have become more targeted, and they have also become more flexible as we have detected changing risks. Nineteen out of 20—95 per cent.—of applications are now cleared for registration after an initial check, and for those applicants the average time to process an application is currently 38 days. I acknowledge, however, that there are also some unacceptable delays in the registration service at the moment.

The hon. Member for South-West Hertfordshire cited Mr. Paul Gray, the HMRC chairman, and Mr. Mike Eland conceding that point before the Treasury Committee and asked what steps HMRC is taking to tackle those delays. First, a taskforce has been set up within HMRC further to concentrate on the highest risk applications to minimise the disruption caused to other legitimate applications. Secondly, the maximum resource possible has been committed to introducing the medium-term changes to concentrate registration staff and expertise in two sites rather than four. Thirdly, there has been a concentration on making the necessary improvements to the computer system. I recognise that it may take some time to get those measures precisely right. HMRC has told me that it is confident that by the autumn it will be on track to deliver a sustained improvement in the registration service that serves taxpayers' needs while remaining tough and strong on fraud. On top of the undoubted pressure with which HMRC is dealing, Opposition Members have proposed a new obligation, which could cause further problems.

There is an established series of regularly and properly used procedures in this House for holding HMRC to account and for HMRC to report to this House, and there are a number of judicial safeguards and methods of redress for companies that may require them. In the end, HMRC is, of course, subject to judicial review for its actions, and it is noteworthy that the courts have consistently supported HMRC's verification approach, including checks made in the past 12 months. To date, all cases reaching a full hearing in the courts have been dismissed.

I submit that HMRC has recognised the drop in the proper and rightfully expected performance on registrations and that steps are being taken to rectify the situation. The fact that that is a temporary dip in performance levels and that the Government will implement public service agreements to ensure that the situation is effectively monitored and scrutinised in the future mean that new clause 4, which would give the Treasury the power to propose statutory time limits for processing VAT registration and repayment applications, would be counter-productive. In the context of a VAT registration service that is currently under pressure and that is dealing with temporary problems, new clause 4 is a disproportionate overreaction. As Julia Goldsworthy has rightly pointed out, it might have the perverse effect of tying up HMRC in unnecessary bureaucracy and litigation at a time when all of us want it operationally to sort out the problems and delays on registration and to maintain the pressure on VAT fraudsters.

I hope that I have been able to give the hon. Member for South-West Hertfordshire and the House the reassurances that they have been looking for. I therefore hope that the hon. Gentleman will not consider it necessary to press new clause 4 and that the House will welcome Government amendment No. 2.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I agree with the Financial Secretary that we have had a good debate this afternoon. My hon. Friends the Members for Ludlow (Mr. Dunne) and for Braintree (Mr. Newmark) and my right hon. Friend Mr. Redwood have highlighted some of the issues for business caused by the delays in VAT registrations and repayments. Indeed, Julia Goldsworthy supported the objectives of new clause 4.

I am grateful to the Financial Secretary for clearly acknowledging the difficulties. He has referred to 95 per cent. of VAT registration cases being determined within 38 days, which is somewhat above the 21-day HMRC target. He has been clear that problems are evident, and he has recognised the difficulties for businesses and that some of the delays are "unacceptable".

The Financial Secretary adopted a slightly different tone than has sometimes been the case for Ministers. On 24 January in evidence to the Treasury Committee, the Paymaster General did not seem to recognise the difficulties. None the less, I appreciate the tone adopted by the hon. Gentleman. He has been clear that he sees this as a temporary dip. Obviously we will watch the situation closely to see whether the steps that he outlined that HMRC is taking to address this succeed in meeting those objectives. If next year improvements have not been achieved, we will look at the matter again. However, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

T

The withdrawal of this clause on the basis that you accept that it is allowable for HMRC to take as long as they see fit to repay monies that have been paid, and been checked as paid, by a company in a legal fashion, would appear to be against European law, (Human Rights)as ruled against the Ukranian Government who also took this approach. No mention made of this as part of argument. You should find out more facts before making requests on so many different matters.

Submitted by Terry Brown