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European Standing Committee B Debates

Value Added Tax

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European Standing Committee B

Wednesday 10 March 2004

[Mr. Nigel Beard in the Chair]

Value Added Tax

[Relevant Document: European Union Document No. 13853/03.]

2 pm

The Paymaster General (Dawn Primarolo): I am pleased to have this opportunity to set out in more detail the Government's view of the European Commission's strategy on value added tax. Tax matters require agreement between all member states, but the Commission has the sole right to initiate legislation at European level, so its objectives and priorities are fundamentally important to the Government's approach to taxation. I am glad that hon. Members found helpful the paper that I gave them with the explanatory memorandum. I will expand a little on that and tell the Committee about progress that has been made since the explanatory memorandum was submitted.

The Government have always believed that member states must be able to choose their level of social provision, size of public sector and type of tax. VAT is a tax on consumption, so a key objective should be that the consumer pays tax at the rate voted for by the Parliament of the country in which the consumption takes place, and that the tax accrues to the Government of that country. The Government resolutely oppose any proposals that unreasonably run counter to that principle, as shown by our insistence at ECOFIN that we would not accept any restriction of the United Kingdom's zero rates. The future of the Commission's review of that area is now uncertain as member states hold differing views about the desirability of resuming negotiations. However, they will all be in no doubt that our zero and reduced-rate derogations are off limits. We will retain them because they are part of our commitment to a fair VAT system, and we will continue to press for the right to introduce new reduced rates to support repairs to the UK's historic places of worship and to encourage energy saving.

Of course, the veto on tax greatly underpins our ability to resist unwelcome proposals. Members of the Committee will be aware that that was challenged by the proposal from the Convention on the Future of Europe for a new EU constitutional treaty. Member states could not reach agreement on a new treaty at the European Council's last meeting in December, but the Prime Minister made it absolutely clear that decisions must continue to be taken unanimously where tax issues are considered at EU level. Our robust stance in the Convention and the intergovernmental conference sends the strongest possible message that commitment to unanimity on tax matters remains firm.

The timetable for future negotiations remains unclear, but when talks resume, we will insist that tax matters continue to be decided unanimously. The

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veto is an important safeguard against unnecessary or ineffective proposals that could adversely affect the social and economic well-being of this country. However, that does not mean that we opposed to change—far from it. That is why the motion gives as one of our aims a responsive VAT system that can cope with the increasing pace of change in what business can provide and how its products are delivered. A VAT system that does not respond will become less and less efficient; competitive distortions will increase, and the Government's choices will be restricted.

We must therefore look ahead to see where change will be needed, and closely engage with the Commission and other member states to make reasoned and persuasive cases. That has led us to make the VAT treatment of cross-border supplies a priority. Reform is necessary as international trade grows in importance for all modern economies, not only to ensure the effective operation of the single market, but to help to develop Europe's international competitiveness. Of course, VAT is applied throughout the EU, but standard rates vary between 15 and 25 per cent. We have argued that it is important to allow member states the flexibility to set the rate that suits each one. However, to ensure that differences do not lead to unacceptable distortion, we must ensure that more tax is paid to the authorities where the consumption takes place and at the rate set by them.

We therefore welcome the fact that the Commission is now putting the issue at the centre of its strategy. That represents a significant achievement for the UK, on the back of much hard work and persistence. Also, the goal is not just a vague aspiration for the future: the Commission set out in the communication a timetable for action, and on 23 December it issued an initial proposal to deal with place of taxation for business-to-business supplies, in line with the input that the UK had made at the preparatory working party stage. I sent the Committee an explanatory memorandum dated 22 January, and the Irish presidency has given that dossier priority. Although there is much work still to be done, our case is strong and we are making good progress in discussions in the Council working group. I shall of course update the Committee as things develop.

