“16 (1) The Chancellor of the Exchequer shall commission a review on the potential revenue changes if domestic law were to diverge from European Union law in relation to VAT groups.
(2) A report of the review under sub-paragraph (1) must be laid before the House of Commons within 3 months of the passing of this Act.”
This amendment requires a review on the potential revenue changes if domestic law were to diverge from European Union law in relation to VAT groups.
That schedule 17 be the Seventeenth schedule to the Bill.
Clause 52 makes changes to the Value Added Tax Act 1994 to allow certain non-corporate entities such as partnerships and individuals to join a VAT group. VAT grouping is an important VAT accounting simplification for UK businesses. It allows companies within the same corporate group to operate under one VAT registration and submit a single VAT return. Members of a VAT group can share goods and services with each other without the need to account for VAT. This helps businesses operate effectively and saves time and resource, for both businesses and HMRC.
Clause 52 will simplify VAT accounting arrangements for many UK businesses and ensure that the UK’s VAT grouping rules operate effectively. It is up to the UK Government to determine how VAT grouping rules operate, to ensure that they work effectively for UK businesses. They must adhere to EU VAT principles when doing so. Following a judgment of the Court of Justice of the European Union in 2016, HMRC held a consultation to determine which entities should be eligible to join VAT groups. HMRC listened carefully to the representations made during this consultation and held detailed discussions with VAT expert stakeholder groups to ensure that the changes to VAT grouping rules work for businesses and HMRC, including publishing draft legislation in July this year.
The changes made by the clause will help reduce VAT accounting burdens for many businesses. Under current rules, only corporate bodies can join a VAT group. We will amend the Value Added Tax Act 1994 to allow non-corporate entities such as partnerships or sole traders to join a VAT group, where those entities control all other members of the VAT group. Although these changes will bring administrative benefits for businesses, it is important that the rules are not misused, so we will update existing anti-avoidance rules via a statutory instrument to ensure that no taxpayers use VAT grouping to avoid VAT. The changes made by the clause are expected to have a negligible impact on the Exchequer.
Amendments 93 and 94 would require the Chancellor to commission a review on the impact of these changes to individuals and businesses and a further review on the UK tax revenue impact of any future divergence from EU VAT grouping rules. The Government do not intend to accept these amendments. The VAT grouping changes have been made following extensive consultations by HMRC. HMRC’s response to the consultation was published in December 2017.
With respect to a review of the UK tax revenue impact of any future divergence from EU VAT grouping rules, it is worth noting that although the UK must follow EU VAT law principles, the UK Government already have the ability to tailor UK VAT grouping rules to our own specifications. If any future changes are made to UK VAT grouping rules, they will of course receive parliamentary scrutiny at that time. I do not consider, therefore, that either of the proposed reviews is required.
I will speak briefly to clause 52, schedule 7 and our related amendments. As the explanatory notes say, UK VAT grouping already allows for two or more bodies corporate, such as limited companies or limited liability partnerships, to register collectively as a VAT group if they are both established in the UK and under common control. Their VAT return is considered as one and, therefore, supplies between the individual subsidiaries are disregarded for tax purposes.
However, a judgment from the European Court of Justice in September 2015 on a case relating to a shipping company widened this definition beyond bodies corporate. After consultation, this has been extended to a wider definition, including non-corporate entities such as partnerships and individuals that have a business establishment in the UK and control a body corporate.
We are awaiting further guidance from HMRC in relation to non-corporate entities, which we are told by the Government will be published after Royal Assent. Outstanding issues remain that the guidance will urgently need to address. The Chartered Institute of Taxation, which has been helpful in providing briefings on the VAT-related issues in the Bill today, has outlined a number of these questions already. We need to know whether partnerships could have partners that were both UK and non-UK resident, and whether a partnership that had UK business premises with entirely non-resident partners would be eligible. How would the ongoing challenge of the physical presence test be monitored and policed? That is especially pertinent given HMRC’s constrained resources.
Equally, it is important to understand how ongoing eligibility for partnership will be assessed. Questions that need to be answered include whether there should be an annual declaration or tick box on the VAT return to encourage regular self-assessment. Will VAT groupings be cross-referenced with partnership or sole trader tax returns within that group to ensure accuracy? Another issue raised by the Chartered Institute of Taxation is whether partnership and sole trader tax registration details should be used to tag and monitor which partnerships or sole traders were within a VAT group, both for HMRC administration and for taxpayers’ reference when dealing with such entities and checking VAT registrations.
