Duty of customers to account for tax on supplies

Finance (No. 3) Bill – in a Public Bill Committee at 2:45 pm on 4th December 2018.

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Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury) 2:45 pm, 4th December 2018

I beg to move amendment 92, in clause 50, page 33, line 11, at end insert—

“(9B) An order made under subsection (9) for the purposes of subsection (9A) must be accompanied by a statement by the Treasury of the expected impact of that order on—

(a) the number of traders who are expected to benefit from the reduction of a burden, and

(b) the supply chain in respect of the description of goods or services.”.

This amendment would require an order made under the new provision of Clause 50 to be accompanied by an impact statement.

Photo of Nadine Dorries Nadine Dorries Conservative, Mid Bedfordshire

With this it will be convenient to discuss clause stand part.

Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury)

We now turn to the part of the Bill that addresses value added tax, which is always a much-anticipated part of a Finance Bill. There is a lot to look forward to. Clause 50 relates to the duty of customers to account for VAT on supplies. It is designed to give the Government the flexibility to mend some items of anti-fraud legislation so that there does not end up being an undue burden on small businesses. It works in conjunction with an order of the Value Added Tax Act 1994, specifically section 55A, which aims to prevent so-called missing trader fraud.

I will provide some context about the ongoing challenges presented by VAT. These appear to fall into two categories, which I believe overlap: fraud, and the complications that administering and reporting VAT poses for businesses. Tackling those challenges is impossible if they are considered to be mutually exclusive. Fraud continues to be a major issue for the Exchequer in collecting the level of VAT that is owed, and VAT fraud costs the UK at least £1 billion a year.

That was discussed at length in last year’s Finance Bill Committee, in October 2017, when the Government introduced a clause to place new obligations on fulfilment houses to help to tackle VAT fraud, which has, understandably, worsened with the rise of online sellers that obtain goods through third-party sellers based abroad. As my hon. Friend the Member for Bootle said at the time:

“Many small businesses find themselves outcompeted and outpriced by overseas traders, which not only have lower operating costs but artificially lower their prices by failing to pay VAT on the goods they sell to UK consumers through fulfilment houses based here.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 117.]

That is something that we will all recognise.

My hon. Friend further highlighted that we will all have received casework from small businesses

“that found themselves severely disadvantaged when filling out their VAT returns when they were unable to obtain VAT receipts from either their overseas supplier or the fulfilment business in question. In one case, the reason for the problem was simple: there were no VAT receipts because the seller had not charged VAT, unbeknownst to that particular British business. The online fulfilment house involved simply washed its hands of the matter and blamed a third-party seller that it supposedly has no control or influence over.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 117.]

That flags just one of the multiple VAT issues that small businesses face. The Opposition believe that they need more support in getting to grips with the tax if we are ever to close the VAT gap. The situation has been worsened by the Government’s disaster-stricken attempts to transition to “Making tax digital”, which have thankfully been delayed to next year to give businesses some chance to adapt.

HMRC believes that there is a £3.5 billion VAT gap resulting from mistakes made by businesses when they submit VAT returns. Tax professionals, via the Chartered Institute of Taxation, said in written evidence to the Treasury Committee’s VAT inquiry earlier this year that HMRC must improve its VAT guidance and show a greater willingness to provide rulings where businesses want certainty over VAT treatment. It also echoed the Opposition’s repeated warnings over the diminishing resources and capacity of HMRC, which has been subject to a series of cuts resulting in staff reductions and office closures. That was admirably highlighted by my hon. Friend the Member for Oxford East in her summer tour of HMRC office closures, which was well received across the country. I should say that the cuts were not well received, but the attention that she was able to bring to them was.

The Chartered Institute of Taxation makes six recommendations to help address the VAT gap, which it estimates at a shocking £12.6 billion. I will focus on just one today, which is its request that the Government resist the temptation to

“introduce widespread changes that are disruptive to the majority of compliant businesses”.

That is tied to concerns around the clause, despite what appear to be quite laudable intentions behind it. The clause relates to so-called missing trader fraud. It is a huge problem, and not only in the UK; it is perpetrated across the EU in several different ways. Europol estimates that the cost to the EU is about €60 billion. Fraud is carried out in supply chains, sometimes by organised criminal gangs. They take advantage of the VAT exemption across borders, charge VAT in the UK when the product is sold on and subsequently disappear without relaying it to the Exchequer. As referred to earlier, section 55A of the Value Added Tax Act 1994 helps to prevent that by making the customer, rather than the supplier, responsible for declaring the VAT on certain goods and services, thus taking the benefit of VAT away from the seller.

