Clause 22 - Disallowance of input tax where consideration not paid

Finance Bill – in a Public Bill Committee at 10:30 am on 16th May 2002.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The principle that credit for input tax should be adjusted if and to the extent that an invoice remains unpaid is entirely sensible and we support it. Despite the extra compliance burdens, we support the thrust of the clause. In other words, the purchaser or client who does not pay should not be entitled to the benefit of a value added tax credit in respect of tax that they have not paid. The clause places compliance burdens on the creditors who comply with the legislation, but there is a degree of uncertainty in the

proposals which I should like to address. Perhaps we can persuade the Government to introduce greater certainty.

The proposed six-month period runs from the later of the date of the supply or the date on which the sum becomes payable. There are two principal difficulties with that. First, the date normally recorded in the accounting records is the invoice date. As the Committee will know, the invoice may lawfully be provided up to 30 days after the time of supply or later if the commissioners permit. Secondly, the time when the consideration is payable is determined by the contract between the parties, and that is frequently a matter of custom. There is therefore a potential difficulty in identifying the expiry date of the six-month period.

A simple and straightforward amendment that the six-month period should run from the invoice date would be entirely sensible. It would add certainty for the thousands of business men who have to comply with the legislation and would avoid confusion. I look forward to hearing the appropriate Minister's comments on this basic, straightforward proposal.

Photo of Mark Hoban Mark Hoban Conservative, Fareham 10:45 am, 16th May 2002

I welcome the simplification that the clause provides for. The Government were right to lift the burden on businesses to notify their customers about claiming bad debt relief and I welcome that. Like the hon. Member for Torridge and West Devon (Mr. Burnett), I am concerned about the six-month rule and the burden that it will place on business. My own experience as an auditor is that often the sheer volume of relatively low-value invoices, some of which may not have been paid, is an issue in business. If a business were obliged to go through and identify those invoices after six months, the task would have to be done on a daily or monthly basis. That would constitute an onerous burden, particularly for smaller businesses.

I wonder whether it would be more appropriate for smaller businesses to be asked to do this adjustment as part of their year-end accounting procedures, when businesses would normally examine their supply accounts and identify any unpaid invoices. The small business community would welcome that measure and see it as being in step with their own procedures. It would not require an additional compliance burden to be placed on them.

My second question is whether, for low-value invoices, a de minimis limit should be put in place so that the measures apply during the course of the year only when an invoice is for more than a particular value. Again, that would simplify matters for businesses of all sizes and prevent them from having to scroll through thousands of invoices on a regular basis.

I ask the Minister to consider further lifting the burden on small businesses by reconsidering the application of the rules. The Government often state

their commitment to lifting the regulatory burden. This would be a positive way of doing that and would demonstrate that their words were not empty.

I want to raise a further and slightly more technical point. Under the previous regime of having to notify customers that one had claimed bad debt relief, there was a concession for receivers of companies, who did not have to repay the input tax on certain debts. Will that concession remain, given the change to the regime outlined in clause 22?

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I, too, want to speak briefly to the clause. I share the concerns expressed by my hon. Friend the Member for Fareham (Mr. Hoban) and the hon. Member for Torridge and West Devon about the risk that a more onerous compliance burden will be put on taxpayers. Speaking from experience, I know that nothing is more frustrating than looking at an invoice that has been unpaid for many months and realising, especially if it includes a large chunk of VAT, that one has already paid out on it although one has been unable to recover. The worry is that the invoice will become a fully-fledged bad debt further down the line. There is a risk that small business folk will be wary about throwing good money after bad in taking such matters forward if more and more paperwork is required. That applies particularly to small business people who are not well acquainted with financial auditing and who may have to get someone who runs their payroll to go through the whole rigmarole of engaging in correspondence with the Revenue or Customs and Excise to get the money back. Despite those concerns, the proposals in the clause are to be supported in principle.

