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Standing Committee A
Tuesday 11 May 2004
[Mr John McWilliam in the Chair]
(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and
282 to 289, and schedules 1, 3, 11, 12, 21
and 37 to 39)
Disclosure of value added tax avoidance schemes
Mr. Howard Flight (Arundel and South Downs) (Con): I beg to move amendment No. 7, in
The Chairman: With this it will be convenient to discuss amendment No. 8, in
Mr. Flight: I welcome you to the Chair, Mr. McWilliam. In addressing the two amendments, I hope that the Economic Secretary will deal with some of the problematic issues that we did not cover entirely during the debate on clause 19, which was the introduction to the contents of schedule 2, and in particular with some of the practical problems raised by the Institute of Chartered Accountants.
The Chairman: Order. Just in case I have misunderstood the hon. Gentleman, my colleague suggested at the closing of the previous sitting that he was not minded to allow a debate on schedule stand part, so it would seem to me that rather more than an introduction to the schedule took place.
Mr. Flight: I thank you for your comments, Mr. McWilliam. There was discussion as to whether there should have been a broad debate on clause 19—the introductory clause—or schedule 2. There was a stand part debate on clause 19 covering the whole territory. I was merely making the point that the Economic Secretary has not yet responded to some of the issues raised in that debate that are relevant to the two amendments.
The amendments are designed to bring better proportionality to the proposed measures in the schedule. As pointed out, the provisions are likely to result in excessive and unnecessary compliance burdens and costs for business. Equally, as has occurred in the USA, they are likely to lead to Customs and Excise being snowed under with reports, especially where the requirements are too loosely drawn for businesses with a turnover of more than £10 million. How many extra Customs and Excise staff are the Government proposing to take on to deal with the processing of reports?
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As with many other measures that have been introduced, such as the lowering of tax rates on small businesses that are incorporated, the Government fail to heed our warning on this matter at their own risk. Hon. Members will appreciate that schedule 2 provides two different, wide-ranging sets of powers for Customs and Excise to be defined and determined in regulations. However, even if the regulations confine reporting objectives to specific schemes, they are unlikely to reduce the potential burdens on Customs or business.
Amendment No. 7 would require the Treasury to include in any scheme designation details of the way in which the designated provision may be used to avoid VAT. The objective is to assist business in complying with VAT scheme reporting obligations in respect of such arrangements, and, with regard to paragraph 5, to make it impossible for Customs and Excise to overdesignate or designate provisions without supporting explanations of the nature of the abusive scheme that it seeks to deal with.
Amendment No. 8 has two purposes. First, it would substitute a main benefit approach for the existing main purpose approach test in paragraph 5. The Inland Revenue clauses later in the Bill apply a benefit test rather than a purpose one. We suggest that taking the benefit rather than the purpose route would make the objective of providing more objectivity in defining the application of the clause more achievable. It should be easier to define the benefits that flow from an arrangement than to determine their purpose, which will inevitably be subjective and will reflect what the individuals in any business that has put such arrangements in place think that the purpose might be. In our view, the VAT clauses should follow the same approach as the later Revenue clauses.
Secondly, the amendment would tie the reporting requirement to the sort of arrangements that the Treasury had in mind in designating the provisions. The combined objectives and intended effects of our two amendments would be to reduce the number of cases to which the provisions could apply, without reducing their effectiveness, and to lessen the potential for snowing under of the Customs and Excise officials involved in operating the measures in schedule 2.
Mr. John Burnett (Torridge and West Devon) (LD): I welcome you to the Chair, Mr. McWilliam. I have served under your wise chairmanship on many occasions in the past.
I will make a general point, because this is my first time in this Committee Upstairs, although I have spoken in debates on the Floor of the House. That point is that the Finance Bill is scattered with anti-avoidance provisions. Hon. Members of all parties will welcome such provisions, but we should not forget a principle in British tax law that has been enshrined for at least a century. There was a leading case at the end of the 19th century or the beginning of the 20th, the effect of which is that individuals, companies and trustees can so organise their affairs as to mitigate the tax that is due and payable—whether it be value added tax, income tax, capital gains tax, inheritance tax or whatever.
