Clause 74 - Zero-rating: splitting of supplies

Finance (No. 3) Bill – in a Public Bill Committee at 9:00 am on 9 June 2011.

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

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I have a couple of questions about the clause, which I hope are relatively straightforward. First, there has been speculation about whether the United Kingdom Government would need a derogation under article 395 of directive 2006/112/EC before the clause could be introduced. I would welcome the Minister’s comments on whether he believes that such a derogation is required.

In addition, the Minister will be aware that there has been some discussion between that august body that has been very helpful to the Committee, the Institute of Chartered Accountants in England and Wales, and HMRC on the implementation of the clause. Although there has been helpful discussion, and HMRC’s and the Minister’s policy intentions for the clause have been under discussion, it may help the Committee if he places on record his response to the concerns of the ICAEW. It still believes that the clause is very widely drafted and may impact far more widely than he and HMRC intend.

The ICAEW raised that concern in response to the draft Finance Bill clauses published in December, and HMRC has set out what the policy intentions are. However, it might be helpful if the Minister responded so that we have clarity outside private correspondence and discussions about the intention in the clause and the concerns raised by the institute, which is particularly anxious about the requirement for two suppliers to be connected, even if they are not aware of each other’s existence.

There is no requirement on HMRC to demonstrate that there has been a tax advantage or artificial value-shifting. Its examples in a briefing to hon. Members indicate that it believes that the following, for example, could be caught by the clause: a newspaper promotional coupon offering a 10% reduction on a restaurant meal; someone hiring electrical equipment from one supplier, who decides to purchase from another independent retailer a book on how to use it; someone having their car serviced, who decides to buy a servicing manual to check that the job has been done properly; a tutor giving a reading list to a group of fee-paying students, who then buy the books from various independent booksellers—the booksellers would not necessarily know that the purchase was linked to an exempt supply of education.

I am sure that all those matters can be easily tied down. The Minister knows that case law often considers what is said in Committee, and in the interest of clarity, we should not accept the clause until he has had an opportunity to cover those points and to put the record straight.

Photo of David Gauke David Gauke The Exchequer Secretary

The clause acts to close a VAT avoidance scheme. The changes that it makes will remove zero rating from the supply of printed matter when it is supplied in connection with services and in circumstances in which the printed matter would not have been zero-rated if both had been supplied by a single supplier. At present, the arrangements are confined mainly to a small number of large businesses, but we believe that there is scope for abuse in any circumstance in which printed material qualifying for the zero rate is supplied with a differently rated service. That is why we are acting now. The clause will have an impact only on businesses that are engaged in that sort of artificial tax planning, and will not affect those who are making legitimately separate supplies to their customers. It is estimated that this counter-avoidance measure will yield £40 million in 2011-12, rising to £60 million a year by 2015-16.

I shall deal with the points that the right hon. Gentleman rightly raised. He asked whether the measure requires a derogation to be agreed by the EU Commission. It does not. It simply ensures that the boundary of the UK zero rate for printed matter is maintained by restricting the scope and circumstances in which, but for supply splitting, it would not apply anyway. Under the terms of the principal VAT directive, the UK has the right to maintain and restrict the scope of its domestic zero rates without reference to the EU Commission.

The right hon. Gentleman asked about the point raised by the Institute of Chartered Accountants and others that the measure goes further than necessary. We believe that it has much more limited application than some of the respondents fear. It will apply only when a supply of printed matter by one person is so closely connected with the supply of services by another that the two supplies would properly have been considered to be a single supply for VAT purposes if they had been made by the same person.

The clause will have an impact only on businesses that have entered into arrangements that artificially split what would otherwise have been a single supply into two separate supplies. It will not have any impact on businesses that are commercially or economically independent of each other and making supplies that, from the customer’s point of view, are separate. Therefore, we do not believe that the measure will catch unwitting or innocent transactions.

The words “connected with” in note (2) in the clause are given a specific meaning, which is set out in note (3). In particular, the clause will have no effect unless the supply of printed matter is so closely linked to a supply of services that the two supplies would have been treated as a single supply of services if they had been made by a single supplier.

Although the rules on what constitutes a single supply can be difficult in some cases, the underlying principle, which has been repeatedly endorsed by the courts, is simple. Two supplies will be treated as a single supply for tax purposes only if they are so closely linked that  they form objectively a single economic supply that it would be artificial to split. By definition, an unwitting or innocent transaction will not be so closely linked to a supply of services by someone else, but together they constitute a single economic supply that it would be artificial to split. To be clear, the clause supports the Government’s aim of making the tax system fairer and prevents the use of an avoidance scheme that is unfair to customers and a cost to the Exchequer. I therefore urge that the clause stand part of the Bill.

Question put and agreed to.

Clause 74 accordingly ordered to stand part of the Bill.