Clause 19 - Disclosure of VAT avoidance schemes

Finance Bill – in a Public Bill Committee at 4:30 pm on 6th May 2004.

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

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

This is an important clause, along with the associated schedule 2. Hon. Members will be aware of the Government's commitment to reduce revenue losses that have historically occurred in the VAT system, and in particular our commitment to tackle artificial VAT avoidance schemes. We set out that strategy in our document ''Protecting Indirect Tax Revenues'', which we published alongside the 2002 pre-Budget Report.

In 2001-02 losses from VAT avoidance were estimated to amount to between £2.5 billion and £3 billion—money that could have been used to support our investment in public services. Alongside these losses to the Exchequer, those engaged in VAT avoidance obtain a significant advantage over their competitors. An effective response to aggressive VAT avoidance is needed, and it is needed without delay.

The clause and the associated schedule introduce measures that target the secrecy and concealment on which avoidance thrives and which make it difficult for the Revenue authorities quickly to identify avoidance schemes and those using them. In future, those who use certain VAT avoidance schemes will be required to disclose the details to Customs and Excise under the provisions of the clause and schedule.

We require disclosure of two types of scheme: first, schemes described and published in a statutory list, and secondly, those schemes that bear certain hallmarks. The measures, in parallel with a new disclosure measure to counter large-scale avoidance of direct taxes, will allow a faster and more targeted response to abuses in the tax system.

It may assist the Committee if I give some examples of the sort of abusive schemes that the measures are designed to help deal with. Let us imagine that a retailer who sells high-value, standard-rated goods—

perhaps furniture—sells some furniture with another item that attracts a lower rate of VAT, or no VAT, such as certain forms of insurance. The total amount that the customer pays is the same as the price of the furniture, but a portion of that price—often an artificially high portion—is attributed to the insurance. By doing that, the retailer avoids VAT on that part of the transaction. The distortion of competition in such a scheme is immediately apparent. The VAT that has been avoided enables the retailer to undercut competitors or take a bigger profit.

Another example might involve a bank that pays VAT on a large purchase of goods for its banking activities. Those activities are, of course, VAT-exempt, so it cannot recover the VAT. The bank therefore contrives to sell the goods on to an associated company and claims that the VAT incurred on its purchase of the goods relates to that contrived, taxable sale, and not to its usual exempt banking activities. It claims back all the VAT. It can go still further: to obtain the effective use of the goods, the bank then contrives to lease them back from the associated company, and although it will incur irrecoverable VAT on that lease, it will typically be spread over several years, so it gets the benefit of full VAT recovery up front, and pays the VAT only in small amounts spread over an extended period.

Photo of Michael Jack Michael Jack Conservative, Fylde

In formulating the approach that is taken in the clause, and taking into account examples such as the scenario that Economic Secretary just gave, did the Government conduct any exercise to discover why the original VAT law was not better and more tightly drafted, and how the vulnerabilities were let in that the Government are now trying to deal with through the clause?

John Healey rose—

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Order. Before the Economic Secretary responds, I point out to the Committee that there is a danger that we shall have a long debate on the clause, and a similar debate on schedule 2. Perhaps hon. Members would prefer that debate to be dealt with along with this clause; it may be best to do that now, and to deal only with the particularities of schedule 2, not the generality of the need for the clause. I shall proceed in that way if the Committee is happy. Two debates on the same subject seem to me a waste of time.

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

I am grateful for that guidance, Sir John. I am making my remarks now on clause 19, as it is the principle item, although the schedule of course contains many specific measures.

