House of Commons Hansard Debates for 22 May 1991

Mr. Archer : Before the Minister passes on to the next stage in her argument, will she take account of the fact that Fashion First has renounced any right to claim, so there will be no question of two people claiming the same amount of money. The company has said, "We are perfectly happy that you should pay the money to the people who originally paid it to you."

Mrs. Shephard : I have taken account of that matter, but the point is that the contract was between Johnson's and Fashion First and that is where the complaint and the problem for Johnson's lies. What should have happened? Fashion First should have reimbursed Johnson's for the import VAT that the agent had paid to customs. There is no dispute about that.

Fashion First should then have deducted as input tax on its next VAT return the import VAT paid but obviously it went into liquidation.

Fashion First would properly have obtained the imported goods effectively tax free and would have accounted to customs for VAT on any onward supplies that it made. In respect of those goods, Johnson's could not have been entitled to deduct as input tax on its VAT return the import VAT paid on behalf of Fashion First, because Fashion First was the importer.

As regards deduction of input tax, VAT registered traders can, subject to the normal VAT rules, treat as input tax the VAT that they have paid on goods supplied to them, or imported by them, where the goods are used or to be used for the purpose of their business. In the case of imported goods only, the trader who imports the goods for the purpose of his business has the right to treat the import VAT as his input tax. A freight agent who pays import charges on behalf of an importer cannot acquire the importer's right.

What seems to have happened is this. Fashion First went into liquidation and failed to reimburse Johnson's for the import VAT that the agent had paid to customs. That is where the dispute lies--the failure of the contract between Johnson's and Fashion First. Fashion First may or may not have deducted as input tax on its next VAT return the import VAT paid, although, as the right hon. and learned Gentleman says, a copy letter dated 28 September 1989 from Fashion First to Johnson's states that such a deduction had not and would not be made.

Mr. Archer : At the risk of being tiresome, I understand that in the first instance one would have expected Fashion First to reimburse Johnson's and then to deduct it from its VAT on onward sale. However, in this case that did not happen. J and S Garments simply stands in the same

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position as Fashion First for that purpose. Fashion First has renounced any interest in the matter. Customs have had the amount twice. Apart from a rather curious logic, why should one not treat J and S Garments as if it was in the shoes of Fashion First?

Mrs. Shephard : If the right hon. and learned Gentleman could allow me pursue my argument, I shall come to a clear exposition of the commercial arrangements that shippers and forwarders need to take into account when they enter into such contracts with importers. That is set out in VAT public notice 702.

Fashion First refused the goods and the German supplier resold them to another United Kingdom trader,J and S Garments, so they kept on circulating within the United Kingdom and they were not re-exported. No VAT was charged on that transaction. J and S Garments neither paid import VAT on the goods, nor made a corresponding deduction of that VAT in input tax on its next VAT return. J and S obtained the imported goods as if it had both paid the import VAT and subsequently deducted it. In no circumstances would either Johnson's or J and S have been entitled to deduct as input tax on their respective VAT returns the import VAT paid on behalf of Fashion First.

In law, only the importer who has imported the goods for the purpose of his business can reclaim the import VAT and he does so by means of normal VAT returns. An agent who enters into a commercial arrangement to pay import charges on behalf of an importer does not acquire his principal's right to reclaim the import VAT as input tax. That is stated unequivocally in the June 1986 edition of public notice 702. I shall read that in full, because it will help clarify the argument. The leaflet says :

"If you act as a shipping or forwarding agent for importers and pay or defer VAT on their behalf, you cannot reclaim the VAT as input tax because the goods are not imported for the purpose of your business. Although Customs usually deal with agents in relation to the importation and clearance of goods, it is the importer's responsibility to ensure that the goods are properly entered and to pay VAT and other charges due. Only the importer can, subject to the normal rules, reclaim any VAT paid as input tax.

If for any reason you decide to pay the VAT or defer it to your own account on behalf of the importer, you should remember that this is a commercial arrangement between you and your principal. Payment of VAT in these circumstances does not entitle you to make any reclaim to Customs in the event of difficulty. Customs regard the payment as having been made by the importer. Whether or not the importer has received the goods the importer has a legal right to reclaim the tax subject to normal roles.

