Clause 22

Finance (No. 2) Bill – in a Public Bill Committee at 6:45 pm on 26th October 2010.

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

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Clause 22 also amends group 8 in schedule 8 to the Value Added Tax Act 1994 to update the status of the provider of a zero-rated passenger transport service that operates in connection with the supply of  postal services. The clause also amends group 3 in schedule 9 to the same Act, restricting the scope of exemption to supplies of public postal services and incidental goods made by a universal service provider. The exemption will apply only to suppliers of services made under a licence duty, including those pursuant to a licence duty if the USP allows private postal operators access to its postal facilities. We welcome legislation to amend the VAT exemption following the case of TNT Post UK Ltd in the European Court of Justice. There is no difference between us on this particular issue, but I want to ask the Minister a number of questions.

Unlike with the previous two clauses, which were passed without controversy and on which I received no representations from the industry in my capacity as an Opposition spokesman, I have received some comments from bodies in connection with clause 22. It is important that we examine those concerns, given that that is the purpose of such a Committee, and that the Minister at least places on record his response to them.

The main representation we have received is a note from the Chartered Institute of Taxation, a copy of which I am sure the Minister will have seen. The institute’s submission to HMRC at the time of the consultation—the note is dated 3 September 2010—states that it has concerns arising from the fact that the clause is too widely drafted. It states that the clause could

“lead to relatively minor terms in an agreement for postal services affecting the application of the exemption.”

It emphasises that it is only the terms that might impact on the ability of firms other than the universal service provider to compete that are taken into account. I would welcome the Minister’s response to those concerns.

Secondly, the Chartered Institute of Taxation has raised the issue that disputes could arise between taxpayers, who might take the view that a service was freely negotiated, and the post office, which considers that it was not and that it is therefore within the exemption. Again, it is important that we consider that particular point, which is made in the letter of 3 September from the Chartered Institute of Taxation. The institute says that the emphasis should be on ensuring that the Bill is as clear as possible. Although we have not tabled amendments to the clause, this is an appropriate moment for the Minister to give clarity on those particular points made by the Chartered Institute of Taxation.

Aside from the letter of 3 September sent to Ms Jane Hyde of HMRC, I would welcome the Minister’s view about what impact assessment the Treasury has carried out on the impact of the clause on Royal Mail’s customers who are purchasing the relevant services and will now have to pay VAT. That might be referred to in the documentation, but given that I have been flitting between the Chamber and Committee, I have not noticed whether that is the case. I would welcome some consideration of whether a proper impact assessment has been undertaken and what its outcome was.

This is a speculative comment, because the House will shortly consider plans on the full privatisation of Royal Mail, but I wish to clarify whether the clause is fully provided for in the event of both Houses agreeing to the further privatisation of Royal Mail in the future. Will the clause have any impact on the current and future status of Royal Mail?

Subsection (1) sets out that a universal service provider is defined within the meaning of the Postal Services Act 2000. I expect that that Act will be changed as a result of the Postal Services Bill, which the House will consider shortly. I want to clarify whether the clause and any future changes to legislation will be compatible. Obviously, the Opposition will take a very strong and robust view on the Postal Services Bill. However, I wish to know what consideration the Minister has given to the issue, because a number of matters relating to the universal service provision, which is referred to in the clause, require at least some consideration by him. I would welcome him referring to the points raised in the letter I mentioned, as well as his comments on the impact assessment and, indeed, on the Postal Services Bill.

Photo of David Gauke David Gauke The Exchequer Secretary 7:00 pm, 26th October 2010

As we have heard, clause 22 amends the existing VAT legislation in relation to supplies of postal services by Royal Mail to remove some of its services from exemption. It also amends the law relating to zero-rated passenger transport services made by Royal Mail by replacing an obsolete reference to the Post Office company. Royal Mail, as the only public postal service provider in the UK, has historically been eligible to exempt from VAT all its postal services, including those provided by any of its wholly-owned subsidiaries. However, postal services provided by other postal operators, both before and after full deregulation of the postal sector in the UK on 1 January 2006, are liable to VAT at the standard rate.

Following a challenge from one of Royal Mail’s competitors, the European Court of Justice confirmed in April 2009 that Royal Mail, as the operator providing the public postal service, is the only body in the UK that is eligible to exempt postal services from VAT. In drawing that conclusion, the Court recognised that many of Royal Mail’s services are subject to regulatory conditions and requirements that have been imposed only on Royal Mail under the terms of its licence, and not on any other postal operator.

