Clause 97

Finance Bill – in a Public Bill Committee at 9:00 am on 7th June 2007.

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VAT: joint and several liability of traders in supply chain where tax unpaid

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I beg to move amendment No. 251, in clause 97,page 68, line 20, after ‘above’, insert

‘in respect of any supply made after the date on which the order has effect.’.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss the following: Amendment No. 252, in clause 97, page 68, line 22, at end add—

‘(9C) An order may not be made under this subsection unless a draft of the statutory instrument containing the order has been laid before, and approved by a resolution of, the House of Commons.’.

Clause stand part.

New clause 3—Missing trader intra community fraud

HMRC shall lay a report before Parliament every three months on the measures taken by the Government to combat missing trader intra community (MTIC) fraud and the effects these measures are having on VAT compliance system generally.’.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I thank you, Mr. Gale, and the whole Committee for that kind welcome. I also thank the Financial Secretary for his kind words on Tuesday, although I was not present at the time. I offer my particular thanks on behalf of Mrs. Gauke, upon whose illustrious reputation my career is built.

I suspect that other Committee members might well also be promoted in the weeks ahead, in particular on the Government Front Bench, and as far as the Financial Secretary is concerned that would be thoroughly deserved—[Interruption.]—as, I am sure, it would be for others as well. On a personal note, it is a pleasure to follow in some respects immediately in the footsteps of my hon. Friend the Member for Rayleigh, who addressed the Committee on Tuesday and who last year addressed it on the subject of missing trader intra-Community fraud. As it happens, it is not the first time in my political career that I have followed in his footsteps. He was the Conservative parliamentary candidate for Brent, East in 1997 and I performed the same role in 2001. It would be fair to say that that is not the most auspicious precedent. Neither of us was hugely successful. We won the arguments, but lost the votes. Perhaps that will happen again today. Also, I should not forget to welcome you to the Chair, Mr. Gale.

I turn now to the matter in hand—[Hon. Members: “Hear, hear.”]—which is the most popular thing that I have said so far. I wish first to say a few brief remarks about missing trader intra-Community fraud in general, after which I shall discuss new clause 3, which would require a report to be produced quarterly by the Treasury on its measures with regard to MTIC fraud and the implications for the VAT system as a whole.I shall then turn specifically to clause 97 and amendments Nos. 251 and 252.

Clause 97 returns us to the issue of missing trader intra-Community fraud, of which carousel fraud is perhaps the most prominent part. The carousel version of MTIC fraud is defined, among other occasions, by Her Majesty’s Revenue and Customs in a note that the Financial Secretary kindly circulated earlier this week. It involves

“a circular trading pattern that allows the same goods to be imported and exported many times, with an unpaid VAT liability and a corresponding VAT repayment being created in each turn of the carousel”.

The scale of the fraud is considerable. HMRC figures, which were quoted recently in the report of the House of Lords European Union Committee “Stopping the Carousel: Missing Trader Fraud in the EU”, show that in the period from 1999-2000 to 2004-05 the size of the figure was at least £1.1 billion and as high as £2.5 billion in some years. The figure quoted in the report for 2005-06 was £3.5 billion to £4.75 billion, although that may be a misinterpretation of the data. It related to the attempted fraud and the cost to the Exchequer, using the same methodology as used in previous years, of £1.4 billion to £2.4 billion.  HMRC also introduced a new methodology in respect of the impact on VAT receipts, which was £2 billion to £3 billion. I am sure that the Financial Secretary will confirm whether my interpretation of the House of Lords report is correct. I see that he is nodding in assent. I am sure that such new methodology is helpful, but it might be interesting to see whether it could be applied for previous years to get a sense of the trend. I do not know whether that would be possible.

I shall leave the matter with the Financial Secretary. We are talking about big numbers to the extent that, according to the Office of National Statistics, MTIC fraud distorts our trade figures. It is substantial. It is persistent and has the capability of adapting and expanding to undermine the entire VAT system. For those reasons, there is no dispute on either side of the House that effective measures must be taken to tackle it.

Hon. Members who discussed last year’s Finance Bill in Committee will recall that we debated MTIC and the Government’s response to it at some length. My hon. Friend the Member for Rayleigh made some well-founded criticisms of the Government’s record in tackling the problem prior to 2006. I have no doubt that the Financial Secretary will describe the progress made in tackling the fraud, and I hope that he will outline the figures for 2006-07, although HMRC has stated that

“trading activity associated with carousel fraud has fallen dramatically during 2006-7.”

We all welcome that progress. None the less there is no room for complacency. It is a dynamic situation. The fraud evolves and mutates, and our responses must develop accordingly.

We are also discussing the necessity to balance the desire to reduce fraud with the need not to impose a disproportionate burden on legitimate businesses. Given the need to balance such competing pressures, the dynamic nature of the fraud and the scale of the problem, it is clear that the need for proper parliamentary scrutiny is considerable. For that reason, we have proposed new clause 3, which requires HMRC to lay before Parliament a quarterly report

“on the measures taken by the Government to combat missing trader intra community (MTIC) fraud and the effects these measures are having on VAT compliance system generally.”

I make no accusation that the Government and HMRC have tried to conceal information in any way. Indeed, as I said, the paper circulated by the Financial Secretary was extremely helpful and informative. Indeed, it repeated points that had previously been raised by HMRC to those Members, of whom I was one, who had independently raised concerns or queries about the Government’s approach. None the less, a formal document published regularly would provide greater clarity and enable Parliament to scrutinise the Executive’s actions much more effectively.

Let me give one example of an area where Parliament would benefit from the opportunity for closer scrutiny. Last year we debated at some length the need to put in place a legislative framework to enable the reverse charge to come into effect. It was at the heart of the Government’s strategy to reduce MTIC fraud and would involve transferring the responsibility for paying VAT from the  seller to the buyer. To implement the reverse charge, it has been necessary to obtain an EU derogation from the sixth VAT directive.

