Amendment moved (this day): 5, in schedule 3, page 75, line 7, at end insert
(10) Paragraphs 2(3) and (4) shall not apply where the supplier can demonstrate that the terms of its contract does not permit additional VAT to be charged (i.e. if the contract provides otherwise for the purposes of paragraph 21(2) of this Schedule) and that at the time the contract was entered into the supplier had no intention or knowledge that it would become connected with the person to whom the supply is made..(Mr. Gauke.)
I remind the Committee that with this we are taking the following: amendment 6, in schedule 3, page 77, line 8, after persons), insert save for section 839(5)(b).
Amendment 7, in schedule 3, page 77, line 19, at end insert
(c) may only apply to supplies made after the date of such order or where supplies have been contracted to be made prior to such order and the contract allows for additional consideration to be paid.
It is a pleasure to welcome you back to the Chair, Mr. Atkinson. As I am sure you would expect, Sir Nicholas Winterton kept us in order this morning in his inimitable way, but we are delighted to see you back.
As I stated this morning, and as Sir Nicholas pointed out, we debated clause 9, which deals with the temporary cut in VAT from 17.5 per cent. to 15 per cent., on the Floor of the House, and I have no intention of running through all those arguments again. I will merely add that those of us who were concerned about the state of the public finances take no reassurance from this mornings news that public sector net borrowing has increased substantially for April and is at record levels, and that the ratings agency Standard and Poors has revised its outlook for the UK to negative, due to borrowing concerns. The agency has said that Britains triple A rating for its Government bonds was at risk if the next Government did not produce a credible plan to put Government debt on a secure downward trajectory. Our concerns about a discretionary fiscal stimulus appear to be further vindicated.
The hon. Gentleman will know that Standard and Poors has reaffirmed the triple A rating for the UK, but has he also seen that, since the publication of the Standard and Poors view, both Moodys and Fitch Ratings have also reaffirmed their view of a stable outlook for their triple A rating? Standard and Poors is on its own on that.
I am grateful for that intervention; none the less, the announcement from Standard and Poors this morning is a timely warning that the public finances are in a perilous state and that the current level of borrowing is clearly unsustainable. I know that you do not want me to dwell on whether the VAT cut was wise, Mr. Atkinson, so I will turn to schedule 3.
Given the changes in VAT and the fact that it will return to 17.5 per cent. on 1 January, we accept that the Governments concern about potential forestalling and their desire to prevent the advancing of the time of supply on standard rated supplies are legitimate. Consequently, and given where we are, we have no objections to the measures in schedule 3, as they are perfectly reasonable.
However, the Law Society has brought a couple of concerns to our attention, and it might help the Committee if I outline them. We have sought to bring the Committees attention to those concerns by tabling amendments 5, 6 and 7. If the anti-forestalling provisions in schedule 3 are to apply, certain conditions that need to be fulfilled, which are set out in paragraph 2. The first condition is that
the supplier and the person to whom the supply is made are connected.
The second condition is that the relevant considerations come to more than £100,000. The third condition is that
a prepayment in respect of the supply is financed by the supplier or a person connected with the supplier
I am simplifying the matter a little, but that probably serves the purposes of the Committee. The Law Societys concern relates to condition A. It says that the test of connection, already wide, has been extended by a recent case, Kellock Brown. Indeed, the society has raised the possibility that some banks in partial public ownership and indeed, the state may be connected for the purposes of the test. I will be grateful if the Minister can respond to that point.
There may be a danger of condition A applying more broadly than is intended. Our amendments are intended to solve the potential problem of the provision applying where the supplier had no intention or knowledge that they would become connected to the person to whom the supply is madepeople may find themselves caught up in the provisions when that was not the intention. We tabled amendments 5 and 6 to highlight that issue and obtain the Governments response.
Our second concern relates to paragraph 10 of the schedule. Our first point is that we are back in the era of Henry VIII clauses, in that it will be possible to amend primary legislation by order. That is something about which, traditionally, the House as a whole has always been concerned. Those of us who served on the Committee on the Banking Bill will remember similar concerns being expressed, and the Economic Secretary and I debated Henry VIII clauses at some length. There is recognition of the potential problem with parliamentary scrutiny arising from any Henry VIII clause. In the case of the Banking Bill, the Minister set out his reasons for why there might be a need to amend legislation to deal with particular casesindeed, if I recall correctly, that section of the Banking Act 2009 is now being used quite extensively in relation to the rescue of Dunfermline building society. The use of Henry VIII clauses is, none the less, a concern that hon. Members on both sides of that Public Bill Committee raised, and I raise it again here.