From October 2019, construction services and works on existing buildings will be added to that list of goods and services, given the prevalence of missing trader fraud in the sector. This is where it gets slightly more complicated, unfortunately, so I will refer to the Chartered Institute of Taxation’s helpful advice on the matter, which says that subsection (3) of section 55A states that

“the value of any ‘relevant supplies’ purchased by the customer over £1,000 must be aggregated along with its turnover from its own business supplies for the purposes of the VAT registration threshold test (currently £85k of taxable supplies in a rolling 12 month period). Note that when construction and building works supplies are included in s.55A, the Order amends the default position so that the £1,000 small value supplies limit will not apply…Clause 50 creates a power for the Treasury to modify the position on the inclusion of ‘relevant supplies’…in the turnover test for the VAT registration threshold...In effect this means that a decision can be made on whether the customer may exclude relevant supplies from the turnover test. The aim of the measure is to prevent the anti-fraud provision from unintentionally pushing a small business over the VAT threshold.”

The order that it works with in tandem extends the reverse charge mechanism. Again, the Chartered Institute of Taxation’s helpful explainer says:

“The reverse charge in this sector applies for business to business transactions where the supply is subject to a positive VAT rate, the customer is registered for UK VAT and is required to report through the Construction Industry Scheme…There is a nil threshold on sales, meaning all qualifying transactions are impacted.”

As we understand it, we see the logic in the clause. Construction businesses may get drawn into declaring VAT in ways that are deemed unnecessary. However, we would caution against adding any further complexity for businesses, given the warnings I mentioned earlier. Therefore, it needs to be backed up by proper guidance and advice through an adequately staffed and resourced HMRC.

Even as someone who used to work in corporate law, I found sifting through the changes to articulate them to the Committee quite a challenge. It would be a big ask for someone to try to do that while running a business day to day. Stakeholders have also raised the issue of complexity in the practical application, which particularly applies to making sure that those in the chain know where they are in it, especially where that relates to an end user for tax purposes, so it is clear who is responsible for VAT accounting.

Equally, we must be careful that making the changes does not have any impact on local supply chains, which is why we have tabled amendment 92, which would oblige the Government to publish the impact on traders who are expected to benefit from the reduction of the burden, as well as the supply chain, which comes into scope. That will enable us to quickly identify if an undue administrative burden is having an impact on supply chains in turn.

My second question concerns how heavily the development and enforcement of such VAT rules are dependent on co-operation from the European Union. I would be grateful if the Minister elaborated on how the plans to clamp down on missing trader fraud are evolving in the light of our expected departure from the EU. Surely our departure from the customs union will prompt some sort of dramatic rethink.

Many hon. Members present are veterans of the Bill Committee on the Taxation (Cross-border Trade) Act 2018. In my view, VAT was one of the most complex issues that we dealt with there—the hon. Member for Aberdeen South is nodding. I would appreciate further information from the Minister about what consultation the Government have entered into about the measure, what feedback was provided, and how concerns about the administrative burden on construction and building works businesses will be addressed.

We would also like to highlight that the making tax digital implementation date for some businesses has been pushed back to October 2019, which will clash with the introduction of new mechanisms to integrate the changes. Has sufficient thought been given to how the burden can be eased for those affected?

Finally, I urge hon. Members to vote for amendment 92, which would empower us and give us the information we need to help small businesses to cope better with VAT collection.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy) 3:00 pm, 4th December 2018

First, Ross Thomson and I are two very different people. He is a lot taller, has dark hair and is a Conservative Member of Parliament. Lots of people have made this mistake over time. He also has very different views from mine on Brexit.

To follow up on some of the issues raised, I am comfortable supporting the Opposition amendment; it makes sense to ask for this information. A couple of matters were raised during the debate. It is important that reasonable VAT guidance is given to organisations. As we have previously discussed in Committee, people can only pay the correct tax if they understand how the tax system works. If they do not have the appropriate guidance, it is difficult for them to ensure that they pay the right VAT.

It is clear that the Government and HMRC are falling short in the information that they communicate to the companies and organisations that are expected to jump through these hoops. It would be useful if the Government looked at that and ensured that they improve the information they are providing to companies and organisations, so that they can better understand their liabilities and how to comply with them.

Lastly, in relation to discussions around the Taxation (Cross-border Trade) Act 2018, the hon. Member for Stalybridge and Hyde mentioned the changes from making tax digital and the impact of that on companies that are finding it more difficult to navigate the system. Another possible impact, depending on what happens with any withdrawal agreement, is that move from acquisition VAT to import VAT, which would also have a significant impact on companies, because they would have to pay significantly more money to allow them to do things differently.

I was pleased that the Government moved on that point after sustained pressure on them through the passage of the Taxation (Cross-border Trade) Bill. I appreciate that they agreed to put in place a deferment scheme in the event of no deal; that is positive. However, we do not yet know what the deal will look like. Could we have more commitment from the Government about smoothing that path, if there is to be change from acquisition to import VAT?