The right hon. Gentleman will know from experience—not just from serving in Committee on Finance Bills, but from his time as a Treasury Minister—that there is an almost constant process of altering legislation when its abuse through systematic avoidance has been identified. That is change of a different nature from the clause. The clause is not about the specific avoidance schemes to which the sort of legislation that he referred to might be appropriate. It is essentially meant to give Customs and Excise more

information, more quickly, about the nature of activities that may be an abuse, or may be systematic VAT avoidance, and may, therefore, create a need for the sort of legislative change that he describes.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford 4:45 pm, 6th May 2004

It makes no sense to introduce the clause and schedule, which are rather extraordinary—and we must discuss that—with examples of abuses, as the Economic Secretary has done, unless he needs the provisions because there is at present no other remedy against the specific abuses that he listed. If the abuses—I agree that they are abuses—are legal under the present law, we may need to change the law, but if they are illegal under the present regime, the provision is irrelevant and it is wrong to use that as excuse for the clause and the schedule.

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

I gave them as examples of the sort of avoidance schemes that Customs is up against. I am about to explain how the provisions set out in clause 19 and schedule 2 will give Customs early warning about such schemes, but not particularly the power to tackle them.

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

I intended to say this in relation to the schedule, but perhaps I could ask a crucial question about the mechanics. If the provision works and, as has happened in the States, all sort of things are reported, Customs and Excise will have masses to look at and it is likely that it will end up finding that a lot of schemes are within the law. What happens then? The expectation is that the Government will change the law so that those schemes are without the law. One cannot have the machinery of Government overriding the law. Something is either legal or not legal. There may be thoughts of deterrence operating, but the provision does not address the issue. Customs and Excise may have all the information, but if a scheme is legal, how can it stop it? The Economic Secretary will be aware that in the States 1,700 schemes were reported and only 20 turned out to be illegal.

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

I hope that the hon. Gentleman will bear with me as I explain the way in which I envisage the provisions operating. It will be business as usual in the sense that the assurance operations of Customs will be no different from the present. Decisions made by Customs and Excise commissioners or Ministers on any legislative and operational changes will be as now. The clause and schedule are designed to alert Customs earlier and more comprehensively to the possibility of avoidance schemes and their use.

I gave two examples to the Committee to exemplify the schemes that Customs are up against. There are many others, all involving a significant element of contrivance. All deprive the Government of substantial revenue. We estimate the savings arising from the measure at around £200 million in a full year. All distort competition, and as they are often available only to large businesses, they are particularly distorting and unfair to small competitors.

Tackling such schemes is onerous, time-consuming and complex. Customs must identify the existence of such schemes, and avoidance, by its nature, is secret and covert. Many schemes will remain hidden indefinitely or for many years, and the revenue will continue to be lost to the public purse. Even when schemes are identified, Customs must analyse the risk and identify every business that uses them. It must then investigate each and every one to discover whether tax is being avoided, and only then can it take action to deal with the avoidance. When taxpayers have disclosed information under the clause and schedule and it has been evaluated, they will be treated no differently as a result of the measure. The measure will bring the use of avoidance schemes to the attention of Customs at a much earlier stage, enabling it to take the appropriate action to safeguard the revenue much earlier. For taxpayers, it will be business as usual, and they will be subject to no different inquiries or treatment than they currently are when Customs discovers an avoidance scheme.

There will be clear criteria for listing the schemes. There must be an avoidance scheme involving contrivance or artificiality, which must be abusive, in that it does not comply with the spirit of the law, and it must represent a serious potential risk to the revenue. The legislation will not provide Customs with an opportunity to go on a fishing expedition into taxpayers' affairs. In any case, before a scheme is listed, Customs will publicly announce its intention to list it, and will allow one month for representations to be made on why a listing is not appropriate. The listing will then be subject to parliamentary scrutiny under the statutory instrument process.

On top of that, there are de minimis limits, which are set high and designed to ensure that smaller businesses are not affected. They require an annual turnover of £600,000 for the listing scheme, and £10 million for the hallmark scheme.

Photo of Michael Jack Michael Jack Conservative, Fylde

The Economic Secretary used the word ''abusive''. Will there be any description, explanation or document to enable us clearly to define the meaning of that word and others that he used that are not subsequently defined in the schedule?

