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Sixth Standing Committee
on Delegated Legislation
Tuesday 1 July 2003
[Mr. Alan Hurst in the Chair]
Value Added Tax (Finance) Order 2003
Mr. David Wilshire (Spelthorne): On a point of order, Mr. Hurst. I seek to discover whether there is any way in which you can defend the rights of Parliament and the best interests of democracy, because what we are doing this morning is an affront to both. The Committee was originally scheduled for half-past two this afternoon, which meant that it would have sat right in the middle of further consideration of the Finance Bill, when the three shadow Treasury spokesmen would have been engaged in the House.
I raised the matter through the usual channels, and I thank them for listening and for initially proposing to move our sitting to half-past two tomorrow. That arrangement would have been acceptable, if a bit difficult. At the eleventh hour, however, my colleagues and I received notification that the sitting had been moved to five to nine this morning. Again, I raised the matter through the usual channels, only to be told that it was not convenient to the Treasury to meet tomorrow. There was no discussion of why it was not convenient.
One should bear in mind that the three shadow spokesmen did not see the programme motion for the Finance Bill until half-past five last night and that they did not know until late last night which amendments had been selected. They do not have a raft of civil servants to do their research, write their speeches and help them to prepare, but one of them had to be ready to stop working on the Finance Bill and to come here this morning. As a result, my hon. Friend the Member for Eddisbury (Mr. O'Brien) could do one of two things. He either had to neglect his duties as regards the Finance Bill, in which case parliamentary scrutiny would suffer, or he had to do less preparation for this Committee, in which case democracy and Parliament would suffer. That is not the fault of Her Majesty's Opposition but the result of the Government's high-handed approach and their lack of interest in proper parliamentary scrutiny.
Is there anything that a neutral Chairman can do to postpone this sitting so that we can do our job properly? We were elected to hold the Government to account. Is there any way in which we can stop them treating hon. Members, democracy and parliamentary scrutiny in such a cavalier and high-handed way? I find their behaviour utterly despicable.
The Chairman: As the hon. Member will appreciate, that is not a point of order. That said, the arrangement of Committee sittings is, as he properly divined, a matter for the usual channels. It is for representatives of the political parties and others to arrange the times and dates of sittings. That is not a matter for the Chair.
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The Economic Secretary to the Treasury (John Healey): Further to that point of order, Mr. Hurst. I appreciate the Opposition's concern to ensure that the order, like other Treasury-related matters, is properly scrutinised, and the hon. Member for Eddisbury takes such matters seriously, but this is a busy time for us all, and the order could clearly not have been considered this afternoon, as originally intended, because it would have clashed with the Report stage and Third Reading of the Finance Bill. Our sitting was therefore moved to tomorrow afternoon, but it would then have clashed with proceedings on the private Member's Bill that is being introduced by the hon. and learned Member for Harborough (Mr. Garnier). The hon. Member for Eddisbury will not be on that Committee, because one of his Front-Bench colleagues is handling the Bill. Sadly, the same does not apply to me, and I must attend. The timing of that private Member's business would have clashed with our discussion of the order, so our sitting was moved to this morning. I hope that that helps to clarify the position.
The Chairman: Equally, that is not a point of order, but a point of explanation. Whether it is acceptable to the hon. Member for Spelthorne (Mr. Wilshire) is a matter for him.
John Healey: I beg to move,
That the Committee has considered the Value Added Tax (Finance) Order 2003 (SI 2003, No. 1568).
I welcome you to the Chair, Mr. Hurst, and look forward to your giving the Committee a firm steer as we scrutinise this modest and limited order under the affirmative resolution procedure.
The VAT finance exemption covers a diverse range of products, which have increased in complexity and innovation over the years since 1973, when the original legislation was put in place at European level. We are committed to ensuring that those products are taxed correctly according to European Community VAT law, and that UK law fully reflects our EC obligations. In setting out the principles and scope of EC law in domestic legislation, we provide certainty and clarification for our finance sector.
The change that we are debating tackles one part of the UK's VAT exemption for financial services, where the courts have found the current legislation to be unnecessarily restrictive. Judging by the results of the extensive consultation with the industry by Customs and Excise, this small but important change will be welcomed by businesses operating in the financial sector.
European VAT law lists certain services that are exempt from VAT and, in some cases, specifies the types of provider that can provide those exempt services. One circumstance is the
''management of credit by the person granting the credit''.
It is clear from the provision that, if someone is not the credit provider, they will not be able to claim exemption for managing credit, so in 1999 the Government introduced a law to specify that credit management was not exempt except if the supplier also granted the credit.
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The UK defined in law the functions considered as credit management and went further by saying that, if a person undertook any one of those functions, they would be considered to be making supplies of credit management. That became known colloquially as the tainting provision. It meant that a credit provider's supply could be exempt, at least in part, if a credit management service was present, regardless of the overall character of the supply. Conversely, a non-credit provider's supply would always be taxable if it contained an element of credit management.
