Abolition of acquisition VAT and extension of import VAT

Taxation (Cross-border Trade) Bill – in a Public Bill Committee at 2:15 pm on 1 February 2018.

Alert me about debates like this

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

With this it will be convenient to discuss the following:

Amendment 133, in clause 42, page 30, line 1, leave out subsection (6) and insert—

“(6) No regulations may be made under this section unless a draft has been laid before, and approved by a resolution of, the House of Commons.”

This amendment requires regulations under Clause 42 to be subject to the affirmative procedure.

Amendment 83, in clause 42, page 30, line 7, at end insert—

“(7A) No regulations may be made under this section after the end of the period of two years beginning with exit day.”

This amendment, together with amendment 84, limits the duration of the delegated power under Clause 42 to the period ending two years after the United Kingdom leaves the European Union.

Amendment 84, in clause 42, page 30, line 8, at end insert—

“‘exit day’ has the meaning given by section 14(1) (interpretation) of the European Union (Withdrawal) Act 2018 and subsections (2) to (5) of that section apply to the term under this section as they apply to the term in that Act,”

See explanatory statement for amendment 83.

Clause 42 stand part.

Clause 43 stand part.

That schedule 8 be the Eighth schedule to the Bill.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 2:30, 1 February 2018

Clause 41 will amend sections 1 and 15 of the Value Added Tax Act 1994 so that, on withdrawal from the EU single market, all goods entering the UK will be classified as imports. The clause will also maintain the existing link between the VAT and customs duty on imports.

VAT raised approximately £120 billion last year via 2.2 million VAT-registered traders—about 20% of the Exchequer’s entire tax yield. It is therefore vital that our VAT system continues to operate effectively after EU exit, whatever the outcome. Part 3 of the Bill covers value added tax and consists of three clauses that will be key to maintaining a fully functioning VAT system. The changes ultimately required will, of course, be dependent on the outcome of negotiations. Our intention, as outlined in our White Paper, is to keep VAT processes after our EU exit as close as possible to what they are now.

Under existing EU and UK rules for intra-EU trade in goods for VAT-registered businesses, the VAT on goods coming into the UK from the EU is known as acquisition VAT. Such goods are not subject to routine customs control or customs duty. Clause 41 will make changes key to ensuring that, in the absence of an agreement, goods entering the UK from the EU will continue to be subject to VAT. It will abolish the concept of acquisition for goods that enter the UK from the EU, classifying them as imports instead.

Clause 41 will also replace section 15 of the Value Added Tax Act, which determines when goods are imported for VAT purposes and who is liable for that VAT, with a new section 15. This change merely reflects the fact that the customs rules will be contained in UK rather than EU law. Time of importation and liability for import VAT will still be connected to the equivalent rules for import duty. No other changes will be made as a result of the clause.

Operating in conjunction with schedule 8, clause 41 will ensure that goods coming from the EU will be classified and treated as imports in the same way as goods entering the UK from the rest of the world. The application of import VAT will ensure a level playing field on which EU businesses do not have a competitive advantage over UK businesses.

As the Government outlined in our autumn Budget, VAT-registered businesses currently benefit from postponed accounting for VAT when importing goods from the EU. The Government recognise the importance of such arrangements to business because of the cash flow advantage they provide. We will take that into account when considering potential changes after EU exit and will look at options to mitigate any impact on cash flow.

Clause 42 will make changes that ensure that the status of EU law in relation to VAT is clear. The European Union (Withdrawal) Bill lays out the Government’s general approach to EU legislation post-EU exit. On VAT, we need to take steps to ensure that the regime works effectively once we have left. The clause will result in EU legislation being retained in respect of VAT only where it is sensible to do so. The approach adopted is as we envisaged in the European Union (Withdrawal) Bill.

Clause 42 will disapply EU regulations that relate to VAT, except the VAT implementing regulation. In the main, those other regulations relate to single market reciprocal arrangements such as for exchange of information; depending on the outcome of negotiations, they will be superfluous after EU exit. Removal of EU legislation that is no longer required or is otherwise deficient is anticipated in the European Union (Withdrawal) Bill.

The clause will, however, retain the VAT implementing regulation as a tool to interpret EU-derived law. This is required for ongoing certainty and consistency of interpretation of the Value Added Tax Act, providing certainty to business and the Exchequer. Where appropriate, parts of the VAT implementing regulation can be removed by secondary legislation—for example, parts specific to EU transactions that, subject to negotiations, will not be required when the UK is no longer a member of the EU.

