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Mr. John Taylor: It is not my intention to interrupt my hon. Friend's flow, but now that he has introduced the German case, will he tell us which jurisdiction was involved? Was it a Lander jurisdiction, a German national jurisdiction, or a European jurisdiction? While my hon. Friend reflects on that question, it is interesting for other hon. Members endeavouring to follow the matter to make a judgment about how persuasive we might find such a case. I suggest that a provincial German jurisdiction would not be persuasive in English courts, that a national one would scarcely be more persuasive, but that a European jurisdiction case may be imperative in our courts.
Mr. O'Brien: That is the very point. Wolfgang Seeling was involved in a case against Finanzamt Starnberg. The court of first instance was the Bundesfinanzhof in Germany, but the case was referred to the European Court of Justice, and that is why it is on a par with the Lennartz case—the very case that has made the Government so concerned to find a remedy. The Government see a mischief that they want to cure, whereas I believe that they have seriously underestimated the uncertainty involved and the legal necessity to go down a different route.
I could spend a lot of time pretending to be a barrister. I am not one: I am simply trying to understand why the Government feel that there is such a great mischief to be sorted out. What really concerns me is that they have framed the whole matter in terms of anti-avoidance. It is as though I had some ghastly, guilty purpose in trying to stop the Government proposing what they consider to be an obvious anti-avoidance measure. The provision cannot be framed as anti-avoidance if it is based on an uncertain legal genesis and authority and, above all, if it is disproportionate. It is under that test that the Government are seeking derogation under the relevant EU directive.
The Seeling case was decided in the European Court of Justice. After the discussion in the Delegated Legislation Committee—in which I had placed much reliance on what I thought would be the outcome—I was delighted to discover that Herr Seeling was vindicated and supported by the court. It is important to recognise that the Lennartz and Seeling cases cast a cloak of uncertainty over what the Government seek to do in clause 22.
Mr. Gummer: I still do not understand, either from the record of previous debates or from tonight's debate, what case the Government make for saying that those decisions are unsuitable. It is possible to suggest that what the courts have shown in both cases is perfectly reasonable. Some of my colleagues believe that anything that the European Court says is unreasonable, but I do not happen to take that view. If the court has made those decisions, the Government must explain why it is not reasonable to accept that judgment and allow it to work in this country. Secondly, they must explain how they see this as an avoidance measure and how their proposals will defeat avoidance. They seem to me to have done neither of those things.
6.45 pm
Mr. O'Brien: My right hon. Friend will be aware that the Government say that an anti-avoidance measure is needed and that they suggest that the Customs and Excise arguments are based on article 6(2) of the directive, allowing a derogation. If that is so, we need to see the counsel's opinion received by Customs and Excise in order to satisfy ourselves about the genesis and effectiveness of what is a serious proposal.
Our concern is that a belief exists—I cannot tell whether it is correct, because I have not seen the evidence—that the Government think that there is a mischief to be remedied under the precedence of Lennartz, a European Court of Justice decision, which the Government clearly feel carries sufficient authority to make them propose domestic legislation to try to remedy the problem. I question whether they have the authority to do so because of EU law—complicated, not surprisingly—but various schemes are being marketed in this country which the Government believe are encouraging people to buy premises to use partly for business and partly for non-business purposes in order to delay or avoid paying VAT in a way that the Government believe is not genuine.
If the Government can demonstrate that that is a proper problem, we are with them 100 per cent. of the way. If, however, they cannot satisfy what, from my long ago legal training, I believe to be the Furniss v. Dawson test of substance over form, it is wholly right to examine the substance. The problem is that the Government have got the form wrong, let alone the substance—the evidence of which we have not seen. On the basis of the Seeling case, the position has become interesting.
Mr. John Taylor: In as much as my hon. Friend refers to the test of substance and form, might there also be some application of the test of dominant use? For example, to reduce the point to street level, in the case of a residence over a shop, would not Customs and Excise—the duty-charging authority—tend to consider dominant use in considering the apportionment? Or does my hon. Friend prefer his own test?
Mr. O'Brien: To be frank, I care only whether the proposal is right or wrong in terms of process and law. No dominance test has been cited in any argument so far because we are dealing with apportionment. The issue is whether that is taken upfront, over the life period of premises during the course of a business, which will vary, or during the course of non-business use, which
will also vary. All that is unpredictable, and all of it creates uncertainty. The Government are concerned that the situation is being used in order to be abused, which is why we must address the point.Interestingly, the Government's position appears to be based on what they believe is their ability to derogate from article 6(2). It is somewhat disingenuous to dismiss the Seeling case, as they have tried to dismiss it, as an argument made only in the domestic courts of Germany. In fact, it is a decision of the European Court, which seems to confirm that if the ability to derogate is absent, clause 22 will be ultra vires under the article.
