Clause 76 - Relief from VAT on imported goods of low value

Finance (No. 3) Bill – in a Public Bill Committee at 9:15 am on 9th June 2011.

Alert me about debates like this

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

Photo of David Hanson David Hanson Shadow Minister (Treasury) 9:30 am, 9th June 2011

The clause reduces the value of goods that may be imported VAT-free from outside the European Union, including the Channel Islands, from £18 to £15 with effect for imports on or after 1 November 2011.  The Minister will know, because it says so in the explanatory notes for clause 76, that the measure is the result of low-value consignment relief, which came from EU directive 2009/132 and which exempts

“low value consignments imported from outside the EU from import VAT.”

My only question relates to the £15 figure that the Minister has set out in the Bill. Paragraph 4 of the explanatory notes for clause 76 states:

“The Directive requires the exemption to be set at a minimum of €10 (£9) but gives Member States the option of setting the limit at up to €22 (£20).”

The Minister has settled at £15, which he has estimated will bring in an additional £10 million of income, backpayable annually, to the Treasury. That relates to VAT-free imports from outside the EU, including the Channel Islands, and £10 million will be brought in with the £15 exemption, but the Minister could set a £9 exemption, which is the de minimis figure, and potentially raise additional income at a time of stringent spending cuts. Even though it is a small amount of money, why have we settled on £15? We could raise a small—I accept that—but additional, amount of money by setting the exemption at £9.

I am not one for increasing VAT generally, and we have had many discussions about this, but the measure appears to ensure that we keep resources and purchases in the EU. It is, therefore, a protectionist measure in one way. I accept that it perhaps goes against the Minister’s free-market approach, but what is the justification for the £15 exemption when he could have chosen £9 and raised a little bit more income as a result?

Photo of David Gauke David Gauke The Exchequer Secretary

The clause, as we have heard, makes changes to the operation of low-value consignment relief, with a view to protecting Exchequer revenues and helping UK SMEs compete on a more level playing field with businesses based outside the EU.

The rapid growth of internet shopping has created conditions in which the relief can be exploited for a purpose for which it was never intended. Instead of the relief benefiting small, long-standing indigenous businesses outside the EU, the primary beneficiaries of the relief are now large, often UK companies. Those companies seek to market their products to UK consumers as VAT-free by moving their logistics centres to non-EU jurisdictions, particularly the Channel Islands, or by using local mail facilitators based outside the EU to process their UK orders.

A range of low-value goods are now being supplied to UK consumers VAT-free in large quantities from outside the EU. The CD and DVD markets have been at the forefront of that trend, with most CDs and DVDs ordered online now being supplied VAT-free from the Channel Islands. However, we are also seeing significant quantities of beauty products, greetings cards, health supplements and printer cartridge ink, among other goods, being imported VAT-free in growing quantities.

As a consequence, the cost to the Exchequer of the relief has increased by 50% over the past five years, from £85 million in 2005 to £130 million in 2010. It is worth pointing out that it is a long-standing issue, and  those of us who have served on Finance Bill Committees in recent years will remember previous debates on the matter.

These costs will rise further as a result of the increase in the standard rate of VAT to 20% in January 2011, even without a further increase in underlying volumes. That trend has also had an adverse effect on UK SMEs who argue, quite understandably, that they are unable to compete with large companies that are operating VAT free in the Channel Islands and elsewhere. Since we announced that the operation of low-value consignment relief was being reviewed last July, I have received a significant number of representations from such businesses, particularly in the music industry, to address the issue. I have a great deal of sympathy for the points that those companies made. The Government recognise that there is a very difficult balance to be struck between delivering fairness in the tax system and ensuring that any new arrangements can be enforced effectively and efficiently, at a time when we are looking for savings in the cost of public administration. We will not, however, tolerate exploitation of the relief for a purpose, and on a scale, for which it was never intended.

We are therefore pursuing a twin-track strategy to stop such exploitation. First, clause 76 amends the Value Added Tax (Imported Goods) Relief Order 1984 to reduce the threshold to £15 from 1 November this year, which is expected to raise £10 million for the Exchequer in 2012-13, rising to £15 million in 2015-16. Secondly, we are exploring options with the European Commission to limit the scope of the relief to prevent its exploitation, including the possibility of seeking a derogation from the usual EU rules on low-value consignment relief. We will return to the issue of the appropriate level of the threshold in Budget 2012, if discussions with the European Commission do not produce a workable solution to the problem of exploitation of the relief, with a view to reducing the limit further.

