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Tyler, Paul

Vaughan, Sir Gerard

Viggers, Peter

Waldegrave, Rt Hon William

Wallace, James

Waller, Gary

Ward, John

Wardle, Charles (Bexhill)

Waterson, Nigel

Watts, John

Wells, Bowen

Wheeler, Rt Hon Sir John

Whitney, Ray

Widdecombe, Ann

Wiggin, Sir Jerry

Wigley, Dafydd

Willetts, David

Wolfson, Mark

Wood, Timothy

Yeo, Tim

Young, Sir George (Acton)

Tellers for the Noes :

Mr. Timothy Kirkhope and

Mr. Robert G. Hughes.

Question accordingly negatived.

Mr. Andrew Smith (Oxford, East) : I beg to move amendment No. 9, in clause 1, page 1, line 9, after II', insert

(except Article 99 on page 16 of Cm 1934)'.

The Second Deputy Chairman : With this, it will be convenient also to discuss the following amendments : No. 45, in clause 1, page 1, line 10, after 1992', insert

but not Article 99 in Title II thereof'.

No. 422, in clause 1, page 1, line 9, after II', insert (except Article 99 on page 16 of Cm. 1934, so far as it may relate to the ending of derogations permitting zero-rating of VAT in the United Kingdom.).'.

No. 423, in clause 1, page 1, line 9, after II', insert (except Article 99 on page 16 of Cm. 1934, so far as it may relate to further harmonisation in respect of excise or other internal taxes.).'.

Mr. Smith : Amendment No. 9, which would delete article 99 from the Bill, is not one that we shall pursue to a Division.-- [Hon. Members :-- "Why not?"] It is a probing amendment, intended to allow the Committee an opportunity to debate important issues relating to the harmonisation of indirect taxation.

Mr. Michael Spicer : Normally in Committee--certainly in the 20 years that I have been a Member of Parliament--right hon. and hon. Members try to refine a Bill. The whole purpose of the Committee stage is to go through a Bill in detail, change it as one goes along, improve it, and so on. We have another 17 Labour amendments to consider. What is the purpose of them when a member of the Opposition Front Bench pops up and says, "We've tabled this amendment but we're not going to vote for it. We are going to speak and vote against it." The whole thing is becoming a charade. What is going on?

Mr. Smith : The hon. Gentleman knows full well that we will certainly be pressing a number of amendments to a Division--such as amendment No. 27, concerning the social chapter, and others that reflect Labour party policy.

Mr. Cash : Does not the hon. Gentleman realise that several titles in the treaty are not included in the Bill? He compounds the point made by my hon. Friend the Member for Worcestershire, South (Mr. Spicer), that this is becoming an absurdity on the part of the Opposition. Not only are they not prepared to put their votes where their windbaggery is, but they are including a whole range of matters that are not in the Bill.

Mr. Smith : The hon. Member for Stafford (Mr. Cash) is the last person to speak about windbaggery--and we will take no lectures from him on absurdity either.

Article 99 states :

"The Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee, adopt

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provisions for the harmonization of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonization is necessary to ensure the establishment and the functioning of the internal market within the time limit laid down in Article 7a."

It is important to emphasise the words

"to the extent that such harmonization is necessary to ensure". Labour has not supported and does not support the contention that it is necessary to make indirect tax rates the same to ensure that the single market operates effectively.

In particular, we have vigorously opposed any moves to end the opportunity for Britain to levy a zero rate of value added tax. We equally oppose the move that the Government are reportedly contemplating, to impose VAT on newspapers, books and publications in the forthcoming Budget. Any such move would place a wholly undesirable burden on consumers and would inflict gratuitous damage on important national industries at this time of deep recession. What is more, such a change could not be justified as necessary for the functioning of the single market.

Mr. Spearing : I am grateful to my hon. Friend. I did not wish to interrupt him, but I wanted to intervene on a specific point. I am pleased to hear what he said because there will be absolute unanimity among Opposition parties, except perhaps one, in agreeing with him. Can I take it therefore that the Opposition Front Bench will wholeheartedly support amendment No. 422 which has been selected as part of this group and which states that the Bill will not apply to anything which ends derogation of zero rating in VAT in the United Kingdom? From what he has said, I understand that my hon. Friend will be voting for that amendment in the name of my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) which will be put to a vote. Perhaps he could give the House that assurance.

