Clause 18 - Joint and several liability of traders in supply chain where tax unpaid

Finance Bill – in a Public Bill Committee at 4:30 pm on 15th May 2003.

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Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General 4:30 pm, 15th May 2003

I beg to move amendment No. 86, in

clause 18, page 16, line 36, after 'payable', insert 'by the supplier'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following:

Amendment No. 87, in

clause 18, page 16, line 37, leave out from first 'supply' to 'would' in line 38.

Amendment No. 121, in

clause 18, page 17, line 14, after 'if' insert 'he knew'.

Amendment No. 122, in

clause 18, page 17, line 17, leave out 'on the open market' and insert

'(taking account of the circumstances of the market in which such prior supply took place as were known to him).'.

Amendment No. 88, in

clause 18, page 17, line 24, at end insert—

'(8A) Where any VAT becomes payable and is paid by a taxable person pursuant to this section he shall be entitled—

(a) to recover that amount from the supplier, and

(b) for that purpose to require the Commissioners to give him a certificate specifying that amount,

and any such certificate shall be conclusive evidence of the facts stated in it.'.

Amendment No. 2, in

clause 18, page 17, line 31, at end insert—

'(11) A person served with a notice under this section may recover any amount that he pays to the Commissioners pursuant to the notice from the person who, apart from this section, would be liable for the VAT specified in the notice.'.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

Clause 18 has been rightly observed to be strongly linked to clause 17, so some of the issues pertaining to clause 18 have already been debated.

There remain some issues in my opinion and that of my right hon. and hon. Friends, which is why we have tabled the amendments. Recognising your earlier guidance about the way in which the amendments will be taken, Mr. McWilliam, I flag up at this point that amendment No. 2 will not be pressed. It has been replaced by the improvements in amendments Nos. 86, 87 and 88, which we tabled later than amendment No. 2, our original amendment.

It will be helpful to examine the amendments together and I suspect that that will necessarily involve something of a stand part debate, with your guidance Mr. McWilliam.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. The hon. Gentleman is right. Again, the amendments eat the clause and in such circumstances we shall have the stand part debate along with the amendments.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful for that confirmation. It will make it more efficient for us to be able to go through the clause.

The clause makes certain businesses in a supply chain jointly and severally liable for tax that has not been paid by a missing trader. That was effective from 10 April this year. The measure is restricted to telephones, telephone parts and accessories and computer equipment, including parts, accessories and software.

There is an increased risk of doing business that involves trading in specified goods, so any business unwittingly caught in a supply chain involving a missing trader fraud will need specialist advice.

It may help the Committee if I read from a letter dated 15 April this year, which was helpfully sent, as a constituency matter, by Sir Nicholas Winterton to me and my colleagues in the shadow Treasury team. The letter is from a Dr. Dwek, who is a constituent of my hon. Friend the Member for Tatton (Mr. Osborne). Fortunately, I spotted that as my hon. Friend came into the Room, so I have been able to give the proper courtesies, but I thought initially that I was raising the case on behalf of Sir Nicholas. In his letter to the Chancellor of the Exchequer Dr. Dwek says:

''Dear Chancellor,

In your recent Budget Statement you referred to the changes in the VAT regulations for the mobile phone and computer industry, in order to avoid VAT fraud, and this is much welcomed by the trade.''

That is why the letter is important: it sets the clause in context. He goes on:

''I know this has been a serious problem and this is now being addressed through consultation documents, some of which appear to be entirely reasonable, and other suggestions could seriously undermine the trade, which is a valuable export earner.''

That is the nub of the issue.

''Surely the simplest solution would be that, instead of paying the VAT over to the supplier, it is paid directly to the Treasury by TT

telephonic transfer—

''or BACS, and on receipt of the funds by the Treasury a receipt could be issued which could then be passed on to the supplier. In this way there could be no VAT fraud and the Treasury would collect its share of VAT at the point of sale. Simple, but quite effective.

Since my business is involved in the trade of mobile phones, we shall of course be making a full submission . . .