Progress towards that derogation has been somewhat uncertain, and I use the word “uncertain” to mean that progress has been somewhat slow and that it has been difficult for Members to evaluate that progress. That is not because of a lack of Government statements; indeed, there have been many. They announced that they had submitted an application for derogation in January 2006. In July, the Paymaster General told Parliament that she was confident of securing an agreement, and later that month HMRC stated that

“we expect to implement the reverse charge on 1 December 2006.”

It was not implemented in the ECOFIN meetings on 9 or 28 November, and at the time rumours circulated that the French Government were reluctant to agree to the derogation because they feared that fraudsters would turn their attention to France, which I find a remarkable argument.

On 13 December, the Chancellor, appearing before the Select Committee on Treasury, said in his opening remarks following the pre-Budget report that he was

“pleased to tell the Committee that last night an agreement was reached on the derogation we have sought with France and, with the support now of other Member States, I am confident that the derogation will be adopted.”

I do not know on what basis he made those remarks, or whether it was in any way an attempt to dominate the news reports of that hearing, although my recollection as a member of the Committee is that much of the press coverage curiously related to the unravelling of education spending figures. None the less, considering subsequent events, it did not appear that agreement had been reached.

If the Chancellor thought that the progress would be swift after 13 December, he was proved to be mistaken. The derogation was not even on the agenda for the ECOFIN meetings on 30 January or 27 February and was finally agreed on 19 March, but at what cost? It would appear that his attempts to protect an element of the rebate were abandoned, according to many reports. As an EU diplomat quoted in The Guardian on 4 April put it:

The British were given to understand that if they wanted their way on VAT, there was another issue on which they needed to give ground”.

That issue appeared to be the EU rebate. This was not a triumph for British diplomacy by any means, and the Chancellor’s ability to obtain a good deal for the UK must be questioned.

I am reminded by the Chancellor’s attempts to obtain the reverse charge derogation of the comments of Sir Stephen Wall in the recent Channel 4 “Dispatches” documentary. Discussing the Chancellor’s negotiating style, he said that when the Chancellor negotiated a particular point he

“hammered away at something which the majority of the member states weren’t prepared to agree to, he got himself into certain amount of difficulty. And when he tried to sum up three times, as I recall, in the direction that he wanted rather than what the majority wanted, in the end people were just sort of laughing. Because it was, it was so, it had become I thought, sort of embarrassing.”

I am the first to concede that a degree of truculence in EU negotiations might be appropriate but, to coin a phrase, it should be truculence with a purpose.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

Given that the hon. Gentleman has followed the hon. Member for Rayleigh in a number of situations, does that comment mean that he is after the shadow Europe job already?

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

The shadow Europe job is in very good hands and I, for one, would hate to leave the Committee after such a short time.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. I have been listening carefully and with great interest. The intervention of the hon. Member for Wirral, West is the cue for me to say gently that we are dealing with the Finance Bill of the United Kingdom and we should move swiftly to a discussion of the matters before us.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire 9:15 am, 7th June 2007

I am, as ever, grateful for your guidance, Mr. Gale.

Returning specifically to MTIC and the derogation enabling the reverse charge, it is not disputed that the reverse charge is not quite what was originally envisaged. Three elements have changed from the original proposal. The application of the reverse charge has been narrowed to only mobile phones and computer chips. When we debated the de minimis requirement last year, it was due to be £1,000; it will now be increased to £5,000. Indeed, the period for the derogation has been reduced from the time that we originally applied for, from three to two years.

Those changes give rise to a number of questions. Given that the reverse charge was a key part of the Government’s strategy last year and that they envisaged bringing it in somewhat earlier, what cost has the delay incurred for the Exchequer? What will be the cost, if any, of the concession on the de minimis amount? I have mixed feelings about that because, as far as business is concerned, the increase from £1,000 to £5,000 is welcome. None the less, the Government wanted £1,000. What was the cost of that?

In particular, what is the Government’s view of the fact that the derogation is only for two years rather than three and that we have to negotiate it all over again? Further concessions in other areas may be necessary to achieve that. That is important because, as we all recognise, MTIC evolves and mutates. There is no particular reason why it would necessarily stick to mobile phones or computer chips. If we find that we need to expand MTIC, we may be in a difficult position.

I appreciate that the reverse charge has been in place only for a few days; it came into effect on 1 June 2007. Will the Financial Secretary make any observations following its introduction, as I am sure the Committee would welcome that? However, I appreciate that it is early days. That brings me back to my point about a regular, quarterly report, which would enable the Government to set out their views on how the reverse charge is operating as it is introduced and beds down.

A further part of the Government’s approach to tackling MTIC fraud, and one that on the face of it appears successful, is the introduction of extended verification for VAT repayments. The figures in the HMRC briefing paper certainly appear impressive. It states that in more than 95 per cent. of cases where traders are subject to extended verification there was at least sufficient suspicion for HMRC to continue to investigate. HMRC add that only 1 per cent. by value of the VAT withheld under the programme has been found to be correctly claimed and properly payable. That appears to suggest that the extended verification measures have been extremely well targeted.

However, many businesses have expressed their concerns, to the extent that one begins to question the figures. The Federation of Technological Industries informed the House of Lords European Union Committee that every participant in the grey markets for mobile phones and computer chips has had their VAT repayments withheld since spring 2006. Is it possible to reconcile that with HMRC’s view that the measures have been extremely well targeted?

For that reason, it might be helpful to dig a little further into the figures that HMRC has provided. If 1 per cent. by value of the VAT withheld has been found to be correctly claimed and properly payable, what is the comparable figure by case load? The terminology—claims that are correctly claimed and properly payable—is different from claims being linked to MTIC fraud. Is there a figure for the claims that are linked to it? How many of the cases where things have not been correctly claimed and properly payable are because of a more technical breach that is entirely unrelated to MTIC fraud?

