‘Allowable deductions from duty payable
11A (1) A taxable person shall be entitled to reduce the amount of duty payable in an accounting period by an amount equal to the irrecoverable VAT brought about solely as a result of changes to the VAT liability of income from Machine Games resulting from the introduction of the duty (“Newly Irrecoverable VAT”), to be calculated as follows:
(2) “Newly Irrecoverable VAT” for the purposes of sub-paragraph (1) will be calculated as follows:
(a) at the time the taxable person carries out the “longer period adjustment” calculations and capital goods scheme adjustments for the purposes of Part 14 to 16 of the VAT Regulations 1995, he shall, in accordance with the method in place under those Parts, for that longer period, identify—
(i) the amount of irrecoverable VAT incurred during that longer period based on income from Machine Games being exempt for VAT purposes; and
(ii) the amount of irrecoverable VAT that would be incurred had income from Machine Games remained liable to VAT at the standard rate;
(b) Newly Irrecoverable VAT will be calculated by subtracting the amount under (ii) above from (i) above.
(3) On each duty return in the year following the VAT longer period adjustment, a taxable person shall be entitled to provisionally reduce the amount of duty payable by an amount equal to one quarter of the amount calculated under sub-paragraph (2) above.
(4) At the end of the year in which provisional quarterly reductions have been carried out under sub-paragraph (3) above, a taxable person shall carry out the calculation under sub-paragraph (2) above and compare it to the total provision reduction for the year. Any difference shall serve to increase, or decrease, the duty due in the accounting period in which the calculation is made.
(5) Should the reduction of the amount of duty payable arising from Newly Irrecoverable VAT result in a negative amount of duty in any accounting period the provisions of paragraph (10) (negative amounts of duty) shall apply.
(6) For the purposes of this paragraph, any references to terms imported from Part 14 to 16 of the VAT Regulations 1995 shall have the same meaning as defined in those Regulations.’.
That schedule 24 be the Twenty-fourth schedule to the Bill.
Members will be aware of the industry concerns which have been raised about the potential impact of the machine games duty. Industry representatives have highlighted various flaws in the Government’s proposals. They believe it will result in an increased tax burden on small businesses in the amusement sector, which has already been struggling in recent years, with the closure of more than 280 arcades over the last 18 months.
The introduction of the MGD, at a rate which is too high to be sustainable, will also impact on bingo halls, pubs and clubs across the country. Bingo is one of the most popular pastimes in the UK, with 3 million people making around 48 million visits to bingo clubs in 2010. The role of bingo clubs in local communities is well recognised, and I know many of my constituents really look forward to their regular game of bingo, partly for the chance to earn a few pounds, but mostly for the opportunity it provides to socialise with friends. Often, this is the only opportunity some older constituents have each week.
Industry representatives have highlighted that 180 bingo clubs closed between 2005 and 2010, and that if the MGD is set at a rate above 20%, it could lead to a further 100 or more clubs closing, with a loss of over 2,500 jobs.
These amendments set out a solution by allowing businesses to net off irrecoverable VAT against MGD, and ensuring that MGD rates are set at a realistic level. The amusement industry sector believes that the current structure of two rates will not achieve the objectives sought by the Treasury. In particular, it highlights the vastly different business models that exist for small businesses in the amusement sector, which means the impact of irrecoverable VAT will vary from business to business.
The bottom line appears to be that an industry built on small businesses, many in seaside locations, is in a perilous state and needs a little extra help to get through this difficult period and sustain important jobs in rural areas in the process. I will be interested to hear the Minister’s response to the proposal.
My hon. Friend referred to rural areas, but he might be surprised to learn that I have a seaside in my urban constituency. Like many other places, it has suffered in recent years and is suffering now, perhaps because of people’s desire to go elsewhere for the sun. Does he agree that that kind of imposition on small businesses is serious and will make it more difficult for such areas to flourish?
To crack on, the second amendment that we have tabled is important because the rate of machine games duty is critical. Representatives of the bingo and amusement arcade industries are united in the belief that MGD at 20% would be unfair and would damage businesses. Members will be aware of research conducted by Ernst and Young that shows an annual burden of more than £9 million in the current tax regime for bingo if MGD is introduced at 20%.