I agree with the technical comments made by my hon. Friend the Member for Fareham. An overhaul of liquidation is required. I know that much is being made about the proposed abolition of Crown preference in the Enterprise Bill, which will supposedly save small businesses between £70 million and £100 million a year. I should be interested to have some idea of whether that windfall will apply also to bad debts, where a fully-fledged liquidation is not in place.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

This has been a useful debate, because it is important that we should constantly keep under review ways of reducing the burden on small and medium-sized businesses, in relation to paperwork and time engaged in dealing with VAT regulations and collection. Anything that clarifies thinking on that or takes forward that cause is to be welcomed, and I am glad that the Committee has, overall, warmly welcomed the clause. It will remove what is currently an onerous requirement: the need for a business to contact a debtor by post to inform him that it has made a claim for VAT bad debt relief. The clause has been welcomed by business.

I can assure the hon. Member for Fareham that the particular tax concession to which he referred will continue to operate. I was probed on the Government's thinking about the six-month period and asked whether it should not be six months from the invoice date. That has a superficial attraction, but we must be careful that, in dealing with one issue, we

do not create other problems for small and medium-sized businesses. Our judgment sought to reflect the current flexibility in terms of the invoice date and the payment date. We did not want to tie the provision for one to that for the other; we wanted to retain the flexibility. That is why we concluded that there should be a clause whose effect would be to relieve suppliers making a claim for VAT bad debt relief of the need to issue the notification letter to their debtor customer. As part of the change, the debtor is required to repay any input tax claimed on supplies if more than six months have elapsed since payment became due. That was felt to be necessary so that debtors could no longer rely on the receipt of notification letters to inform them that their suppliers had claimed for bad debt relief. That was our thinking.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I shall just finish the point, then I shall be happy to do so.

It is important to stress that the change is being made in response to representations that we received from business prior to the Budget. They pointed out the unnecessary and onerous nature of the requirement on small businesses, as Committee members have done, and the change is an important part of the package.

A question has been asked about compliance costs. We are removing the most onerous requirements; it will be up to customers to monitor the timing of the payments so that they are aware when they are liable to repay the input tax. I shall be surprised if that represents any more than a routine requirement for most; it should not represent an additional requirement for the majority of businesses in that situation. Whatever burden exists should be switched from the supplier—who has, after all, acted in good faith—to the business that has defaulted on its payment.

Those are specific issues. The right hon. Member for Fylde might be coming in his intervention to one that will need to be dealt with by way of draft regulations. We are in consultation with business so that detailed issues can be resolved with the necessary input. The measures may then achieve that which they are designed to do—to lighten the burden on business.

Photo of Michael Jack Michael Jack Conservative, Fylde

The Financial Secretary mentioned the relevant date and the date on which the sum becomes payable. What happens if an invoice has been rendered, but there is no expected date of payment because either it is not shown or the terms and conditions do not specify one, or no agreement has been reached between the parties regarding one?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

In those circumstances there might be potential for dispute. Generally in such circumstances—for instance, if there is a dispute over pricing or delivery—if there is a failure to pay the full amount on time, due to the dispute, the customer is liable to repay the input tax claimed on the unpaid balance, but can claim it back once the dispute is settled and the full amount is paid. In the right hon.

Gentleman's example, the date of payment will almost never be later than the date of the invoice. Provisions ensure—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

May I deal with the point, and then give way to the hon. Gentleman?

Provisions ensure that the relief needs to relate to the date from which payment is late. If there is no payment date, we take the invoice date, which reinforces the point that I made on flexibility.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I want to give an example for which the Financial Secretary's assertion is faulty. The date for payment in seasonal businesses can be much later than the invoice date.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 11:00 am, 16th May 2002

