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Delegated Legislation Committee Debates

Value Added Tax (Reduced Rate) Order 2000 (S.I. 2000, No. 2954)

Fourth Standing Committee on Delegated Legislation

Thursday 23 November 2000

[Dr. Ashok Kumar in the Chair]

Value Added Tax (Reduced Rate) Order 2000 (S.I. 2000, No. 2954)

4.30 pm

The Paymaster General (Dawn Primarolo): I beg to move,

    That the Committee has considered the Value Added Tax (Reduced Rate) Order 2000 (S.I. 2000, No. 2954).

Good afternoon, Dr. Kumar; it is delightful to see you in the Chair.

I should explain the background to the order. As part of the 2000 Budget, the Government announced that women's sanitary protection would be charged at a reduced VAT rate of 5 per cent. from 1 January 2001. The announcement was greeted with widespread support from Members on both sides of the House and we have since consulted the appropriate trade bodies. The order fulfils our commitment.

The Government agree that, for social reasons, certain strictly limited goods and services should be subject to a reduced VAT rate of 5 per cent., which is the lowest rate allowed under our agreements. Sanitary protection is one of those items.

The order is made under section 2(1C) of the VAT Act 1994. It amends schedule A1 of the Act by adding women's sanitary protection products to those goods and services that are eligible for a reduced rate of VAT. I shall refer to three important issues that cropped up during the consultation.

First, I shall explain why the rate is 5 per cent. and not 0 per cent. I should have liked a zero rate, but we are bound by European agreements not to introduce more zero rates. European law allows a reduced rate for sanitary protection products and we are adopting the lowest permissible rate—5 per cent.

The second issue was the exclusion of incontinence products from the definition. Again, there are difficulties with EC law, but the main explanation is that better tax relief is already available and it applies to incontinence products. When they are bought by incontinent people living in their own homes, they are zero rated; when they are supplied to patients in private nursing homes and hospitals, they are exempt; and in the national health service they are free of charge. The Continence Campaign says that, for a variety of reasons, incontinent people do not buy the products at the zero rate and urged us to move from the zero rate to 5 per cent. I do not believe that that will solve the problem. Applying a tax to incontinence products is not the best way of dealing with the issue.

The matter is not strictly covered by the order, but, because many members of the Committee will be interested, I hope that you, Dr. Kumar, will allow me to tell the Committee what I have asked Customs and Excise to do. We have been informed that, for reasons personal to incontinent people and because of the complexity of adapting tills in places of purchase, there is either a reluctance to say that someone may be entitled to the reduced rate because of incontinence or because suppliers are unable to cope with deduction of VAT. It is important to preserve the zero rate, so I have asked Customs and Excise to hold discussions with the trade and the Continence Campaign to find ways—administrative ways, I hope—in which we can apply the zero rate to those people to whom it should apply, because that will be far easier and will remove some of the problems that they experience. If that is impossible, we shall have to consider whether to impose a tax. I am sure that all members of the Committee agree that if we can maintain a zero rating we should do so.

The Government have made it clear to manufacturers and suppliers of sanitary protection products that we expect the VAT reduction to be passed on to customers. Many of the larger retailers have lowered their prices before the introduction of the measure on 1 April 2001. It would be disappointing to discover that businesses were using the reduced rate to increase their profit margins at the consumer's expense. I am confident that smaller traders—who will find it more difficult to make the adjustment—will none the less pass the price reduction on to consumers. Women across the country have applauded the benefits of the measure, for which many campaigns have taken place over the years.

It was difficult to apply the border line in terms of the benefits and disbenefits of the 5 per cent. rate. We hope that we have achieved the correct definition and separation and that women will benefit greatly.

Mrs. Claire Curtis-Thomas (Crosby): I know that there is to be consultation on the zero rating of incontinence products and on enabling people who find themselves in need of such products easily to reclaim tax, but if the exercise is protracted those concerned may incur significant costs. Has the Minister defined objectives by which it is to be concluded, at which point we would be able to consider further proposals?

Dawn Primarolo: I want it to be done as quickly as possible. I appreciate that those who are not claiming at the reduced rate may find doing so a source of difficulty and embarrassment. Consultation will help us to establish the scale of the problem and give us an opportunity to consider the procedures.

I am sure that my hon. Friend understands that, although we need to make speedy progress, we must ensure that we do not inadvertently open up a loophole in the legislation whereby other parties—not individuals—can claim a reduced rate to which they are not entitled. We introduced some anti-avoidance measures in relation to connected services because the Government were losing money as a result of technicalities that enabled the relief to be given beyond our intentions.

We need to balance the two objectives. It is important that people who are entitled to a zero rate are able to buy the product at the reduced rate, without having to claim the money back.