I have found no specific figure in the public domain. The House of Lords concluded that the number could be as high as 1,500, but having looked at how it reached that calculation, I would say that a certain amount of guesswork was involved. What amount of VAT is not being repaid because of the extended verification process? How many people at HMRC are working on this area? I am sure that the Committee would be pleased if the Financial Secretary were able to shed any light on those issues. It would be useful if the information could be provided on a formal and regular basis.

There are also problems with the VAT repayment system which appear to be unrelated to tackling MTIC fraud. That goes to the heart of one of the House of Lords European Union Committee’s concerns about the extended verification process, in that it ties up an enormous amount of HMRC’s time and effort. The Committee said that

“the system of extended verification is an inefficient and unsustainable use of HMRC’s resources”.

I should be grateful if the Financial Secretary would tell us whether or not he agrees with that view, because there is widespread concern about how the VAT system is working.

One assumes that resources have been directed to tackling MTIC fraud—that is not necessarily the wrong thing to do; I have stated several times that such fraud is a serious problem—but I, like other hon. Members, have been informed of several cases where there are problems with repayment systems. My hon. Friends the Members for Rayleigh and for Fareham have been  contacted by Viking Garages, which is seeking recovery of a VAT overpayment. Delays have occurred, in part because of delays in allocating caseworkers. Viking Garages’ professional advisers have said:

“HMRC are putting woefully inadequate resources to the team responsible for authorising repayments”.

I have also been informed about a case taken up by my right hon. Friend the Member for North-West Hampshire (Sir George Young). It relates to a building firm that is having great difficulties; there seems to be a widespread problem with repayments to builders. Neither of those cases are high risk from an MTIC fraud point of view, but it would appear that people are being taken away from such areas, and that is causing problems in the repayment system.

More widely, there are substantial problems with VAT registrations. I raised that point with the Paymaster General in last year’s Finance (No. 2) Bill Committee and have done so subsequently in a Treasury Committee sitting with senior members of HMRC. At that time, my attention was drawn to problems with VAT registration by a City lawyer with whom I am acquainted. There seemed to be a particular difficulty with delays in getting VAT registrations for companies, and that is a serious concern. There are cash flow problems, particularly for start-up companies, and one of the competitive advantages that we have in this country is that it is relatively easy to get a business started and up and running. The proposal will put that in jeopardy.

As I said, on 24 January 2007 I raised that point with senior HMRC officials. Paul Gray, the chairman, stated that it was

“one of those areas where we have had probably the greatest degree of pressure and the performance certainly was not as good as I might have hoped”.

His colleague, Mike Eland, added that the problem is with

“trying to get a balance between facilitating legitimate business and tackling fraud. We did not get that quite right. We put the emphasis on tackling the fraud. We are now looking to correct it the other way by simplifying some of the procedures and also getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly”.

Both Mr. Gray and Mr. Eland stated that HMRC was improving but was “not there yet”.

Some months later the problem persists. My hon. Friend the Member for Chipping Barnet was contacted by Ingenious Media plc, which was deeply concerned about delays in obtaining VAT registrations for start-up companies in which it invests. Yesterday, I spoke to the finance director of Ingenious Media plc. He said that

“there is a crisis at HMRC in respect of VAT registrations. They are months behind with their work and seem to be in despair. They are hopelessly short of staff”.

That is not an isolated case. John Arnold, chairman of the VAT committee at the Institute of Chartered Accountants in England and Wales, said that

“there’s no doubt that there is a problem with missing trader fraud but to delay VAT registrations to this extent is disproportionate”.

He added:

“in general it seems to be two or three months from sending the form off. It used to take three weeks”.

I would be grateful if the Financial Secretary could indicate whether there has been a decline in the number of VAT registrations completed within the three-week target, whether the problems are concentrated in areas that could be seen as being related to MTIC fraud, or whether they are more general, and whether there has been an increase in the number of complaints received by HMRC on that point. Last year, I tabled some parliamentary questions on that point, and might do so again, depending on the answers that I receive.

If it is determined that a VAT registration will take longer, an extended verification process might be applied. As I understand it, if that is the case, no notification is given to an applicant, although there might be good reasons for that—along the lines of not wanting to tip off the applicant. However, in some cases that causes added uncertainty and difficulty, and if a company was aware that there was going to be a delay in achieving VAT registration, it might be able to take mitigating steps. Has HMRC considered doing that?

Essentially, does the Financial Secretary see the problems with VAT registration as being directly related to MTIC fraud, either because it takes longer to deal with applications that might be related to MTIC fraud or because resources are being put into tackling it, or is the problem wider and more systemic? Are there particular problems within HMRC? Are the budget cuts affecting HMRC causing particular difficulties and a decline in the quality of service? I am afraid that that is the perception of business.

No doubt we will hear evidence of improvements in tackling MTIC fraud. Those improvements might be overdue, but none the less they are welcome. However, the issue will continue to be of concern, and a regular report, as proposed in new clause 3, would enable us to scrutinise such matters in a well-informed manner.

I turn more briefly to clause 97 and the two amendments relating to it. The clause will amend the joint and several liability provisions applicable to traders who know or have reasonable grounds to suspect that VAT will go unpaid elsewhere in a supply chain. Currently, those provisions apply to a narrow range of products, such as mobile phones, computers and certain other electronic goods and their accessories. The clause will give powers to the Treasury to make orders to extend those into other areas. I assume that the rationale for that is the danger, if not the likelihood, that MTIC fraud will mutate away from those goods, with which traditionally it has been associated, and into other areas.

I am sure that the Financial Secretary will elaborate on that in due course. If that is the reason, how adequate is the reverse charge derogation? At the very least, it suggests that it will be necessary to return to Brussels in a couple of years to seek an extension. Given that we have already had to narrow the scope of our derogation, that throws the difficulties created by that narrowing into sharp focus.