The Bingo Association has highlighted that that would result in more club closures and further job losses, as well as a far wider impact on machine supply and servicing firms, building contractors, food and drinks suppliers and other businesses connected with bingo. The rate can always be looked at again in future years, but starting at a more cautious one of 15% would lessen the risk of more businesses being damaged, while having a negligible impact on duty revenues. Setting the standard rate of MGD at 15% would minimise the harmful impact on the industries affected and enable them to grow and increase the tax take. I very much hope that the Government will listen to the genuine concerns expressed by those representing thousands of small businesses in the bingo and amusement sectors and accept this proposed change to the MGD rate.
My constituency of Redcar has the sort of establishments that every constituency has—bookmakers, pubs, clubs and so on—but it has a thriving working men’s club sector of the type referred to by the hon. Gentleman. It also has a race course that depends on a healthy bookmaking industry, and a seaside with amusement arcades. This area of legislation is therefore important to my constituency.
I have absolutely no problem with the objectives of the proposed legislation, including simplification, although, having looked at the 27 pages of schedule 24, it does not seem that simple to me.
The hon. Gentleman is saying that he has no problem with the legislation, but although the justification of the proposal is simplification, and it is tax neutral, a detailed study carried out by Ernst and Young indicates that the tax take will in fact be bigger, which will have a negative impact on the small businesses in his area that he has just been praising.
I am coming on to the points made by the hon. Gentleman, because I was about to say that one of the proposal’s objectives is to be revenue neutral. We want to see that that is based on evidence, consultation and correct assumptions. I know that the Minister is aware of the representations, some of which have already been referred to, and I want to highlight the input into the exercise made by the Association of British Bookmakers. Licensed betting offices account for 48% of the machine games duty tax take. We have had analysis from Ernst and Young, and I have seen some detailed private analysis. Despite all the different premises, businesses and categories, I have not yet seen a single one that shows a rate of 20%, so the average rate is clearly lower than 20% right now.
Bookmakers are already taxed from nine different sources and have an overall tax bill far higher than their profits. Any increase, which, again, they believe the legislation will lead to, threatens jobs and shops. The big five bookmakers categorise their shops by size, and they categorise 1,350 as very small. They believe that many of those shops will be under threat. There are also bookmakers outside the big five, including independent operators and even single-shop operators, that account for another 1,250 shops that might be under threat.
“the Government is considering what further data can be published.”
I urge the Minister to publish further data so that the industry can understand the thinking behind the measure, and check and challenge the numbers. As I have said previously, I have no wish to change the policy’s objectives, but it is important that the Minister check that the objectives will be achieved and, in particular, are revenue neutral.
It is a real pleasure to follow my hon. Friend the Member for Livingston and to pick up on the points raised by the hon. Member for Redcar. I have also read the brief from the ABB, and I want to highlight two issues: the impact on betting shops and the impact on bingo halls.
There are 17 betting shops in my constituency, and they employ 85 people directly and support a further 119 jobs. Those shops pay some £187,000 in business rates. As was indicated a little earlier, the betting industry predicts that 11,000 jobs and 2,600 shops will be lost as a direct consequence of the 20% machine games duty rate, because more than 2,600 shops make less than £22,000 in profits each year. That is a large proportion, almost a third, of the total number of shops.
Today’s betting shops are, in the main, modern leisure and retail businesses. However, one of the things that has characterised this debate—this is true of Opposition as well as Government Members—is the view that betting shops and gambling have a bad name. There is a perception of bookies in large cities being the same as bookies in an area such as mine, where staff and customers are well acquainted and friendly, and where there tends to be less passing trade. Betting shops are an important part of the retail mix in the high street, especially in areas such as mine. Apart from post offices and pharmacies, they generate more footfall than all other similar sized businesses.
The Mary Portas report, which has had a lot of publicity recently, recommended that empty units be used as bingo halls. In Easington, we have a problem with the high level of vacant and derelict shops. Betting offices could fill some of those premises and keep a modest number of people coming to often quiet high street areas.
That is an interesting point very well made. I had not given it any thought, but my hon. Friend is probably correct.