We are also pleased that our ideas for technological solutions to minimise burdens on business are being taken up. The Commission has conducted extensive preparatory work on a key issue in that area, which is to work up ideas for a single place of compliance for businesses trading across borders—the so-called one-stop system. That is based on the arguments and ideas that the Chancellor advanced during earlier negotiations on the taxation of e-commerce. Those concluded with agreement on a web-based VAT declaration for non-EU suppliers of electronic services. The successful implementation of those new systems last July shows that the potential is there. We look forward to a Commission proposal later this year that will create the right environment to enable simplified collection of tax for EU businesses to underpin taxation at the place of consumption.

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With much change ahead, however, we must also ensure that the VAT system is robust, that it enables collection of the right tax at the right time and that as far as possible our revenues are protected from fraudsters. The Commission is right to be particularly concerned about carousel fraud, or missing trader intra-Community fraud, which is the UK's main VAT abuse. Tackling that is a top priority for Customs and Excise, and it has been implementing a national strategy to protect UK revenues since September 2000. Using existing structures, the approach has stemmed the previously rapid growth of such fraud. In 2002–03, UK losses fell for the first time, by around 5 per cent. There is considerable operational evidence that that decline has now hastened, and customs is confident that it is on target to halve the scale of UK losses from such fraud by 31 March 2004.

The Commission's communication covers a great deal of ground and, overall, sets out a positive and pragmatic agenda. In my paper for the Committee I assured hon. Members that we would none the less be vigilant in ensuring that the agenda is properly followed and the criteria properly applied. So far we have done that successfully. We look forward to building on that, as we continue to engage constructively in the EU.

The Chairman: We now have until 3 pm at the latest for questions to the Paymaster General. I remind hon. Members that questions should be brief and asked one at a time. There is likely to be ample opportunity for all Members to ask several questions.

Mr. Mark Prisk (Hertford and Stortford) (Con): The explanatory memorandum dated 12 November stated that the UK objective in relation to the original strategy was to simplify and modernise VAT, in order to reduce costs and burdens. The Paymaster General said that that has generally been met. What does that mean and which burdens have been removed?

Dawn Primarolo: I could mention electronic commerce and the requirements to simplify matters for businesses operating across the EU. The most important thing for business, however, has been the removal of the competitive distortion caused by the supply of services from non-EU suppliers into the EU.

Mr. Kelvin Hopkins (Luton, North) (Lab): I am pleased with my right hon. Friend's statement, particularly her comments about the Government's insistence on their red lines on VAT and unanimity in the proposed European budget. Discussions collapsed under the previous presidency, but at the start of the Irish presidency we were told that they would quickly restart, and that the British red lines would be wiped off in order to start again. Have the Government told the Irish presidency that the red lines are still very much in place?

Dawn Primarolo: I assure my hon. Friend that the red lines on taxation, particularly on the unanimity requirement, remain firm, and that they are forcefully advanced by all UK delegations in any discussions that impinge on tax issues wherever they occur, including those on the Convention.

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Mr. Michael Connarty (Falkirk, East) (Lab): Is not the Paymaster General concerned about the trend of countries asking for reduced rates? First, France requested a lower VAT rate for labour-intensive industries, and now it wants one for the restaurant industry which Germany appears likely to support. How can we reach a consistent policy on VAT if countries decide to take slices of their economies out of the system by reducing VAT?

Dawn Primarolo: My hon. Friend raises an important point about the speculation on whether there has been some sort of agreement between France and Germany, and the discussions on the possible extension of the reduced rate for labour-intensive industries. I cannot assure him on that point. I, too, have seen the reports, but they have not been confirmed.

The labour-intensive exceptions are very narrow and link specifically to generating employment. My hon. Friend may remember that the UK did not participate in the experimental period for labour-intensive supplies on the grounds that we were not persuaded that there would be an employment gain. Indeed, the Commission's report on that operation shows that to be the case. The question of whether there should be a further extension is a matter for discussion—certainly, the UK continues to advance its view on the possible limited use of those reduced rates. However, I remind my hon. Friend that the number of reduced rates that can be operated is also restricted by VAT legislation. I see his point, but I assure him that that is not the case, if only because the revenue from VAT is vital to all member states to fund their services.


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