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'( ) where a payment relates to a supply of services on which value added tax is chargeable, the amount of value added tax chargeable shall be disregarded (irrespective of whether or not that amount is paid by way of value added tax),'.—[Jim Fitzpatrick.]
Clause 18
Mr. Stephen O'Brien: I beg to move amendment No. 52, in page 15, line 15, leave out Clauses 17 and 18.
The amendment relates to clauses 17 and 18. We recognise that we have had considerable discussion and debate in Committee, but further developments have arisen on those important clauses and it is therefore important to hold a debate. The Committee considered them in some detail, and in the light of that additional information the only way to ensure that a debate takes place on Report is by having, in effect, a clause stand part debate through the technique of tabling amendments to delete the clauses.
In expressing the situation in those terms, I may have hinted that I am not keen for the clauses themselves to be deleted here and now. It should be well understood that I realise that missing trader fraud is by far the biggest single fraud confronting tax authorities. It is pan-European in scope and practised by highly sophisticated individuals. The explanatory notes put the total cost of such fraud to the United Kingdom at between £1.7 billion to £2.75 billion in 2001–02. I fully support, therefore, the objectives of clauses 17 and 18, which seek to secure the VAT that would otherwise be lost through missing trader fraud.
Because of the way in which our procedures work on Report, my amendment, which would delete clauses 17 and 18, has been structured to allow a clause stand part debate. I do not want to get into a false dialogue, however, so I should point out that it is not our intention to strike down the clauses' objectives.
Mr. Djanogly: Many arguments are circulating to the effect that the Government are to some extent responsible for much of the VAT fraud to which my hon. Friend refers. Investigations are ongoing in that regard, and it seems unfortunate indeed that it is the taxpayer who will have to bear the cost.
Mr. O'Brien: I am grateful to my hon. Friend for that intervention. We are dealing with a very difficult issue. It is right that any Government be entitled to collect duly levied revenue, and it is not part of our agenda to seek to wreck that. However, we do have to examine the balance between the rights and responsibilities of citizens and taxpayers, and those of the Government—that is part of the democratic accountability that we are elected to provide. I ask my hon. Friend to bear with me, because although I certainly welcome interventions, it is important that I go through this issue with some care—I shall try not to detain the House for too long, but I cannot pretend that this will be the briefest of our episodes on Report—not least because the House of Lords had something to say about it in Committee. It is important to ensure that we give due consideration, given that the other place will not be able to scrutinise this provision in any other way. My hon. Friend will therefore find that the context in which his remarks are placed is a little more proportionate, given the seriousness of the issues with which we are dealing.
Since our deliberations in Committee, we have continued to receive representations that, as drafted, the proposed legislation may catch legitimate traders. I understand that Her Majesty's Customs and Excise believes that the draconian powers in clauses 17 and 18 are necessary to target the abuse. As I recall, the
Economic Secretary said in Committee that in practice, the powers will be applied in such a way as to protect legitimate traders. However, the concern remains that the legislation is widely drafted and is not subject to external review before being applied. I am therefore concerned that the necessary separation of powers to protect the innocent appears not to exist.The third report of the House of Lords Select Committee on Economic Affairs echoes those comments. Paragraph 5.10 states, in respect of clause 17:
- "With reference to the self-denying undertaking by HMCE"—
- "we note that the necessary degree of satisfaction on the part of the Department that all reasonable checks have been applied by a legitimate trader is not subject to any external review. Indeed, under the normal powers of delegation of the Commissioners of Customs and Excise, that discretion could rest with the investigating officer. We have therefore concluded that in the Clause, as drafted, the protection for legitimate traders can be said to be deficient in that their access on appeal to the VAT and Duties Tribunal arises only after HMCE have applied their new power to require security, albeit following a warning. By this stage, the negative economic consequences for their business could already be significant. We considered that a part of the solution could lie in a suggestion made by the ICAEW"—
- "that, before taking steps to require security under Clause 17, HMCE should be obliged to seek leave from a Tribunal Chairman."
The report continues, in paragraph 5.11:
- "We recommend that consideration be given to creating an enhanced statutory safeguard for legitimate traders, which would ensure that the conclusions related to Clause 17 arrived at by the investigating officer are reviewed at Board level within the Department and by an external judicial authority before the power to require security is exercised. This two-stage review would precede the issue of the preliminary warning letter contemplated as an essential element of Departmental practice in operating the new power. Under the procedure which we envisage, the application, which should be approved by the Commissioners of Customs and Excise themselves, without power of delegation, should be on an ex parte basis. Before giving leave, the Chairman of the VAT and Duties Tribunal would have to be convinced by the HMCE case against the trader that the business was involved or complicit in the alleged fraud."
- "We recognise the considerable educational effort that is being undertaken by HMCE to provide help and guidance for legitimate traders, in order not to find themselves through inadvertence, becoming involved in an "artificial" supply chain. However, we still have some misgivings that, as in the case of Clause 17 . . . the protection afforded to the legitimate trader by challenging the step of being made jointly and severally liable for the unpaid net tax in a supply chain only after the event would be insufficient. We acknowledge that the procedure begins with a "Notification Letter". The trader then has 21 days in which to demonstrate to HMCE a legitimate reason. If he or she fails to do so, at the end of that period a Demand Notice will be issued for the unpaid net tax. But we still see the need to enhance the protection for a legitimate trader from the burden of being faced with a "Notification Letter" in the first place. The detailed arguments that we advanced at paragraph 5.10 in respect of enhanced statutory protection for the legitimate trader apply with equal force in the case of Clause 18."