However, there is one item of the draft new legislation, which does not make sense, that is: Customs will presume that a taxable person—

Dr. Dwek emphasises the following—

''had reasonable grounds to suspect'' that VAT had not, or would not be paid, on goods supplied to it in two circumstances;

1. The purchase price of the mobile telephones was lower than the price, ''the lowest price that might reasonably be expected to be payable for them on the open market''. (Section 77A(6)(a) of the draft legislation)

2. The purchase price of the mobile telephones was, ''less than the price payable on any previous supply of those goods.'' (Section 77A(6)(a) of the draft legislation).

The purchase price of mobile telephones fluctuates''—

that is a fairly obvious point—

''according to market conditions and because of the uncertainty created now by the new measures, there are so many mobile phones on the market that the price has dropped considerably, thus any trader now operating could fall foul of these two items, and this cannot be right.

Finally, the measures introduced contain so much lack of definitions, and have created so much uncertainty that the trade has come to a virtual standstill.''

Mr. Joe C. Dwek CBE, who has made many public-spirited contributions as well as obviously being a successful businessman, has put his personal reputation on the line in suggesting that these measures have already

''created so much uncertainty that the trade has come to a virtual standstill.''

Photo of Michael Jack Michael Jack Conservative, Fylde

Is my hon. Friend also aware that Joe Dwek was a former chairman of the Confederation of British Industry in the north-west?

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful to my right hon. Friend, who is able, with his considerable experience, to clarify that for me. As a former elected member of the CBI's south-east regional council, I know that there is proper respect for the CBI's representation of business. The Government have placed an enormous value on the views and advice of the CBI. Dr. Dwek concludes:

''In the interim, therefore, there ought to be more clarification.''

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Since the letter was written on 15 April, has Dr. Dwek made the full submission to which he refers? If so, will the hon. Gentleman refer to the full submission?

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am conscious of the fact that I have taken a liberty in reading so much of the letter in Committee. I do not plan to go into the submission at great length. I am also conscious that Dr. Dwek's Member of Parliament is in Committee and may be able to assist—I do not want to steal all the thunder from my hon. Friend the Member for Tatton, who has the most thunderous voice in Committee.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. My co-Chair, the hon. Member for Macclesfield (Sir Nicholas Winterton), has done nothing more than pass on a letter from someone who is not his constituent, so he has no interest in the matter.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful that that is on the record.

Photo of George Osborne George Osborne Opposition Whip (Commons)

May I make it clear that Dr. Dwek has written to all members of the

Committee? The information is available for anyone to use in the debate.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful because one often receives letters and does not know to whom they have gone.

It is clear from the example that up to now a supplier has been liable only to Customs and Excise for output VAT on goods that they have supplied. There have been a few limited exceptions, such as reverse charge VAT on the buyer in the case of a service brought in from abroad, but the ultimate principle remains the same.

It is back to the drawing board with parties A, B, C, D and E. I have tried to distil the raft of representations that we have received from the Chartered Institute of Taxation, the Institute of Indirect Taxation, the Institute of Chartered Accountants in England and Wales, the Law Society, Dr. Dwek, PricewaterhouseCoopers and others. This is the best distillation that I can come up with and I hope that it helps the Committee. Under the new provision, if A makes supplies to B, who makes supplies to C, who makes supplies to D, who makes supplies to E, C can be made liable not only for their own output VAT on those goods and services, but for that of A, B, D or E if A, B, D, or E fail to pay. C must have known or have had reasonable grounds to suspect that the person in question would not pay their proper VAT, which relates to the Value Added Tax Act 1994 new section 77A(2). ''Reasonable grounds to suspect'' is an objective test—new section 77A(6) and (8) also relates to the issue.

The Customs and Excise paper ''VAT Strategy: Joint and several liability—Consultation on reasonable checks'' dated April 2003 proposes the publication of a statement of practice on the checks that Customs expects C to take. The new liability is currently limited to supplies of telephones, computers and associated equipment, but the Treasury has the power, which is contained in new section 77A(9), to add other types of supply ad lib. C is given no express right to claim a refund from A, B, D or E, which appears to be permissible under article 21.3 of the sixth directive, but it must be questionable whether the article permits such a wide provision.

It would be a good idea if the Chancellor of the Exchequer had to state on the front of the Finance Bill that the provisions are compatible with all EU directives, just as he has to state that they are compatible with the Human Rights Act 1998. In VAT matters, we would all find that particularly helpful for future reference. I hope that the Economic Secretary and those who have a supporting role will take that on board.

