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Schedule 2

VAT: Groups of companies

Mr. Heathcoat-Amory: I beg to move amendment No. 1, in page 102, line 15, at end insert--

'(5) For the purposes of subsection (2) above the Commissioners may only give notice in the circumstances specified in subsection (2) above if it appears to the Commissioners that--
(a) a company is engaged in a VAT avoidance scheme,

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(b) membership of the group threatens the collectability of tax, or
(c) the revenue loss associated with its membership of the group goes beyond the natural consequences of grouping.'. Although the amendment will be spoken to by my hon. Friend the Member for West Dorset (Mr. Letwin), I am moving it because of the rules of advocacy. My hon. Friend may conceivably have an indirect interest, which he will doubtless describe to the House.

Mr. Letwin: I declare a possible interest in that there may be clients of the bank of which I am a director who could be affected by the amendment. The amendment protects not so much against a Henry VIII clause--we have done much of that in this Parliament--as against a Charles I clause of the kind that has also become all too familiar. Such a clause would give Customs and Excise tyrannical powers over those who are unlucky enough to fall into its clutches. When the issue was raised in Committee, a great many organisations were quoted--organisations that are not politically partial, but rather, are bound by the rules of looking after the interests of their members and, indeed, the public interest. The Institute of Indirect Taxation said:

"Under all of these provisions"-- to which the amendment relates--


"the trigger for Customs powers is subjective." The Law Society said that


"it would be possible for the Commissioners retrospectively to degroup a company . . . that . . . ignores the possibility of a mistake being made by the Commissioners". The Institute of Directors said:


"The power, given by new section 43C (1) and (2),"-- to which the amendment relates--


"to remove companies from groups where that is necessary is far too wide." The Institute of Indirect Taxation had more to say, as did many other bodies, including the Institute of Chartered Accountants. The interesting point, which gave rise to our amendment, is that the Paymaster General--not the Financial Secretary, whom I excuse from blame entirely--remarked to the Committee, no doubt with the consent and acquiescence of the Financial Secretary:


"It is right that Customs has broad powers and some discretion, as has long been provided in our legislation. That is to ensure that abuse is dealt with adequately . . . That approach . . . is the conventional way to proceed."--[Official Report, Standing Committee B, 13 May 1999; c. 174-182.] There is some truth in the hon. Lady's observations. Alas, we find that the conventional way to proceed, under Governments of both colours over many years, has been to give quite excessive and undue powers to Customs and Excise, and it is about time that something was done to correct that. Finding a means of restricting the excessive, arbitrary powers of Customs and Excise--in order to protect legitimate businesses from the exercise of those arbitrary powers in ways that cause significant dislocation for many of our constituents--will be a major plank of the Conservative party's policies for going forward. That is particularly the case in respect of people with small and

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medium-sized businesses which cannot afford to employ legions of highly paid advisers to protect them against the exercise of those powers.

9.30 pm

Amendment No. 1 is astonishingly modest: I am amazed by our moderation. It would merely specify a little more closely how the commissioners must go about their actions. It says that commissioners can give notice of degrouping only if it appears to them that

"a company is engaged in a VAT avoidance scheme . . .


membership of the group threatens the collectability of tax, or . . .


the revenue loss associated with its membership of the group goes beyond the natural consequences of grouping."

Straightforwardly, that amounts to saying that the commissioners must satisfy themselves that there is a genuine abuse.

It is a perfectly reasonable proposition that the commissioners, before taking action that could be highly deleterious to the companies against which they are taking it, should at least satisfy themselves that there is a real abuse, and that it is not an honest and innocent scheme.

I note that the Financial Secretary has closed her mind to this proposal, because she is happily engaged in badinage with her colleagues on the Front Bench. I am afraid to say that that surprises us not in the least. We have just debated a proposal from my right hon. Friend the shadow Chancellor that was so eminently reasonable that the Economic Secretary was unable to find the slightest rationale for defeating it. We now have another such reasonable proposal, and I am sure that it will meet the same fate. Her Majesty's Government are unfortunately unwilling even to listen to the argument. The time will come when amendments such as amendment No. 1 will be seen for what they are: modest, perhaps even pusillanimous. In due course, we will need far more protection for the ordinary and innocent business man against the exercise of arbitrary power.

This is a test case. If the Government insist on rejecting amendment No. 1, it will show that even the most modest constraints on that arbitrary power, such as the requirement that commissioners should satisfy themselves of an abuse, is too much for the Government. The Financial Secretary should bear in mind the fact that--if she is lucky enough to catch your eye, Mr. Deputy Speaker, as I am sure she will be--what she says in her usual mellifluous and elegant fashion will be recorded in Hansard, and will ring down the ages as a statement of the Government's intention, which is that things should be done in the conventional way. That is what the Government will stand for: the proposition that the conventional way should be followed, and Customs and Excise should be given wholly arbitrary powers.

Some slight purpose will have been fulfilled by this debate if we at least get it on record that that is the Government's intention and design. It would, of course, be far better if, having heard these words, the Financial Secretary had a damascene conversion and accepted amendment No. 1, but that will not happen. We could then get on with the serious business of trying to put to rights something of which Governments of both colours--this is not a party point--have been culpable for the past 50 or 100 years, and which the Opposition at least intend to do something about.

Mr. Fabricant: I support the amendment, primarily because I have experienced the abuse that my hon. Friend

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has described. He referred to the badinage among hon. Members on the Treasury Bench. I suspect that the reason for that badinage is that they have not been abused as I have, because none of them have run a business. None of them have had the experience of Customs and Excise officers descending on them in the early hours. They have not heard the kick of the jackboot on the door--perhaps I exaggerate--and have not endured an inspection of their books lasting a week or two.

Customs and Excise has a long history. The revenue men have powers that go back 300 or 400 years. Their powers exceed and have existed for longer than the powers of the police.

I hasten to add for the record that I was abused, and my company was abused, because the company--although it was a new company--had started from scratch, and ended up exporting all over the world. As a consequence, we incurred a lot of input tax--because we were purchasing items and paying VAT--but very little output tax, because we were exporting at zero rates. Most of our VAT returns, therefore, related to claims rather than payments.

There we were, a small company, trying to trade and trying to build up a reasonable base not only of suppliers, but of English--British--employees. Then the jackboot came: Customs and Excise arrived, and for two or three weeks we experienced complete disruption. No sales could take place, and while Customs and Excise went through our books with a fine-toothed comb--this was long before the days of computers--we were in cashflow difficulties, and were barely surviving as a result. Fortunately we got through that, and my career culminated on the Back Benches in the House of Commons.

The amendment is reasonable. My hon. Friend the Member for West Dorset (Mr. Letwin) described it as a test case; I would go further, and say that I consider it to be an acid test of the Government's good intent. Is it unreasonable to expect the Government, Customs and Excise and the commissioners to pay a little attention, and exercise some caution, before kicking down the gates of a small business and examining its books?

The amendment is also simple. The commissioners need to satisfy themselves that

"a company is engaged in a VAT avoidance scheme"--

in other words, not engaged in its lawful business. Is that unreasonable, I ask the Financial Secretary? I do not see how she can say that it is.

The commissioners also need to satisfy themselves that

"membership of the group threatens the collectability of tax"--

in other words, that the group has not been formed as a natural consequence of the functions of the company. Is that unreasonable, I ask the Financial Secretary?

Finally, the commissioners must satisfy themselves that

"the revenue loss associated with its membership of the group goes beyond the natural consequences of grouping."

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