- "We recommend that consideration be given to providing that, before taking steps to hold a trader liable under the joint and several liability provisions of Clause 18, HMCE should be obliged to seek leave from a Chairman of the VAT and Duties Tribunal. The application, which should be approved by the Commissioners of Customs and Excise themselves, without power of delegation, should be on an ex parte basis. Before giving leave, the Tribunal Chairman would have to be convinced by the HMCE case against the trader that the business was involved or complicit in the alleged fraud."
I am sure that that the Economic Secretary will take those comments from the House of Lords seriously. I hope that he will address the concerns of many legitimate traders, learned professionals and Opposition Members. Indeed, similar concerns were raised, in Standing Committee by hon. Members from other parties, and they have also been voiced by those in another place. I look forward to his response.
I come now to another important matter in connection with clauses 17 and 18. I want to be slightly cautious and make sure that the point is well understood, but I understand that a firm of solicitors has served a letter before claim on the Chancellor of the Exchequer, the Attorney-General, the Treasury and the Chairman of the Board of the Commissioners of Customs and Excise. I understand that they have the opinion of counsel that Parliament does not have the power to legislate in the way clauses 17 and 18 seem to intend, as the clauses are in contravention of Community law. In addition, I understand that those concerned contend that the provisions are not in accordance with the Human Rights Act 1998. Further, those served with the letter before claim have now been put on notice that should they seek to apply the clauses, any loss or damage caused to any business, director or shareholder that is attributable to that application will be sought in accordance with the decision of the European Court of Justice in Frankovich, reference C-6 and C-9/90.
Given the value of the industry sectors concerned and the fact that the explanatory notes puts the total cost of missing trader fraud to the UK at between £1.7 billion and £2.75 billion in 2001–02, the level of damages from legitimate traders could very well be significant. I understand that the annual turnover for mobile and computer chip traders in the UK is now £50 billion. There are 400 traders, approximately, paying annual corporation tax of £600 million; there are 10,000 jobs, involving national insurance contributions and PAYE. These figures do not take account of major retailers such as Carphone Warehouse.
I have raised the issue of Community law on the Floor of the House before. When we debated clause 22 on 13 May, I raised many arguments that that clause was incompatible with Community law. It should be noted that these arguments in relation to the Seeling case have not been answered. On clauses 17 and 18, we have significant concerns about the compatibility with Community law. I am not a barrister, nor have I had access to the Government's legal opinion on the compatibility of clauses 17 and 18; nor, for that matter, on clause 22, despite repeatedly asking for it. Nor have I seen counsel's opinion supporting the solicitor's letter concerning the people who have sent the letter before claim, which I understand has been served.
I do know that we now have uncertainty for the industry and for taxpayers. We have seen case after case where the European Court of Justice has upheld the taxpayers' case against the UK, so we must take these matters seriously. A further concern regarding clauses 17 and 18 is the threat of Frankovich damages. I do not know the merits of the case but, if successful, legitimate traders—a number of whom have already suspended trading as a result of these clauses—can seek to recover any loss or damage caused to any business, director or shareholder. Without overstating the case, this could be in the order of tens of billions of pounds. Who would bear the cost? The taxpayer.
In Committee, the Paymaster General stated that, as far as Ministers were concerned, parliamentary counsel was "all four aces" when it came to being the final arbiter on the drafting of Bills, adding that Ministers challenged the interpretation at their peril. She went on to say that she sincerely hoped that aspiring Ministers in the decades to come—let us hope it is not anywhere near that long—would also consider such challenges unwise.
In Committee on 15 May, the Economic Secretary gave assurances that clauses 17 and 18 were in accordance with Community law, but gave scant legal support to those assurances. To that end, I recognise that we have a letter before claim, but we are not sub judice; we are certainly on notice. I have been provided with the documentation, and I know the Government are aware of that. I know that they will be prepared for my arguments.
As I now understand that another legal counsel has a different opinion and considers clauses 17 and 18 not to be in accordance with Community law, one could say that the Government's aces have been called. The Government have been put on notice. If they are wrong, they are putting UK taxpayers at risk of having to meet significant damages. I do not believe that it is right for UK taxpayers to be put at such risk.
Let us take the simple example of a planning application. If those considering a planning application are advised that their course of action may be successfully challenged—this could happen to any councillor in any authority in the country—and they proceed, those considering the planning application are held personally accountable. That is often one of the biggest issues in terms of getting an open discussion. In this case, I recognise that it is not thought that Ministers will be held personally accountable in such a case, but this is a direct equivalent. Importantly, neither should the UK taxpayer be held accountable when the Government have been put on notice, just as officials in a local authority would put councillors on notice that they are taking a huge risk for themselves and for local council tax payers. It is therefore incumbent on the Economic Secretary to give a full answer.
The Paymaster General warned that Ministers challenge parliamentary counsel at their peril. However, ignoring my personal views on that assertion, surely the position changes when another legal counsel—naturally, legal counsel will have different opinions—formally puts forward a clearly different opinion. The Chancellor and others have been served with the letter before claim. Given the importance of those issues, particularly for UK taxpayers, I call on the Economic
Secretary to make the Government counsel's opinion available to the House, so that we can make an informed judgment about whether the clauses are compatible with Community law. The Economic Secretary knows that precedent exists, not least when the Attorney-General's legal advice was made available in advance of the Government decision to take us to war with Iraq.The House should think exceptionally carefully before allowing these clauses to pass without considering the potential burden on the taxpayer. As Sir Humphrey Appleby might have said: "It would, Minister, be very courageous to proceed on this basis." Such advice should be enough to stop any responsible Minister in his tracks. We need a full exposition. Above all, if Ministers decide to proceed, one way of avoiding the very serious peril that I have identified—as I say, I shall not make a judgment on the merits of the legal case—would be to postpone the implementation date until such time as the legal matters have been fully resolved.
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