I want confirmation that the Government do not perceive any risk of the legislation falling foul of VAT directives as being disproportionate and therefore ineffective, which is how they were found to be acting in the bondholder case when the European Court of Justice found against them. I seek confirmation that there are no concerns on that point.

Amendment No. 251 would address the concern that provisions made under the clause may be retrospective to some extent. Any supplies made after the date on which the order comes into effect should be affected by the provisions. I presume that the Financial Secretary will say that that would weaken their effectiveness, and I will certainly listen to his argument before deciding whether to press the amendment to a Division, but we are not dealing with persons involved in fraudulent behaviour and we should always be wary of retrospective legislation.

Amendment No. 252 would require an affirmative resolution in the event of the Treasury seeking to extend its powers in these areas. The original provisions under section 77A of the Value Added Tax Act 1994 were debated at length in the 2003 Finance Bill. I believe that the hon. Member for Wolverhampton, South-West was a member of the Standing Committee that considered that Bill, as was the Financial Secretary. They may recall a lengthy debate on that point.

The provision essentially imposes VAT on people who would not otherwise be liable. There may be good reasons for that, but the imposition of tax has rightly and traditionally been seen to be a matter for Parliament and not the Executive. I recognise the arguments for some flexibility for the Government in these circumstances, but parliamentary scrutiny is important and I seek recognition from the Financial Secretary that there will be adequate opportunity for Parliament to scrutinise any extension of the provisions that were debated at length in 2003.

My final point was raised by the Institute of Indirect Taxation. Under existing section 77A of the Value Added Tax Act 1994, a person could reject the assessment that he had reasonable grounds for thinking that a transaction was not suspicious because of the low price if he could prove that the low price payable for the goods was due to circumstances unconnected with the failure to pay VAT. The provision that we are debating would enable that presumption to be scrapped, so that even if someone could prove that the low price was entirely unrelated to MTIC—“prove” is a fairly high hurdle—there would still be grounds for thinking that MTIC fraud had occurred simply because of the low price, whatever the circumstances. Does the Treasury have it in mind to remove that presumption?

My introductory speech from this Bench has been rather lengthy, but I have raised a number of important points. MTIC fraud costs this country a great deal of money and is evolving. All parties want to address it, but if we are to do so sensibly, it would be useful for the House to be better informed, and new clause three would serve a valuable purpose.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury 9:30 am, 7th June 2007

It is a pleasure to welcome you to the Chair, Mr. Gale. It is also a great pleasure to welcome the hon. Member for South-West Hertfordshire to the Opposition Front Bench. I am sure that he enjoyed making his first speech and that it will be the first of many; perhaps not on this Finance Bill but on next year’s if he is not promoted again in the meantime.

In yesterday’s First Delegated Legislation Committee considering the VAT (Payments on Account) (Amendment) Order 2007 and the Value Added Tax (Administration, Collection and Enforcement) Order 2007, there was unanimity about the need to tackle the problem of MTIC, so there is support on both sides of the House for the intention of tackling it. However, I have a great deal of sympathy with the amendments tabled by the hon. Gentleman and his colleagues. It seems reasonable to request a positive resolution procedure, given that it is important for hon. Members to be aware of how that fraud might be evolving and the flexible approach that the Government and HMRC will therefore have to take in tackling it. We have heard about how it might change to involve different products and about the implications that that might have for EU derogations. In addition, the legislation that we have passed and will pass will impact on how the fraud might change.

I am bearing in mind your comments about the timetable this morning, Mr. Gale, so I will keep my remarks brief. There is a great deal of sympathy with new clause 3. Given that the scale of the problem is so significant, it is important that there should be transparency and honesty from the Government. There is a need to restore public confidence that the problem will be tackled. It is important for the Government to demonstrate the impact that the new system of reverse charging will have. Producing a regular report, not necessarily quarterly, would help to keep people up to date with how the situation is or is not improving.

I have a few questions that relate to issues already raised by the hon. Member for South-West Hertfordshire. Concerns have been expressed about whether HMRC is best placed to determine whether taxpayers should or should not have known that tax would go unpaid. Is the implication that many businesses will seek pre-approval from HMRC for every transaction? If so, given that there have been reports of time scales of more than 12 weeks to decide whether to register a taxpayer, will businesses be expected to wait that long to know whether registration will be approved or denied for each transaction?

The Chartered Institute of Taxation believes that a solution to the problem would be real-time checking of specified transactions. I would appreciate the Financial Secretary’s comments on how realistic he thinks that might be and on the potential benefits or pitfalls. The key concern, which I raised yesterday, is that there is significant abuse, which needs to be tackled. We learned yesterday that probably hundreds rather than thousands of businesses are abusing the existing loophole. However, there is a concern that innocent businesses will have to take on the burden, while those abusing the system will either not comply or find ways of getting around the system.

There are concerns that the proposals before us and those that have just been implemented will generate new types of abuse. I seek reassurance from the Financial Secretary that the Treasury and HMRC are alive to the fact that MTIC is a rapidly evolving type of abuse. I appreciate the efforts being made to respond to the abuses, but what efforts will HMRC and the Treasury undertake to be alive to such changes and to ensure that any potential new loopholes or abuses are identified and closed down as quickly as possible?

I raised yesterday the issue of the amount of officer time dedicated to MTIC and I received a partial response from the Financial Secretary. Can he tell us the number of officials, in full-time equivalent terms, who are currently dedicated to tackling MTIC and the number of officials who are working on the introduction of this proposal? He talked about redeployment yesterday, but it is important to know exactly where we are now.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I, too, welcome you back to the Chair, Mr. Gale, and I congratulate my hon. Friend the Member for South-West Hertfordshire, who has been with me—painfully—both on the Treasury Committee and on this Committee for some time. He certainly deserves his promotion.

