The Chairman: Order. The word ''you'' should not be used; I have never sold a car except at an extreme loss to myself.
John Healey: I will deal with the questions of the hon. Member for Hertford and Stortford (Mr. Prisk) on the nature of the avoidance and who is involved during the course of my explanation of clause 22. I will also do my best to explain the relevance and the operation of nominal value and the case for moving to a market valuation.
The hon. Gentleman asked about losses. They are currently estimated at £5 million a year. That is not a theoretical loss: the estimate is based on abuses that are currently taking place and are known to Customs officials. If this scheme were to be expanded to its full capacity, it is estimated that the annual loss would be between £20 million and £25 million.
Mr. Prisk: Will the Minister answer my specific question by giving the Committee some idea of the proportion of the market that is engaging in such avoidance?
John Healey: As I have said, I will do my best to answer that in the course of my remarks.
Clause 22 counters a serious VAT avoidance scheme as part of our wider determination to clamp down on artificial and abusive tax avoidance activity. The changes that we are making will tackle underpayments of VAT on the private use of demonstrator cars—cars that are used in the motor trade for demonstration purposes but that are also made available to sales staff for their private purposes on weekends and evenings and at other times when they are not being shown to customers. Using a tax avoidance scheme promoted by many tax advisers, some motor dealers and manufacturers are paying a only tiny fraction of the VAT that they ought to pay when they make demonstrator cars available to employees.
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Where a demonstrator car is not used wholly for business, dealers and manufacturers are required to account for tax on the provision of the car to the employee for private use. That is based on the full cost of providing the car. Using rates agreed with the major motor trade bodies, the VAT due is normally about £120 to £140 per employee per year. However, by charging the employee a nominal sum for the use of the car—typically £1 for a couple of years' use—some businesses have at a stroke been able to limit their tax exposure to the VAT on only this nominal amount. To answer the hon. Gentleman's question, this avoidance scheme works because in VAT even the smallest amount of consideration—even £1 a year—counts as payment for a supply. The result of this is the loss of virtually all the tax that should be due.
I have explained the scale of the current revenue loss and the scale of the full revenue loss if the scheme were to be expanded to full capacity. For some of the larger businesses in the motor trade, the loss runs to hundreds of thousands of pounds a year. The changes that we are making will give Customs the power to direct an open market valuation when a car is supplied for a consideration by a motor dealer or manufacturer to an employee and its value is artificially low.
Mr. Prisk: My understanding is that the Chartered Institute of Taxation questions whether making this nominal value would achieve the aim on the basis that the £1 charge for, notionally, two years would not be considered to be in the course or furtherance of business. It would not enable a business to seek exemption from the VAT charge. Is the institute correct in making that assessment?
John Healey: I had understood the hon. Gentleman's explanation of why this avoidance scheme would not work to be related to a concern about the interpretation of the law. The clause is a direct response to the avoidance that we know takes place. I have tried to explain why and how the use of a nominal payment that constitutes a consideration allows an avoidance in this field that is not available to employees in other fields. That is why we are looking to close the scheme.
Mr. Prisk: I am trying to say that the very fact that it is questionable whether the nominal charge enables a business to make itself exempt in these circumstances means that Customs and Excise already has the powers, because such a payment would not be made in the course or furtherance of business. Therefore, even if the Treasury's view is that this is an attempt to avoid tax, the clause is unnecessary because Customs already has the powers to challenge such nominal payments.
John Healey: I have tried to avoid giving a blunt answer to the hon. Gentleman. He has asked me the same question a third time, so I will say that, in our view, the Chartered Institute of Taxation is wrong. Any small amounts of consideration—even a pound a year or a pound over two years—is regarded in tax law as being received in the course of business. That is why the scheme works and why it allows the payment of VAT on only that nominal value.
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What we propose in the clause requires a European Community derogation, which we applied for in February. The changes will take effect following receipt of the derogation on a day to be appointed by the Treasury. The measure is proportionate, necessary and a targeted response directed at the avoidance of VAT on company cars used as demonstrator cars. Car salesmen at present are getting away with avoiding the VAT on their company cars that other businesses have to pay. This measure will put an end to that.
Mr. Prisk: I am interested in the Minister's comments on whether the notional payment is a consideration. Unless I have missed the point, I did not hear any explanation from him—I am sure that it is an omission on his part—on open market value and rental businesses. Does he have any comments in response to those points?
John Healey: I will write to the hon. Gentleman about open market valuation and about the issue of free use, which he also raised.
Question put and agreed to.
Clause 22 ordered to stand part of the Bill.
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