8.30 pm

Mr. Smith : I am grateful for my hon. Friend's support for what I was saying about the importance of defending Britain's right to sustain zero rating. As I read amendment No. 422, it would not approve article 99 as it specifies :

"so far as it may relate to the ending of derogations permitting zero- rating of VAT in the United Kingdom".

As I have said, I do not accept that it would or should be taken to end zero rating derogation and therefore it would not be necessary to support that amendment to sustain the position that I have been advocating. However, I certainly agree with the spirit in which the amendment was tabled.

Mr. Spearing : I am grateful to my hon. Friend. This is Committee style, and I am quite sure that he agrees with this form of discussion.

Article 99 in its new form would surely give the Community that very power. Unlike the existing article 99, which is entrenched in the treaty of Rome, there is no escape clause, as the Home Secretary was vigorously advocating in the last debate saying that article 8a was not relevant because it already exists. This is a new article 99 and if the amendment is carried, as I hope it will be, the Bill will provide that no regulation or directive from the European Community can increase or apply VAT to anything which is at the moment derogated. I would have thought that that would have appealed enormously to my

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hon. Friend. Surely it is the legal and precise reading of such an amendment because we would have a new article 99 after the treaty of European union.

Mr. Smith : As I said, I do not accept that article 99 should be interpreted in that way.

I intended to press the Paymaster General on the very point that my hon. Friend raised about what powers specifically are granted under the treaty and what follows from the treaty in relation to Britain's ability to levy a zero rate of VAT. As I was saying, it would be especially damaging for such a change to be contemplated. Moreover, it would be inconsistent with the pledges that the Prime Minister made during the general election campaign.

It would also be inconsistent with what the Paymaster General said when he assured the hon. and learned Member for Montgomery (Mr. Carlile) in a letter on 6 January 1993 that there was no intention to extend VAT to newspapers, books and publications.

Mr. Michael Spicer : If the hon. Gentleman believes in that, and in my view it is wholly admirable, for various reasons which I hope to explain, why is he equivocal about pressing amendment No. 422 which the hon. Member for Newham, South (Mr. Spearing) has brought to his attention?

Mr. Smith : I have made it clear that I do not interpret article 99 as involving that danger. Moreover, I would not advocate supporting an amendment that would wreck the treaty.

In any event, it is somewhat ironic that we are debating this part of the Bill today, four weeks after the advent of the single market and the 31 December 1992 deadline set out in article 7a to which article 99 refers. The single market is of course already with us and this evening's debate provides us with an early opportunity to press the Government on their judgment of how well or badly the new arrangements are working out in practice and, in particular, on how things stand in regard to the operation of the new VAT regime. The Minister will have seen many of the reports in the press highlighting the difficulties which are all the more serious because they impede consumers and businesses from making the most of the opportunities which the single market offers.

The Daily Telegraph of Monday 18 January reported a number of serious problems. It said that :

"Accountants phone lines have been jammed by companies who cannot ship goods around Europe because of tax difficulties say the situation is chaos with no prospect for improvement for months yet." Christine Sanderson of Price Waterhouse was quoted as saying : "Many people do not understand what the changes are and so they are not properly prepared. But the most disappointing aspect has been that various countries are not prepared. We had believed that government would get their act together."

The article continues :

"Trouble spots have emerged in Spain, Portugal, Italy and, perhaps more surprisingly, in Belgium and the Netherlands where lorries have been kept waiting at customs points while officials checked documents which in theory should no longer be required."

The article goes on to itemise other difficulties :

"Huge backlogs in handing out VAT numbers on the continent. VAT registration is absolutely essential to the working of the new system."

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Although Britain is well prepared in that respect, those other member states which have used other tax codes have now had to dish out many new tax codes specifically for the purpose of VAT. The article continues :

"Price Waterhouse estimate that there are millions' of VAT numbers to be issued, a process which could take years. Companies selling to buyers who have not yet received a VAT number could find themselves liable for the payments which may not be recoverable.".

Mr. James Molyneaux (Lagan Valley) : When I paid one of my very rare visits to Brussels last November, we were given lectures by officials of the Commission and when we asked about the transition period beginning 1 January in regard to VAT in particular, they all confessed that it will be a sheer muddle because although the Governments had exhorted each other to obey the rules and to have everything in place on 1 January, there was no hope of that happening for some months.