In the few minutes I have left, I want to make some points about the amusement industry and bingo halls. Like other sectors in this country, the amusement industry is facing a critical period in these tough economic times. More than 280 arcades have closed in the past 18 months, which has had an impact on the manufacturing sector. Companies that manufacture amusement machines have seen their sales drop by 55% in five years. Bingo halls and pubs and clubs up and down the country have also been affected. I appreciate and value these businesses, especially in communities such as mine. Bingo halls are a lifeline to many older people, as indeed are local pubs and clubs. They are often at the heart of the communities they serve. The Budget proposals are likely to cause further closures. As well as the knock-on effect of job losses and falling tax revenues, the Bill contains plans to reform the taxation of gaming machines through the introduction of a machine gaming duty.
As has been said, although the Treasury claims in the explanatory notes that its aim is to simplify the tax system in this area and that the changes are revenue-neutral, such assertions are strongly challenged by industry representatives. Will the Minister comment on that? If it is not the Government’s intention to increase the tax burden on small businesses but simply to reform the tax system, why is the burden being increased? Ernst and Young has cast real doubt on the claim that these measures are revenue-neutral. It says that they are likely to increase the tax burden on small businesses and introduce additional complexity and compliance burdens. Government Members often claim to be the champions in the war on red tape and bureaucracy, but that is exactly the issue we will now have to face.
When the Government have been challenged on these issues, one of the expressions that has come back is that there may be winners and losers. The hon. Gentleman has obviously researched the matter extensively. Is he aware of who the winners are?
That is an interesting question. If the industry is right and the surveys are correct, the Treasury stands to gain from these measures, at least in the short term. However, it is a pyrrhic victory if the consequence is that more jobs are lost. Although 180 bingo clubs have closed since 2005, with the loss of 2,500 jobs, we still have a significant industry in many areas of the country, which generates more than £300 million a year in tax revenues for the Treasury.
I am pleased to say that Easington has a number of bingo clubs, which I have visited. Like other Members, I have taken the opportunity to play bingo with local residents. For many people, especially the elderly, bingo is their sole social outing, so it is a vital lifeline. Bingo fulfils a basic social function for vulnerable people and is important in communities such as mine.
Gala Bingo has sent me a brief. It says that the
“break-even rate of machines taxation for bingo is 16.3%”,
which is much closer to the 15% that our amendment proposes, rather than the 20% that the Treasury is proposing. The danger for many clubs is that the increased tax burden will make them unprofitable. Although the figures may look small and the overall impact on company profits may be low in percentage terms, the real risk is that more remote clubs, such as those in my area, will be forced to close.
Like my hon. Friend, I have a number of pubs, clubs and bookmakers in my constituency that rely on revenue from gaming machines. Unfortunately, due to the local economy many of those establishments are teetering on the brink. The trade in the area tells me that this relatively modest change—from the Government’s perspective—will drive some establishments over the brink and into closure. Sadly, it is unlikely that they would ever return from that position.
I am grateful to my hon. Friend. With bookmakers, it is particularly the small independents who are most vulnerable. Machine gaming duty should be set at 15%. Any tax rise above 15% will cause club closures and job losses.
I thank my hon. Friends. My hon. Friend the Member for Easington and the hon. Member for Redcar have given powerful speeches explaining why the Government should think again. I will reiterate some of the most important points and seek assurances from the Minister.
As my hon. Friends said, we have received representations from the amusement arcade industry and the bingo sector, as I am sure has the Minister. They tell us that they are facing difficult times at the moment. More than 280 arcades have closed. As my hon. Friend the Member for Edinburgh East suggested, the seaside economy is in difficulty at the moment and we want to ensure that people who have made their living in traditional ways can continue to do so.
As my hon. Friend the Member for Easington said, the people bingo halls and clubs serve have changed over the years. They are no longer exclusively the province of women, although traditionally they served much the same purpose as a social hub for women, as the pub did for men in some working-class communities. They were a place where women could meet people and have a social evening, as well as hope to win something more than they could get from their jobs or other income.
The real question I want to press the Minister on is that, as has been mentioned, the Treasury’s justification for the reform appears to be that it will simplify the tax system and remain revenue-neutral. Evidence and submissions, which I believe the Minister has been given, suggest that that is unlikely to be the case. The Ernst and Young report, to which my hon. Friend referred, suggests that the changes make it unlikely that the Treasury will achieve its aim of a neutral change. It believes that the proposed structural tax change will introduce additional complexity and compliance burdens to businesses, particularly in seaside constituencies, and are likely to cause the further closure of businesses, potential reduction in investment, loss of jobs and the loss of tax revenue for the Treasury.