I shall carry on with the diagrammatic example, which seems to have emptied the Government Benches. C has a right of appeal to the VAT tribunal, under subsection (2), but only on the question of whether he has on the facts a liability under the new section. The tribunal has no discretion to let him off. HM Customs and Excise says that that provision is necessary to deal with missing trader

frauds and that it will apply the provisions reasonably. However, that is not written into the legislation. I suspect that there are strong echoes from the debate that we have just had on clause 17. The provision goes over the top again, and will expose many small businesses that do keen deals with other businesses to great worries and liabilities.

One answer would be to leave the clause out altogether. However, I suggest an amendment that restricts C's liability to B's unpaid VAT, and also gives C an express right, for what it is worth, to reclaim from B any money that C has to pay under the provisions. Amendments Nos. 86, 87, 88 address that point and the right of recovery. I hope that that is clear to members of the Committee.

There are other issues that need to be considered carefully. It is very much the opinion of the Law Society—the chairman of the VAT and duty sub-committee of the Law Society, Mr. Gary Richards helpfully submitted the information—that the words ''if he knew'' should be inserted in new section 77A(6). That is what we propose in amendment No. 121. There again we have an echo of the point raised by the hon. Member for Wolverhampton, South-West, which was particularly perceptive. I was somewhat disappointed that he concluded that he ought to vote against the amendments. As he is not in his place, I will have to let that rest.

Amendment No. 121 invokes that essential element of knowledge that harks back to all the arguments that we have adduced about the rights, checks and balances that should be taken into account in a proper settlement between individuals and the state. Amendment No. 122 relates to the end of paragraph (a). It would

''leave out 'on the open market' and insert '(taking account of the circumstances of the market in which such prior supply took place as were known to him).'''

It is patently along the same lines. The purpose is to restrict the application of the clause to cases of actual knowledge. In the last discussion, it was disappointing that that point was not taken sufficiently seriously.

The Law Society states that, in its current form, the clause applies to a person who knew, or had reasonable grounds to suspect, that VAT on transactions already entered into, or that may subsequently occur, will not be paid. However, there is a presumption, albeit rebuttable, that that person has reasonable grounds for suspecting that the VAT will not be paid if the goods offered to him have been offered for a price less than that paid on any previous supply of those goods. If A sells goods for £1,000 to B, who sells them for £1,050 to C, who sells them for £900 to D, D is presumed to have reasonable grounds for assuming that VAT will not be paid. There may be many reasons why C is prepared to sell the goods to D that are not tax-evasion driven. More importantly, commercial confidentiality makes it very unlikely that D will be able to find out the terms of the bargain between A and B and between B and C. I am happy to adopt the recommendation of the Law Society that

''clause 77A(6)(b) could only operate where, in this example, D has knowledge of the prices previously paid in the supply chain.''

Without having to recite at length the welter of representations that I and other hon. Members have received on the matter from the reputable organisations that I listed earlier, I hope that it is as clear as it can be that we have yet another example of the measure being rough, to say the least, and probably unfair. We need seriously to reconsider the balance of rights and duties between the citizen taxpayer and the public authority. I hope that on this clause the Government may be prepared to take the track that I advocated in the response to clause 17 and forlornly expected the Minister to adopt. Given the nature of the arguments advanced in that debate, we want to draw attention to the importance of our arguments by dividing the Committee on the amendments. However, I hope the Minister will show that that will not be necessary.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 4:45 pm, 15th May 2003

The hon. Member for Eddisbury has made his point extremely effectively on behalf of Opposition Members, as he did on clause 17. Because the clause is drafted very widely, many of the issues are relevant to the previous debate. I do not want to squeeze every bit of juice from the letter from the constituent of the hon. Member for Tatton, but Dr. Dwek summed up the situation that applies to clause 18 perfectly when he said that the law as proposed is too penal, subjective and uncertain.

I have four, rather than the usual three, questions for the Economic Secretary to follow up the points made by the hon. Member for Eddisbury. First, does the Economic Secretary really believe that it is necessary to pursue what is essentially an open-ended chain in the way proposed? Does he think it can be done in a way that will be consistent and fair for all the businesses that may be caught in this potential trap? Did his advisers in the Treasury propose any alternative that may have been considered in respect of similar problems in the past that could have the same effect in safeguarding revenues without the draconian consequences in the clause?