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

I would hope that I had answered that question when I said that a scheme would need to be abusive and qualified that by saying that it must be contrary to the spirit of legislation that has been passed.

Photo of Michael Jack Michael Jack Conservative, Fylde

For the avoidance of doubt, I ask whether that means that each body of VAT legislation will be accompanied by some description of the spirit of that legislation, taking into account, for example, the implications of judgments such as Pepper v. Hart.

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

No, what I am explaining and proposing is no different from the current situation. We already examine, categorise, and, where appropriate, take action against abusive schemes that are contrary to the manifest purpose and spirit of current legislation. That will not change with the

introduction of this legislation, and neither will the conduct, judgment and follow-up action of Customs. It will be business as usual.

The hallmarks part of the scheme means that hallmarks will be selected as being features that are most closely connected with avoidance—for example, conducting normal commercial transactions artificially offshore, where they are intended to be used in the UK, purely to obtain a tax advantage. That will not give Customs a fishing licence. The primary legislation makes it clear that taxpayers will be required to disclose only if a main purpose is to obtain a tax advantage.

Notification of a hallmark scheme will not be an onerous procedure. Once a taxpayer has notified, they will not need to take any further action. Customs will examine the notified scheme and will undertake further investigations only when it considers that there is avoidance. Even then, investigations will be no more than it would undertake had it identified the scheme as part of its normal assurance programme.

To make the measures as effective as possible, I propose penalties for failure to comply. The penalties have different aims. I have explained that there will be two types of scheme: listed, and those that bear the hallmarks. We have judged listed schemes to be avoidance schemes, and we intend to pursue and assess such schemes if necessary. I think that members of the Committee will immediately understand that there is, therefore, a strong incentive for taxpayers not to tell us about their use of a listed scheme. The penalty must be substantial enough to counter that.

On the other hand, we have made no advance judgments on the nature of the arrangements of hallmark schemes or whether they constitute avoidance. We simply wish to be informed of such activities so that we can properly study them and take further action if necessary. The proposed penalty in that case is a regulatory one, in line with the penalty for breaching a direct tax disclosure requirement.

The new measures are designed to enable Customs to take quick and effective action against schemes through the provision of information on the extent to which known schemes are used and through early notice of potential new schemes. Once schemes are disclosed to a central point in Customs, they will be carefully managed, along with any follow-up action that is taken. If Customs did not already know that a taxpayer was using a listed scheme, it will investigate and issue an assessment to secure the revenue. If disclosure of a scheme is under the hallmarks part of the measure, Customs will consider ways in which to challenge it at an early stage. Officers will be given guidance on how to challenge such schemes as they discover them at other businesses and if they are judged, on the basis of information received and further study, to be avoidance.

Photo of Michael Jack Michael Jack Conservative, Fylde

I would be grateful if the Economic Secretary, in the light of the adjudicatory processes that he has just described, would explain whether there will be some mechanism for referring a case to the European Court, bearing in mind the sixth VAT

directive, if a person involved in a scheme objects to some of the interpretations and subsequent actions taken by Customs?

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

Nothing in clause 19 or schedule 2 changes the existing entitlements and routes for challenging the judgments and assessments that Customs makes as a result of such investigations.

We do not take this step lightly. The way in which the provisions operate and the way in which Customs manages the information that is disclosed will be closely monitored. I will keep a close eye on that and also on the results over the next year or so. In summary, the provisions are necessary. They are a proportionate response to aggressive VAT avoidance and are likely to be effective. They will enable Customs swiftly to identify, and if necessary tackle contrived and abusive VAT avoidance schemes. On that basis, I commend the clause to the Committee.

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

We have considerable reservations about the proposals, but I begin by saying that we had thought that the Government would have grouped this arrangement with the later part of the Bill dealing with Inland Revenue disclosure arrangements, as there are several common points of principle as well as practice. In the main, we will raise our concerns under that part of the Bill.

