Finance Bill

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The Chairman: I have to say to the hon. Gentleman that they cannot do that at this moment, because the amendments will be dealt with in a subsequent debate. The Question before us is whether clause 19 should stand part of the Bill. I have allowed the Opposition spokesman to make considerable reference to amendments that relate to schedule 1, but if the Opposition want to vote on those amendments, they will have to wait until the relevant stage. I must say that when we move to schedule 1, I trust that only brief reference will be made to the amendments that I have allowed to be covered under clause 19.

Mr. David Laws (Yeovil): We understand entirely the concerns that have induced the Government to introduce the proposals in the clause and schedule 1. The Economic Secretary clearly set out the case for taking action. We understand that, under the existing legislation, tax losses arose in some circumstances when intermediate suppliers sold face-value vouchers. It therefore seems sensible of the Government to introduce measures to tackle that. However, we share many of the concerns set out by the hon. Member for Eddisbury (Mr. O'Brien), and we support the amendments, which we will debate in greater detail later.

As the hon. Gentleman mentioned, there seems to be a certain overlap between the debate on clause 19 and the debates that we had the other day on clauses 17 and 18. Given the lack of time, I do not want to put us into reverse and revisit those debates. As the hon. Gentleman mentioned when he cited the comment of

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the Institute of Indirect Taxation, this is another instance of Customs possibly seeking to collect tax from an innocent third party when it cannot collect it from the person who actually owes it. The Economic Secretary will be aware that the Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Indirect Taxation have expressed several concerns about the clause. The hon. Member for Eddisbury set out those concerns clearly, and I will not go over the ground that he covered. The Chartered Institute of Taxation questions whether the Government's measures are consonant with the sixth VAT directive. I would be grateful if the Economic Secretary indicated whether he thinks that the measures are consonant with that directive and whether he received specific advice on the point.

More broadly, the Institute of Chartered Accountants sums up the major criticism of the clause when it raises the issue of fairness. It states:

    ''The proposals are also likely to impose an unfair liability by requiring the issuer of such vouchers to bear any tax not accounted for by some other person'',

and that takes us back to our debates on clauses 17 and 18.

The hon. Member for Eddisbury also discussed the substantive issue of fairness in relation to face-value vouchers, which are used in payment for a wide variety of goods on which VAT levels may be varied—zero or lower rate VAT or standard rate VAT. There is concern about whether the way in which the Government intend to deal with the issue will breach the fundamental principle of VAT, which is that the tax collected in relation to a particular supply of goods or services should be proportionate to the value of that supply.

The hon. Member for Eddisbury has introduced some fairly sensible proposals and amendments. We hope that the Economic Secretary can respond to them.

Mr. Djanogly (Huntingdon): I congratulate my hon. Friend the Member for Eddisbury on his clear explanation of the problem. Although double taxation should obviously be avoided, given that an issuer does not charge VAT on the supply of face-value vouchers to an intermediary, it is difficult to find a legal basis for an input tax deduction by an intermediary. It is questionable whether VAT charged on the supply of goods and services should be regarded as an input tax of the intermediary who purchased the face-value vouchers. I therefore support amendment No. 89, which would address that situation.

It is worth noting that the Chartered Institute of Taxation considered it ''extraordinary'' that such important matters—input tax deduction and invoicing—will be dealt with on an extra-statutory basis. It suggests that both input tax deduction and invoicing should be dealt with in statute, and I agree.

Mr. John Baron (Billericay): I shall briefly concentrate on two issues, both of which have been touched on, but both of which bear dwelling on. The

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first relates to the unfairness of the scheme and the second its practical implications.

On unfairness, the clause is another instance of Customs and Excise seeking to collect tax from an innocent third party when it cannot collect it from the person who owes it. Paragraphs 3(3) and 4(4) of schedule 10A to the Value Added Tax Act 1994, which is introduced by schedule 1, hold the issuer of a voucher, such as a record token or a phone card, or any intermediate purchaser liable to pay the VAT on the supply of goods or services made by a third party against the voucher. Several Members have discussed that issue, which is clear. The provision is unreasonable if the failure to account for the tax is outside the issuer's control or influence. I ask the Economic Secretary to give that some thought because it will have practical implications for the commercial world.