Secondly, can the hon. Gentleman clarify whether clause 18 will also relate to the issues of bad debts and fraud? Thirdly, the Economic Secretary will be conscious that many of the tax practitioners who have opposed, or expressed concerns about, clause 18 feel that the issue of prior warning to third parties is even weaker in clause 18 than it is in clause 17.

Photo of Michael Jack Michael Jack Conservative, Fylde

Does the hon. Gentleman agree with me that one of the principal weaknesses of the approach is its dependence on interpretation and anticipation of conditions in a fast-moving marketplace?

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The hon. Gentleman is entirely right; it is a fast-moving marketplace and I will come to that matter in a moment. In addition, if the Government wish to introduce measures on such an issue, they should have the courage to introduce some clarity and put them in the Bill rather than rely on the confidence to exercise discretion.

My fourth question is about safeguards in respect of the assessment that will have to be made about whether there are reasonable grounds to suspect a

particular entity, based on the price that was paid in the open market. There might be circumstances in which it would be reasonable to be suspicious of a transaction that occurred at a price that was very much below the market price.

Some of those who have made representations on clause 18 have pointed out, quite sensibly, that there are particular products, such as those that clause 18 affects, for which there can be a sudden step effect. For example, a new product that came on to the mobile phone market could cause the price of an existing product that was considered to be inferior to move down very sharply. Therefore, the way in which the Government has drafted the clause and introduced the proposals connected with clause 18 could be open to confusion and controversy with respect to items that undergo sharp movements in price.

Photo of George Osborne George Osborne Opposition Whip (Commons)

It will not surprise the Committee that I, too, am concerned about the effects that the measures in the clause will have on a perfectly legitimate business—the mobile phone business—and could bring to an end a vital trade and a huge export earner for the UK mobile phone industry. I am grateful to Dr. Joe Dwek CBE, who has brought his expertise to bear on the issue, and who wrote to all members of the Committee, including the hon. Member for Wolverhampton, South-West, who has now discovered the letter among his pile of correspondence.

According to the proposed legislation, as my hon. Friend the Member for Eddisbury ably demonstrated to the Committee, Customs will presume that a taxable person has ''reasonable grounds to suspect'' that VAT had not or would not be paid on goods supplied. Subsection 77A(6) sets out those reasonable grounds, the first of which is that if the purchase price of a mobile phone was lower than

''the lowest price that might reasonably be expected to be payable for them on the open market''

and the second of which is if the purchase price of a mobile telephone

''was less than the price payable on any previous supply of those goods.''

That is what the Government seek to enact in law.

The objection to those provisions centres on the presumption of ''reasonable grounds to suspect'', because the presumption presumes—if I may put it that way—that a taxable person is aware of facts that a taxable person could never know in a commercial environment, or reasonably be expected to find out. The price paid for products in a free market is often a commercial secret, but the clause presumes that a person might know what that price might be.

We might take as an example the presumption of suspicion where the price of the mobile phones was

''the lowest price that might reasonably be expected to be payable for them on the open market.''

Those of us who are familiar with the mobile phone industry—I suspect that we are all customers of the mobile phone industry—will know that it is very difficult to establish the lowest price payable for any one consignment of mobile phones. The price of

mobile phones, like that of shares, fluctuates on day to day, in accordance with market conditions, and the price depends on the amount of stock—

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I can tell the hon. Member for Tatton that the standing order that says that tedious repetition is not to be allowed does not necessarily apply to one hon. Member. If another hon. Member is repeating arguments that have already been made, they can also fall foul of it. The hon. Gentleman should consider this as a yellow card.

Photo of George Osborne George Osborne Opposition Whip (Commons)

I hope that if I accumulate enough yellow cards, I will be suspended. I live in hope.

The serious point is that if a single mobile phone manufacturer dumps a large number of mobile phone handsets on to the market on a particular day, the price can vary by as much as £10 per handset. Mobile phones are also subject to the whims of fashion. I have a 17-year-old brother, and every time I go to my parents' house for lunch or dinner he has a new mobile phone. It irritates me and my other brothers—and my parents even more—that he has a new mobile phone every time we see him, but such phones are subject to fashion.

