We are moving on to consider a number of technical clauses that tidy up a number of areas where things have been perhaps the practice over a period of time but now need to be put on a statutory footing. The background note says that the clause relates to group supplies using an overseas member. It talks about reverse charges and says:
“A reverse charge is a mechanism for taxing supplies of services bought by businesses from outside the UK but consumed within the UK.”
It goes on to say:
“Supplies made by one member of a VAT group to another are disregarded (section 43(1) of VATA). Therefore no VAT would be chargeable when supplies from outside the UK are brought into a UK VAT group by a member belonging overseas. Sections 43(2A) to 43(2E) of VATA are anti-avoidance provisions preventing reverse charges from being avoided by buying in services, ultimately for consumption within the UK, via a VAT group member belonging overseas.”
It also explains:
“This valuation provision is necessary (as was the concession it replaces) to restrict the impact of sections 43(2A) to 43(2E), in appropriate circumstances, to the bought–in services introduced into the UK via an intra-group charge. Without this provision the charge would apply to the use of the overseas group member’s own resources included in the intra-group charges as well as the bought in services.”
In essence, my understanding is that the clause puts on a statutory footing the long-standing concession on how the reverse charge on intra-group supply would be valued and applies when the representative member of the group satisfies the commissioners as to the value of the bought-in services. The clause also sets out how the charge is to be calculated and allows HMRC to direct that the value of the bought-in services is to be an open-market value. That provides a power for subsequent amendments to be made to the valuation provision.
We do not have a difficulty with this clause, but it is important to spell out for the record—I am sure that the Minister will want to do so as well—its purpose.
I thank the hon. Lady for her support for this clause and for setting out its purpose. Let me also briefly reiterate the position. The Government announced in Budget 2011 that we would legislate an existing VAT extra-statutory concession in Finance Bill 2012. The clause does that, effectively ensuring that taxpayers and UK VAT groups pay VAT on services brought into their UK business via overseas establishments on a fair basis.
Let me provide hon. Members with some background to this clause. It is part of HM Revenue and Customs’ ongoing review of extra-statutory concessions, commonly called ESCs. The current law imposes a charge to VAT on supplies within VAT groups in certain circumstances. Generally, supplies within VAT groups are disregarded, so no VAT is charged. The charge to VAT targets an avoidance scheme set up to avoid VAT on services bought from third parties via overseas premises. The ESC restricts the value of the charge to ensure that the anti-avoidance legislation is well targeted and that a fair charge is applied. The clause affects partially exempt VAT groups with members that have overseas establishments that make supplies to UK members of the group—mainly businesses in the financial and insurance sectors.
The clause provides that the valuation of the charge as set out in the ESC is now provided in legislation. It also provides that, where supplies are undervalued, Her Majesty’s Revenue and Customs may direct that they are valued at open market value. It therefore preserves the status quo. It is not designed to change the current treatment—for example, by specifically linking the charges to VAT avoidance and not applying them when no avoidance motive exists.
Some respondents to the HMRC consultation, which was held in summer 2011, suggested such substantive changes, but any such changes would have to be part of a wider review of VAT grouping legislation. Most respondents supported the proposed legislation. As requested by some respondents, HMRC will publish clear guidance on how to apply the charges in practice. The guidance has been exposed in draft to interested parties and will be published this summer, prior to the clause taking effect.
In conclusion, the clause enables the Government to continue to prevent avoidance by VAT groups, while ensuring that the legislation provides for a fair charge on services purchased outside the UK.