May I begin by thanking the Financial Secretary for his courtesy in having written to the Committee in some detail on the Government’s strategy for tackling MTIC fraud? Carousel fraud is clearly a significant problem. The Government take seriously their duty to deal with it robustly in order to protect the Exchequer. Let me make it clear that if I am critical of the Government’s strategy, it is because there have been significant problems in the way in which that strategy has been implemented, not because I challenge the principle of confronting fraud.

In his letter to the Committee, the Financial Secretary wrote that the Government’s stance on the issue was founded on the need to

“ensure that HMRC’s operational strategy is able to respond swiftly and flexibly to future mutations in MTIC fraud.”

That must be the right approach. There is, indeed, a frantic evolutionary process involving fraudsters and revenue inspectors. In its report on the Budget, the Treasury Select Committee expressed its expectation that the Government should remain vigilant in guarding against new methods of intra-community fraud. If the order-making powers in clause 97 give the Treasury and HMRC greater flexibility in support of that vigilance, they should be welcomed, although unbridled flexibility is no good thing.

I am not convinced, however, that the powers will do anything much to improve how swiftly HMRC can adapt or act. I do not know how many members of the Committee have come across MTIC fraud in the course of their constituency casework. Unfortunately, I have. As a result, I believe that there are significant flaws in HMRC’s capacity to handle the kind of investigation that it is undertaking and that no new order-making powers should be conferred on the Treasury for the purposes of tackling MTIC fraud until that capacity is first expanded and then proven in practice.

Let me share with the Committee the essentials of the case that I was presented with. My constituent’s company supplied mobile phones; it had exports totalling £60 million in 2006. It waited from May 2006 until January 2007 for a VAT repayment claim of £6.7 million to be met, while “extended verification” procedures were carried out on its supply chain. That wait did not have a happy outcome, because on 17 January it went into administration due to the substantial dent in operating cash flow represented by that £6.7 million, which is a substantial sum for a company with £60 million turnover.

I wrote to the Paymaster General and she gave me a very gracious answer. However, she said that she could not comment on the individual case because of the confidentiality issues raised by the involvement of administrators. My letter was dated 15 January, and not even the most efficient private office, which I am sure she has, could have turned around a response in two days. In fact, by some fortuitous accident of the postal system, my original letter was returned to me, and I see that it was not logged for answer until long after the company had gone into administration. Unfortunately, as a result, I have had no explanation as to why it took 10 months for HMRC to investigate that company and why it was allowed to go to the wall during that time. Nor, I strongly suspect, will I ever find out the outcome of that investigation. In the absence of any indication to the contrary from HMRC, I must conclude that an honest company went out of business as a direct result of HMRC’s investigation.

I shall not give the Committee any further details of the company, or its troubles, but I believe that this example is illustrative of the serious delays that can occur while the Revenue is investigating VAT claims.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

If the hon. Gentleman claims that this problem was caused by maladministration, he should take the matter to the ombudsman; it is not connected to this legislation. I have done a similar thing with a company, and the ombudsman will examine such issues if there is maladministration. However, the matter has nothing at all to do with the legislation.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. Forgive me, but the Chairman will decide whether something is in order or not.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 9:45 am, 7th June 2007

If the hon. Lady was listening at the beginning of my speech, she will know that I was saying that there was a serious capacity issue in dealing with problems like this one. The point that I am trying to make is that, although I and other Opposition Members take MTIC fraud seriously, the fact is that there may not be the capacity to deal with companies such as this one, which have been victims of a delay and unfortunately then go into administration, when I believe that there was no deceit or intent on their part to defraud the Revenue. That was the point that I was trying to make. The point is relevant to clause 97 because it seems that the order-making powers could significantly increase the competence of HMRC to pursue new and more elaborate forms of MTIC fraud. To me, that implies the need for an increase in work load, which must be met by increased capacity and an attendant increase in resources.

Will the Financial Secretary give me some reassurance that a 10-month wait during an HMRC investigation is atypical? The Chartered Institute of Taxation is of the opinion that investigations routinely last in excess of 12 weeks. Is that figure accurate? Will the Financial Secretary further commit to ensuring that, in future, HMRC is equipped with the necessary resources to conduct investigations in as timely a manner as possible?

In a letter regarding my constituent’s case from the acting chairman of HMRC, which was written in December 2006, the acting chairman said that 600 extra staff had been redeployed to cope with the burden of checking VAT claims. Just two months later, the Paymaster General told me that that figure had risen to 700. Can the Financial Secretary tell me whether that figure is expected to continue escalating and, if so, what will be the effect of any new orders that are expected to be made under clause 97?

I want to touch briefly on one or two of the wider issues raised my constituent’s experience. It is the Financial Secretary’s contention that, when it comes to carousel fraud, black is black and white is white. He believes that one is either a knowing participant in an utterly contrived and fraudulent arrangement, or one is an innocent buffer who is not a party to such an arrangement. More specifically, in his briefing— underlined for emphasis—he said:

“It is difficult to see how any trader operating in a carousel supply chain can be unaware of the fraud, or not suspicious of the trading patterns and practices encountered.”

I agree with that. However, when the Financial Secretary replies, can he set out the process of augury by which an innocent buffer is differentiated from a knowing fraudster?

The Government have taken their lead from the European Court on the test that ought to be applied for judging participation in MTIC fraud, which is that a participant must either have known, or should have known, of the fraud. However, unlike my hon. Friend the Member for Rayleigh, I am not so enthusiastic about all things European that I anticipate the need to leave the Committee in order to pursue my interest. So I would like the Government to look again at whether the question of those who are involved, uninvolved or potentially involved in MTIC fraud is really cut and dry.

More specifically, I would like to ask the Financial Secretary a simple question: if involvement in MTIC fraud is so blindingly obvious when it occurs, why is there the need for a 10-month investigation into a company that is accused of it? If it is blindingly obvious who is guilty and who is not, why did the House of Lords Economic Affairs Committee feel the need to report last year that

“we recall that we expressed our own misgivings, in the light of the evidence given to us in 2003, that safeguards for the innocent trader caught up in a MTIC fraud-tainted supply chain needed strengthening”?