Photo of Chris Evans Chris Evans Labour, Islwyn

It is a pleasure to serve under your chairmanship, Mr Caton

I want to pick up the point that my right hon. Friend the Member for Delyn made about the Postal Services Bill. There has been speculation that TNT or Deutsche Post could take over the running of the Royal Mail through a wholesale privatisation of the service. What effect would that have on the European Court of Justice’s judgment, and did the Government take legal advice in advance of the Bill’s Second Reading tomorrow?

Photo of David Gauke David Gauke The Exchequer Secretary

The right hon. Member for Delyn also made several points about the Postal Services Bill. I am sure that you will be pleased to hear, Mr Caton, that I have no intention of opening a debate on that Bill this evening. Many hon. Members will recall that Lord Mandelson pushed forward such proposals not so long ago, albeit sadly without achieving much. Provisions for the universal service provider exist in other European member states, and there is an opportunity for zero-rated arrangements in those areas. We anticipate that that will be the case, even if there is a change in structure.

The matter is not directly relevant to these changes, but there is no reason why the clause could not be implemented in law. If there is a need to examine the matter again, we will have to do that on a case-by-case basis, depending on the circumstances and arrangements. However, for example, there is no reason why the fact that VAT is not payable on stamps should change where there is a universal service obligation on Royal Mail.

It is worth pointing out that Royal Mail operates under a significantly different legal regime from that of its competitors, but the European Court of Justice ruled that the exemption does not apply to supplies made by Royal Mail for which the terms have been individually negotiated, or which can be dissociated from the service of the public interest. The Court’s ruling means that the exemption for postal services must be applied on a narrower basis, and the clause applies that from 31 January 2011. That date reflects the need to regularise the position as soon as possible while giving Royal Mail sufficient time to make the necessary IT changes.

Most of Royal Mail’s services will remain free of VAT, including stamps and normal deliveries—so-called social mail—so private individuals will be largely unaffected. Those services provided by Royal Mail that are not subject to price and regulatory control in the public interest, or which are individually negotiated, will become liable to VAT at the standard rate. The principal services affected are Parcelforce, door-to-door mail—that is unaddressed mail—Mailroom and other contract services. The customers who will be primarily affected will be those businesses and other bodies that purchase the affected services from Royal Mail and are unable to reclaim all the additional VAT incurred. The Government have consulted Royal Mail, as the sole provider of the affected services, as well as the Postal Services Commission and representatives of the private postal markets.

The Government are mindful of the possible impact of proposed changes to the regulatory framework for postal services and have noted the comments made in response to the consultation, including by private operators. We will therefore review the VAT legislation in mid-2011, in line with any changes being made to the regulatory framework, and take action as appropriate to ensure that it supports the development of a fully competitive postal services market.

The right hon. Member for Delyn mentioned disputes arising over the application of the exemption. We will consider those case by case, but do not expect minor changes to affect the exemption. He also asked whether the exemption was too widely drafted and whether it would be a barrier to competition. VAT not being a barrier to competition is the key to the development of the postal services industry. We will continue to keep the VAT position under review as the regulatory framework develops, as I have mentioned.

Retaining certain services within the exemption, pending their deregulation by the market regulator, is consistent with the court’s decision and ensures that the VAT treatment does not give rise to any unwelcome distortive effects.

I was asked whether there was an impact assessment—there is not. It is normal practice to publish an impact assessment on significant policy changes, but this is a  unique set of circumstances, with essentially only one taxpayer directly affected and having to incur compliance costs. As such, much of the information on costs and qualitative impacts, if published, could be directly attributed to Royal Mail. Such information is subject to considerations of commercial confidence and taxpayer confidentiality. The information that we could have published in an impact assessment has been published elsewhere. For those reasons, no impact assessment has been published.

I should like to say a word about Postbus. The clause also amends the law relating to the zero-rating of passenger transport by Royal Mail to replace an obsolete reference to the Post Office company with the designation “universal service provider”. In practice, zero-rating applies to Postbus, which is a rural bus service that Royal Mail provides in conjunction with its postal services. The scope of the zero rate remains unchanged as a result of the amendment.

Although the clause removes the zero-rating of some of Royal Mail’s services, everyday use by private individuals will remain largely unaffected. I hope that the Committee will support the clause.

Photo of Chris Evans Chris Evans Labour, Islwyn

I return again to the Postal Services Bill, in which it is proposed that Post Office Ltd and the Royal Mail should be separate companies, with Royal Mail being privatised and the Post Office remaining—there are suggestions that it could be run as a mutual or remain in public hands. If the proposal goes through, will it have any effect on the clause?

Question put and agreed to.

Clause 22 accordingly ordered to stand part of the Bill.