As others have mentioned, submissions from the bingo industry particularly highlight that the fiscal-neutral rate for the sector is 16.3%. Bingo industry modelling shows that an MGD rate of 18% would cost each bingo club about £11,000, a 20% rate would cost about £26,000 per club, and a 22% rate would cost about £41,000 per club. It also points out that about 170 bingo clubs make less than £70,000 a year. It estimates that an MGD rate of 22% would therefore lead to a further 100-plus clubs closing with the loss of more than 2,500 jobs and further damage to local communities
I hear what the hon. Gentleman is saying and, as ever, he has made a powerful contribution. I should like to put those figures and questions to the Minister, and I hope that she will be able to come forward in the spirit in which the amendments have been tabled by my hon. Friends. She has made much play of listening to industry in relation to other parts of the Bill and trying to work with industry to come to a consensual position, so I hope that in that context, she will give an assurance that she will take the figures, look at all the information provided by the industry and come back to us before Report, or before the Bill proceeds further, in order that we can scrutinise it more carefully and look at the issue again. Given that we are under a bit of pressure at the moment to get through the clauses, I will give the Minister the opportunity to respond.
I shall try to be as quick as possible, although there are a number of points I need to respond to.
Clause 190 and schedule 94 introduce machine games duty, or MGD. Where MGD is payable, it will replace both amusement machine licence duty and VAT, and it will come into force on 1 February 2013. The reform to gaming machine taxation will put tax revenues from gaming machines on a more sustainable footing.
The hon. Member for Kilmarnock and Loudoun asked me what the benefits are and why we were making the change. The benefits of introducing a gross profits tax are as follows: amusement machines face a more complex regime, as they are subject to amusement machine licence duty, a licence fee for each new gaming machine and VAT on net takings. Compared with other gambling regimes, it is inconvenient to pay and a cash-based system is not able to deal with technological changes, or changes to social regulations, with the same flexibility. Machines making equal profits can also pay different levels of duty if they are in different categories. The reform is
“right because the new system would be fairer.”––[Official Report, Finance Public Bill Committee, 17 May 2011; c. 180.]
I hate to pull this kind of trick, because of course those are not my words, but those of the hon. Member for Bristol East (Kerry McCarthy), speaking in the debate on last year’s Finance Bill from the position where the hon. Member for Kilmarnock and Loudoun is sitting today.
I shall explain why I—like the hon. Member for Bristol East and the Labour party when they began these reforms in government—went ahead with the reforms, before coming to the broader points that have been made by Members today. The VAT treatment of gaming machines has been challenged in the courts, as some Members will be aware, and any Government have to respond to such challenges. The point I have made in relation to previous clauses before us today is one—naturally enough, in a Finance Bill—of needing to secure the public finances, which we have to pay for, after all. Introducing machine games duty and exempting dutiable machine games from VAT will protect tax revenues, and will ensure that operators of those machines continue to make a fair contribution to tax receipts. MGD will also support the objective of a fairer tax system by ensuring that the taxation of machine games is more closely linked to machine takings, as, indeed, the hon. Member for Bristol East said last year.
The Government first announced their intention of going ahead with the reform of gaming machines and introducing MGD in December 2010. That decision followed a consultation on the taxation of gaming machines launched by the previous Government in July 2009. Following a second consultation over the summer of 2011 on the design characteristics of MGD, significant amendments were made to MGD based on feedback received. In particular, the Government limited the scope of MGD to machines offering cash prizes greater than stakes. That measure—here I begin my reassurance of hon. Members who have asked questions today—will help to support many small family entertainment centres with non-cash prize machines, such as crane grabs and so-called redemption machines. The Government have also excluded B3A lottery machines from the scope of MGD.
I turn to the rates and costings relevant to MGD, as that is the subject of much of what we have discussed today. MGD will be charged on the net takings from playing dutiable machine games, which are games played on a machine from which customers hope to win a cash prize worth more than their stake. There will be two rates: the standard rate will be 20%, and the lower rate will be 5% of net takings The lower rate will apply to machines with maximum stakes of 10p and maximum cash prizes of £8. The lower rate will particularly help to support many small businesses that are commonly found at British seaside resorts. Again, I seek to emphasise to the Committee that I am well aware of the industry’s concerns in relation to the measure, and we have taken steps to help many of the industries referred to today.