I shall dwell for a second on the practical difficulties of the clause, and I would welcome the Economic Secretary's thoughts on them. Practical difficulties arise in connection with the charge to tax under paragraph 6(5) of new schedule 10A in respect of the face-value vouchers specified in paragraphs 4(4) and 6(2). It is important that the consideration for the supply is apportioned on a fair and reasonable basis between exempt, zero-rated, reduced-rated and standard-rated elements.

Such a fair and reasonable basis would reflect the sales mix of the persons who eventually redeem the vouchers for goods or services, and it should take into account any difference in the mix of cash sales and voucher exchange sales. It is unclear from the clause how the person supplying the voucher is supposed to arrive at even an approximation of the mix, and I would welcome some explanation from the Economic Secretary as to how the clause would deal with that issue.

Mr. Michael Jack (Fylde): I rise briefly to support the comments that have been made and to pay tribute to my hon. Friend the Member for Eddisbury on the way that he introduced our views. I, too, am concerned that the proper level of VAT be collected for those who have a liability. Once again we seem, as the hon. Member for Yeovil (Mr. Laws) suggested, to be replicating the line of argument that we had on for clauses 17 and 18. In that case, the Economic Secretary was able to demonstrate some real-world examples of where such fraud had been perpetrated, from the fields of telecommunications, computers and chips. However, so far the Economic Secretary has given us a theoretical construct with no practical examples.

I am concerned about how the measure will work where one has face-value vouchers. How would it work, for example, if the Virgin group, which has interests in zero-rated services such as transport and full VAT services such as selling music CDs, were to do a deal with the Kellogg's company and put vouchers on the back of Corn Flakes packets which could be redeemed against any products sold by the Virgin group? Will the Economic Secretary tell us whether that problem exists in other parts of the European Union covered by the sixth VAT directive? If it does, how is it dealt with abroad? If not, why does

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the United Kingdom appear to be unique as far as that problem is concerned?

John Healey: I explained the purpose of clause 19 in my earlier remarks. This is no trivial issue. Hon. Members have talked about a sense of proportion. The total revenue loss this year is estimated through a combination of leakage and avoidance to be around £105 million.

Mr. Jack: To put the £105 million in perspective, will the Economic Secretary tell us how much VAT is collected in those areas where the proper rate has been paid?

John Healey: I was not seeking to make a point about the proportion, but the total revenue lost from VAT as a direct result of the existing loophole in legislation, which clause 19 and the associated schedule will plug.

As with other forms of revenue leakage and avoidance, the concerns that I have explained are twofold. First, the taxpayer has a right to expect the Government to collect what is due on the purchase of goods and services. Secondly, business has a right to expect that we shall prevent others from gaining an unfair advantage by reducing their tax and VAT bills. The Opposition amendments to schedule 1 reflect genuine concerns that have been expressed in some quarters. They were well argued and are well intentioned, but they are ultimately unnecessary and, to a degree, misguided.

Amendment No. 89 would specify that an intermediate supplier is entitled to claim input tax on the supply of vouchers to him by an issuer who redeems the voucher. I assure the hon. Member for Eddisbury and other hon. Members that that is our intention. Intermediate suppliers of face-value vouchers are already entitled to reclaim VAT paid on the purchase of the vouchers, and it is unnecessary to complicate the legislation further.

The hon. Member for Eddisbury suggested that that might be overkill and asked whether a second party can reclaim VAT. The answer is yes. It is not overkill because the second party will sell the voucher for more than it was purchased for. That will have the effect that we intend of being able to tax appropriately the mark-up on the transaction.

9.30 am

Mr. Djanogly: The Minister keeps referring to our amendments being unnecessary. Our intention is to elaborate on what the Minister proposes to clarify and to react so that there is less chance of further upset and avoidance.

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