May I also back-track to support the hon. Member for Newham, South (Mr. Spearing), who I call my hon. Friend for these purposes, in regard to his point about derogation. As leader of an Opposition party, I have always taken the view that whenever we are in doubt we should oppose the Government of the day, whatever colour it may be, to safeguard those who send us here. I hope that the hon. Gentleman and his colleagues, in the light of what will be unsatisfactory assurances from the Government, will reconsider their decision not to vote on the amendment.

Mr. Smith : I agree with the first part of what the hon. Gentleman said. Clearly, it is incumbent on Governments to get their act together for the introduction of the new VAT regime. Can the Minister say what information the Government now have on the adequacy of those preparations and how far are other countries properly geared up to issuing VAT numbers and to the full and fair administration of the new system?

I now return to the other difficulties itemised in the article. They include confusion over goods currently in Customs warehouses awaiting export. The article stated :

"In Holland and Belgium, tax authorities have told companies they will not release goods that entered warehouses before January 1 unless VAT is paid first. This form of back tax is not legal, according to British tax opinion."

It would be helpful to have the Government view about that. The article went on to refer to what it described as

"the EEC's infamous simplification directive, which was intended to make it easier for companies exporting to buyers in one EC country via a middleman in a third member state ... That has already broken down in Spain. The Spanish have said they will not implement the directive until September, so British companies selling indirectly to Spain will have to register there temporarily."

It concluded by drawing attention to what it described as "the biggest problem yet to come."

That was the need for companies, by 10 February, to file details of their January exports and imports with national tax authorities. It pointed out that the relevant form

"asks 19 different questions, including the weight of the goods shipped, their value and a code number."

Although ignoring those is a criminal offence, the article said : "one medium-sized exporter reckons it will have to double its export clerical staff to deal with the new requirement, which in the past was handled entirely by government officials."

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May we have the Government's estimation, on the basis of information available to them, of the extent of those difficulties and what is being done about them?

Mr. Robert Sheldon (Ashton-under-Lyne) : My hon. Friend is making a vital point. Whereas ordinary imports and exports can be dealt with--it will take time, but such matters will eventually be sorted out--the authorities have not got anywhere near sorting out the intercountry, third party trade, where a trading body buys from one country and sells to another, conducting a valuable wholesaling function. Proper provision has not been made for that. It may be months before those concerned even begin to work out satisfactory solutions. It is a serious matter for a trading country such as Britain.

Mr. Smith : I share my right hon. Friend's concern about that serious issue. I fear that the problems will result in what was intended to be a better system getting off to a damaging start. As he says, it could act as a great disadvantage to a country such as ours. A great proportion of our production goes for export, exceeded, sadly, by the faster rising level of imports. Are the problems to which I referred confirmed by the information that the Minister is receiving? If so, what action is being taken by the British Government and other member states to resolve them?

Further to the comments of my hon. Friend the Member for Newham, South (Mr. Spearing), will the Minister state the British Government's position on, and interpretation of, the Community's legal position on the future of the legally binding minimum VAT rate of 15 per cent., which the Chancellor conceded in July last year was part of the package which then enabled Britain to retain its zero rates, at least to the end of 1996, when the agreement comes up for review? An article in the Financial Times on 28 July last year said :

"There is still some confusion about whether member states have committed themselves to having a legally binding minimum VAT rate for ever. Mr. Lamont indicated that the directive would lapse if ministers failed to reach unanimous agreement on a renewed legally binding minimum before 1996. The Community would then be subject only to last year's non-binding accord."

It reports others as disagreeing, pointing out that Mr. Jorge Braga de Macedo of Portugal, who was the Chancellor's predecessor as president of the Council of Finance Ministers, believed that "the legally binding minimum would be automatically renewed if they failed to agree. That would deprive dissenters, possibly including Britain, of any effective veto."

That issue is of great concern to hon. Members and I hope that the Minister will give a clear answer, including the benefit of the legal advice that the Government are receiving on the issue.

8.45 pm

Mr. Cash : In view of the case that the hon. Gentleman is putting on behalf of the Labour party, may I ask him to say whether he is in favour of what appears to be an argument for the harmonisation of VAT and if he appreciates the corollary to that, which is in the Onno Ruding report, published in the summer and clearly Commission policy, for the harmonisation of business taxes? Is that Labour party policy? Considering the date 1 January 1996 and all that will be going on at about that time, he might clarify whether Labour is also in favour of a single currency.