In line with the European Union (Withdrawal) Bill, clause 42 confirms that certain rights and obligations recognised before exit day will continue to apply for VAT, while rights and obligations no longer considered appropriate or relevant for UK VAT, such as those that relate purely to membership of the EU, may be disapplied or modified by regulations. The clause also reinforces that other provisions of the European Union (Withdrawal) Bill will apply, particularly clause 6, on “Interpretation of retained EU law”. VAT law and policy has been developed to a significant extent through European case law, including through application of that case law in the UK courts, so UK legislation and policy are inextricably linked with the case law. The clause reinforces that EU principles and case law on VAT that were determined pre-EU exit will continue to apply when interpreting domestic VAT legislation. For example, it identifies the Halifax and Kittel principles of abuse, which have been instrumental in tackling avoidance and “missing trader” fraud and have protected billions of pounds of revenue.

Amendment 133 seeks to change the parliamentary procedure for the exercise of powers under clause 42 from negative to draft affirmative. The Bill ensures that the scrutiny procedures that apply to the exercise of each power are appropriate and proportionate. The procedures take into account the technicality of the regulations and the frequency with which they are likely to be made.

Clause 42 outlines how EU law relating to VAT will apply post-exit. The powers in clause 42 relate to residual rights, powers and obligations in relation to VAT incorporated by clause 4 of the European Union (Withdrawal) Bill and to the VAT implementing regulation. They are therefore limited to those specific areas. The EU law affected by those provisions reflects the fact that we are currently in the EU. Once we exit, some of it will no longer be relevant or could not be applied in its current format. Given the limited width of the powers in the clause, it is appropriate and proportionate that their exercise should be subject to the negative procedure. The Government therefore urge the Committee to resist amendment 133.

Amendments 83 and 84 seek to limit the duration of the delegated power under clause 42 to the period ending two years after the United Kingdom leaves the European Union. They are two of a number of amendments that would time-limit powers in the Bill. As the Committee is aware, the Bill is drafted to cater for a variety of long-term outcomes from negotiations on our future relationship with the EU. It is essential that we have a fully functioning VAT system on and after EU exit, including during any implementation period. The powers in clause 42 have a part in ensuring that we are able to achieve that. As we do not know the outcome of negotiations with the EU, or exactly when the final outcome will be confirmed, it would not be prudent to time-limit those powers at this stage. I therefore urge the Opposition not to press the amendments.

Clause 43 introduces schedule 8, which makes changes to the Value Added Tax Act 1994 and other consequential changes relating to VAT to take account of the UK’s withdrawal from the EU, should they be needed. The principal VAT directive sets out the framework for the EU’s VAT system. Unlike the EU’s customs regime, there is little directly applicable legislation in the VAT sphere.

The VAT system in the UK is set out in the Value Added Tax Act 1994. The main body of the Act sets out the general rules, and the schedules set out the detail of areas such as the scope of tax reliefs and registration requirements. As is usual in tax law, the Act provides a range of powers for the detailed rules—in particular in relation to the administrative framework of the tax—to be set out in secondary legislation, of which the Value Added Tax Regulations 1995 are an example. That allows us to react quickly to changing circumstances or to threats to tax, or generally to ensure its effective administration and collection. Appropriate parliamentary scrutiny is provided for that secondary legislation. Statutory instruments that deal with the administration of tax are generally subject to the negative procedure, whereas those that make more fundamental changes are generally subject to the affirmative procedure. The changes made by schedule 8 are fully consistent with those principles.

The changes made by schedule 8 remove the many references to EU law and EU-specific rules and processes. In particular, they remove references to “acquisitions” and “dispatches”, which would no longer apply to trade in goods with the EU. Instead, they would become “imports” and “exports”. That requires the removal of numerous sections and schedules of the VAT Act associated with EU trade, and consequential amendments to many others. The VAT Act contains many existing powers, which schedule 8 amends to reflect those changes. Most changes are therefore necessary housekeeping to reflect changes to cross-border trade arising from our exit from the EU and changes in the Bill. They do not affect domestic trade or the underlying principles of the system.

However, there are some areas where, depending on the outcome of negotiations, more fundamental changes may be required. For example, there is a new power in relation to small parcels sent from abroad, to be used in the unlikely event of the contingency scenario. That enables the transfer of the liability to account for import VAT from the UK recipient to the overseas seller, and provides for the necessary administration and compliance framework. There is also a power to govern the VAT treatment of goods entering the UK from another territory in a UK customs union, which would allow for a modified treatment for trade with the EU if that is the result of negotiations.

In addition, there is a new provision that enables HMRC to obtain information from businesses so that it can share that with others, subject to appropriate safeguards, if doing so is part of an international VAT agreement. That would ensure that the UK can give effect to agreements that help combat international avoidance and evasion. That power can be used only if the agreement facilitates the administration, collection or enforcement of UK VAT. That mirrors the power for excise.