Let me set out the argument about revenue neutrality, which has been referred to. The rates of MGD have not been set to raise additional revenue. Instead, the revenue from MGD will replace that from amusement machine licence duty and VAT on dutiable machine games on a revenue-neutral basis. I am happy to repeat that commitment today.
On that note, let me turn to the amendments that Opposition Members have tabled to the clause. Amendment 192, tabled by the hon. Members for Livingston and for Easington, proposes to allow businesses to offset a sum equivalent to the input VAT that becomes irrecoverable against MGD liabilities. I oppose the amendment for two reasons. The first is the impact on Exchequer revenues, and the second relates to the administrative burdens within the industry. The rates of MGD have been set to achieve revenue neutrality to the Exchequer. I shall come on to that shortly.
Is the Minister aware that small operators may rent their premises? Some may pay VAT on that rent, and others might not. There might be two premises next door to each other, and the fact that the irrecoverable VAT cannot be recovered may mean that the two businesses have distinctively different outcomes. Potentially, one could close and the other stay open.
I am aware of that scenario, and of the range of different decisions that businesses across the industries in question will take. I do not think it is fair for the Treasury to be held responsible for decisions on whether to rent or buy, or for myriad other decisions pertaining to a business. I can reassure the hon. Gentleman that the loss of recoverable VAT was taken into account when the MGD rates were set. If it had not been done that way, MGD rates would have been set significantly higher, based in part on data supplied by the industry. I am happy to repeat that point if necessary. It is the crucial argument to make in response to what trade bodies have been putting about in relation to irrecoverable VAT. If one does the maths, the figures would have come out higher if things were not done this way. Again, we are in revenue-neutral territory.
Allow me to come to that in due course. I have a whole series of comments that will cover everything. I said that I opposed amendment 192 on two grounds. The first is on Exchequer revenue grounds. To allow business to offset a sum equivalent to the input VAT that becomes irrecoverable without a corresponding increase in MGD rates would cost the Exchequer in the region of £200 million per annum. That would not be advisable given that the most important task facing this Government is to reduce Britain's debt. The second reason is that the proposal would also be administratively very burdensome for both businesses and Her Majesty’s Revenue and Customs.
I am intrigued. In the last group of amendments, the Minister’s criticism was that we were following our Front Benchers and just asking for a review. Now when we have asked for something specific—a 15% rate, which is in line with what was requested by the consultants engaged by the industry—the Minister has been dismissive of the modelling. They are concerned that a third of bookmakers could go out of business. Surely that must affect the Treasury’s revenue.
I am grateful to the hon. Gentleman for that intervention, because I was feeling that I had been a bit harsh in the previous debate on the topic of whether a review was a good thing. I trust that he will realise from what I am doing that I am engaging in the substance of what he is highlighting in his amendment. Let me reassure him and other members of the Committee that I am in no way dismissive of what the industry is saying to me. Two consultations have been held on this topic, and all the responses have been considered. My predecessor and I met all the major trade organisations—in some cases repeatedly. We have met businesses large and small to discuss the measure. There is a list of meetings in the summary of responses, including those that officials carried out—meetings with 11 trade bodies and 21 individual companies. I put it to the Committee that that constitutes fairly serious engagement with industry.
To deal with the detail, as the hon. Gentleman requests me to do, under his proposal businesses would need to calculate both the input VAT actually claimed against businesses’ VAT-able supplies, and what they would have been able to claim had machines continued to be subject to VAT. Businesses would need to do that every quarter. In addition, subsequent adjustments would be required when the full partial exemption information became available after the annual adjustments had been made. That is not a reasonable burden to ask businesses, particularly at the small end, to take on, because it would leave them astride two different systems. The Bill seeks to create a fairer system to replace both amusement machine licence duty and VAT, as I have outlined. I ask the hon. Gentleman not to press amendment 192 to a vote on the two grounds I have set out.