My final point—

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Perhaps the hon. Gentleman would like me to go on?

My final point is about the question of proportionality. The Financial Secretary’s briefing states—this time the words are in bold—that

“interventions are closely targeted at the criminals who orchestrate, and the participants within, suspect supply chains.”

I hope that I have quoted the extracts to which he wished to draw my attention, but there must be a high incidence of MTIC fraud, indeed, if closely targeted interventions require the attention of upwards of 700 HMRC officers and still take 10 months to run their course.

In my letter to the Paymaster General on my constituent’s behalf, I questioned whether the balance between revenue protection and the burden placed on business was correctly struck. I would do a disservice to the Financial Secretary if I expected him to comment on that specific case, because he does not have any of the details in front of him and he would not be able to commit himself even if they were available to him. However, I hope that he is mindful of an old Blackstone’s maxim that

“the law holds, that it is better that ten guilty persons escape, than that one innocent suffer.”

Perhaps when the Financial Secretary replies he will be able to provide a commitment that the Government will continue to assess the proportionality of their stance on MTIC fraud, and a guarantee that future orders made by the Treasury under clause 97 will neither further erode the principles of proportionality nor blur the sharp distinction between the innocent and the guilty in which he puts such faith at present.

Photo of Roger Gale Roger Gale Conservative, North Thanet

It has already been noted that the Financial Secretary very courteously circulated both the letter and an extremely complicated but comprehensive and comprehendible briefing note about carousel fraud, which is clearly a very important issue arising from the Bill under discussion. I have quite deliberately allowed hon. Members a certain amount of leeway in the discussion, because that briefing note—I suppose this is one disadvantage of circulating a briefing note—has obviously generated further queries. Having been lenient with hon. Members making contributions up until now, I propose to be equally lenient with the Financial Secretary if he wishes to place things on the record.

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

I welcome you to the Chair, Mr. Gale, and thank you for that guidance. We have had a very wide debate on what is a very narrow clause. I shall do my best to deal with the most relevant points that have been put, but I do not intend to test your patience by straying beyond your judgment about what is in order in this debate.

I say to the hon. Members for Braintree and for Falmouth and Camborne that we remain extremely vigilant about such fraud, as the Select Committee on the Treasury and the hon. Member for Braintree urged us to be. As the hon. Member for Falmouth and Camborne urged, we remain alive to the fact that it is a rapidly evolving and highly sophisticated international criminal activity whose networks constantly change their methods and tactics. It requires HMRC officers to undertake some of the most effective and skilled work of anywhere in the Department, and I pay tribute to them and their work. I hope that the briefing that I sent to the hon. Lady and to other hon. Members underlines the point that we are alive to the fact that the situation is constantly changing. It is the underlying reason for introducing the clause, which is one of a range of measures—in this  case, a rather narrow measure—that are necessary to try to deal with the problem.

The hon. Lady asked me a couple of direct questions. I do not expect traders to seek pre-approval for transactions. The legislation that the measure amends does not and has not worked in that way since it was introduced in 2003. I should like to put matters in perspective. The provisions on joint and several liability are used when HMRC identifies a company that has traded in a supply chain that has involved MTIC fraud. In those circumstances, HMRC notifies the company, in writing, that it might face an increased risk of being made liable for VAT debts elsewhere in the supply chain.

Hundreds of those warning letters are issued and, in many cases, they deter the sort of activity that HMRC is concerned about, such as people turning a blind eye to suspect trading patterns or practices. That is proved by the small number of cases—the number is in single figures—in which HMRC has gone on to issue formal notification letters. It has gone on to issue notices of liability in only four cases. That is largely because of the deterrent effect of the warning letters.

That is how the original legislation was designed to work; the clause provides for making minor adjustments to that legislation. I want all that to be in perspective when we consider the clause. Any trader who is not satisfied with a decision taken in HMRC’s verification process can challenge it at a VAT and duties tribunal. To date, however, the courts have fully supported HMRC’s approach in that regard.

The hon. Member for Falmouth and Camborne asked about the real-time checking of transactions. Generally, the Government are prepared to consider any proposals or suggestions that might help us to tackle this fraud, but we must be conscious of the implications of putting burdens on business in doing so, and of the complexities for HMRC of managing any regime.

Real-time checking is likely to be extremely difficult, for reasons that are self-evident, such as the volumeof VAT transactions. Some 1.9 million traders are registered for VAT, and about £130 billion of VAT goes through the system. MTIC is not just about checking a particular transaction. A challenge that we face, because of the artificiality, and often the complexity and length, of supply chains, is that we have to check the entire supply chain to determine the link between the first defaulting trader and others. On first sight, therefore, real-time checking does not seem to be a terribly plausible solution, although we are prepared to consider it.

I address my next comments to the hon. Member for Braintree. I appreciate that he speaks with some passion about his constituent’s case, and I shall look into it. If there is more information on that case that I can encourage HMRC to give him, I shall certainly do so.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I appreciate the courtesy with which the Financial Secretary is trying to deal with the issue, but the bottom line—the sad fact—is that the company went out of business while the individual waited for 10 months for this serious issue to be dealt with. That is the point that I was trying to make.

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

The point that I was about to make relates directly to that concern. MTIC fraud and fraudsters have created increasingly complex and sophisticated transaction chains to disguise and allow the stealing of VAT from the public purse. They are characterised by some of the most opaque trading practices that HMRC comes across. To try to get to the bottom of this and stop it, there is a duty to check such transaction chains, which often include international links and therefore require the involvement of international HMRC-equivalent agencies. Given the complexity involved, it is not surprising that the process of focusing on the trading patterns or traders that we suspect are most at risk can take some time. It is also not surprising that the courts have consistently supported our approach to verification, including in cases for which it has taken up to 12 months to complete the verification checks.