On Second Reading, I said that hon. Members needed to see the regulations and understand how they would work in order to discuss such arrangements. I learned a little earlier this afternoon that the regulations are available, but I have not received a copy. I would be grateful if the Economic Secretary would ensure that in future at least those regulations pertaining to the Inland Revenue part of the Bill are sent in good time.

The Economic Secretary will no doubt be aware of some fairly detailed criticisms that have been raised by the Institute of Chartered Accountants. I shall refer to some of them, but there are too many to raise them all in this debate. I hope that the Government will be able to deal with them, because it seems that many of the proposals have been cobbled together rather speedily and without the necessary thinking through of all the ramifications of the drafting.

My right hon. and hon. Friends made the essential point, which is that in some senses this mechanism, which I fear will not work, is a sloppy way of not doing the job that ought to be done—that is, the correct drafting of VAT law and the eager investigation by Customs and the Revenue of the avoidance schemes that are knocking around.

Sitting suspended for a Division in the House.

On resuming—

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 5:15 pm, 6th May 2004

I made the point that the better approach might have been to have a thorough review of VAT law to address the problem of its misuse in significant

avoidance schemes, and for Customs and Excise and the Revenue to have conducted their own investigation of the sorts of schemes being used.

We have some practical concerns. The US recently introduced similar measures to those under discussion and the UK introduced money laundering legislation, both of which led to massive reporting. Everybody was naturally motivated to protect themselves, the costs of assessing those reports was huge and, at the end of the day, there was pretty low output for all that effort. We fear that the measures under discussion will follow that course, and our amendments are specifically designed to reduce that.

We are particularly concerned about the duty to disclose which applies to businesses with a turnover of £10 million or more. As drafted, the Bill states that businesses have a duty to pay the maximum VAT that they can and, if they do not, they should disclose it as an avoidance scheme. The conceptual problem emanates from a failure when drafting by the Government and Customs to produce any definition of unacceptable VAT avoidance. We must clarify what constitutes acceptable VAT and tax planning and what does not. The definition of unacceptable tax avoidance in new schedule 11A is so widely drawn as to mean that anything not maximising VAT costs to a business could be deemed unacceptable avoidance.

Customs stated in its November 2002 paper that

''every business has the right to plan its tax affairs efficiently, so that they do not incur higher tax liabilities and increase costs more than they need to.''

Schedule 2 contradicts that statement.

I return to the extent of the problem to which the Economic Secretary referred earlier. There has not been any adequate research or evidence assembled. The VAT gap, which we would all like to see a lot less of, was 16.1 per cent. in 2002-03, and it was down to 12.8 per cent. in 2003-04. It may have reduced substantially further as the gap included losses for error, insolvency and companies in administration. However, as Members know, VAT revenues in 2003-04 exceeded Government estimates by £3.1 billion. The reasons have not been satisfactorily analysed or explained. As far as I can see, the figure of £3 billion comes from a paper produced by Customs and Excise in 2002, headed ''Measuring indirect tax losses''. It was based on a 10-fold multiple of an assessment of what businesses were spending on legal fees for tax avoidance schemes. The key point is that there needs to be better evidence and better chronicling of the extent of tax loss through such avoidance schemes.

There has also been no quantification of the cost to the taxpayer of the measures that are being introduced, which could lead to significant additional costs for businesses—as well, I suspect, as significant unallowed for and unestimated costs to Customs and Excise. A quantification should be published so that the methodology can be the subject of informed examination. The proposals should also target those areas where there is a demonstrable risk of loss of revenues.

There is also the fundamental issue of whether the measures will be effective. The Committee will be aware that the carousel proposals, which go back to the Finance Act 2002, are already subject to European Court of Justice scrutiny. As I understand it, the sixth directive states that member states may impose other obligations deemed necessary for the correct collection of tax, and for the prevention of evasion; but Community law principles require that such measures are proportionate to the objective to be achieved and do not go beyond what is necessary to achieve that objective.

