Clause 21 - Business gifts

Finance Bill – in a Public Bill Committee at 9:45 am on 20th May 2003.

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Photo of John Healey John Healey The Economic Secretary to the Treasury 9:45 am, 20th May 2003

This is a small and simple measure, but it will be none the less welcome to many businesses and to members of the Committee. The Committee will know that firms from across the country routinely offer gifts to visitors, clients, partners and, on some occasions, visiting MPs in furtherance of their business. Such business gifts have traditionally qualified for VAT relief provided that their value does not exceed a prescribed limited and that they are given to an individual only once in a 12-month period. In Budget 2001, we increased the limit on the value of gifts qualifying for relief from £15 to £50.

There is, however, an anomaly in the rules. If a business gives a succession of gifts to the same person, the gifts are subject to VAT even if their total value over a 12-month period does not exceed the £50 limit. The clause replaces the current qualifying criteria with a provision that any number of business gifts made to the same person in a 12-month period will qualify for relief where the total cost does not exceed £50. The clause is small, simple and sensible, and I commend it to the Committee.

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

The Economic Secretary has said that the clause is small and simple. On delving a little further, however, we find that it raises some issues, which I hope that he will consider carefully and respond to. He will note that no amendments have been tabled because we are raising these points to catch his eye, and the eyes of his advisers. He may want to tackle the difficulties that we have identified on Report. If he chooses not to do so, we reserve the right further to consider the clause.

I will not rehearse what clause 21 is intended to achieve, and none of us would dispute its intent or principle, which the Economic Secretary has outlined. The problem is that Customs and Excise might be too rigid in examining what constitutes ''the same year''. Two annual gifts such as those given at Christmas might be given in consecutive years but within a little less than 12 months of each other. The sums may be small, but, for a small business giving a lot of Christmas gifts to clients and sales staff, the cost might be an unwelcome added burden.

I have identified a hassle factor. When one examines a provision that has been described as relatively easy and simple, it is important to consider whether true simplification has been achieved. I recognise that there is no compulsion to conduct a regulatory impact assessment, which I dare say the Economic Secretary did not consider in relation to this relatively small matter. However, the clause may well add an unnecessary and disproportionate burden to small businesses, which need to ensure that their commercial relationships and staff relationships are well cemented.

I hope that the Economic Secretary will carefully examine the idea of allowing businesses to choose a 12-month period, or to use a 12-month period determined in law, such as the VAT year, the accounting year or the period to 31 December. I also hope that he will consider bringing the matter back on Report. The problem was identified by the Institute of Chartered Accountants, which states:

''We welcome the intention to simply these rules. However, by introducing any period of one year in which a succession of business gifts can be aggregated means that businesses will have to keep rolling 12-month records, thus reducing much of the effect of the simplification. We would suggest that either businesses be permitted to choose a 12-month period, or that one should be determined by law'',

which reinforces my point.

The key is to recognise that rolling periods are worse because all companies must have them. If such records were kept, they would impact on those businesses that have already identified the ''same year''. It would be better to have a single date rather than bringing businesses into line by using a rolling period, because businesses dealing with the regulatory burden can anchor to a single date.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 10:00 am, 20th May 2003

Does the hon. Gentleman agree that the calendar year would be the simplest system for everybody?

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

At first blush, the calendar year would be the simplest system, but for administrative reasons—and therefore to reduce the regulatory burden—there may be a better way of picking the ''same year''. Personally, I would take the hon. Gentleman's suggestion, but I am raising the matter to tease out the issues. It is a Parkinson's law issue, because although the provision looks small, the hassle factor could be severe.

Another issue has been raised with me and it may have been raised with other Opposition parties. The Charities' Tax Reform Group has come up with a significant point, which I urge the Minister seriously to

consider in order to make the necessary clarification and adjustment on Report. Like all of us, charities say that simplification and clarification are desirable, but there is a problem:

''Although it was clearly not the Government's intention to target charities by introducing this measure,''

the Charities' Tax Reform Group is

''concerned that charities may inadvertently be affected by it. This is because, under Schedule 4, paragraph 5 of the 1984 VAT Act, the making of a succession of gifts by a taxpayer to the same person is a deemed supply. This can be beneficial to charities (and other not for profit organisations) in that they distribute zero-rated literature to their supporters/contacts to keep them updated on developments within the charity.

Where this activity is not a taxable supply in its own right, (eg a formal subscription to a membership organisation) the activity is a deemed supply at the zero rate. The consequence of this is an ability to recover a proportion of the VAT incurred on related costs.''