Obviously I would rather there was no change and we all stayed in a customs and VAT union, with common VAT as the preferred option. If there is to be any change, will the Government reassure us that companies that will be provided with as much support as they can, in order to make that change without the cash-flow impact suggested by organisations such as the British Retail Consortium?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Before I get into more general points on the clause, I will turn to some specific issues raised by Members, starting with the hon. Member for Aberdeen North. I entirely take her points about the distinction between her and my hon. Friend the Member for Aberdeen South. The differences are quite stark in all respects, though I am not sure to whose benefit that is.

The hon. Lady is entirely right to suggest that we need good guidance on these issues. I should point out that a primary focus of the proposed change is to ensure that we do not, under the existing arrangements, have a number of construction companies falling due to VAT and going over the threshold. That does bring unwanted complexity for those who would not otherwise be in that situation. It is worth bearing in mind that the reason behind the measure is trying to avoid drawing ever more businesses in that sector into the VAT regime.

The hon. Lady also reminded us of the discussions that we had at length on the Taxation (Cross-border Trade) Bill, when most of us were all together.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Happy days. I thank the hon. Member for Aberdeen North for her positive comments about the position that the Government have taken on acquisition VAT as opposed to import VAT, and extending that—at great cost to the Exchequer, of course—to all external trading arrangements, whether with the EU27, as they will become, or the rest of the world.

It is worth making a general comment on the VAT gap, which featured prominently in the contribution from the hon. Member for Stalybridge and Hyde. That gap has fallen from 12.5% under his party in 2005-06 to 8.9% on the latest figures. That is a pretty significant drop in relative terms across that period. Clause 50 amends the anti-avoidance provisions in section 55A(3) of the Value Added Tax Act 1994, which will enable effective implementation in October 2019 of the VAT reverse charge to combat missing trader fraud in construction sector supply chains. As announced at autumn Budget 2017, the Government are introducing a VAT reverse charge for specified construction services, which is due to come into effect from 1 October 2019.

This measure will help to tackle the problem of organised criminal gangs fraudulently creating or taking over companies in the sector to steal VAT and income tax, known as missing trader fraud. Under reverse charge accounting treatment, the customer, if VAT registered, is responsible for settling VAT with HMRC. As a result, suppliers cannot get the tax due and hence cannot steal it. However, there is currently an anti-avoidance provision in the primary legislation for VAT reverse charges, which requires businesses that purchase supplies subject to a VAT reverse charge to include those purchases as part of their turnover for VAT registration purposes.

Reverse charges apply only to supplies to other VAT-registered businesses. Therefore, this provision was designed to prevent fraudsters from avoiding reverse charges, especially on mobile phones, by instead charging VAT to small unregistered businesses before going missing. The current anti-avoidance provision has the effect of making unregistered businesses purchasing supplies covered by the reverse charge registrable for VAT sooner.

The construction sector has many businesses legitimately trading close to, but below, the VAT threshold. The current anti-avoidance provision could therefore push some legitimate small businesses over the VAT threshold and increase the burdens placed upon them. Clause 50 will amend the VAT Act to allow future VAT reverse charge statutory instruments, including one for the construction sector, to waive this anti-avoidance provision. That means that unregistered businesses will not have to add purchases of construction supplies subject to the reverse charge to their turnover for the purposes of VAT registration, thereby limiting the impact of the reverse charge on small businesses.

Disabling this provision in the construction sector will not have an impact on the effectiveness of the reverse charge, because builders are unlikely to be involved in the sort of supply chains that feature in large-scale missing trader fraud in construction. However, the Government do not wish to remove the provision in its entirety, as it may be beneficial for other sectors subject to missing trader fraud.

Amendment 92 would require that, whenever the Treasury makes use of the Government’s proposed new power to disapply the anti-avoidance provisions in section 55A(3) of the VAT Act, it would also publish a statement setting out the number of traders expected to benefit from being relieved of the burden to register for VAT as a result, and the impact of the VAT reverse charge and the disapplication of the anti-avoidance provisions on the supply chain in the sector that they target. The Government have closely considered the amendment, but ultimately deem it unnecessary. Whenever a Treasury order is made to require the use of a VAT reverse charge in a particular sector, HMRC publishes a tax information and impact note as a matter of course. This note will highlight the scale of the reverse charge’s expected impact in terms of numbers of traders who will be affected and whether the anti-avoidance provisions will apply, and outline how the changes will help to disrupt fraudulent supply chains operating in that sector. This publication is more than sufficient for the purposes sought by amendment 92. I urge the Committee to reject the amendment, and I commend clause 50 to the Committee.

Question put, That the amendment be made.

The Committee divided:

Ayes 9, Noes 10.

Division number 24 Finance (No. 3) Bill — Duty of customers to account for tax on supplies

Aye: 9 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 50 ordered to stand part of the Bill.

Clause 51