The Government's stated purpose is to increase transparency in the tax system. The new rules will provide Customs and Excise with information about tax avoidance schemes, and about those using them, much earlier than at present, which will enable swifter and more effective investigation and, when appropriate, counteraction. They are intended as a disincentive to the creation and use of contrived and elaborate schemes, whose main purpose is to avoid tax.

The question is whether the legislation goes beyond what is allowed by the sixth directive and the principle of proportionality, and whether the United Kingdom can require disclosure relating to measures that avoid but do not evade tax—the directive distinguishes between the two. Arguably, specific disclosure of transactions that avoid but do not evade tax can be required only under the catch-all of the correct collection of tax.

The disclosure duty is extended to arrangements that, in the view of the Treasury, would be unlikely to be entered into unless the main purpose or one of the main purposes was the obtaining of a tax advantage. Although one can see that the Treasury needs that wide power to designate schemes, it must be exercised reasonably or with some power of appeal. That could be presumed under the principle of natural justice, but it would be preferable to have a clear line of appeal or challenge.

The 15 per cent. penalty would appear to bite even if it is subsequently agreed with Customs and Excise or determined by the courts that, as a matter of law, the tax planning scheme is legitimate. That does not seem proportionate, and the penalty might better be limited to cases where unlawful schemes lead to a loss of tax.

From a constitutional perspective, such legislation may require its authority to be in the form of a derogation under article 27 EC of the sixth VAT directive. That would certainly seem more appropriate as within an internal market additional obligations should be kept to a minimum and at least be subject to the scrutiny and approval of the Commission. I would ask the Minister whether the Government will be going for such a derogation or whether they will be running the likely risk of the proposals being raised with the European Court of Justice.

The definition of the key term in new schedule 11A of what constitutes a tax advantage is so widely drawn that all sorts of perfectly normal transactions could be included. For example, leasing cars, as opposed to purchasing them outright, reduces VAT costs. There is

an exemption when a business leases goods rather than buys them, which defers VAT and so reduces the VAT liability. Rent may be pre-paid to achieve a discount, but that also reduces the VAT paid.

The Institute of Chartered Accountants has raised a number of other important practical points. How will businesses be informed about designated schemes and when will they know when their reference numbers have been allocated? When will they be deemed to have been so informed? Would it not be sensible for Customs and Excise to advise up front on schemes that it considers to be legally ineffective in order to save everybody a great deal of time?

Clarification will be needed on reporting requirements when a scheme that a business intends to notify is slightly different from one for which a reference number already exists. Surely everything that is notified to Customs should be placed on the public record. The process should be transparent. Turnover definitions need considering and potentially changing to avoid discrimination against other EU member states, depending on the different ways of arriving at turnover figures. Surely there should be an exclusion of one-off input supplies.

There is particular concern about notifiable schemes and in that area uncertainty is added to all the difficulties that I have already raised. The two principal areas of uncertainty relate to the concept of advantages associated with designated schemes and the subsequent calculation of any tax advantage. A VAT advantage may be obtained by opting to tax a building to be used by a fully taxable lessee. Is that disclosable by a business that exceeds the turnover limits? A purchaser of that property can exercise the option to tax in order to benefit from transfer-of-going-concern relief. Is that disclosable? It is perfectly legitimate and common accepted practice. What about the business that restructures its operations—for example to make up for the deficiency of capital allowances for non-UK property investors or to obtain a direct tax deduction—in a way that results in an unanticipated VAT efficiency? Is that disclosable? It would appear to us that, under the rules as currently drafted, provided that turnover limits are exceeded, that is the case.

I fear that the provisions will be like the money-laundering provisions, and that they will not achieve their objectives, but will cause a bureaucratic snowing under of the authorities. The Institute of Chartered Accounts commented as recently as this March on the December 2003 Customs draft proposals, which are relatively similar to what is in the Bill:

''We are doubtful whether the proposals will achieve their derived aim. If they do, then it is likely that the rate at which businesses move certain functions offshore will increase. If they do not achieve their intended objectives then they will serve only to add another layer to VAT complexity that businesses have to face.''