Dr. Evan Harris (Oxford, West and Abingdon): The right hon. Lady might be aware that when the exemption was zero-rated, many health service budgets had to pay the standard rate before claiming back VAT. That left them short, certainly in-year, and they decided to move from disposables to non-disposables for many vulnerable patients. Does that problem still remain? Has the Department of Health's review of continence products concluded that many people are still obliged to use non-disposable products because of the budget cuts that apparently resulted from this change?

Dawn Primarolo: I hope that you will allow us to deal with this issue, Dr. Kumar, because although it falls outside the terms of this order it is very important.

The national health service is funded for the VAT that it incurs, and there was no cut in funding to the NHS. The previous order dealt with the fact that, by exploiting technicalities and a loophole in the difference in provision of services and supply in the private sector, an added bonus arose in the form of a price reduction of 17.5 per cent. In a sense, there was therefore a double payment of VAT. The anti-avoidance measures did not reduce the moneys available—the NHS gets back its VAT as funded. Instead, the measures put a stop to an avoidance mechanism through which certain suppliers were able to sell their products at a cheaper rate. That gave rise to exploitation and distortion in the market.

I shall go no further down the road of a past debate, but I am happy to correspond on the matter with the hon. Member for Oxford, West and Abingdon (Dr. Harris), who seems to be echoing a point made by my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas). We must determine the scale of the problem and examine the procedures with some speed, and ensure that we do not re-open the possibility of exploitation and the unintended use of rules.

Unfortunately, people sometimes creatively use part of tax law to give a benefit that was not intended. In this case, we are talking about people who use incontinence pads, and we must ensure that those who are entitled to a zero rate buy their products at that rate. I appreciate that they should not have to fill in complicated forms to claim the money back, or stand at the till and say, ``I'm incontinent, so I'm entitled to a zero rate.'' We are trying to deal with those issues as quickly as we can, and given that I have a note of the members of the Committee I am happy to inform them of our intentions when a decision is reached.

I commend the order to the Committee, and I thank you for your tolerance, Dr. Kumar, in allowing me to deal with an important issue that, strictly speaking, is not covered by the order but which is of great concern to Committee members.

4.43 pm

Mr. James Clappison (Hertsmere): It is a pleasure to serve under your chairmanship, Dr. Kumar. The pleasure is all the greater because this is the first time that I have done so, and I look forward to doing so on many occasions.

We have a number of questions to ask the Paymaster General. The Government announced this decision in March, at the time of the Budget. I believe that the announcement was made by way of press release, rather than in the Budget speech itself. The press release baldly stated that the measure would cost £35 million each year. Are figures available on the revenue generated from VAT on sanitary products, or is the figure in the press release simply an estimate?

It has been accepted that the order will occasion compliance costs for business, to which the Paymaster General referred obliquely when she talked about the difficulties some businesses would experience in making reductions. We need to ask one or two more questions about that, particularly about the draft regulatory impact assessment, which estimates that 40,000 smaller businesses and 4,000 larger businesses will be affected by the change to a reduced rate of VAT. Customs and Excise has accepted that business will incur an initial compliance cost to make adjustments to their accounting procedures and that some retailers will have to account for a reduced rate of VAT for the first time. The other reduced rate of VAT is for domestic fuel, but many suppliers of domestic fuel will not supply sanitary products. Many of those supplying sanitary products might be supplying at reduced rate for the first time and will have to undertake changes in their accounting procedures.

The draft regulatory impact assessment estimates that the compliance cost for each business will be £32. If we multiply that by the number of businesses concerned, we discover that the total compliance cost will be £1,408,000. What is the basis for the figure of £32 as the cost of compliance for each business?

Comment was invited in the draft regulatory impact assessment on the assumptions underlying the estimates of the number of businesses affected. As it is mentioned in the impact assessment, will the Minister tell us how many comments have been received and what comments the Government have received on their projected compliance cost for business and the projected total compliance cost of £1,408,000?

The Government invited comment and consultation on the definition of sanitary products. It was said that Customs and Excise would consult trade groups to establish a clear, workable definition of the sanitary products to be taxed at the reduced rate. The definition in paragraphs 6(1)(a), (b) and (c) no doubt reflects that process. How many trade groups were consulted and what was their response?

In the announcement at the time of the Budget, the Paymaster General justified the introduction of a reduced rate on sanitary products on the grounds of fairness and of doing what the Govt could to lower the cost of a necessity. It is possible to introduce a reduced rate of VAT on sanitary products because they are included in annexe H the list of supplies and goods that may be subject to reduced rates of VAT in to the famous sixth VAT directive. They appear in category 3 of that directive, which deals with pharmaceutical products of a kind normally used for health care, prevention of diseases and treatment for medical and veterinary purposes, including products used for contraception and sanitary protection. It is accepted that many individuals purchase items in that list other than sanitary products, consider them to be a necessity but pay a full rate of VAT on them. What is the Minister's rationale for the distinction in the reduced rate of VAT? We have heard today about the issue of incontinence products, which the Committee accepts is a sensitive subject that should be dealt with sensitively.

 
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