This is a brief foray into the heady world of VAT for me, as my hon. Friend the Member for South-West Hertfordshire, who would normally lead on this, is debating with the Economic Secretary the matter of preparing Britain's economy for the future. Therefore my remarks on VAT will be mercifully brief. Clauses 75 to 78 and associated schedule 36 introduce some changes to the way VAT is accrued and effectively implement a package of changes that govern the place of supply for VAT purposes. From 1 January 2010, the basic place of supply for services for a business-to-business transaction will become where the customer is established. This is a change from the existing rules, where it is where the supplier is established. It is a significant change and will require some change to how suppliers account for the VAT on goods. There are various exemptions, which I shall not go through, about restaurant and catering services, intermediary services and transport of goods. However, there are some administrative issue that I do want to touch upon.
Kevin Misselbrook, the customer services director for Access Accounting said:
With these new rules, businesses will have to track the dates of delivery that the services were provided, and account for VAT accordingly. Things get really complicated with invoices that cover multiple deliveries of services, or those occasions where the service dates change...This will place an even greater burden on business at a time when what they really need is help and support as they steer their way through the current recession. Indeed many organisations may not currently be aware that the new VAT rules will be coming into force.
He is keen to make sure
that this issue is not buried within the Budget.
Will the Financial Secretary set out what will be done to ensure that businesses supplying services to other businesses cross-border are aware of those changes? We will touch on the European sales list later. There are winners and losers in the changes to the place of supply. While those changes will reduce many businesses need to reclaim non-UK VAT or register elsewhere in the EU, businesses that are unable to recover all VAT on purchases, such as those in the financial sector, could see an increase to their cost base as services not currently subject to UK VAT are required to be reverse charged.
Many businesses are already considering the requirements and planning for the changes, although some points of detail remain to be resolved. There are some administrative changes here, so would the Financial Secretary indicate what assessment the Treasury has made of the cost of introducing them on businesses, because VAT is a complex issue? He will know that a great friend of mine is a VAT expert[Interruption.] The hon. Member for South Derbyshire looks at me questioningly, but even I get lost when discussing VAT. It goes way beyond the running joke of the VAT treatment of Jaffa cakes, because there are some complex issues here that businesses need to grapple with. What assessment have the Government made of the cost of introducing those changes, and what work will they do to ensure that businesses are aware of the impact of those changes?
Clause 75, along with clauses 76 and 77, implements a package of changes to the VAT treatment of cross-border trade. It was agreed by European Finance Ministers in 2008. The clause introduced schedule 36, which changes the place of supply rules for cross-border supplies of services, and it is worth bearing in mind that it is purely about services. Those rules determine where VAT on the cross-border supply of services will be due, and from whom. They apply across the European Union, so avoiding the possibility of double taxation or non-taxation. We are also taking an opportunity to consolidate the rules so that they are more sensibly grouped together in the Value Added Tax Act 1994.
Those changes will modernise the EU VAT rules to ensure that they keep pace with changes in business practices, the impact of globalisation and advances in technology. A package of changes to simplify and modernise VAT treatment of cross-border trade was, as I said, unanimously adopted. The new rules are part of that package agreed in February 2008 and will be phased in from 1 January 2010. They aim, as far as possible, to achieve taxation at the place of consumption, so ensuring that UK VAT is paid on supplies made to UK customers regardless of where the supplier is located. I think that the new rules better achieve the aim of taxing services where they are consumed. They ensure that in the future UK VAT will apply to most services supplied to UK customers.
The hon. Member for Fareham, perfectly fairly, relayed concerns that had been expressed about aspects of the clause. If we had had those discussions much earlier in the process, many more concerns would have been expressed. People feel that Her Majestys Revenue and Customs, by and large, has done quite a good job in dealing with some of the potential difficulties for small businesses. He raised a question about the time of supply. The objective of the change in the time of supply rules on the cross-border supply of services is to align the time at which the supplier includes a transaction on the European Community sales listwe will talk about that shortlywith the time at which a customer will have to record that transaction as a reverse charge on the VAT return.
The hon. Gentleman asked what the cost of all that will be. An impact assessment was published on Budget day detailing the estimated cost to businesses of implementing the measures in the clauses. It is estimated that up to 220,000 businesses will be affected. They will need to understand the changes and adapt their existing accounting systems. The continuing annual costs are thought to be in the region of £5 million, making an average quantified cost of just less than £90 per business, which will vary depending on the extent to which a business is affected by the changes. The impact assessment also included a one-off cost of almost £30 million for an estimated 1.3 million VAT-registered businesses to spend an hour just checking that they are not affected by the requirement to submit the EC sales lists. We are talking about a total cost of some tens of millions across businesses.
HMRC is taking an active approach to informing businesses about the changes. The hon. Member for Fareham rightly asked how we can be confident that people will know about the changes. It is important that we achieve certainty at as early a stage as possible for changes of this kind. We were the first member state to publish legislation and interpretationon 22 December. We published initial guidance on 1 May, covering all aspects of the cross-border VAT changes coming into effect on 1 January 2010, and that guidance will be updated as further queries are highlighted or issues already identified are resolved. HMRC and Treasury officials will continue to discuss any outstanding issues of interpretation and implementation.
The arrangements will apply to the whole of the European Union. There have been concerns about whether every country will be as timely as we will be in implementation. The indications are encouraging on that front, at least as far as the bigger countries in Europe are concerned. It has been suggested that there could be some points of details on which there could initially be some differences of interpretation, and HMRC will be ready to talk to businesses about those if they prove to be a difficulty. It is perfectly possible that there might be some teething problems, but HMRC will understand if businesses face a little difficulty to begin with because of issues of the kind that the hon. Member for Fareham has referred to. We are talking to others at the Commission to ensure that businesses receive clarification as quickly as possible.
I shall finish, perhaps slightly self-indulgently, by quoting an accounting firm that praised HMRC for the open and pragmatic approach being taken here. I have mentioned that we were the first to publish the legislation. HMRC has done a good job. I am not saying that there will be no difficulties, but they will be manageable and minimal.