I remind the hon. Gentleman of the flexibility to which I referred. The invoice date and the date of payment are not necessarily the same or linked. There may be good business reasons for a gap between the two, as he suggested. In those circumstances, obviously the parties would take the date most favourable to them, and the dispute would be dealt with in the way that I outlined.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The point that I tried to make was one that Customs might have made to the Financial Secretary. There must be certainty for Customs and Excise as well as for the people operating the tax.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I do not think that our proposal is unreasonable or uncertain. We have not received a representation from business to suggest that it is. Draft regulations will be laid on the implementation of the measure, and we are in consultation with business on their content. If the hon. Gentleman's point emerges from that consultation as one of the detailed issues that needs to be addressed—if he was right to point out, bearing in mind his constituency interest, that there may be special circumstances in relation to seasonal businesses—we would look to the draft regulations to deal with it. However, I do not sense that the issue has been raised with us to date as a problem in relation to the provisions, which overall have been warmly welcomed.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I am grateful to the Financial Secretary for that response and undertaking. He said that the measures had been widely welcomed. The hon. Member for Torridge and West Devon was referring to a point that has been made by the Chartered Institute of Taxation, which is concerned about the practicality of the measure and whether problems will be caused. I think that the Institute of Directors is concerned as well. If the Financial Secretary says that proper regard will be made to representations, to ensure that the new system is practical and not burdensome, obviously we accept those assurances.

When the Financial Secretary replied to a question from my hon. Friend the Member for Fareham, was he confirming that, to quote the Chartered Institute of Taxation, the

''extra-statutory concession in Notice No 48 para 3.21 will be revised to meet the new conditions so that no adjustment is necessary if the six-month period falls after the 'relevant date' of the insolvency''?

It would help if we knew that precisely.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Briefly, yes, I am confirming that in saying that the concession remains in place.

I do not want to return to the point made by the hon. Member for Torridge and West Devon, other than to say that when detailed points need to be addressed in regulations, the consultation should enable that to happen. He gave seasonal businesses as an example of when there is delay in when payment is due, because that is the nature or custom of the business. That circumstance affects payment, but it will also affect relief, because the point from which bad debt relief applies will then also be delayed. If that is the nature of the business and of the supply, the relief will have to, and will, reflect that.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

I have a final question relating to this clause and to clause 23 on the flat rate VAT scheme. We discussed clause 23 on the Floor of the House, which is why I now want to raise the point in the context of clause 22. If a business has taken advantage of clause 23, and has a flat rate of VAT and a reclaim of input tax based on a percentage related to its business, will clause 22 apply to it? Will it have to repay any input tax arising on invoices that it has not settled?

Photo of Michael Jack Michael Jack Conservative, Fylde

I have one simple question. Can the Financial Secretary explain why the opportunity has not been taken, either in primary legislation or in subsequent regulations, to incorporate into law the extra-statutory concession in the interest of improving and simplifying the work of the tax system?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The link that has been pointed out between this clause and clause 23, which we debated on the Floor of the House, is a real one. I return to the point that I made to the hon. Member for Torridge and West Devon: the factor in that clause will have to, and will, be taken into account in this measure. It is a relief, and this is the context in which that relief is being sought--a context that will need to be taken into account.

The right hon. Member for Fylde asked why we have not taken advantage of the opportunity to make an extra-statutory concession into a statutory one. I should have thought that he had been long enough in this game to know why. That the concession is extra-statutory is the nature of it. It is a concession and remains so.

Mr. Jack rose—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I shall give way in a minute.

I am not quite clear about what the right hon. Gentleman would otherwise want us to do. People will have the opportunity to benefit from the extra-statutory concession. Nothing that we have done interferes with that in any way.

Photo of Michael Jack Michael Jack Conservative, Fylde

In his response, the Financial Secretary has suggested that what used to be the tradition has ceased—that every year, in the Finance Bill, Ministers would be presented with a series of extra-statutory concessions that either the Revenue or Customs and Excise had considered suitable for incorporation into mainstream tax law. What I sought was an explanation, not something unprecedented.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I understand that. That has not ceased, but remains as an extra-statutory concession. When an appropriate opportunity arises for it to be incorporated, the extra-statutory concession will be brought within the ambit of statute. The right hon. Gentleman has been around for long enough to understand that that is how it works. The concession is extra-statutory now, and people benefit from it; when an appropriate time comes to incorporate it into statute, it will be incorporated. There is nothing sinister or out of the ordinary there. The right hon. Gentleman will have witnessed that approach on many occasions.

Question put and agreed to.

Clause 22 ordered to stand part of the Bill.