Finally, I will cheekily ask the Economic Secretary whether I am correct in understanding that the VAT avoidance scheme under which people can structure the acquisition of a head lease in a property as a transfer of a going concern through a newly created subsidy, thus treating the property acquisition as a

business acquisition rather than as a property, will not be covered by these arrangements, but will be subject to a separate regulation. As the Economic Secretary knows, the Labour party is alleged to have used this avoidance scheme to save £1 million of VAT in March 2002 when it acquired its new old Queen street property.

Our amendments are relatively limited and modest, and they are designed to bring back proportionality. We fear that the clause is a sledgehammer. It will be less than effective, and it will add considerable costs and burdens to Customs and Excise. The Minister talked of the fruits of the clause being some £200 million per annum. If £3 billion per annum of VAT has been lost in avoidance schemes, what has happened to the £2.8 billion difference? Surely what is wanted is better VAT law?

Photo of John Butterfill John Butterfill Conservative, Bournemouth West 5:30 pm, 6th May 2004

I must clarify my earlier ruling. We are debating clause 19, and we are having a de facto schedule 2 stand part debate, so we will debate only the amendments to schedule 2 when we come to that point. Members who are storing up a debate on schedule 2 stand part should include that in their observations on clause 19.

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

Thank you for that guidance, Sir John. We support the stated objective of Government policy in this area. The Economic Secretary spoke of abusive tax avoidance schemes and schemes that involved contrivance and artificiality, from which we can understand the Government's intent. However, he will be aware that the framing of clause 19 and schedule 2 has caused considerable concern. Business and the tax profession are sceptical about whether the existing legislation is simple enough to be implemented clearly and whether it will impose a significant burden on them.

I am aware that the Minister published the draft order a couple of days ago, which was helpful. I saw it only yesterday, which did not give us much time to ask tax practitioners' advice about whether it helps to clarify some of the outstanding issues. I understand that the order is a list of some of the designated schemes. The feedback that we have received so far is that it is helpful but does not deal with the major outstanding concerns that the hon. Member for Arundel and South Downs set out very clearly. I will not repeat all of them, because that is not necessary. There are, however, several salient issues, to which I would be grateful for a response from the Minister. A very important issue is the legal status of the clause, to which the shadow Chief Secretary referred. There is real concern about whether the Government's measures comply with the EC sixth VAT directive, and whether the Government could be challenged on the basis that that directive deals with tax evasion but that this legislation appears to deal only with tax avoidance. It would be interesting to know from the Minister whether advice has been taken on that point, and whether the Government are confident that they will not fall foul of that element of the sixth VAT directive or whether they believe that they will need a

derogation from article 27 of the directive, as the hon. Member for Arundel and South Downs suggested might be necessary.

I understand that there is also a question about the penalties that the Government propose to implement in relation to the sixth VAT directive, which would be 15 per cent. of the tax in question. Several tax practitioners argue that such penalties could be regarded as excessive in situations in which the non-disclosed scheme would have been perfectly lawful. In the past, the European Court of Justice has taken a dim view of such types of penalties, particularly when the Treasury determines the arrangements and its view plays a large part in determining whether the tax advantage will be granted. There is a major issue of EC legislation in the area and it would be helpful to know whether the Government have taken any definitive advice, not only from their own advisers but from EU VAT advisers. Do they think that there will be any problems?

All the tax representative bodies have set out their concerns about clause 19 and schedule 2. They all relate to the breadth of the Government's proposals to catch all sorts of tax avoidance schemes, which the Government cannot anticipate at this point in time. The introduction to the paper from the Institute of Chartered Accountants in England and Wales sets out the salient concerns particularly clearly. More than anything, the tax practitioners are concerned that the proposals are so widely drawn that virtually anything that appears to reduce VAT liabilities could be regarded as avoidance, even if it is quite legitimate. One cannot imagine from the Economic Secretary's comments that he means to capture those who carry out such activities. It is reassuring to have those comments, but one wonders what the safeguards will be in practice.