I recognise the point made by the right hon. Gentleman. Some would have liked us to go further today by reducing the threshold to £9, which is the lowest level available under EU law, or even by withdrawing the relief from mail order goods altogether. The previous Government did not take action in that area, and I considered the options carefully when reviewing our policy on relief for low-value consignments. I believe that exploring a more targeted approach to tackling exploitation of the relief with the European Commission is the best way forward, potentially allowing a better balance to be struck between the cost of enforcement of new rules by the Government and Royal Mail, and tackling the adverse impact of low-value consignment relief of the Exchequer and UK SMEs.

The Government are committed to ensuring fairness in the tax system. We are determined to tackle the exploitation of low-value consignment relief, and the clause represents the first step towards achieving that objective.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful for that explanation. However, in passing, I note that this Government and the Minister have increased VAT to 20% on a range of goods across the board, which is hitting people on lowest incomes hardest. They have an opportunity, under EU law, to adopt a lower threshold to address the VAT relief, where people are paying no VAT on importing goods  into the EU, but the Government have chosen a figure of £15 as the de minimis requirement, rather than £9, which they could have chosen. They raised £10 million by reducing the figure from £18 to £15. That is a small amount of money, but further money still could have been raised by reducing it to £9, as allowed by the EU.

I will support the threshold of £15, and I did not table an amendment for the figure of £9. I cannot understand, however, why the Minister will not maximise the level of income by making a level playing field, so that we do not undermine British manufacturers who are producing goods such as CDs in this country by allowing the import of VAT-free goods made outside the EU at a lower cost. That strikes me as completely unfair, and I cannot see the logic of the Minister’s decision not to use the lower figure. However, those points are made in passing and no amendment has been tabled, so we will accept the figure that the Minister has produced.

Photo of David Gauke David Gauke The Exchequer Secretary

Will the right hon. Gentleman give way?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Let me make one final point, before the Minister intervenes. He has used the word “derogation” a number of times today. I find it amusing that he seeks derogations for this, that and the other, for clause 76, and for everything else. However, when my hon. Friend the Member for Bristol East talked about a derogation for VAT on fuel, we were told, “It can’t be done. It’s impossible to do so.” It seems that derogations can happen when the Minister wants them, but when he does not, he does not wish to pursue them. In the spirit of co-operation on this matter, however, I will give way to the Minister.

Photo of David Gauke David Gauke The Exchequer Secretary

If the right hon. Gentleman really wants to return to the Opposition’s farcical policy on a VAT derogation on fuel, let him do so. The previous Government did nothing on this. The right hon. Gentleman might want to ask former Ministers why, but if we simply lower the limit to £9, we impose a significant additional administrative burden in relation to packages that come into the UK. There is likely to be a behavioural response which means that packages will still be below that £9 limit. The more effective approach is to take a first step by reducing the limit to £15. We think that that gets the balance right. Essentially, the desire to go to the EU to explore what opportunities lie in a better targeted low-value consignment relief system for the UK is a sensible approach. After years in which nothing happened, this Government are doing something about this.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I want to lay to rest the argument that because a previous Government did not do something about it, that is the history of the world per se. I could argue that Ted Heath or Margaret Thatcher did nothing about it. Life moves on, and people take decisions at different times about different issues.

Photo of David Gauke David Gauke The Exchequer Secretary

It may have slipped the right hon. Gentleman’s mind, but there was not an awful lot of internet shopping going on when Margaret Thatcher was Prime Minister.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

It just shows what a fabulous improvement there was in terms of range and opportunities under the previous Labour Government, and how many more people have access to computers thanks to schemes that  we brought in, including in libraries and everywhere else. It is also delivered by a publicly owned postal service, which was maintained under the Labour Government. But that is by the by. I have made my point on this. I think that the Minister is missing an opportunity to raise a small but important amount of money. I hope that he will consider bringing forward the proposals to reduce the de minimis figure as soon as practicable.

Question put and agreed to.

Clause 76 ordered to stand part of the Bill.