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Mr. Burnett: Will the Economic Secretary at least consider the issue, referred to by the hon. Member for Eddisbury and myself and raised by the House of Lords, that an application should be made before action is taken? We understand that that should be ex parte, but to an independent judicial authority.
John Healey: We have received a range of views on these provisions from all sorts of parties, as hon. Members might expect. We have considered the hon. Gentleman's suggestion that Customs should have to seek the tribunal's go-ahead before taking action, but my concern about that is twofold. First, it could delay the ability of Customs to take action. Secondly, he may wish to consider further that any pre-implementation hearing with a tribunal chairman on any ex parte basis could be perceived to compromise the tribunal's very integrity and independence, which is, of course, a mainstay of the system. Of course, when these clauses are in place with the safeguards that I am outlining, we will keep them very closely under review to ensure that they have the intended effect on fraud, not an unintended effect on legitimate businesses. I shall return to the inbuilt safeguards in clause 17 in a moment.
I come now to clause 18. Article 21(1) and (2) of the sixth VAT directive defines the persons liable for payment of the tax. Article 21(3) of the EC sixth Council directive provides the legal vires for joint and several liability. It states:
- "In the situations referred to in paragraph 1 and 2, Member States may provide that someone other than the person liable for payment of the tax shall be held liable for payment of the tax."
On human rights law, clause 18 is compatible with article 1 of protocol 1, which deals with the protection of property, contained in schedule 1 to the Human Rights Act 1998 because, first, it is prescribed by law; secondly, when used, it will strike a fair balance between the demands of society and the interests of individuals; and, thirdly, it serves a legitimate purpose. The proviso to article 1 states that such a provision should in no way
impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes, other contributions or penalties. Again, these are not arbitrary powers and the provisions are clearly in proportion to the scale of the systematic attack on the VAT system.Again, the measure has inbuilt safeguards. It can be applied only in appropriate circumstances—in other words, where Customs can show that a business knew or had reasonable grounds suspect that VAT would be unpaid in its supply chain. Customs has to establish some sort of knowledge—either guilty knowledge, or reasonable grounds to suspect a business. There is a full right of appeal and the right of judicial review.
Clause 18 is accompanied by a statement of practice, which lays down stringent guidelines on how the measure should be applied, so there are further safeguards. Although the statement of practice does not have the force of law, once published, Customs will be expected and, if necessary, required by the courts to follow it in appropriate cases. I hope that I have cleared up any questions that hon. Members might have about the legal vires of clauses 17 and 18.
5.45 pm
I want to deal with the more substantive questions of not only why the measures are justified but, especially, how we will ensure that innocent parties are protected during the operation of the tough new powers that we deem necessary, which was the concern raised by the hon. Member for Eddisbury.
I shall emphasise that last point first. I made it clear in Committee that I do not underestimate the gravity of the measures that we propose to use under clauses 17 and 18. We fully understand that although they will help to crack down hard on fraud, if appropriate safeguards are not put in place and the measures are not properly targeted and restricted, the impact on legitimate businesses will be unacceptable. Let me spell out clearly, as I did with the clauses' legal basis, how legitimate businesses will be protected under the proposals and why I do not accept that we need additional measures that have been suggested by a range of bodies from all walks of life.
I start by considering the measures under clause 17. The revised public notice 700/52 is Customs' statement of practice. It outlines the procedures and circumstances in which Customs will require security. Customs will be expected to follow it and, if necessary, required to do that by the courts. The measure is aimed at businesses that are repeatedly involved in supply chains in which there are substantial tax loses. Businesses that are known to have dealt with high-risk businesses or individuals in the past will be given advice by Customs on the steps that they should take to avoid dealing with such businesses. Security will be required only if they continue to do that.
The measure will not be applied without a formal written warning, which will give businesses the opportunity to mend their ways. A new right of appeal will be introduced—an appellate rather than a supervisory right—that will allow the tribunal to reduce
or vacate any security requirement. An appeal will be allowed unless Customs satisfies the tribunal that there has been, or is likely to be, evasion in the supply chain. I would fully expect a tribunal to uphold any appeal in which Customs failed to follow its procedures, for example, if no warning were given before applying the measure.The measure in clause 18 is limited in law to two trade sectors. It will theoretically affect 50,000 of the 1.7 million businesses that are registered for VAT but, in practice, it is likely to affect no more than 5,000 or 6,000. The law means that Customs will not apply the measure unless it can establish that a business knew, or had reasonable grounds to suspect, that VAT would go unpaid. A business may rebut any presumption if the low price paid for goods is unconnected with unpaid VAT.
Businesses will be notified if they are caught by the measure before it is applied, which will give them the opportunity to provide an explanation. I make it clear that the measure will not be applied to businesses that demonstrate that they have not become involved in a supply chain in which VAT has gone, or will go, unpaid. Businesses will have the right of appeal to an independent VAT and duties tribunal if they receive a joint and several liability notice.
I hope that my remarks have helped to reassure hon. Members about their greatest concerns, and demonstrated that there is robust legal basis behind clauses 17 and 18 and that the measures proposed are properly restrained and balanced by comprehensive and effective safeguards to protect the innocent. We do not take the powers lightly. As I explained in Committee, we have examined other options, but none would be as effective as measures set out in clauses 17 and 18. The scale and nature of the fraud, often involving complacency or collusion, require us to take the measures to complement Customs existing actions to clamp down on the VAT fraud.
In light of the explanation and assurances that I have set out for the hon. Member for Eddisbury and other hon. Members, I hope that he withdraws the amendment. If he wishes to press it to a vote, I must ask my hon. Friends to reject it.
Mr. Stephen O'Brien: In the interests of time, as other business is pressing, I shall just say that I am grateful to the Minister for the spirit in which he treated the issues raised. As he rightly observed, the gravity of the subject merits that and he did, indeed, treat it seriously. We needed to take a technical approach to have what is, in effect, a stand part debate. Our exchange has been important. It has provided us with the chance to raise concerns.
On the House of Lords report, no doubt the other place will look to the Government for a response. The debate on whether there is prior, rather than post, protection, and where the balance of rights and responsibilities lies, will develop. Furthermore, on a letter before a claim, that may, or may not, end up being a matter for the courts. It would be irresponsible of me to speculate further on that other than to say that it has been a useful exchange and we have ensured that the issues are well understood.
The Minister rightly observed, as part of the article 1 and protocol 1 attached to schedule 1 of the Human Rights Act 1998, that we have discussed the fair balance of a judgment to be applied between society and the individual. On that basis, a useful exchange has taken place, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 1
Amendment made: No. 12, in page 143, line 35, at end insert—
"and other supplies that are not taxable supplies".—[John Healey.]
Mr. Flight: I beg to move amendment No. 5, in page 138, line 41, leave out subsection (3) and insert—
- "(3) For subsection (3) substitute—
'(3) For the purposes of making their determination under subsection (1)(b) the Treasury shall be required to apply generally accepted accounting practices in determining whether all or part of any payments represent such interest as is referred to in that subsection.'.".
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