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Mr. Smith : There will be other occasions to deal with matters such as those. I am anxious to remain in order and to relate my arguments to the amendments now before the Committee. I have already made it clear that the Labour party does not believe it necessary to levy the same rate of indirect tax for the single market to operate properly.

I have put a number of questions to the Minister. Given the importance of developments that will be occurring in future years on the subjects I have raised, perhaps the Minister will give the latest Government thinking on the arguments for a move to an origin-based system rather than the destination-based system of VAT that is now operating. The change has been advocated by the Commission and others. What is the Minister's response, for example, to the arguments advanced by the Simpler Trade Procedures Board, known as Sitpro, that an origin-based system would be an improvement because it would replicate the domestic system, dispense with the requirement for a European sales listing, eliminate the need for evidence that goods have left the country and avoid the complex problems of triangulation--or strangulation, as some in the trade are already calling it?

May we also be assured that if the Government were looking to an origin- based regime, as the Commission is likely to press member states to consider, our zero rates could be retained? It is important for us to know what stance the Government are taking on Community discussion of those important policy issues.

Have there been any developments since the draft 7th VAT directive was considered by the Standing Committee on 2 December? At that time we debated, in particular, the question of the rate of VAT on imported works of art. Hon. Members in all parts of the House expressed concern about the future of London's international art market, which is worth well over £1 billion a year, if the proposals set out in that draft directive and imported works of art were to come into effect.

The directive would impose VAT of at least 5 per cent. on art entering the EC, and that could have grave consequences for British and European culture, discouraging the repatriation of art which has already gone abroad and provoking an outflow of the national heritage. We have seen from the Irish experience what such attacks can do to the art market. We continue to urge the Minister to accept the recommendations of the National Heritage Select Committee and adopt a vigorous stand against those potentially damaging proposals. Will he set out the Government's position on that issue?

The Minister and I have exchanged correspondence about the bloodstock industry. The advent of the single market and the lower rates of VAT applied in other member states have presented a dire threat to that industry because of the obvious attractions for buyers and sellers to trade in markets where the lower rate of VAT is charged.

So serious is that situation that Tattersalls, in response to its clients' preferences, have moved their yearling sales to Fairyhouse in Ireland for next September and in a news release announcing this sad fact it said :

This decision has been brought about by the United Kingdom Government steadfastly refusing to give the industry the competitive low rate available under EC law. Separately, they are considering the possibility of extending VAT registration to racehorse owners" I will come back to that in a minute. I am aware that there are ongoing discussions between representatives of the industry and of the Government on this and of the fact

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that some schemes attempting to ameliorate the situation have been put forward, namely, proposals on distance selling, on dispatch and acquisition and the flat rate farming scheme which we shall be debating again next week.

However, there have been problems about this between the Government and the industry. In that same news release, Tattersalls said : "in the last few days"

this was dated 24 November--

"an unexpected change has emerged from discussions with Customs and Excise. Previously we had been assured by Her Majesty's Government that all horses coming to Newmarket from Ireland and France and being sold by United Kingdom Flat Rate Farmers would be sold free of all United Kingdom VAT,"

--as stated in its previous press release of 21 September. "Customs have now changed their previous interpretation so that all Yearlings, previously purchased with Irish or French VAT charged in either of these two countries, would have to be sold by Flat Rate Farmers with VAT in Newmarket or VAT would have to be charged on entry into the United Kingdom."

So I ask the Paymaster General, as those most closely involved in this remain very concerned about the situation and the implications for the industry, what the Government will do about this. It is an industry in which Britain is a world leader and many jobs depend on it. It is imperative that it is not damaged further. I ask the Paymaster General to assure the House that the Government will give urgent and sympathetic reconsideration to those matters. I think he should look again at the proposal to allow racehorse owners and traders to register, as they can do in nine of the 12 member states. That is one of the key steps which have been suggested by people in the industry as being of most assistance in resolving the crisis.

Mr. Tim Smith (Beaconsfield) : Does the hon. Member accept the statement by Tattersalls which he read out that there is a competitively low rate of VAT available in this case? Is he suggesting that VAT should be lowered in the way they are suggesting?

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