Clause 43 and the associated schedule 8 are necessary to maintain the UK’s VAT system, provide certainty for the UK’s cross-border trade and maintain revenue flows as we leave the EU. They also, along with other powers in the Bill, provide the ability to make changes to reflect the outcome of negotiations.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

I hope the Minister does it with more feeling next time. That was a whip through the clauses, but I will read them. The fact that any of us have any sentience at all is wonderful. I also notice that the Minister’s cut and paste button in relation to appropriate and proportionate has been in overdrive again.

This area of our future relationship with the European Union has been the subject of much public debate, because, like much of the Bill, part 3 is conditional upon the outcome of the Government’s Brexit negotiations, which appeared to take a further turn for the worse this week. This section of the Bill provides a framework for a new VAT arrangement between the UK and EU member states, to be enacted should we need to do so. Clause 41 makes no provision for the abolition of acquisitions, as far as I can gather, as a taxable event for goods entering the UK from member states and, in the absence of a negotiated agreement, goods would be subject to import VAT.

Amendment 133 seeks to add the affirmative procedure to secondary regulations under clause 42. The clause sets out that the automatic conversion of EU law into UK law following exit from the European Union does not apply in matters relating to VAT. It also provides the Treasury with the power to exclude or modify any other EU rights, powers, liabilities, restrictions, remedies and procedures by statutory instrument, currently subject to the negative procedure. The amendment would ensure that the modification or exclusion of EU rights, powers, procedures and so on would be subject to affirmative resolution.

It is a fact that when we leave the European Union, we will leave the EU VAT area, and therefore we cannot be subject to the rules governing it, at least until further negotiations have taken place. That is why we have not chosen to table amendments to clause 41, which as I have outlined, sets out the major legal changes necessary to exit from the European Union, but have instead sought to ensure that any further regulations necessary are subject to the proper scrutiny—appropriate and proportionate proper scrutiny.

I would like the Committee to once again note that the amendment is in line with the recommendations made by the Delegated Powers and Regulatory Reform Committee, which explicitly called for the powers to be made affirmative, as we are seeking to do. The report says:

“Clause 42(2) contains a wide power for the Treasury to amend VAT law which is retained EU law under clause 4 of the current European Union (Withdrawal) Bill...Regulations under these powers are subject to annulment in pursuance of a resolution of the House of Commons. Given the importance and scope of the powers in clauses 42 and 47, we do not consider that the regulations should only ever be subject to the negative procedure.”

I again appeal to members of the Committee to heed the advice of the Delegated Powers Committee and support our amendment to introduce proper parliamentary scrutiny to regulations made under clause 42.

Amendments 83 and 84 relate to clause 42. They seek to add what are commonly known as sunset clauses to the provisions in clause 42 and would limit the duration of the delegated powers to the period ending two years after the United Kingdom leaves the European Union, which we think is appropriate and proportionate in the circumstances.

As was pointed out by the Delegated Powers and Regulatory Reform Committee, the Government’s own White Paper, “Legislating for the United Kingdom’s withdrawal from the European Union”, acknowledged the importance of time-limiting delegated powers where powers are not needed in perpetuity, so there seems to be a little bit of flip-flopping on that one from the Government. Indeed, clauses 7 to 9 of the European Union (Withdrawal) Bill contain important time limits on the use of delegated powers. There are no corresponding sunset clauses on the use of delegated powers in this Bill—there seems to be a bit of a pick-and-mix approach to scrutiny. Despite the Treasury’s delegated powers memorandum acknowledging that the Bill has been drafted to cater for various contingencies that might never materialise—for example, if the UK left the EU without a negotiated agreement—we must have these scrutiny powers in place to keep checks on that one.

The Delegated Powers and Regulatory Reform Committee proposed a time limit on the powers under clause 42. That is exactly what amendments 83 and 84 are intended to achieve. They would bring the Taxation (Cross-border Trade) Bill in line with the procedures currently proposed in the European Union (Withdrawal) Bill. If the Minister is unwilling to restrict the use of powers in this instance, perhaps he might explain why the Government believe the procedures to be appropriate for the European Union (Withdrawal) Bill but not for this one. There seems to be no possible justification for the powers being created under this Bill to last in perpetuity while those in the European Union (Withdrawal) Bill do not. It would be helpful if he could enlighten us on that particular question; I look forward, if I may say so, to his gymnastics in that regard.

Similarly, if it is true that these powers may be necessary at any point after the establishment of a functioning customs framework, perhaps the Minister can give us a specific example of how and under what circumstances they might be used—a masterclass, no doubt. Failing that, I should hope that the Government will see fit to include the sunset clauses we are proposing in amendments 83 and 84, which pose no threat to the proper establishment of a customs system, but merely ensure that the Bill does not confer unnecessary powers beyond a reasonable point.