The Government’s 2017 consultation document stated:
“The government recognises that any widening of grouping will come with a revenue cost unless it excludes businesses that make exempt supplies. This is not something that the government is planning to do, so any potential change must be assessed to fully understand the effect on UK revenue.”
I appreciate that the Minister’s comments appeared to contradict that, but that also appears to be contradicted by the wording in the consultation document last year.
The consultation also says:
“Whilst we agree that there may be implications with joint and several liability for certain entities, the government has no immediate plans to make any changes to joint and several liability rules.”
Can the Minister confirm that both statements still apply 12 months later, and that there is no intention to change joint and several liability rules now or widen grouping in a way that impacts on revenue?
Ensuring compliance and that revenue is fully collected must be our priority. It is noted that, in the 2017 consultation, the majority of respondents agreed with HMRC’s view that an entity could be excluded to prevent evasion, avoidance and abusive practices. However, given the large VAT gap in the UK, the Opposition believe we must be vigilant to any potential opportunities that arise that can be exploited with regard to VAT treatment by incentivising individuals or businesses to enter into groups for tax purposes when they might not otherwise have done so. That is why Labour has tabled amendment 93; I encourage Committee members to vote for it. It mandates the Government to commission a review on the impact of provisions made on the number of individuals entering into VAT groups for the purposes of tax planning by the end of the tax year 2019-20. That will help us to identify quickly whether a distorting effect has been created by the legislation.
The second, wider issue in relation to the clause and schedule is how our own changes in VAT legislation will be impacted by our departure from the EU. Amendment 94 would require a review of the potential revenue changes if domestic law were to diverge from EU law in relation to VAT groups. As we outlined when discussing clause 51, we must take stock of the full impact as the Government propose our departure from the customs union. That will have a huge bearing on how we collect VAT, and potentially VAT revenues, if we choose to deploy flexibility in what we do and do not accept. This measure is no exception and for the purposes of scrutiny it is critical that we have a full understanding of its impact on the UK.
It is not our position that the UK should leave the common VAT area, but we support both Labour amendments, because it is sensible that we have more information about all these provisions, so that the House can take better-informed decisions.
I am extremely grateful for the hon. Lady’s intervention and entirely agree with it.
On the access of financial services to the single market once we leave the EU, under the terms of what the Government have negotiated—that single market access will almost certainly be denied unless the equivalence provisions prove adequate, although most people expect them not to be—the Government’s advice to firms in the UK is to set up subsidiaries in the EU. It was reported to me in meetings yesterday in the City that there is concern that when those subsidiaries are created, the connected UK entities will not be able to enter VAT groups in the UK, which would therefore trigger a substantial tax liability in order for firms to comply with the Government’s own advice on market access to the EU. The Minister may not be able to answer that now, but I want to put it on the record.
I call on all Committee members to support both amendments today so that we can get a clear and full picture of the wider impact of the measures on the future VAT policy approach outside the EU and on closing our own VAT gap here in the UK.
The hon. Gentleman raised a large number of questions, most of them very specific and quite technical, not least around the treatment of UK resident individuals in the context of VAT grouping as opposed to non-residents in a similar situation, where perhaps a business has—my terminology—a permanent establishment here, but is run by non-residents. He also made various points about the administration of VAT groups. I will write to him about those issues and the other points he raised in that part of his contribution. He asked a specific question about whether we are updating joint and several liability rules for these changes. The answer is that we are not. HMRC will continue to monitor the rules, of course, to ensure that they work effectively for UK businesses.
The final point that the hon. Gentleman raised related to our future relationship with the European Union. His specific question, as I understand it, was about compliance with the financial services arrangements that might be in place once we have left the European Union: if, as a consequence of that, a UK financial services business had a subsidiary or another operation within the EU27 as opposed to here, would that prohibit that particular operation from participating in a VAT group with the UK domicile concern? I have absolutely no idea what the answer to that is, but I did at least understand his question and I am happy to look into it and get back to him.