The second element of concern about paragraph 10 is that there is nothing in the paragraph that would prevent the Treasury from making an order that is, to some extent, retrospectivenothing that would prevent an order from applying to a supply that occurred before the date of the order. That concern was also raised by the Law Society, which we attempt to address in amendment 7, which provides that any order made under paragraph 10 should apply only to supplies made after the date of the order, or where there is a contractual provision enabling it to be varied subsequently. We think that that answers the concern. It may well be that the Government would not, in any circumstances, use the order in a retrospective manner, and we would welcome an assurance to that effect. Otherwise, I would be grateful if the Minister outlined the circumstances in which the Government would make an order that was not in compliance with amendment 7. That would be helpful to the Committee.
Subject to those technical points, we have no particular objections to schedule 3, for the reasons that I outlined earlier. However, we think that we have expressed legitimate concerns that we hope the Minister will be able to answer, perhaps by accepting the amendments.
I shall not speak at length, Mr. Atkinson, because the points that I had wished to make were either made in detail in the main Chamber of the House, or made a few moments ago by the hon. Member for South-West Hertfordshire.
My party also did not approve of the temporary VAT cut. We did approve of a fiscal stimulus, but we thought that the money could be better spent than on a reduction in sales tax. That reduction is worth approximately £1 billion a month, depending on what people choose to buy. That is a substantial amount of money, which, as I have said, we felt could have been spent more constructively. Having said that, we are where we are. The Government have implemented that policy of a reduction in sales tax and it seems reasonable to us that the anti-forestalling measures outlined in schedule 3 be put into effect to ensure that people pay the tax that they are expected to pay.
The Conservative amendments strike me as reasonable, but I would be interested to hear the Ministers response to them. He may feel that there are practical difficulties and that the amendments are too loosely defined in their scope. If that is the case, they may not be appropriate. I look forward to hearing what the Minister has to say on those amendments, but my party supports the schedule as a whole.
I only have a couple of questions for the Minister. My hon. Friend the Member for South-West Hertfordshire mentioned the concerns of the Law Society. I would like to mention the concerns of the Institute of Chartered Accountants in England and Wales.
Some of the institutes concerns overlap with those of the Law Society, such as the wide definition of connected persons. However, the ICAEW raised another question that is valid to ask here. What is the basis of the assumptions underlying the schedule about the potential scale of abuse? The ICAEW makes a very good point that, without that type of evidence, the nine pages of anti-avoidance legislation that are before us seem a disproportionate response to what is only a 2.5 per cent. adjustment.
Welcome back to the Chair of our Committee, Mr. Atkinson.
I am grateful to all the hon. Members who have spoken today to express general support for the measures in the schedule. As we have discussed, the reason for the temporary reduction in VAT was to deliver a fiscal stimulus to the economy in a timely, targeted and temporary way, and that stimulus is working. The hon. Member for South-West Hertfordshire drew attention to some economic news this morning. He may also have noticed the Office for National Statistics retail sales figures published this morning showing continuingindeed, I would say remarkablestrength. Retail sales volume is up 2.6 per cent. on the year. In very stark contrast to what happened to retail sales figures in the last recession, over the past six months retail sales volume has grown by almost 2 per cent. In the last half of 1991, which is a comparable period to now, that figure fell by 2 per cent. So that 4 per cent. difference in retail sales volume over a six-month period is the difference.
I am delighted to do so, Mr. Atkinson.
In introducing a temporary VAT reductionthe benefit has been explainedbusinesses would have advance notice of a rate rise, so they could attempt to arrange their affairs so that they paid VAT at the reduced rate on goods and services provided after the rate goes back up. Hon. Members have rightly acknowledged that that is what the schedule addresses.
To respond to the hon. Member for Henley, on previous occasions when the VAT rate changed, we saw arrangements providing for prepayments of well over £100 million covering future supplies over many years. Recent comments from businesses and tax advisers made it clear that anti-avoidance rules were needed to thwart those arrangements. We estimate that £400 million of revenue could be at risk if such measures are not taken. On 25 November, I announced that legislation effective from that date would be introduced in the Finance Bill to protect the public finances from such artificial avoidance. We intend to stop arrangements designed to avoid payment of tax, but to leave genuine commercial transactions unaffected. I hope that I will be able to persuade the Committee that we have achieved that.