It is simply not possible for the industry to ascertain the open-market value of a mobile phone. It would be fine if Customs were saying that the price had to be so low that it was obviously suspicious. If it were the equivalent of someone saying, ''You can have a Rolls-Royce for £5,000'', anyone would know that something dodgy was going on. If that is the spirit of the Bill, it should be explicit in the wording, but it is not.

There is also the operational presumption that VAT has not been paid, because the telephones were purchased at a price below that paid by any previous purchaser in the supply chain. Again, that presumes a knowledge that is not available in the commercial market. How is someone supposed to know how much the person who supplied them with a consignment of mobile phones paid for it, or how much the person who supplied that person paid for it? That is unknowable in a free market. The industry could therefore fall victim to the clause through no fault of its own.

Finally, there appears to be an incongruity between the Bill and the Customs and Excise consultation document. The Minister will be aware that paragraph 13 of that document states that Customs will deem that a business knew or had reasonable grounds to suspect that VAT on a supply had not or would not be paid if

''it has made a gain or benefit from the suppliers' failure to account for the VAT''.

The concept of gain by the taxable person is not contained in the Bill.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

On a point of order, Mr. McWilliam. Is it in order for the hon. Gentleman to read from a letter without saying that he is doing so, as the hon. Gentleman just did with Dr. Dwek's letter?

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

It is not in order for hon. Members to read at all, unless they say they are going to quote something specific.

Photo of George Osborne George Osborne Opposition Whip (Commons)

I was not reading. The hon. Gentleman will not find a reference to my 17-year-old brother in the letter to which I referred.

Rob Marris rose—

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I have explained the situation.

Photo of George Osborne George Osborne Opposition Whip (Commons)

I am using hand-written notes. They are not a verbatim account.

There is a serious point. There appears to be an incongruity between the Customs consultation document and the Bill, and I would be grateful if the Minister could address it. The industry has serious concerns about the effects of the clause, and it is right that we bring them to the Committee's attention and ask the Minister to respond.

Photo of Michael Jack Michael Jack Conservative, Fylde

I shall move away from the rather difficult issue of mobile phones in the time that remains before the Division. The Institute of Indirect Taxation has raised further questions about the practicalities of the clause, and I would be grateful if the Minister could respond.

Paragraph 14 of the institute's submission to the Committee suggests that many people in the supply chain could be held liable for missing unpaid tax. Given the operation of joint and several liability, the institute postulates that everyone in the supply chain could be held liable for the total amount of the missing tax, even though only one person in the supply chain was causing the problem. I would be grateful if the Minister could enlighten us as to how the clause will work in reality.

The institute notes that there are other issues. Paragraph 18 of its submission states that Customs is consulting on what tests it might be reasonable to expect a trader to carry out as part of the operation of the clause. Will the Minister enlighten us on that? We can then try to deal with the concerns of individuals who feel that they may unwittingly be caught up in a supply chain in which VAT will ultimately go unpaid.

Those two important practical questions illustrate once again that some of the major concerns that have been raised about the clause—particularly through the amendments—reflect how these wide-ranging, widely drafted powers will be used in practice.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon 12:00 pm, 15th May 2003

Order. I think that it would be wrong to call the Minister to speak at this stage because there will shortly be two Divisions in the Chamber. They must be called by 5.6 pm, so I shall suspend the Committee until 5.35 pm.

Sitting suspended.

On Resuming—

Photo of David Wilshire David Wilshire Conservative, Spelthorne 5:35 pm, 15th May 2003

On a point of order, Mr. McWilliam. When my hon. Friends and I were preparing for the Committee, my hon. Friend the Member for Eddisbury made me aware that he had a major speaking engagement tonight in Cambridge. I took it on myself to say that I could see no reason why we would be here after 5 o'clock, so he did not withdraw

from his engagement. I make no criticism of the Government for that; I did not ask for an undertaking that we would finish by 5 o'clock.

Conscious of the fact that he had moved the amendment, my hon. Friend wished to be here as a matter of courtesy to the Committee. I took it on myself to persuade him to go. If anyone in this Room considers that there is a degree of discourtesy to the Committee, the blame is entirely mine, not my hon. Friend's. I hope that the Committee will accept that.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Further to that point of order, Mr. McWilliam, may I say to the hon. Members for Spelthorne (Mr. Wilshire) and for Eddisbury that I am sure that all Committee members appreciate that these things sometimes occur? The Committee will take no umbrage and understands the pressures on Members' time. I am happy to put on the record our complete understanding and agreement that he is unable to be here at this stage. We shall miss him, but we shall soldier on.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I thank the hon. Members for Spelthorne and for Eddisbury for their courtesy. At this time of evening proceedings, I like to tell the Committee my views on suspending for dinner. I am not yet in a position to do that, but as soon as I have made up my mind, I shall let hon. Members know.