I welcome the hon. Member for South-West Hertfordshire to the Front Bench. On our side, some are disappointed that the job did not go to the hon. Member for Braintree.

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

Indeed. The hon. Member for South-West Hertfordshire has for some time served with great diligence on Treasury issues from the Back Bench. I am sure that he can look forward to a successful and long career on the Opposition Front Bench, and I look forward with interest to watching him.

The hon. Gentleman dwelt for some time on the question of reverse charge, which is not related at all to clause 97. It is disappointing that he did not make his debut in a Statutory Instrument Committee yesterday, when the hon. Members for Falmouth and Camborne and for Wycombe and I dealt with the arrangements for reverse charge and the modifications of them. Nevertheless, before I turn to the clause, let me try to deal with some of the much wider questions that the hon. Member for South-West Hertfordshire posed.

The hon. Gentleman and other hon. Members are rightly concerned about potential burdens on business resulting from the compliance and assurance activity that is necessary to deal with MTIC fraud. We start from the recognition that the vast majority of British businesses are not involved in MTIC fraud and are doing their best to comply with the tax rules. Therefore, we do whatever we can to focus as tightly as possible on those that are behind the MTIC fraud chains and that choose to participate in and profit from the associated trading activity.

The hon. Gentleman helpfully cited the extended verification procedures. I want to stress some figures that we have, because they underline the fact that we do whatever we can to ensure that the most intense activity is focused on the highest risk, where the greatest incidence of fraud takes place. So far, of the case load that HMRC has undertaken on extended verification, it found that over 19 out of 20 traders that it targeted have been participating in or profiting from trading that is linked to MTIC fraud. To put that another way, only 1 per cent. of the VAT that has been withheld so  far under the verification programme has been found in the end to be correctly claimed and properly repayable.

How many staff are involved? Just over 1,500 staff are involved in dealing with MTIC and VAT fraud. How many traders are affected? Only a tiny fraction of the 1.9 million traders are affected by any of the extended verification procedures, precisely because we go to great lengths to ensure that the action that we take is as targeted and as focused as possible.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

May I press the Minister a little further on how many traders are affected? He said that it is a tiny percentage, but how many, broadly speaking?

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

I do not have a precise number, and it is quite difficult to give one for the particular traders that are at any time subject to the extended verification procedures. However, I hope that I have made two things clear. First, the action that we are taking is closely targeted, particularly in relation to joint and several liability. Secondly, I hope that the figures that I gave earlier show that we are dealing with a relatively small minority of the large population of VAT-registered traders—nearly 2 million—the majority of whom do their best to comply with the tax rules, and trade legitimately and pay their tax as it is due.

The hon. Member for South-West Hertfordshire talked about delays in VAT registrations. I should like to give him some sense of scale: there are almost 300,000 new VAT registrations every year. Clearly, HMRC aims to process those registrations as quickly and efficiently as possible. In order to do so, and given the evidence that the Treasury Committee took, to which he referred, HMRC has taken steps to streamline that process, particularly by targeting its pre-registration checking in order to speed things up.

So far, the outcome of those steps has been that more people are getting their applications right first time because of the improved application form and guidance. A year ago, that number was under 30 per cent., whereas it is now more than 70 per cent. Better targeting of the procedures for identifying risk has meant that about 95 per cent. of applications are now cleared for registration after the initial check. The average time that it takes to process those applications is less than 30 days.

The hon. Gentleman asked about the costs of the changes in the past year to the derogation on the reverse charge. The short answer is that they are minimal. The new de minimis limit is sufficient to deter the fraud that we seek to stop. The reduction in the scope of the goods is also needed. It concentrates on computer chips and mobile phones—the two principal products on which the bulk of MTIC fraud is perpetrated. The provisions in the clause for extending joint and several liability sit precisely alongside the reverse charge that is focused on those two products.

On the two-year lifespan of the derogation, I think that it is a good principle not to have legislation on the statute books indefinitely, and to review whether it is still needed. If, toward the end of the two-year derogation, we decide that we still need it, we will  certainly apply to extend it. The hon. Gentleman might like to know—we discussed this yesterday—that one of the Government’s obligations under the derogation is to report to the European Commission, by 31 March 2009, on the impact of our reverse charge derogation, including on its impact on this type of fraud in other countries.

Finally, the hon. Gentleman asked whether the joint and several liability legislation is contrary to the EU directive. It is not. The European Court of Justice ruled, in a recent case, that UK legislation complies with the directive and is proportionate.

Let me now address clause 97 and the provisions on joint and several liability. The clause introduces a power to amend the provisions that apply to traders that know or have reasonable grounds to suspect that VAT will go unpaid elsewhere in the supply chain. The Committee is aware that the operational strategy and the range of measures that we have put in place have greatly reduced the level of trading activity that has in recent times been associated with MTIC fraud.

The hon. Gentleman mentioned the ONS trading figures, which are produced monthly. Those trading estimates suggest that MTIC-related activity, particularly of the carousel type, over the summer last year was around 90 per cent. lower than in the latter end of 2005 and the early part of 2006. The Committee will also appreciate, because it has been discussed at length alongside the proposal to allow the extension of the joint and several liability provisions, that we have introduced a reverse charge. That is a significant triumph on the part of my right hon. Friend the Paymaster General after a year’s hard negotiation, and it is an important provision for this country.

Currently, under the Finance Act 2003, HMRC can direct that another person in the supply chain other than the seller is responsible for accounting for the VAT payable, if that person knew or had reasonable grounds to suspect that it would go unpaid. That presumption is rebuttable on proof that the price reduction is due to circumstances that are unconnected with the tax being unpaid. The new power in clause 97 will allow us to change the circumstances under which a person can be presumed to know that the tax will go unpaid. Any such change would also include a provision to lay down how the presumption can be rebutted.