What the schedule does is enact what I said in my statement of 25 November. Our intentions and approach were set out in that statement. The draft of the schedule was published, I think, a couple of weeks before the Budget, so there has been ample opportunity to respond, and so far, as far as I know, no one has come forward with alternative proposals. Of course, if there were some alternative ideas, we would be interested in seeing them. The schedule contains the distillation of learning from 20 or more years of experience, and I think the judgment has been got right.
We listened to a number of comments that were made and we have made some changes as a result.
Let me just underline this point because it helps to deal with the concerns raised. As a backstop safeguard, there is a power in paragraph 15 of the schedule to remove transactions from the scope of the provision by order, so that unintended effects can quickly be rectified. If someone came forward with a particular kind of perfectly legitimate commercial transaction that would be impeded by the schedule, we could use that power to remove such transactions from the scope of the schedule.
I have a genuine query. The Minister talked about experience in this area. The focus is principally on the return of VAT to 17.5 per cent., but did any problems arise when VAT was reduced from 17.5 per cent. to 15 per cent.? Was there a loss to the Exchequer because the equivalent of that type of provision was not in place at the time?
I do not think that there were difficultiescertainly not along the lines referred towhen the rate was reduced. When tax is going to go up, opportunity arises, and there is clearly a benefit for people who can organise their affairs artificially so that they can do the transaction now, rather than after the tax increase. The difficulty arises in cases where the base of the tax is expanded, which is what happened at the end of the 80s when there was quite a lot of forestalling. As I said, some £400 million of revenue could be at risk, and the Committee will accept that we would be negligent if we allowed loopholes to be created, or doors to be opened to avoidance.
Let me pick up the point that the hon. Member for South-West Hertfordshire raised about whether there would be an impact on banks part-owned by the Treasury. We are not aware of any prepayment or similar transactions between the banks now partly in public ownership that could fall within the scope of this legislation, nor is there reason to think that such transactions are likely. His point about connectedness might arise, but there is no transaction that is likely to cause any difficulty and, as I said, if there were we could use paragraph 15 of the schedule to deal with it.
Amendments 5 and 6 would limit the connected parties test in certain circumstances. It would not be difficult to set up prepayment arrangements, particularly between connected parties, to enable large amounts of transactions to escape the effect of the VAT rise. When parties are connected, it is not clear in which circumstances there would be a need for prepayments as opposed to any other method of financing that they might arrange between themselves, so the legislation needs to provide a robust defence against such artificial arrangements. I suggest that the amendments would weaken the protection of the connected parties test and could open the door to avoidance.
Amendment 5 would introduce an intention test into the legislation. I understand the reason and the fairness argument for that, but in practice it would be very difficult to assess intention. For obvious reasons, we cannot be sure that tax avoiders would be wholly frank about their intention if the success of some tax avoidance depended on it. Introducing such a test would create uncertainty for taxpayers and for Her Majestys Revenue and Customs, and the circumstances for which the amendment is designed are unlikely to be common. I hope that the Committee accepts that it would not make sense to introduce uncertainty when the number of transactions is small. In any case, as I have said, the schedule allows transactions to be excluded by order if we come across transactions that would be effective.
Amendment 7, as the hon. Gentleman has set out, prevents retrospective orders from extending the scope of the measure. I think that I can give him the reassurance that he seeks, making the amendment unnecessary. Paragraph 10 does not permit retrospectionit would not be possible. To have the power to amend legislation by order retrospectively, the primary legislation needs to give a power of retrospection which the paragraph does not explicitly give. We do not intend to apply such orders retrospectively. Perhaps the fact that I have said that might help the hon. Gentleman.
I hope that I have covered the issues raised by the three amendments, and that I have persuaded the hon. Gentleman that he can safely withdraw the amendments.
I thank the Financial Secretary for his response. I note his remarks about connectedness and about how amendments 5 and 6 might weaken the provisions, although proponents of the amendments might say they would narrow the provisions. I recognise his point about an intention test resulting in some uncertainty, but the amendments have helped to flesh out the Governments position.
I am also grateful for the right hon. Gentlemans remarks about paragraph 10, for his comments that it is implicit that there is no retrospective right to amend unless the primary legislation allows that, and his assurances that the paragraph will not be used for retrospective purposes. I am still uneasy about such a Henry VIII clause, but the argument that presumably he would makethat it could only apply in narrow circumstancesmay be reasonable here. Consequently, I beg to ask leave to withdraw the amendment.