Treatment of vouchers

Finance (No. 3) Bill – in a Public Bill Committee at 3:00 pm on 4th December 2018.

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

Photo of Nadine Dorries Nadine Dorries Conservative, Mid Bedfordshire

With this it will be convenient to discuss the following:

That schedule 16 be the Sixteenth schedule to the Bill.

New clause 8—Review of Schedule 16 provisions on voucher circulation and distribution—

“(1) The Chancellor of the Exchequer must commission a review of the expected impact of the provisions of Schedule 16 on the circulation and distribution of vouchers in—

(a) the United Kingdom, and

(b) the European Union.

(2) A report of the review under subsection (1) must be laid before the House of Commons within 3 months of the passing of this Act.”

This new clause requires a review of how the provisions in Schedule 16 affect voucher circulation and distribution.

New clause 9—Review of potential divergence of VAT treatment of vouchers—

“(1) The Chancellor of the Exchequer shall commission a review that will consider the potential public revenue, and other impacts, if domestic law regarding the VAT treatment of vouchers were to diverge from European Union law.

(2) A report of the review under subsection (1) must be laid before the House of Commons within 3 months of the passing of this Act.”

The provisions of Schedule 16 transpose Council Directive (EU) 2016/1065. This new clause requires a review of the revenue effects of diverging from EU law on the VAT treatment of vouchers.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 3:15 pm, 4th December 2018

Clause 51 and schedule 16 make changes to ensure that we can properly collect VAT when purchases are made using vouchers. It amends the Value Added Tax Act 1994, introducing new section 51B, 51C and 51D and new schedule 10B. These clarify the VAT rules for postage stamps and set out new rules for the VAT treatment of vouchers issued after 1 January 2019.

Members of the Committee will be familiar with tokens—for example, those used in the purchase of books—but the world of vouchers has expanded significantly in recent years. The UK vouchers market is now estimated to be worth about £6 billion a year. As well as the traditional use of vouchers as Christmas presents, vouchers now play a large part in business promotion programmes and staff incentive schemes, which rely heavily on complex distribution systems using electronic, plastic and internet-based products, as well as the traditional paper voucher. Some businesses issue and redeem their own vouchers, whereas others issue vouchers to be redeemed by others. VAT law has been slow to adapt to these changes. This new law modernises the rules and introduces a simpler system.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

The Minister is extolling the virtues of vouchers and noting how innovative many of the company schemes that use them are, but why are the Government still committed to removing individuals’ capacity to benefit from childcare vouchers?

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

I think that issue may be outside the scope of the clause, tempted though I am to be drawn into the issue of childcare and vouchers. The hon. Lady will have noted the delay that we implemented in that respect, to make the transition that little bit easier for some of those who might have been impacted.

The clause transposes new EU law, which we pressed the European Commission to introduce, to help combat tax avoidance. The new law has to be in place by 1 January 2019 and the Provisional Collection of Taxes Act 1968 will give the measure effect until Royal Assent of this Finance Bill.

From a VAT perspective, vouchers are unexpectedly complex. That is because, for one payment, a buyer gets two things: a voucher and an underlying good or service. Without special rules, we risk taxing twice: once for the voucher and a second time for the underlying supply. Gift vouchers could be used to buy products with different VAT rates. It is therefore often difficult to apply VAT at the time the gift voucher is bought. Furthermore, gift vouchers are now often sold at a discount to the face value, via distributors to businesses, which give them away for free in business promotion or staff incentive schemes. It is then not always clear to the shop accepting the voucher exactly what has been paid.

Finally, trading vouchers across borders resulted in problems of double and non-taxation, as different countries have different rules. The changes made by clause 51 and new schedule 16 will standardise these rules. First, the legislation specifies the type of voucher covered. Quite a few things nowadays look similar to vouchers, but are not recognised as vouchers under the VAT system—for example, the type of card many of us store money on to go on holiday or give to our children. We are not talking about vouchers that are totally free from when they are issued to when they are used to buy something, such as discount vouchers found in magazines or toothpaste money-off tokens.

The legislation identifies two distinct types of voucher and sets out specific VAT treatments for each. If we know what the voucher can buy and where, that can be charged at the point of issue and at any subsequent transfer of a voucher through its distribution network. If these details are not known at the time of issue, because it is a general gift voucher, we must wait until it is used to be able to apply the correct VAT. Therefore, the law identifies single-purpose vouchers, such as a traditional CD token that can be used only to buy CDs, which are limited to specific products, and multi-purpose vouchers, such as a WHSmith gift voucher, which can be used to buy many things,.

To avoid charging VAT twice, single-purpose vouchers are subject to VAT throughout distribution, but no VAT is charged on redemption. In contrast, multi-purpose vouchers are VAT-free through distribution, but are subject to VAT at redemption. For the multi-purpose voucher, the redeemer—the shop—must account for VAT. If they know the amount paid for the voucher, they should account for the VAT on that value. If they do not know the amount paid, they should account for VAT on the face value of the voucher.

Because the activities of any distributor of multi-purpose vouchers are disregarded for VAT purposes, there will be certain restrictions on the extent to which they can reclaim VAT incurred on related costs. I hope that the Committee is following this very closely, because it is an extremely important series of elaborations on how these vouchers work. HM Treasury and HMRC have consulted with the relevant businesses represented, and HMRC will be clear in guidance on how the rules will work.

The two new clauses would require two reviews by the Government within three months of the passing of the Act. New clause 8 concerns the impact of the provisions on the circulation and distribution of vouchers in the UK and the EU. New clause 9 concerns potential revenue and other impacts that could arise if UK law were to diverge from EU law.