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

I am sure that, like me, the whole Committee wishes the hon. Member for Eddisbury a safe journey to Cambridge, although whether the Cambridge Conservative Association really qualifies as a major speaking engagement is for others to judge. I know that the hon. Gentleman will look very carefully at the full debate, including the remarks that I shall make now. I hope that he will be satisfied that I have covered the points that he and his hon. Friends made.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. The hon. Member for Spelthorne did not make it clear whether it was the Cambridge near Lincolnshire or the Cambridge in Massachusetts, which is rather close to where I went to university.

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

The hon. Member for Eddisbury has his work cut out if he needs to get to Cambridge, Massachusetts by 7.15 pm.

I turn to the clause and the amendments. I understand the concerns raised by hon. Members and professional institutions and institutes, and the concerns of businesses in the sectors that are bedevilled by this form of missing trader fraud. The Government do not seek to take these powers lightly. We have examined other options, but none of the options that we looked at would achieve the same effect, which is what the hon. Member for Yeovil asked. The scale and the nature of fraud involving collusion in the supply chain require us to take the measures in clauses 17 and 18.

When Customs discovers a transaction in relation to which a missing trader fraud is suspected, it will investigate that trading activity and the other businesses involved in the supply chain. If it establishes that those other businesses knew or had

reasonable grounds to suspect that the VAT in that supply chain would go unpaid, the measure in clause 18 ensures that Customs can recover the unpaid VAT from any businesses involved in that supply chain.

The legislation presently specifies as potential targets only those businesses in the telephone and computer sectors that are either complicit in, or complacent about, missing trader fraud. We hope that the Bill will form a substantial deterrent against that. We also hope that it will ensure fairer competition within those trade sectors by targeting businesses that are cutting corners or colluding with fraudsters.

Customs and Excise has published a draft statement of practice that sets out the reasonable steps that we expect businesses in those sectors to take. We are consulting on that matter, and have invited comments from business to help Customs and Excise to ensure that the steps, when finalised, are practical and fair. That consultation is still going on, and closes on 10 June. After that, we intend to produce robust guidelines that will ensure, as far as possible, that businesses are not penalised if they unwittingly end up in a missing trader supply chain. That will be published as a Customs and Excise public notice.

The right hon. Member for Fylde raised the question of businesses that may unwittingly become caught in such supply chain. The public notice, based on the present draft statement of practice, shows the reasonable steps businesses can take to establish the integrity of their customers, suppliers and supplies. Legitimate businesses have nothing to fear, but they have a role in ensuring that they are not unwittingly caught up in a crime. If a business has traded honestly, and Customs is satisfied that it has genuinely taken all reasonable steps—which will be set out in the public notice—to ensure that it has not become involved in a supply chain where VAT has gone—or will go—unpaid, Customs will not apply the measure.

We will include safeguards in the provision, and in the application of the rules, in order to protect innocent and unwitting businesses. The legislation includes safeguards in relation to any presumption by Customs of guilty knowledge, by providing the ability for the business to rebut that with a reasonable explanation. Moreover, Customs will be careful to exercise their discretion in favour of businesses that can demonstrate that they have genuinely taken all reasonable steps to ensure that they have not become involved in a supply chain where VAT has gone—or will go—unpaid.

Apart from the rights of the courts to review the exercise of the direct discretion of Customs, the legislation has an in-built right of appeal to an independent VAT and duties tribunal against the imposition of any joint and several liability notice.

Photo of Michael Jack Michael Jack Conservative, Fylde

Can the Minister assure me that, when the mechanism for an independent tribunal is invoked, every effort will be made to deal with matters in a timely fashion? My constituency mail indicates that—from time to time—when representations have to be made in complex matters, it can take a very long time to sort out. We have discussed the viability of

businesses. People will wish to hear an assurance that those matters will be brought swiftly to a conclusion.

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

That is an important point. Timing is a relevant factor in the delivery of due process.