If the importer fails to pay you the VAT or goes into liquidation without reimbursing you, you cannot recover the money from Customs and Excise. Your only recourse is to the importer".

I know that that is not the burden of the right hon. and learned Gentleman's argument. He is saying that that is the law, but we should see common sense and try to change it. My point is that nothing could possibly be clearer than the position laid out in those paragraphs. It is absolutely clear that if a shipper is not paid by an importer with whom he has entered into a contract, he cannot recover the money from Customs and Excise ; his only recourse is to the importer. Johnson Freight Services, as an experienced forwarding agent, which undoubtedly provides services for merchants in the import-export business, would be aware of that.

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Mr. Archer : The hon. Lady has been extremely courteous and helpful in giving way. Does she accept that that provision is to protect customs against a loss? I accept that if there is a loss, it should not fall on customs. However, in this case there has been no loss ; customs has received the money twice.

Mrs. Shephard : I do not accept that. If two parties enter into a commercial arrangement, it is no part of customs to bail out either party in the event of the arrangement's failing. That is the point. The right hon. and learned Gentleman mentioned extra-statutory concessions. Customs staff are not quite the hard-hearted and faceless persons whom he is trying to depict. I feel it incumbent upon me to defend them in their absence. An extra-statutory concession was introduced in 1988.

VAT is a tax on the consumption of goods and services in the United Kingdom. If goods on which tax has been paid to customs at import are re- exported and have not entered the UK economy, it is clearly unfair to the agent who paid the tax on behalf of an importer that he should have to bear the cost should the importer not reimburse him. During 1988, agents and freight forwarders made representations to customs about that problem. In July 1988 the Minister then responsible for customs--my right hon. Friend the hon. Member for St. Albans (Mr. Lilley), now Secretary of State for Trade and Industry--announced in the House an extra-statutory trial scheme for repayment to agents where certain conditions were met, and 30 June 1988 was adopted as the start time.

It is deeply irritating to be caught on the wrong side of such a line. However, in this case, because one of the criteria is that the goods should have been re-exported in the same state, the extra-statutory concession would not have helped Johnson. It is specifically to deal with the case where goods have not entered into and are not being circulated in the United Kingdom economy. That is why that concession cannot apply to Johnson Freight Services. Sadly, it entered into a commercial arrangement with Fashion First that went wrong. If Fashion First has gone into liquidation, perhaps Johnson's first recourse should be to the liquidators.

Normally, Adjournment debates offer a window of opportunity, but I have been limited to giving the clearest possible explanation of the Government's policy. VAT public notice 702 is clear. The fact that there might be a commercial risk involving VAT and customs is laid out clearly in the leaflet. It is clear that only importers can reclaim VAT on goods that are imported for the purpose of business and, if a problem occurs, the shipping agent, the freight forwarder, cannot have recourse to customs.

Mr. Archer : I am criticising not the clarity of the notice but the injustice of it. Is the Minister saying that, under no circumstances, would customs or the Treasury consider amending the notice to take account of circumstances where customs has had the money twice?

Mrs. Shephard : One can never say never. In the past, Treasury Ministers have considered aspects of VAT schemes and the way in which VAT works to see what injustices might be righted.

The commercial position of freight forwarders is so clearly laid out in VAT public notice 702 that they are

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aware of the risk. Should a company with which they have a contract go into liquidation, they cannot have recourse to customs. I sympathise with the predicament of Johnson Freight Services and with the arguments that were advanced by the right hon. and learned Gentleman, with all the skill for which he is well known. In drawing up rules and legal arrangements for contingencies, it is important to ensure that the rules and regulations and risks are laid out clearly so that those who are entering into arrangements are aware of the risks that they may be running.

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It is important to protect the revenue. We are all rather grateful for the proceeds of VAT as national revenue. A tax- collecting system must be so arranged that the possibilities of fraud and mistake are minimised. I have much sympathy for the right hon. and learned Gentleman and much admiration for the way in which he presented his case. I said that one never says never, but, as things stand, we must stick to the position laid out in VAT public notice 702.

Question put and agreed to.

Adjourned accordingly at two minutes to Ten o'clock.

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