Amendments 83 and 84 are all the more important given the unprecedented steps taken by the Government, in a shift of constitutional power that has been recognised right across the piece, including by many of the witnesses who came before us. I have repeated that issue already, and no doubt it will be repeated time and again. I may borrow the Minister’s cut and paste button to repeat it—

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Yes, two buttons: control and whatever it is. As I have mentioned, we are not alone in this view, which is shared by the Delegated Powers and Regulatory Reform Committee. The Government ought to respond to our genuine concerns in this matter, and we will persist in asking them until they do respond to our genuine concerns and those of other agencies, bodies, organisations and people.

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

I am grateful to the hon. Gentleman for his invitation to do some gymnastics, but I do not think they will be necessary, because his questions are easily answered. He referred to my cut and paste button in respect of “appropriate” and “proportionate” and he is right; there is a cut and paste button for those terms, because they are extremely important. At the heart of this is his cut and paste button, in which he regularly says something along the lines of, “All we are asking for is appropriate scrutiny on these important matters.” So the argument has gone back and forth over every area of the Bill as we have ranged across the various clauses.

Moving on to the hon. Gentleman’s remarks about the House of Lords Delegated Powers and Regulatory Reform Committee and its comments on sunset clauses, and his specific question about why we would have sunset clauses in the context of the European Union (Withdrawal) Bill but they would not be appropriate in the case of this Bill, the answers are clear and require no gymnastics at all. They are that the aims of this Bill are different from those of other Brexit Bills.

For example, while the European Union (Withdrawal) Bill makes provision for day one, with the understanding that further primary legislation will be made to supplement it, this Bill will be required in order to maintain a functioning customs regime, an effective VAT regime—as we are currently discussing in the context of these clauses—and an excise regime on an ongoing basis. There is a fundamental distinction between bringing the EU acquis into UK law and handling that process, which is the principal rationale for the European Union (Withdrawal) Bill, and what is happening on a dynamic, ongoing basis in terms of a customs, VAT and excise regime.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

Can I read from the Minister’s remarks that the European Union (Withdrawal) Bill does not seek to create new institutions in, for example, environmental policy or other areas, which potentially need to be just as flexible in many ways as the taxation and customs system? I am struggling to grasp the essence of the Minister’s distinction here. Maybe he could provide more information.

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

I have made the point about the day one situation with the European Union (Withdrawal) Bill and the primary legislation, and so on, that will follow. I will resist the urge to start debating another Bill, other than to repeat the points I have made about this Bill. We are of necessity in the context of customs, customs duties, export duties, import duties, VAT, excise regimes and excise duty. We are dealing with a rapidly changing set of measures going forward. We are in the middle of a complex negotiation, the outcome of which is not clear at this particular moment. That is why in many instances in this Bill where we have had these ongoing repeated debates about whether a stiffer, tougher form of scrutiny is necessary, we feel that a balance has to be struck, which is appropriate and proportionate—to use my cut and paste button again—between the needs of parliamentary scrutiny where it is appropriate, and the ability to get on with the job and ensure that this country is match fit for life outside of the European Union in terms of its imports, exports and trade.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to the Minister for his response. However, we have been informed that the reason why sunset clauses are appropriate in the EU (Withdrawal) Bill and not in this Bill is because this Bill needs a more dynamic system—if I understand the Minister’s comments correctly—whereas that is not necessary in the EU (Withdrawal) Bill. I am still struggling, because if we look at an area such as environmental legislation, we have the institutions that are created, the overall framework and then the calibration within it that would respond to scientific information—levels of pollution, for example. There is also an international context with different treaties. Perhaps this is something we could correspond about another time, but I am struggling to discern the fundamental qualitative difference between this policy area, which apparently cannot be amenable to sunset clauses, and those contained in the EU (Withdrawal) Bill.

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

I will be brief, because we are beginning to go around in circles, but I am very happy to discuss any of these matters offline, or to receive a letter from the hon. Lady, on the points she has raised.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

We will not press the clause to a vote, because we have persistently made this point all the time. I completely accept that it gets pretty tedious, but it gets pretty tedious from this side as well, when we keep on getting told that Parliament cannot have the scrutiny that it constitutionally and rightly deserves. We will come back to this point.

I have to say that other nations and democracies, much younger than this one, are perfectly capable of dealing with such issues, very detailed issues, without this sort of carte blanche approach that the Government seem to take, where they want to block every opportunity for us to scrutinise. They are not even prepared, when things might have calmed down in relation to the processes of exit, to give us the opportunity to check them via a sunset clause and that is deeply regrettable.

Question put and agreed to.

Clause 41 accordingly ordered to stand part of the Bill.

Clauses 42 and 43 ordered to stand part of the Bill.

Schedule 8 agreed to.

Clause 44