I apologise for potentially keeping hon. Members from their football, but it is important that I answer Committee members’ questions. Amendment 193 was tabled by the hon. Members for Easington and for Livingston to reduce the standard rate of machine games duty to 15%. I have already set out the kind of impact that that could have on Exchequer revenues. As I have said, the rates of MGD have been set in a way that is intended to achieve revenue neutrality for the Exchequer. The policy costings document published alongside the Budget outlines how rates have been calculated. The hon. Member for Bassetlaw will be overjoyed to know that those costings have been independently scrutinised by the OBR, which he fêted in his intervention.
The Government have also published a technical note, which the hon. Member for Redcar will be keen to read, if he has not done so already, describing the data and methodology used to calculate the standard and lower rates of MGD in greater detail. The note shows how, based on a thorough analysis of all the available evidence, the rates are set in a way that is intended to achieve revenue neutrality for the Exchequer. The industry is saying, “Well, are you sure about that?” and yes, I am sure about that. The data used in HMRC’s modelling has been collected from many sources. Statistics from the Gambling Commission underpin many of the inputs, although those have been corroborated by and adjusted for other sources of information, including the consultation responses that I referred to earlier.
The Minister referred to the huge amount of intricate and complex detail that the Treasury used to calculate this guesstimate, and then said that the Office for Budget Responsibility had been able to verify it. How possibly could a small, poorly resourced body like the OBR do that level of calculation necessary to verify the statistics? Is the Minister suggesting that this has been nodded through by the OBR? That brings in wider questions, not for this Committee, about what on earth is going on if the OBR is able to verify things that require that level of intricate detail and are disputed by the betting industry.
I refer the hon. Gentleman to two sources. The first is the technical note that I have just mentioned. I suspect that he has not yet had the pleasure of reading it, but it outlines exactly how the figures were arrived at and validated. The second source is the published costings of all measures in the Budget, in which the hon. Gentleman will be able to see perfectly well that the OBR has the capacity to work through that amount of data.
When the hon. Gentleman was late for this morning’s sitting, he and I had a conversation outside the Committee Room about ways in which we could hold a Budget to account. I applauded him for the detailed and forensic job he was doing on this Committee before he gets relegated back to the Information Committee. I am sure that he knows from his work this summer that the OBR is capable of achieving the same feats as he is. I hope that we will have his company for many seasons to come.
I referred to the Chancellor’s suggestion that he might be willing to publish more data. Would the Treasury be prepared to publish the kinds of details under discussion, so that the industry can see where its numbers are wrong, if, indeed, the Economic Secretary is right?
That is exactly what the technical note, which has been published and is available on the Treasury website, does. I suspect that, as we speak, the industry is taking a close look at it, as it is more than welcome to. I reassure the Committee that the data and methodology used have arrived at the correct rate for the reform.
On the question of winners and losers, the analysis shows that seaside arcades and the majority of pubs will gain from the machine games duty, while bingo operators will, on average, lose out marginally. The losers will be casinos and licensed betting offices. Members may wish to keep that information in mind and question who is telling them what when they are being briefed.
On 21 March, the AMG Leisure website cited an adult game centre owner who said, referring to the changes:
“At the moment I am paying both vat and license duty which is nearly 40% of turnover at my AGC. This way I am not restricted on the amount of…machines and am paying 20%...I know we cannot claim VAT back on purchases but I still feel I will benefit as a whole.”
I know that that is but one business owner, but it is an important voice that needs to be heard alongside those cited by other members of the Committee.
Let me wrap up by saying that the most important task is not only for England to win their match tonight, but for the Government to reduce Britain’s debt. As has been said this afternoon, if we did not do that, it would be worse for everybody. I therefore oppose the amendments and ask that the Opposition do not press them to a vote. Last year, the hon. Member for Bristol East (Kerry McCarthy) said:
“Given the urgent need to protect revenues now and to maximise revenues that will not impact families directly, such as gambling duties”––[Official Report, Finance (No. 3) Public Bill Committee, 17 May 2011; cc. 179.]
I will complete the sentence for her: we ought to go ahead with this reform and improve the sustainability of the gaming duties regime.
Thank you, Mr Bone. We have made our arguments and I hope that the Government have listened. Being a genuine Scot, I do not wish to keep hon. Members away from the football—it would be too risky for me—so I do not wish to press the amendments to a vote.