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Another problem is that there have been many aggressively marketed, artificial schemes. Ten or 15 years ago, leading cases taken up by the Inland Revenue, such as the Ramsay and the Furniss and Dawson cases, narrowed the ability of taxpayers to use artificial schemes to avoid taxation. It is a very difficult line to tread, but I hope that the Government agree with the general principle that all persons—in tax, persons means individuals, trustees and corporations—can organise their affairs in such a way as to mitigate the tax that they have to pay.
I support amendment No. 7, because in dealings with the taxman—Customs and Excise or the Inland Revenue—there must be some balance. We cannot be taxed by fiat of the Customs and Excise—what it believes to be the law. We can be taxed only by what actually is the law. I believe that amendment No. 7 goes a small way towards redressing that balance in favour of the taxpayer.
I am grateful to the Law Society for providing a few examples of fairly simple and straightforward steps that are ordinarily taken by VAT payers. For instance, a company can obtain a tax advantage by joining a group of companies for VAT purposes, which in itself may be subject to anti-avoidance provisions. We have to know what Ministers and the Inland Revenue, Treasury and Customs are driving at when they make such provisions in anti-avoidance laws.
I also support amendment No. 8, which is a logical amendment to ensure that the test is benefit rather than purpose. I look forward to hearing from the Economic Secretary on those general and specific points.
The Chairman: Before I call the Economic Secretary, may I remind hon. Members of my colleague's ruling in the last sitting? If anyone wants to make any points on schedule 2, they had better use the vehicle of these two amendments to do it.
The Economic Secretary to the Treasury (John Healey): The amendments relate to the hallmarks scheme, which is the second element of the new disclosure rules. It requires large businesses to disclose use of schemes that have certain provisions, or hallmarks, that are characteristic of avoidance. The objective behind the designation of certain hallmarks that are or are likely to be associated with avoidance schemes is to provide Customs officials with information about new VAT schemes that they do not already know about, which may be avoidance schemes. Early action can then be taken to examine the scheme, and if necessary act against it, either by litigation or by making changes to legislation.
The hon. Member for Torridge and West Devon (Mr. Burnett) vividly described the challenge that the Revenue faces in this modern age, given modern tax planning and advice. He referred to aggressively marketed and highly artificial schemes. He was not present at the last sitting when we debated at length the points that he raised. With your indulgence, Mr. McWilliam, I shall briefly repeat that the general principle that companies have a right to organise their
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affairs in such a way as to mitigate tax is correct, but when such activity becomes abusive—in other words, when their action is contrary to the purpose or spirit of the legislation—we move into a different realm. It is right that Customs and the Inland Revenue act to protect the taxpayer and those businesses that pay the full amount of tax that is due; indeed, they have a duty to do so.
Mr. Flight: What the Economic Secretary just said is extremely important, in that he set the juxtaposition in which it is accepted that a citizen has the right not to pay more tax than he is legally obliged to pay, although he used the somewhat questionable word ''abusive'' in his definition. A major objection to the hallmarks scheme is that the requirements are worded such that anything other than paying the maximum VAT constitutes a scheme to be reported. I cannot think that that is the Government's intention, as Customs and Excise will be snowed under. That was one of the main criticisms made by the Institute of Chartered Accountants about the drafting.
John Healey: I am aware of that, but it is a serious misrepresentation of the way in which the measure will be brought into effect. Far from being a scheme that will catch anything that is not the fullest possible payment of tax, the hon. Gentleman will be aware—he has had a chance to study the draft statutory instrument—that, as with the listed schemes that we discussed last week, the hallmarks will be designated specifically by Treasury order, subject to affirmative resolution, and therefore debate in the House. Drafts of the order will be exposed for comments one month before it is laid, so it will be subject to consultation and parliamentary scrutiny. The first hallmark will be designated at the same time as the first listed schemes under the same order.
It is highly unlikely that Customs will be ''snowed under'' by notifications under these provisions. There will be a central unit, as I explained during our proceedings last week, but we anticipate being able to cope well within existing resources to deal with this. The central unit will be staffed by existing staff in Customs who will be redeployed to work in the unit.
With the hallmarks scheme, we have designed arrangements to minimise the burdens on business. Any burden need fall only on those who think up such schemes, and we have provided a facility for promoters to remove the disclosure requirement on their customers by making prior disclosure themselves. Promoters who make use of that facility can relieve businesses and clients of any burden. If a business with a turnover of more than £10 million chooses to use a scheme not disclosed by the promoter, it will have to consider whether it needs to be disclosed.