Clause 23 - Supply of electronic services in member States: special accounting scheme

Finance Bill – in a Public Bill Committee at 10:00 am on 20th May 2003.

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Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 10:00 am, 20th May 2003

The question is that clause 23 stand part of the Bill.

Mr. O'Brien rose—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

The hon. Gentleman is a little late.

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

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

I am most grateful to you, Sir Nicholas. I shall clearly have to jump out of my seat more energetically. I thought that a little eye contact would do the trick, but that is clearly not so in your case. I must remember that, as both of us come from Cheshire constituencies, I shall have to smile harder at you.

Clause 23 and schedule 2 relate to the supply of electronic services in member states and the special accounting scheme and are part of a series of changes pursuant on the EU VAT on e-commerce directive 2002/38/EC, which deals with VAT on international e-commerce. This particular change relates to the position of a non-EU business that provides interactive services over the internet to buyers in the EU, without having any place of business in the EU itself—shades of our previous debate on betting online. Up to now such a business could avoid European Union VAT on its sales. It must now register and pay VAT on sales to private customers in the EU. However, it needs to register in only one EU member state, which can be any member state that it chooses.

As we are discussing clause 23 stand part, I have taken the opportunity to lay out the introduction. The amendments relate to schedule 2, which inserts schedule 3B to the VAT Act 1994 into the Bill, and provide for a person to register in the United Kingdom. All other EU countries are meant to be introducing corresponding provisions. The schedule is interesting from a technical point of view, as the business will create output VAT.

As this is a stand part debate, I have taken the opportunity to lay out the introduction. The amendments relate to the schedule, which I understand will be taken later. Unless you immediately give me guidance, Sir Nicholas, that you would like to combine them, I shall sit down now and discuss the amendments as part of the schedule after the stand part debate. As the schedule relates to the clause, I wanted to make it clear that I had amendments, as it might affect our view on the stand part debate.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 10:15 am, 20th May 2003

May I help the hon. Gentleman? If he chooses to raise these matters now, clearly, as I previously told the Committee, I shall not want a repeat performance when we reach schedule 2. In view of the advice that I gave previously, I am happy for the hon. Gentleman to raise those matters now if he believes that that is the best way to present his case.

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

I am grateful, Sir Nicholas. I want to follow the correct procedure, but it would be sensible to discuss schedules with their relevant clauses. Whether that will be the theme as we discuss the Bill is for you and others to decide.

The schedule is technically interesting in that output VAT is at the UK rate on supplies to customers in the UK, but on supplies to customers elsewhere in the EU, the rate will be that in the customers' countries. Customs and Excise will collect output VAT, but pay it to another country. That seems straightforward, and it was as a result of representations from the Chartered Institute of Taxation that we tabled amendments Nos. 91 and 92 to schedule 2. I shall move them at the appropriate time, but will debate them now for the convenience of the Committee following your guidance, Sir Nicholas.

The Chartered Institute of Taxation believes that the text of paragraph 14(4) of new schedule 3B to the Value Added Tax Act 1994:

''Records must be made available electronically under sub-paragraph (3) above'',

should state:

''Records under sub-paragraph (3) above must be made available electronically.''

That may seem a minor change, but it would be helpful in clarifying and tidying up the drafting. The Committee is taking up the time of right hon. and hon. Members to try to ensure that the legislation is as good as possible, irrespective of whether we agree with it. In this case, we have no difficulties with the principles concerned.

On amendment No. 92, paragraph 22(7) of new schedule 3B to the Value Added Tax Act 1994 does not identify the UK provision giving effect to article 4(2) of the 13th directive. All Committee members will have latched on to that point and have it in the forefront of their minds. The Institute of Taxation states that it appears to be regulation 190 of the VAT regulations 1995, SI 1995/2518. That is a minor but important omission, which should be tidied up, and I simply seek the Minister's undertaking that if he is not minded to accept our amendments, he will return on Report with amendments to give proper legislative effect to them. If he cannot give such an undertaking, we shall have to register our displeasure when the amendment is moved formally.

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

I shall follow your guidance, Sir Nicholas, and the lead given by the hon. Member for Eddisbury. I shall briefly explain the clause, the schedule and my view on the two amendments.

The Committee may recall that last year my right hon. Friend the Chancellor successfully concluded negotiations with other European states within the

European Union on a new VAT directive for e-commerce. My right hon. Friend the Paymaster General played an important role in that agreement.

At present, e-services supplied by EU firms to non-EU customers are subject to VAT. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is looking puzzled, so I shall repeat that for his benefit. At present, e-services supplied by EU firms to non-EU customers are subject to VAT. Those supplied by non-EU firms to EU customers are free of VAT. That anomaly, as my hon. Friend will appreciate immediately, undermines the competitiveness of UK firms and firms in other European Union states. The new agreement has at its heart a UK proposal to level the playing field between EU and non-EU businesses by introducing, by 2006, a comprehensive electronic system to enable EU consumers to be charged VAT at the rate applicable where they live and whoever the supplier may be. In the interim, non-EU businesses providing e-services will, from 1 July 2003, will be required, for the first time, to charge VAT on all the supplies that they make to EU customers. That requirement, which the hon. Member for Eddisbury touched on, would mean that non-EU businesses would be obliged to register and account for VAT in every EU member state where their customers resided. However, clause 23 and schedule 2 introduce a simplified optional scheme to allow such businesses to register electronically in a single member state of their choice and to declare electronically the European Union tax due on a single VAT return to that member state. The member state of registration will then distribute the VAT to the appropriate EU member states. As I have explained, the scheme is expected to be replaced by July 2006 by the comprehensive electronic system for both EU and non-EU businesses.

As far as I can see, amendment No. 91 would merely alter the structure of the sentence in page 149, line 26, and appears to be principally a matter of style and taste that adds nothing substantive to the clause. If our drafting is unclear or could be misconstrued, I should be prepared to make such a change, but I do not feel that the hon. Gentleman has made that clear or pressed that point hard enough for me to accept the amendment.

Amendment No. 92 seeks to add an incorrect and unnecessary cross-reference to a VAT regulation. It is incorrect because regulation 190 implements article 4(1), not article 4(2) of the 1986 VAT refund directive—which is directive 86/560, the 13th VAT directive. It is unnecessary because article 4(2), which allows member states to apply extra restrictions to non-EU businesses that they do not place on their own businesses, has not been implemented in the United Kingdom. I hope that, on that basis, the hon. Member for Eddisbury will agree not to move the amendments. If he does not, I shall have to ask my hon. Friends to resist them.

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

In the light of the Economic Secretary's response, for which I am grateful, and in particular of his highlighting of the detail of amendment No. 92, I shall, at the appropriate moment, seek leave to withdraw that amendment.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

The hon. Gentleman has not yet moved amendment No. 92. As it will be taken with amendment No. 91—with which it will be convenient to consider amendment No. 92—he will not have to withdraw it. We will come to those two amendments when we move on to schedule 2. I hope that the hon. Gentleman appreciates what I am saying and understands the very important procedures of Committee.

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

In the light of your advice, Sir Nicholas, I shall wait until we get to the amendments. For the Committee's convenience, I was simply trying to flag up where we were coming from, but we will get to that shortly.

Question put and agreed to.

Clause 23 ordered to stand part of the Bill.