Collecting VAT when vouchers are used is always complex, and it will inevitably take some time for the new rules to bed in. Throughout the negotiations about the changes in the underlying EU law, the Government were in regular contact with the UK businesses affected by the changes, and it was generally felt that this option was the best of the various options identified. Officials have worked hard with businesses to ensure as smooth a transition as possible, and HMRC has offered to be pragmatic as businesses get to grips with the new system.

I can reassure the Committee that the Government will continue to monitor the effects of the change and other developments in this area, including impacts on revenues. With regard to divergence from EU law, it is far too early to consider such impacts, given that we do not yet know the future agreement with the EU and what it will look like in respect of the VAT system more generally. However, I stress to the Committee that a key advantage of this measure is to ensure a level playing field across the EU, so that UK businesses are not disadvantaged by different rules in other EU member states, which they would need to understand and which could result in double taxation or—in terms of Exchequer impact—no taxation at all. I therefore ask the Committee to reject the new clauses, and I commend the clause and the schedule 16.

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

I begin with a word of apology to the hon. Member for Aberdeen North for mixing up my Aberdeen constituencies. I can only say to her that in a former Parliament a former Member for Aberdeen South and I were both shadow Energy Ministers, and that at some level I must be missing him and I cannot bring him back. However, that is no excuse for mixing up the two parts of Aberdeen.

Clause 51 relates to gift vouchers and the transposition of an EU Council directive clarifying the consistency of treatment of vouchers. I thought that this was more interesting than it sounded in the explanatory notes; the Minister has done a very good job on that. As he said, this Christmas, when people are out shopping, not many of our fellow citizens will understand that vouchers pose a challenge to HM Treasury in charging VAT, because when a customer buys a voucher, should we charge the VAT on that, or should we charge it when they spend the voucher?

As the Minister said, the discrepancy is further complicated because there will be some stores that sell gift vouchers that then offer zero-rated VAT items, such as children’s clothes. I understand that there have been mismatches in the way that different member states have approached these questions, and that this situation has potentially led to double taxation or no taxation at all across borders. That is the background to the introduction of the EU vouchers directive agreed in June 2017.

The Minister outlined the new regime of single-purpose vouchers and multi-purpose vouchers; I do not think that anyone wants me to repeat that. However, it makes sense that there is clarity on vouchers, finally, and that the risk of there being either double taxation or intra-EU taxation is avoided.

However, professional bodies have raised a number of issues, which I would appreciate some further detail from the Minister on. It is my understanding that there is still no new guidance available from HMRC on this measure, even though implementation is from 1 January 2019. As I mentioned in relation to the previous clause, VAT is a complex and time-consuming area for businesses, so they need as much advice and notice about it as possible. The timing of this implementation, in January, will also coincide with one of the peak times of the year for voucher redemption—hopefully, all of us will get a voucher for Christmas—and that could create a further burden. Gift vouchers are an important part of revenue for UK businesses.

This is a very challenging time for the high street, so the Opposition are mindful that we do not want to create any additional administrative barriers for smaller shops as they develop their businesses. As the Chartered Institute of Taxation has highlighted, shops will need to be able to identify the date of purchase for vouchers, to assess whether they need to declare VAT, given that the rules will be changing. It is surely important, therefore, that they receive as much support as possible from HMRC through the process and receive as much guidance as they can. Those technical details are a concern, and I would appreciate further context from the Minister on how they might be mitigated.

Clause 51 also raises a wider issue, given that it relates to the transposing of EU laws into the UK and our future compliance with EU VAT regulations. Historically, it has not been possible for the UK to fully diverge from the EU on setting rates for VAT. VAT revenues to the Exchequer are a crucial part of the UK’s tax landscape, and we need to know how crashing out without a deal or abruptly pulling out of the customs union will affect how we set VAT rates in future. That is why Labour has tabled new clauses 8 and 9, in relation to schedule 16, which is associated with this clause. New clause 8 would oblige the Government to

“commission a review of the expected impact of the provisions of Schedule 16 on the circulation and distribution of vouchers in—

(a) the United Kingdom, and

(b) the European Union.”

Vouchers are an important part of business for UK retailers. As we leave the EU, questions should be raised about whether this decision on compliance will still work best for both sides, as it has been drafted on the basis that the UK is a member of the customs union. Given that circumstances will change quite dramatically in future, we must be mindful of how this will impact on ongoing changes.

Subsequently, new clause 9 mandates the Government to produce a review of the potential divergence from EU policy of the VAT treatment of gift vouchers, so that we can properly assess its implications. Supporting our high street in today’s challenging environment is a priority for all of us. I therefore urge Members to vote for our new clauses, to make sure that we create the best possible taxation framework for vouchers and help our retailers to succeed.

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

I will be brief, but will hopefully answer the questions that the hon. Member for Stalybridge and Hyde has posed. First, as regards guidance, these measures were consulted on widely with UK businesses and stakeholders, and HMRC has recently shared draft guidance with stakeholders for comment. HMRC’s guidance was published yesterday, so that is now in the public domain. Of course, if the hon. Gentleman has any particular observations on that, I would be happy to take representations from him. The Government have also given businesses advance notice of the changes. A consultation document was published last December, HM Treasury and HMRC have been in constant discussion with businesses, and we published the draft legislation last July on L-day, with an impact assessment last month.

My final point relates to the hon. Gentleman’s comments about future VAT arrangements in the context of our departure from the EU. Of course, at this stage, we do not know exactly what those will look like. However, the Government have made a general statement that we are seeking to have arrangements that are broadly in line, so that we do not have very dramatic changes when we depart from the European Union.

Question put and agreed to.

Clause 51 accordingly ordered to stand part of the Bill.

Schedule 16 agreed to.

Clause 52