asked Her Majesty's Government:

Whether compensation payments made by government to individuals are subject to VAT.

My Lords, compensation is subject to VAT only in the specific circumstances where something is done in return for the compensation and the recipient is a VAT-registered business.

My Lords, I am grateful to the Minister for that Answer. As the Government are recipients of VAT, does he agree that it is very unsatisfactory that compensation cannot be paid ex-VAT in order to stop the incredibly expensive paper chase? In 1997, two successful claims were made, and compensation received, under the Firearms (Amendment) Act. The two companies involved were both paid for the same kind of reasons but, more than six years later, through a tribunal system—which has been extremely costly—one company has been told that VAT is not due to be paid on the amount of compensation it received and the other company is still waiting, having paid the VAT some five and half years ago. Does the Minister agree that this is a very unsatisfactory state of affairs?

My Lords, I am grateful to the noble Baroness, Lady Blatch, for giving me the detail contained in her supplementary question. As regards the firearms issue, under European Community VAT law, compulsory purchase—to which this relates—results in the supply of property. The Court of Appeal has twice found that this applies to guns for which compensation was paid after Dunblane. The Customs and Excise issues guidance to all government departments and those who might pay compensation that if VAT is payable it should be reflected in the level of compensation. In other words, if £1,000 is due, £1,175 should be paid. If the noble Baroness gives me details of the cases to which she has referred, I shall look into them and write to her about them.

My Lords, is there not something about these cases which brings to mind the costly merry-go-round that the Government have made of the entire tax system, in which people first pay tax to the Government and then have to fill in a complicated form in order to claim a benefit or a credit from the Government?

No, my Lords, nothing brings that to mind. If the noble Lord, Lord Saatchi, wishes to introduce amendments to his Taxation (Information) Bill, with which we shall be dealing next, to make that point, he is fully at liberty to do so.