I will address amendments Nos. 86 and 87, which seek to restrict the circumstances in which a business is served with a joint and several liability notice to recover the unpaid VAT. The clause, as currently drafted, enables Customs to serve notice on any business when it knows—or has reasonable grounds to suspect—that another business in that supply chain would not pay some or all of its VAT. The effect of the two proposed amendments would be that notice will be served on a business only where Customs knows—or has reasonable grounds to suspect—that some or all of that business's own suppliers' VAT would go unpaid. In practice, that means that only the first business in the supply chain, following the one that had deliberately not paid its VAT, could be held jointly liable for the unpaid VAT. No other business further along that supply chain could be held severally liable for the unpaid VAT, and by turning a blind eye to the fraud, it would still gain an unfair financial advantage because of the artificially lowered price of the goods at the start of the supply chain. It could do so without any fear of being held liable for any unpaid VAT.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 5:45 pm, 15th May 2003

In relation to the unpaid tax that we are talking about, would the Minister clarify whether it is unpaid simply because of fraud, or could it be because of the economic position of the business in question?

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

We are looking at the problem of fraud, so we are discussing specifically the prospect of the failure to pay VAT that is due because of fraud.

If the amendment is passed, a fraudster could easily exploit the loophole that the amendment creates by deliberately inserting a business with no assets next to it in the supply chain. The business would become liable for the fraudster's unpaid VAT, have little or no assets with which to pay the debt, and become insolvent while protecting the fraudulent activity of the ongoing supply chain. To accept the amendment would not only severely restrict the application of the clause, but seriously undermine its effectiveness in tackling missing trader fraud.

Of amendments Nos. 121 and 122, No. 121 is the main one and No. 122 is consequential. Together, they would remove the presumption of knowledge where Customs can demonstrate the tests currently laid out in subsection (6) of new section 77A are met, and instead, place on Customs an evidential burden of establishing knowledge. The clause enables Customs to presume that a business has reasonable grounds to suspect that VAT would go unpaid in the same supply chain when the price paid for the goods was either less than the lowest open market price, or less than the price paid on any previous sale of those goods.

The hon. Members for Tatton and for Eddisbury both asked how one could tell that prices are below the market rate. Those who trade in the sector are

generally aware of the market price day to day. In most cases of missing trader fraud, transactions for goods such as mobile phones will take place at such a substantially lower rate than any plausible current market rate that it will be transparent that they are part of a fraudulent activity.

Photo of George Osborne George Osborne Opposition Whip (Commons)

What the Minister says is very reassuring. Is he confirming that Customs and Excise would exercise a considerable degree of discretion and apply the law only where it was obvious to any reasonable person that the price being offered was much lower than what was available on the open market?

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

I am confirming that it will be relatively straightforward to establish the market price. The practice of such fraud, and our experience of trying to tackle it, means that the goods are sold on for substantially below the going market price. Therefore, it should be transparent that such activity is fraudulent, not commercial. The clause also enables a business to rebut Customs' presumption of knowledge. For example, a business could provide a legitimate reason for the low purchase price of the goods, and demonstrate that the price benefit was not as a result of unpaid VAT.

The proposed amendments would require Customs to demonstrate that a business actually knew that a price paid for the goods was less than the lowest open market price, or less than the price paid on any previous sale of those same goods. To obtain that type and level of evidence would, on the basis of our experience, be extremely difficult and render the measure largely ineffective. To accept the amendment would restrict the application of the clause and seriously undermine its effectiveness.

Amendment No. 88 is a consequence of amendments Nos. 86 and 87. It would entitle the business that is liable to pay its suppliers VAT by virtue of the clause to recover that amount. It also requires Customs to provide a certificate that will act as evidence that the business has paid the VAT. In many ways the arguments are the same as those that we had on clause 17. There is already recourse for the recovery of debts through the civil litigation process. The person who has paid the VAT should seek to prove a debt against the person who should have paid it in the first place, and should gain redress through the courts in the normal way. There are no legal vires in EU law to introduce an amendment such as the one that is proposed. To do so in the UK would, therefore, be illegal.