I accept that Seeling does not deal directly with the question of derogation. However, it confirms the following effect of the Community legislation, namely that it is not within a member state's gift to determine whether a taxable person applies article 6(2). That choice is afforded to the taxable person, not the taxing authorities. That is the important point. I refer the Minister to paragraphs 40 to 43.
We are not necessarily in the business of saying that the Government should be getting less than their due. We may argue about why they are raising the tax and about other aspects of their processes and their promises and further expectations, but we are not arguing that just because the tax authority ends up with less tax than it seeks it is not wholly legitimate in trying to remedy that. However, according to the judgment, that is no reason to apply the provision of the directive and interpret it differently. That is in paragraph 54.
The key question is whether there is a power of derogation from article 6(2). In that regard, it should be noted that the UK does not appear to have sought specific authority to derogate from article 6. Instead, it relies on the fact that article 6(2) provides sufficient authority for the derogation contemplated.
As the Minister will understand well, derogations are not unrestricted; they are not a means whereby tax authorities can deny taxable persons the treatment that the Community legislature intended. Furthermore, the derogation in article 6(2) is a simplification, not an anti-avoidance measure. Derogations for anti-avoidance purposes need to be sought specifically under the procedures provided for by article 27 of the sixth VAT directive, but the Government have not done that. They have placed their whole argument on anti-avoidance. They have tried to distinguish article 6(2) from all the arguments that I have made, which are taken from the whole legislative proposal, yet they have not even applied for derogation for anti-avoidance purposes under article 27 of the sixth VAT directive.
It is thus possible that the derogation power in the article is limited and not as wide as the Government propose. The derogation under article 6(2) that member states may derogate from the provisions of the article provided that such derogation does not lead to distortion of competition—a point that was also made—could be interpreted in two ways.
The first interpretation is that any derogation is to be construed narrowly; for example, Advocate General Jacob's opinion in Kühne at paragraphs 19 and 20. On such a narrow construction, it could be argued that the derogation permitted to member states is not to apply a charge for private use where, by allowing no private-use charge to be made, there was no distortion of
competition. That means that derogation is not applicable to the recovery by the taxpayer of the input VAT, but only to the recovery by the Government on any private-use element.The alternative and perhaps broader view was expressed by the same Advocate General in Lennartz at paragraph 75. That broader view suggests that an input tax restriction could be justified where the goods are to be put to private use in certain circumstances, but that such an input tax restriction cannot prevent input tax deduction on a genuine business expenditure. It follows that even on that wider view there is a need to provide a mechanism whereby increased proportions of business use, after the initial apportionment, could be recognised as giving rise to recoverable VAT.
Accordingly, one could argue that, whether one takes the stricter or the wider view, the initial deduction would still be required to be allowed by the member state in situations where the relative proportions of taxable and non-business use varied over time, where the private-use charge reflected the variable use over time. It should also be noted that the derogation within article 6(2) is subject to the provision that such derogation does not lead to distortion of competition; whether there is any such distortion should be determined on a case-by-case basis and should refer to an actual distortion of competition rather than a theoretical one.
As I hope the Minister realises, I have tried not to be too slothful since our discussion on 7 May. What came out on 8 May was a one and a half page synopsis—my best attempt—of a long judgment, but it was a genuine attempt to understand, given that, critically, I asked in the Standing Committee for a copy of the counsel's opinion to Customs and Excise, as that is the whole driving force behind the advice given to Ministers on the clause and the statutory instrument that we debated in the Standing Committee.
I have had a letter—I am glad to have been accorded such courtesy by the Economic Secretary—which says that counsel's opinion is internal advice, and its disclosure is therefore governed by the code of practice on access to Government information. We know that the Attorney-General made legal advice known in advance of the engagement in the Iraqi war. While that was seen as reasonably exceptional, it was by no means breaking with all precedent.
It is therefore a precedent that, for the greater benefit and understanding of the House, in passing legislation, it is found to be uniquely helpful to have legal advice—I do not think that I am making up precedent as I go along—that that is where the legal precedent for that request comes from. Although we explored at length Upstairs why this loophole, as the Government see it, is being closed, it is similar to, if not precisely the same as, the tax opportunity and—many would argue—loophole in the arrangements for the Labour party headquarters purchase in Old Queen street. My right hon. Friend the shadow Chancellor, who is in his place, has written to the chairman of the Labour party about that, and I gather that he has only just received a reply; he had certainly not received one when he raised the issue on 7 May. That begs questions as to why we are addressing this issue but not that.
I dealt with this matter at length Upstairs, and although it is tempting to rehearse it in the Committee of the House, it is more important that I have had a
response, as I am trying to move the argument on. I have had a response from the Economic Secretary—[Interruption.] It takes time to go through such complicated matters, and I am sorry if the hon. Gentlemen's attention is flagging. We are here to scrutinise legislation and not to put in place bad law that is ill thought through and will not provide a remedy. For once, that is the purpose for which both he and I have been elected: to do our job and to scrutinise the Government's business.
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