The Economic Secretary may be aware that alongside the examples raised by the shadow Chief Secretary to the Treasury, the Institute of Indirect Taxation raised the example of a transaction where a company outsources its IT function. That outsourcing would be a transaction or arrangement that potentially gives a tax advantage: the outsourcing fees attract input VAT whereas the previously paid salaries did not. It is quite possible that the company would not have gone ahead with such a transaction if there were no particular tax advantage. I am sure that the Government do not intend to catch such schemes in the legislation, but the Economic Secretary's reassurance would be useful. Perhaps more importantly, it would be useful to have his reassurance that there will be mechanisms to avoid such schemes being caught.

The shadow Chief Secretary also referred to the lack of evidence supplied by the Government to show that the cost of implementing the tax avoidance legislation will be proportionate to the benefits. It would be interesting to know whether the Government have undertaken any assessment of the compliance and administration costs involved. The greater the

uncertainty about the clarity of the legislation, the greater the administrative burden that will fall on firms and tax practitioners. There is also concern that parliamentary scrutiny will potentially be curbed because of the scope for secondary legislation, and that the Treasury will push through wider schemes in the future without the opportunity for as much parliamentary scrutiny as there would be if the issues were debated on the Floor of the House.

Finally, there is the issue of what appeal rights will be available for individuals and companies whose schemes would be caught under clause 19 and schedule 2. That is obviously a major concern, and it is linked to the issue of whether the penalty payments that would already have been imposed by the Treasury would be recoverable by the entity in question where an unlawful scheme has led to a loss of tax. Those are serious concerns. Although we understand why the Government are introducing the legislation—to avoid the loss of tax that may result, which could be spent in far better ways or used to reduce other elements of tax—we are concerned that its scope is so wide that it is creating uncertainty and concern among practitioners and businesses, and that it would involve additional costs for them.

Photo of Michael Jack Michael Jack Conservative, Fylde

I rise simply to underscore the concerns already made about the breadth of the clause and the difficulties with some of the definitions. I am worried, and I want to draw together the concerns. What information will be available to help taxpayers to understand the difference between the normal activities of VAT payers who reduce the amount of VAT that they remit and those of people who deliberately enter into schemes that, although legitimate, are marketable?

Some of the boundaries between saying, ''If we look at it this way and you pay VAT that way, then you will pay a little less,'' and the aggressive and abusive scheme that the Economic Secretary put to us earlier will be difficult to define. We read in schedule 2, under designation by order of avoidance schemes:

''If it appears to the Treasury—''.

That is a very general phrase; we are not given much clue as to what kind of activity is envisaged. The Economic Secretary said that this is not a fishing expedition. However, that strikes me as giving carte blanche to examine any VAT activity, call it in and turn it over. Many practitioners and companies will simply use the failsafe route: they will bombard the Treasury, the commissioners and anybody else they think appropriate with details of what they are doing. We shall have the same problem that we have with money laundering; we will not have enough people to see the wood for the trees. It will be interesting to hear from the Economic Secretary how the Treasury will cope if that occurs.

One of the points raised by the Chartered Institute of Taxation—in paragraph 21 of its submission to hon. Members—is that:

''The new Schedule 11 paragraph 2 can be summarised by stating that any ''scheme'' gives rise to a ''tax advantage'' if a taxpayer pays less (or recovers more tax) ''than would otherwise be the case''. It is not entirely clear what the comparator should be in the context of this provision.''

I do not propose to go through further representations, because they parallel those that have been recorded. However, that quote demonstrates the clear need of all who either pay VAT or receive advice on it for advice about where the boundaries between legitimate activity and abusive activity will be drawn, and for help with some of the definitions in what amounts to new territory for some of them.