It goes on to say:

''Clause 21 would remove from the deemed supply any succession of gifts where the cost to the provider''—

that is the charity—

''of the gifts is less than £50 in any given 12-month period.''

It continues:

''As it is very unlikely that any charity will spend anything near £50 a year on newsletters for their supporters, this proposed change will prevent the charity being able to treat the activity as a deemed taxable supply. Consequently, the charity will lose the ability to recover the input tax associated with supplying the newsletter—adding yet more irrecoverable VAT to the £500 million that charities pay each year.''

It then goes on to cite at some length—I will not take up the Committee's time by putting it on the record—the technical adviser, Peter Jenkins from Ernst and Young. He has gone through the provisions in great detail. The Charities' Tax Reform Group has reasonably and responsibly said:

''If this clause goes ahead, we are concerned that Customs might not accept the technical interpretation that we outline above. We should therefore be most grateful if Ministers could confirm that it was not the intention to affect the present arrangements and that the status quo could continue for charities, ie they can continue to treat the supply of the newsletters as a deemed supply and recover a proportion of input tax on related costs.''

It goes on to say, which is why I believe it is a very constructive representation:

''Such a ministerial assurance would help clarify matters and prevent charities having to enter into detailed technical negotiations with Customs and Excise.''

I am sure that all Committee members would regard that as a sensible and appropriate approach. If any adjustment is to be made, I hope that the Economic Secretary will reflect on those points and make adjustments on Report. If that is not the case, we reserve the right to try and do the same.

Photo of Norman Lamb Norman Lamb Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury)

We have received the same representations from the Charities' Tax Reform Group, and we share the concerns outlined by the hon. Member for Eddisbury. It seems that a simple solution to the problem would be for the Economic Secretary to confirm that it is not the intention of the clause adversely to affect charities in the tax treatment of literature such as newsletters that they distribute to members.

Perhaps the Economic Secretary would also advise charities how they can make it clear through their own literature that people will receive the newsletter in return for donation to the charity so that the matter is given consideration. As I understand the briefing, that would take it outside the definition of a business gift. The matter could be simply clarified by the Economic Secretary making it clear that charities will not be adversely affected and the status quo will continue.

My other quick point, which was also referred to by the hon. Member for Eddisbury, is that I would be grateful if the Economic Secretary would deal with the concern that the effect of the clause could be that businesses will have to keep rolling 12-month records, which will increase the regulatory burden on them and reduce the beneficial impact of the clause.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I agree with my hon. Friend the Member for Eddisbury. It is disappointing that the Government are not taking the opportunity to simplify the situation. The rolling period will mean that the red tape that will need to be processed in order to comply with the clause will be processed at many different times. The Economic Secretary made the point that we are talking about small amounts, but regular processing of small amounts is relatively cost-inefficient. My hon. Friend made an important point that should be addressed; a fixed, 12-month period would be far simpler to administer.

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

In relation to representations that I have received from the Charities' Tax Reform Group, I shall examine those concerns to check whether there is an unintended impact, or any consequences for charities in the way that the hon. Members for Eddisbury and for North Norfolk (Norman Lamb) have outlined.

On the question of the 12-month period, which was raised by the hon. Members for North Norfolk, for Eddisbury and for Huntingdon, it is right that the Bill provides for a rolling 12-month period. By concession, businesses will be able to adopt any suitable 12-month period, such as a calendar or tax year, but they will be able to pick the period with the least hassle factor for them, to use the term of the hon. Member for Eddisbury. The decision is down to businesses. Businesses will then have to demonstrate that the £50 limit is not exceeded in any 12-month period.

In relation to the hon. Gentleman's first point about Christmas gifts, a company could choose to define its 12-month rolling period appropriately if it were concerned about the Christmas period and could give gifts on 25 December in one year and 24 December in the next. Therefore, they can choose both their 12-month period and when they make the gifts to staff. I believe that it is the simplest and most flexible way and best suits the needs of different businesses.

Concerns have been expressed about the possible increase in compliance costs. Any increase in record keeping is likely to be minimal. Businesses must already monitor whether they are making a series or succession of gifts and must keep records on the value

of some business gifts for the Inland Revenue. Therefore, the change merely extends record keeping minimally and should not involve a significant increase in costs. On that basis, I hope that all members of the Committee will support the clause.

Question put and agreed to.

Clause 21 ordered to stand part of the Bill.