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Session 1999-2000
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Delegated Legislation Committee Debates

Value Added Tax (Input Tax) (Amendment) (No. 2) Order 1999

Fifth Standing Committee on Delegated Legislation

Thursday 9 December 1999

[Sir David Madel in the Chair]

Value Added Tax (Input Tax) (Amendment) (No. 2) Order 1999

9.55 pm

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

    That the Committee has considered the Value Added Tax (Input Tax) (Amendment) (No. 2) Order 1999 (S.I., 1999, No. 3118).

The order is part of a package of seven orders. The other orders are subject to the negative procedure. They have not been prayed against, but I shall refer to them briefly for completeness and to put my remarks in context.

The Government are committed to ensuring that United Kingdom traders compete on equal terms with our European partners. In the past, gold has been treated differently across the European Union. That has put UK traders at a disadvantage: in particular, the charging of value added tax on gold has stifled the UK private investment market. When Britain held the presidency of the EU in 1998, we made it a priority to finalise a special scheme that would make investment gold exempt from VAT. That scheme—the so-called ``gold directive''—takes effect on 1 January 2000. The order is one of several that implement the scheme into UK law.

As a general rule, the gold scheme will exempt investment gold from VAT. Investment gold is gold in bar or wafer form that is of a purity too high for jewellery; it also includes some gold coins. Gold regularly moves between the exempt investment and taxable industrial markets, and the order us designed to deal with that. The scheme allows businesses to opt to tax investment gold that they sell to other traders. It also gives businesses a special limited right to reclaim the VAT that they incur on gold and on processing costs. Together, the measures avoid the locking of VAT into exempt sales and the double taxation of taxable sales. The gold directive also allows member states to require businesses to keep special records to counter fraud, and it protects simplified procedure currently enjoyed by the London bullion market by putting similar procedures into European Community law. The trade has been extensively consulted on those issues, and it supports the process introduced by the order. The previous Government pursued similar discussions.

As I said, the order is part of a package of legislative measures intended to enact the gold directive. The special scheme for investment gold provides exemption for such gold to harmonise treatment across EC countries and to enable the development of a market in the UK. It deems gold coins meeting the definition of investment gold not to be coins for such purposes and excludes them from the definition of collectors' items, thereby preventing difficult borderline issues. It provides an option to tax by putting gold moved from the exempt investment market to the taxable industrial market on the same footing as gold traded solely within the industrial market. It contains special rights to deduct specific elements of input tax attributable to the exempt supplies of investment gold, so as to prevent double taxation. There is also a special procedure for the London Bullion Market Association, to preserve the existing zero rate for the London bullion market; and special record-keeping requirements to prevent and detect fraud.

Mr. John Burnett (Torridge and West Devon): Will the Paymaster General give way?

Dawn Primarolo: I prefer to finish speaking about the other orders first. I know that the hon. Gentleman wants to speak in the debate; perhaps he would agree to make his point then.

The changes are made in a series of orders: the Value Added Tax (Investment Gold) Order 1999, the Value Added Tax (Input Tax) (Specified Supplies) Order 1999; the Value Added Tax (Input Tax) (Amendment) (No. 2) Order 1999; the Value Added Tax (Special Provisions) (Amendment) (No. 2) Order 1999; the Value Added Tax (Importation of Investment Gold) (Relief) Order 1999; the Value Added Tax (Terminal Markets) Order 1999 and the Value Added Tax (Amendment) (No. 4) Regulations 1999. Together, the order provide for the enactment of the agreement reached during the United Kingdom presidency, which will become effective on 1 January 2000 and which has been welcomed by the market. It is a good provision to enable a market that has been stifled here to develop and to ensure fair taxation in the European Union with respect to VAT on investment gold.

10.1 am

Mr. Oliver Letwin (West Dorset): I am grateful to the Paymaster General for her concise and lucid explanation. She referred to the Value Added Tax (Terminal Markets) Order 1999. Today the Finnish presidency has proposed a series of so-called compromises on the withholding tax, which will indeed be terminal for our markets. We have investigated the order and its accompaniments in some detail with a view to spotting the deep conspiracy that lies within. However, in this case we have failed to find any evidence of a deep conspiracy. Investigations among the affected bodies reveal that the Paymaster General is right to say that they believe the proposed changes are beneficial. Therefore, I do not propose to detain the Committee further than to say that the Opposition support the order.

