Clause 17 - Requirement of evidence or security

Part of Finance Bill – in a Public Bill Committee at 3:30 pm on 15th May 2003.

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Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 3:30 pm, 15th May 2003

Welcome to the Committee, Mr. McWilliam, and I welcome your guidance on the debate. It is extremely useful and will

allow us to deal with many issues at the same time and more crisply than would otherwise be possible.

We support the argument developed very effectively by the hon. Member for Eddisbury and the amendments. Clause 17 and the related clause 18 seem to have been two of the most controversial in the Bill and are probably two of the more controversial clauses that we shall debate. The hon. Gentleman was correct to say that there has been widespread criticism of them—I shall try to focus on clause 17, as that is the one before us—which has ranged across the principal bodies with expertise in tax matters, including the Law Society, the Institute of Indirect Taxation, the Institute of Chartered Accountants and the Chartered Institute of Taxation. All those bodies have been extremely critical of the way in which clauses 17 and 18 have been drafted and all have made points that appear to underpin the hon. Gentleman's arguments.

The background is well understood by all members of the Committee, who understand that the Government are concerned about the loss of large amounts of indirect tax revenue—possibly billions of pounds a year—and are responding by closing some loopholes used to evade tax that could be used to cut tax burdens on business or to invest in public services. Therefore, this is clearly an important issue.

We also understand why the Treasury wants to draw the clauses as widely as it has, as such a body would always do. It enables it to catch many types of offences without having to come back in one Finance Bill after another to introduce increasingly tough measures, as has happened in some areas of tax evasion. This time, the Treasury seems to seek to catch a whole area of evasion in one go, but in doing so, it is asking us to trust it to administer that in a way that is safe and reliable for the interests of taxpayers. I hope that the Economic Secretary will not mind my saying that businesses across the country and Members on this side are concerned about giving the Treasury powers to the extent that it seems to seek in this and other clauses—the power to make judgments itself on whether businesses have acted reasonably in particular cases.

I draw the Economic Secretary's attention to much of the evidence provided and many of the points made by the leading tax advisory groups, and to the issues that the hon. Member for Eddisbury picked out so well in his discussion of the amendments. The Institute of Chartered Accountants has distributed an analysis on clause 17 to us all. It has drawn serious concerns to public attention. The first is the potential for some of the measures to apply to businesses that are innocent as well as to those that are clearly guilty and need to be dealt with. The second is that, as the hon. Gentleman said, there do not appear to be adequate safeguards for many of the businesses that could fall into that category. Many would undoubtedly be smaller businesses, those just getting off the ground, perhaps with shaky finances, or those in a fragile position that could fall victim to some of the measures proposed in the clause. In less favourable circumstances than the economic growth of the past 10 years, a large number of businesses could be in such a position.

As the hon. Gentleman pointed out, another serious concern in relation to his helpful notion of the four entities, A, B, C and D, is that the Treasury is essentially asking to be able to police the entire supply chain, rather than holding businesses accountable only for the immediate transactions with which they are involved. If taken to its logical conclusion and not implemented in a sensitive way, that could in practice require some legitimate businesses to cease trading. The Institute of Chartered Accountants sums that up well when it says:

''The legislation should be properly targeted and not drafted so widely that it applies to innocent taxpayers. It is not acceptable for a wide class of taxpayers to be taxed under the law, only to be untaxed by internal safeguards within Customs which have no legal effect. Limited experience of similar, but more restricted, laws in other countries indicates that tax administrations tend to pursue the legitimate businesses in the supply chain, since these are the ones who remain after the fraud has taken place.''

That is a well-put case and concern.

Not only the Instituted of Chartered Accountants, but the Institute of Indirect Taxation and the Chartered Institute of Taxation have expressed concerns on whether clause 17 is consistent with the sixth VAT directive or the Human Rights Act 1998. The Chartered Institute of Taxation has said:

''The provisions will inevitably lead to situations whereby the VAT due from a taxpayer falls to be discharged by another person. This appears to be contrary to the express provisions of article 21(1)(a) of the Sixth VAT Directive.''

As that concern has been fairly widely expressed, I hope that the Economic Secretary will return to it.

We entirely understand why the Economic Secretary is trying to frame the clauses as widely as possible. We understand the good intentions in the Treasury over trying to ensure that only businesses that have been complicit in VAT fraud should be held to account. However, we do not feel that the safeguards here are sufficient to give businesses comfort that they will not fall into a situation in which the concerns that have been expressed, and to which I have referred, will come about.

Perhaps I could list some of the detailed concerns, which the hon. Member for Eddisbury has already brought to our attention. Those concerns are set out by the Institute of Chartered Taxation in its paper about clause 17, and are precisely the points the hon. Gentleman raised. First, it finds it unacceptable in principle that one business could under clause 17, and clause 18 to some extent, be held liable for the actions of another in a circumstance where it cannot be proven that it is acting in collusion. We require some assurances from the Economic Secretary if we are to contemplate supporting the clause.

The second salient concern is that the clause appears to apply whether business is required to provide the security, or was aware of the existence of the other potentially fraudulent business. The provision is likely to bear down hardest, as the hon. Member for Eddisbury mentioned, on smaller businesses, which in many cases will be able to provide a security from their own resources. There are some very serious concerns, and we are worried that the Treasury, in trying legitimately to close a loophole that means the loss of an enormous amount

of tax revenue, is going over the top. We urge the Economic Secretary to balance the desire to ensure that we do not lose excessive amounts of revenue to tax evasion with the requirement that tax law should deal fairly with all entities and should not bring in a significant area of injustice for some businesses in order to police those who are acting in a responsible way outside the law.