I shall now deal with the new clause, then with the two amendments. The hon. Member for South-West Hertfordshire said that parliamentary scrutiny in this area is important. He is right. However, new clause 3 will not add much to the scrutiny by Parliament and is not necessary. I shall explain why. Parliament leads well established reporting and scrutiny arrangements looking at MTIC, which is the right thing to do, given the importance and scale of the problem that we face. The National Audit Office audits HMRC activities every year and, for the past two years, its section 2 audit work has specifically included a look at MTIC VAT fraud. The NAO’s work is overseen by the Public Accounts Committee, which reported on the NAO’s findings in its 2005 standard report. The NAO was subject to a PAC hearing in January this year and we expect a PAC report on this area shortly.

The House of Lords, as the hon. Gentleman has recognised, recently concluded and reported on an  inquiry into missing trader fraud in the European Union. He will know that the Treasury Committee, particularly the Sub-Committee that oversees HMRC’s work, scrutinises its operational activities and measures in this area. HMRC publishes a spring report and an annual report, both of which deal with and update activities in relation to MTIC and are laid before the Libraries of the House. Normally—it was the case with the spring report—those reports are subject to a Treasury Committee hearing.

Generally, every year alongside the pre-Budget report, HMRC produces a report on its latest measurements of indirect tax losses, including on VAT and MTIC. The ONS also produces national statistics each month, which include estimates of the effect of carousel trading on the UK’s balance of payments. In addition to all that information—that regular scrutiny—Members of Parliament can and do ask parliamentary questions to probe further. I hope that the briefing that I have supplied to Committee members, and to others who are interested, has been helpful. I have placed that briefing in the Libraries of both Houses.

We already have a significant amount of regular reporting and scrutiny. If the hon. Gentleman is still concerned that Parliament is not paying sufficient attention to this matter, I think the answer is more to step up the scrutiny and cross-examination of what HMRC is doing rather than looking for a greater frequency of figures.

With VAT, there is a problem with quarterly reports, for example. Returns and payments of VAT are generally submitted quarterly, but the return dates are staggered so that a proportion is received each month. The returns are also subject to verification checks, which means, in part, that we can check whether MTIC is suspected. I do not believe that quarterly reports of this nature would add to the useful information that is available to Parliament. If the hon. Gentleman feels that they would, despite the extensive scrutiny in this field, that is a question for the bodies in Parliament. I remind the Committee that the UK remains the only EU country that produces annual estimates of MTIC fraud. As I have said, we publish them each year alongside the pre-Budget report. I hope that the hon. Gentleman will not press his new clause to a vote.

I can deal with amendment No. 251 quite briefly. As the hon. Gentleman explains, it tries to ensure that the new power cannot be applied retrospectively. I understand his concern, but the amendment is not necessary because any order exercising that power can be applied retrospectively only if the power, in this case proposed new subsection (9A), made it clear that there was provision for it to be applied retrospectively. Since proposed new subsection (9A) does not, it cannot.

Let me turn now to amendment No. 252. It is not clear what the hon. Gentleman seeks to do and whether the amendment is intended to refer to the existing power, the new power or both in changing the procedure from negative to positive. The way in which the amendment is drafted means that it would be defective.

The existing power is to amend the scope of the joint and several liability provision by altering the goods to  which it applies. Incidentally, we have just used that power; it came into effect from 1 May. That extension passed almost without comment and no hon. Member prayed against the use of that power to extend the goods to include iPods, digital camcorders and so on. The new order-making power does not allow fundamental changes. It is about the burden of proof, not about creating a VAT liability that would not otherwise be there. Nevertheless, there is a case for considering whether it is right to stick to the approach that was set out in the 2003 legislation. There is an argument that the provisions might be better scrutinised where the order-making powers are invoked by positive rather than negative resolution procedure.

As hon. Members will know, I have always been inclined to use the positive order-making procedure where appropriate rather than the negative procedure. I have always believed that it is important that Parliament has a stronger position and power to scrutinise the decisions and legislation of the Executive. I am prepared to consider tabling an amendment on Report to make the sort of change that I think that the hon. Gentleman is arguing for—although it was not entirely clear what he is after.

I hope that that will be welcomed and will help the hon. Gentleman to believe that he does not need to press his amendments or his new clause to a vote. I warn him—this is his first outing on the Finance Bill on the shadow Treasury Front Bench—that he will not find progress as easy in future.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire 10:15 am, 7th June 2007

I thank the Financial Secretary for his generosity. On the point that he just made about positive resolution, I do not expect such generosity to be repeated regularly but I am grateful for it on this occasion.

We have had a broad and wide-ranging debate—[Interruption.]

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. The hon. Member for Surrey Heath (Michael Gove) is not a member of the Committee. He must leave the area of the Committee Room reserved for Committee members.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

As I said, we have had a broad and wide-ranging debate, thanks both to your guidance, Mr. Gale, and to the fact that new clause 3 would address many aspects of MTIC fraud. As I have suggested, any such report under new clause 3 would have to address a wide range of issues, and the Financial Secretary manfully attempted to address many of them in his remarks. However, I think that it will be found that there were a number of questions that, quite understandably, he was unable to answer this morning.

The Financial Secretary commented on the amount of MTIC fraud scrutiny that we have, and I fully take on board the fact that Parliament performs considerable scrutiny through the Public Accounts Committee, with the assistance of the National Audit Office; the House of Lords reports to which I referred; and the Treasury Committee, of which I was a member until recently.

The new clause would assist in such scrutiny, because although the information may well be available in ad  hoc or informal documents such as the briefing that was released earlier this year, in HMRC’s annual reports or in ONS statistics, it would be helpful to place it in one document. For that reason, I am inclined to press for a vote on new clause 3. I am grateful for the clarification on amendment No. 251, which I shall withdraw, and in particular for the clarification on amendment No. 252. The Financial Secretary’s comments are very much appreciated. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 97 ordered to stand part of the Bill.