10.2 am

Mr. John Burnett (Torridge and West Devon): Sir David, I welcome you to the chairmanship of the Committee. I doubt that you will be detained for too long.

I understand that the statutory instrument takes investment gold transactions out of the VAT net and makes them exempt. It also aligns the definitions of collectors' items and works of art in section 21 of the Value Added Tax Act 1994. That brings our law into line with that of the European Union. It will also help, I understand, to cut out fraud. It has been a problem that, with a string of taxable transactions, it is open to individuals and companies who have sold on their gold to pocket, not only the sale consideration, but the value added tax, and then not account for it to Customs and Excise.

I have one or two issues to raise with the Paymaster General. First, she referred to the option to tax gold that moves from the collectors' to the industrial market. Do I take it that the option can be exercised only when the gold moves to the industrial market? Secondly, will the Minister confirm that the usual partial exemption rules apply and that, where applicable, there will be a right to limited input tax recovery?

Thirdly, will the Minister tell the Committee whether there is an error on the face of the order? Is the reference in paragraph 3 (a) to notes

    ``1(b) and (c) to Group 15(c) of Schedule 9''

correct? Should not the reference be to note 2 of group 5 of schedule 9? Will the Minister give my three points her consideration and let us have her views?

10.05 am

Mr. Austin Mitchell (Great Grimsby): I had not expected to speak, but I have a question because I am ignorant of the markets covered by the order and of whether VAT exemptions apply. What is the status of krugerrands and sovereigns, which are a form of investment gold? I note that gold coins with a purity of 900,000ths or greater that were minted after 1800 have been legal tender and are exempt. I am shocked to learn that they are normally sold at a price not exceeding by more than 80 per cent. the value of the gold content of the coin. I had not realised that the market for sovereigns and krugerrands was so great; somebody in the business is making extraordinary profits. The question is simple: what is the status of krugerrands and sovereigns?

10.06 am

Dawn Primarolo: I shall start with the final question of the hon. Member for Torridge and West Devon (Mr. Burnett), which concerned the cross-referencing error that he thought was in the order.

Mr. Burnett: My question concerned whether there was an error; I hope to hear whether there is.

Dawn Primarolo: It will not surprise the hon. Gentleman to hear me say that I do not believe that there is an error. I tried quickly to jot down his reference; I am sure that it will be in Hansard and we shall double check it.

The process of consultation has been long, and members of the Committee will note that several orders have been necessary to make the changes to VAT. We have been extremely careful to ensure that no factual problem occurred, but, as a Minister, I have learnt never to say that we never make mistakes. I shall examine the issue with the parliamentary draftsmen to ensure that the reference is correct; I shall then give confirmation in writing.

Mr. Burnett: I am grateful to the Paymaster General for that response and I hope to hear from her whether schedule 9 includes a group 15.

Dawn Primarolo: I do not propose to go through every order now—the hon. Gentleman has apparently sat up all night reading them and I congratulate him on that.

The hon. Gentleman referred to works of art and to the consequential changes required by the increase in VAT on those items from 2.5 per cent. to 5 per cent. The Government announced in July a further widening of the definition of works of art, and we needed the consequential placing of the Value Added Tax (Importation of Investment Gold) (Relief) Order 1999 because of its interaction with the changes made by today's order.

The hon. Gentleman asked about partial exemptions from the application of the provision. They apply only to overheads of VAT on gold purchasing and processing costs. That is clear.

The hon. Gentleman also asked whether traders could opt to tax only when gold moved to the industrial market. The answer is no, but it is obviously important that there is a tax option; otherwise, there would be a danger of double taxation.

Mr. Burnett: Will the Paymaster General give way?

Dawn Primarolo: The hon. Gentleman persists on the question of group 15. My civil servants have double checked this: group 15 will be a new group for investment gold. I think that that answers his question. It is difficult to concentrate on answering a question if the next series of questions starts before I get half-way through. I realise that the hon. Gentleman is riveted by the order—I did not know from his listed interests that he follows the subject so avidly. I am happy for him to return to that matter later.

My hon. Friend the Member for Great Grimsby (Mr. Mitchell) asked about krugerrands and sovereigns. As they are investment gold, they will be on the official journal list. We consulted with the trade at every stage and we Jointly compiled the information for the contribution to the lists. My hon. Friend may think that it is a high—


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