A European Court of Justice decision in the case of Card Protection Plan set out tests by which to decide whether a bundle of services constituted a single supply or multiple supplies. On comparison of those tests with the UK definition of functions constituting credit management, it was found that the two approaches were inconsistent in deciding whether a supplier making taxable and exempt elements should charge VAT on the whole supply. That is why this change is needed.
Another company, whose services fell clearly within the UK's definition as taxable credit management, challenged the UK's interpretation of EC law. That company undertook functions relating to the operation of credit cards and, although elements of its service were regarded as exempt, Customs ruled that the overall supply was data processing or credit management and therefore taxable. However, the courts found that Customs was incorrect and that that company was making VAT-exempt transfers and payments and, in doing so, in effect making the wording of the UK law obsolete.
We therefore propose changing domestic law to reflect the terms of that judgment and the judgment in the Card Protection Plan case. The new law will reflect the wording of EC law:
''management of credit by the person granting it''.
That has been done by a separate order that is subject to the negative procedure. It was laid before the House on 16 June and is due to come into force on the same date as this order: 1 August 2003.
This order removes the tainting provision, which is unnecessarily restrictive, and taxes or exempts supplies by the mere presence of a specified function rather than by considering the overall nature of the supply. As I explained, the changes are in line with recent court judgments.
In preparing the changes, Customs twice sought the views of interested parties in the industry. Those parties confirm that the new law more accurately reflects the provisions of EC law and correctly interprets the terms of the court judgments. On that basis, I commend the order to the Committee.
Mr. Stephen O'Brien (Eddisbury): I welcome you to the Chair, Mr. Hurst, as we consider statutory instrument No. 1568, which, as revealed in the explanatory note, needs to be taken with statutory instrument No. 1569, the Value Added Tax (Finance) (No. 2) Order 2003, which is subject to the negative procedure.
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I had to make an overnight study of the order, given that I did not even have the paperwork for it until 9 pm last night, after I had sweated to be reasonably prepared for the Finance Bill. The Procedure Committee and the Government Whip will recognise that there was a degree of genuine trade on my part.
I understand the position as outlined by the Minister to be that a listed service that had been included in the legislation would be exempt if undertaken by a credit provider but taxable if undertaken by a non-credit provider. In the First Data Resources case, it was held that because a non-credit provider was automatically tainted if it undertook one of the listed services, the legislation was in breach of EU law. That theme—the opposite of a golden thread—seems to run through many parts of the Finance Bill.
The Government's response through Customs and Excise, after consultation, was simply to remove note (2B), as has been explained, with the result that the non-credit provider will not be tainted and the credit provider will need to carry on exempt activities in substance. Therefore, the question of whether a relevant supply of financial services would be taxed or exempted is determined according to the overall character instead of by reference to the presence or absence of a service listed in note (2B).
It was notable that, following the FDR case, Customs and Excise said that it would seek to change the group 5 definitions by way of consultation and then proposal. That is effected through this order, but order No. 1569, which is subject to the negative procedure, also applies. A little more explanation from the Minister as to how the consultation proceeded would have been helpful, given that the original ideas have changed in the light of consultation, about which I make no complaint. However, we do not know the chain of causation of thinking, which would have been helpful to our understanding, not least because of the very clear Court of Appeal findings by Lords Justices Ward, Laws and Bell on 13 July against Customs and Excise and in favour of FDR Ltd., and given that Customs and Excise was refused leave to appeal to the House of Lords. As a result of that case and the usual difficulties that they have in trying to get their way while finding, increasingly, that they appear to be in breach of EU law, the Government have had to come scrabbling back to get the order through.
On 25 November 2002, Customs and Excise issued a letter on the matter. It is difficult to understand why there are two orders, one subject to the affirmative resolution procedure and the other to the negative procedure. For clarity and ease, one statutory instrument would have been more convenient. However, it might have been better to define the changes in the primary legislation, rather than by way of an order. The Government have not chosen that course, so it will be up to the professionals to follow the chain of interpretation and the new orders.
One other point arises from the changes in the associated statutory instrument, which is critical to a
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full understanding of whether the order justifies our support. That associated statutory instrument is being dealt with under the negative procedure. It deals with the rewording of item 10, which deals with the exemption for management of open-ended investment companies. The new wording is:
''The management of the scheme property of an open-ended investment company.''
The equivalent exemption in the EC sixth VAT directive is the
''management of special investment funds as defined by Member States''.
We should note that member states' power to define is limited to the ''special investment funds'', not the ''management''. That is established case law.
It seems extraordinary that Customs seeks to confine the exemption to the management of the scheme property—the portfolio assets—when the EC legislation imposes no such limitation. It raises the question of management of an administrative nature. Is Customs and Excise, through the Minister and the order, saying that that is not exempt? We will not have an opportunity to explore that matter, which relates to the wording in statutory instrument No. 1569, which interacts crucially with the order that we are considering. I hope that the Minister will give a clear answer.
Technically, I would not raise any particular objection. However, it is important that we understand the interrelationship between statutory instruments Nos. 1568 and 1569 in relation to the questions that I have raised. The definitional matter is critical to the way in which matters will operate in future. I hope, therefore, that the Minister will give a clear answer. We will be able to form our view in the light of what he has to say.