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

I appreciate the comments and the tone in which they have been put. This is in some ways new territory, as the right hon. Member for Fylde says.

On regulations, I, like the Paymaster General, accept that, whenever we can, we should provide substantive draft statutory instruments for debate in Standing Committee as part of our consideration of the Finance Bill. With regard to the main supporting statutory instrument to this set of provisions, this is our first day of sittings and I remember signing the Dear John and Sir John letters on Tuesday night. My office faxed copies of the draft to members of the Committee and I am sorry if it did not reach the hon. Member for Arundel and South Downs. It remains our declared intent to put the main substantive draft statutory instruments before the Committee for consideration alongside the relevant clauses.

I understand that a degree of uncertainty might exist among the professional bodies. Like Committee members, we have received representations and detailed comments from the Chartered Institute of Taxation, which the hon. Gentleman quoted, and the Institute of Chartered Accountants, which the hon. Member for Yeovil mentioned. We take them seriously and will take them into account in drawing up the draft orders that will derive from the legislation, and in planning to put into operation the Customs response to the powers.

If Committee members have not yet examined the draft statutory instrument that we have circulated, I encourage them to do so. To be clear, it is a statutory instrument for affirmative resolution, so there will be substantive debate in the House on the measure. It covers the schemes that we are proposing to list. It also covers the hallmarks that are, in our judgment, associated with, or characteristic of, avoidance schemes. I hope that studying the draft will help to settle some of the questions about specific schemes that the hon. Member for Arundel and South Downs raised and give the right hon. Member for Fylde some reassurance. I hope that it will be clear to him that the schemes listed are, and will be, clearly identified. The

importance of that, of course, is that a business will be able to assess whether it is adopting a listed scheme and do so with sufficient certainty in the future.

The hon. Member for Arundel and South Downs mentioned, as I did, the strategy for tackling indirect tax which we published in 2002. He suggested that our assessment of the cost of avoidance of between £2.5 billion and £3 billion per year is unreliable. I simply say to him that the UK remains the only country that makes a serious and systematic attempt to assess the scale of the indirect tax gaps. Ironically, that measure will help us to make a better and more reliable assessment of such avoidance in the future. It will also, as I said, help us to reduce, but not remove, the scale of that VAT gap, and I agree with the hon. Gentleman that we need better VAT law. That is certainly something that we strive for, not always successfully, in the Treasury and in Customs.

Both the hon. Members for Yeovil and for Arundel and South Downs asked whether the provisions in clause 19 and schedule 2 go beyond the sixth directive. They do not. The notification obligations are legitimate, proportionate and comply with Community law.

Photo of Michael Jack Michael Jack Conservative, Fylde 5:45 pm, 6th May 2004

Have there been any discussions about the proposal with the Commission?

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

As the right hon. Gentleman would expect, we make the normal checks and assessments of that in making such a firm statement and declaration. The obligations that we propose in clause 19 and schedule 2 are proportionate in terms of a response to the loss of revenue that is arising from not identifying businesses that have implemented VAT avoidance schemes and from identifying them too late.

In so far as the additional burdens imposed on the taxpayer are concerned—the hon. Member for Yeovil was concerned about this—I reassure the Committee that article 22(8) of the sixth directive authorises such obligations. The proposed de minimis thresholds will limit the impact of those additional obligations and assist in supporting their proportionality.

Finally, I mention the specific point about how businesses will know if the penalty will be imposed. If, as part of its normal assurance work, Customs finds that a business has not disclosed or notified as it should, Customs will issue an assessment for the penalty. It will do so, as normal, by sending a notice in writing by post. The business will then have, as at present, the right to appeal against the imposition of the penalty and against its amount.

On that basis, I hope that the Committee will give the clause and, when we come to it, the schedule, its support.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at eleven minutes to Six o'clock till Tuesday 11 May at half-past Nine o'clock.