The hon. Member for Yeovil asked me a series of questions. I have answered some of them. The measure will not apply to bad debts. There is prior warning, but it is different from that in clause 17—the business will receive a notification letter providing 21 days in which to explain legitimate actions. The answer to his question about alternatives is that we have, as the Committee would expect, studied a range of options to achieve the objective of the clause. None would have the effect that we believe we need.

I hope that I have demonstrated that the clause is necessary and that it is not a step that the Government are taking lightly. Our operational activity in Customs has consistently shown that for this type of missing trader fraud to work, it needs businesses that are run by fraudsters, are in cahoots with them or are deliberately turning a blind eye and allowing themselves to be sucked into a contrived supply chain, benefiting themselves by gaining an unfair advantage over legitimate businesses. Honest businesses taking reasonable steps would not trade in such supply chains. The clause introduces serious consequences for businesses that knowingly engage in a supply chain in which VAT will go unpaid. It is important and necessary, and I commend it to the Committee, while urging the Committee to reject the amendments, which, in your words, Mr. McWilliam, would ''eat'' the clause.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

I do not think that I meant that they would eat the clause in any sense other than that they would cover the whole sense of it. I have no view about the clause one way or the other. However, I have a view about where we are now. Because the hon. Member for Eddisbury is not with us, and it was he who moved the amendment, it cannot be withdrawn and will have to be disposed of. I would be grateful if hon. Members would indicate their intentions with regard to the other amendments. However, they have not yet been formally put.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I extend to you, Mr. McWilliam, the apologies of my hon. Friend the Member for Eddisbury. As stated, he understood that the proceedings were to end at 5 pm. As the Committee will have witnessed, he feels very passionately about these matters and is upset not to have been able to wind up on his amendments. I thank the Paymaster General for her kind comments on that situation.

The issues are essentially the same as those under clause 17. The extent of the fraud is sufficiently large that it is understandable that any Government would want to take effective measures to combat it. However, it is necessary to make a delicate judgment between excessive authoritarianism and effectiveness. I stress that the legal community considers that both clauses stray too far on the side of excessive powers. Without intending any criticism of Customs and Excise, the history of its activities is such that it is not unreasonable for the citizen to have reservations about its having such strong powers, which could result in innocent parties being saddled with joint and several liabilities. To make the point another way, we cannot see why the principle of warning and knowledge cannot be written into the Bill. It is fine for the Minister to make the point that the various guidelines will, in essence, cover the fairness of the situation, but they are not part of the ultimate law and cannot be relied on.

We want to put the two principal amendments, amendments Nos. 86 and 121, to the vote. Amendments Nos. 87 and 88 follow from amendment No. 86 and amendment No. 122 from amendment No. 121.

The Minister said that the measure was intended solely for the mobile phone and computer industries.

My understanding is that the Bill gives the Government power to extend it to other areas without parliamentary consultation, so it is not quite right to say that it covers only those two industries. Secondly, the points that Dr. Dwek made about the volatile price of mobile telephones are entirely practical and somewhat undo the protection that the law is intended to give against price fluctuation.

As the Minister will know, the industry has ground to a halt, and not all its members are fraudsters by a long chalk. The Government should be concerned that that has been the result of the measures. We believe that it would still be possible to address the problem without straying so far towards overauthoritarianism. For that reason we wish to put the two amendments to the vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 7, Noes 17.

Division number 5 Adults Abused in Childhood — Clause 18 - Joint and several liability of traders in supply chain where tax unpaid

Aye: 7 MPs

No: 17 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Amendment proposed: No. 121, in

clause 18, page 17, line 14, after 'if' insert 'he knew'.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 7, Noes 16.

Division number 6 Adults Abused in Childhood — Clause 18 - Joint and several liability of traders in supply chain where tax unpaid

Aye: 7 MPs

No: 16 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Amendments made: No. 61, in

clause 18, page 17, line 33, at end insert—

'(2A) In section 84(3) of that Act (appeals not to be entertained unless the VAT has been paid or deposited, except where that would cause hardship) for ''or (q)'' substitute '', (q) or (ra)''.'.

No. 62, in

clause 18, page 17, line 34, at end insert

'except subsection (2A) which applies in relation to any appeal notice of which is given on or after the day on which this Act is passed'.—[Mr. Healey.]

Clause 18, as amended, ordered to stand part of the Bill.

Further consideration adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at one minute past Six o'clock till Tuesday 20 May at five minutes to Nine o'clock.