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It also acknowledged that the commercial sector had the fastest growing energy use apart from aviation, principally from space heating and lighting, ventilation and air-conditioning. Other drivers include the energy services associated with the use of information and communications technology. In addition, that sector is
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highly electricity intensive—electricity has an especially high carbon footprint. According to February’s Department of Trade and Industry projections, if no new policy measures are introduced to tackle energy demand in the commercial and public services sector, its use of electricity is projected to soar by a staggering 45 per cent. from 1990 to 2020.

In the light of the above, the Bill is clearly long overdue. I hope that it will be welcomed by all parties. Indeed, it has received support across the House. Early-day motion 2378 in support of the Bill was tabled only on 15 June, but has already attracted the support of 200 Members of Parliament. The Bill simply requires the Government to take reasonable steps to achieve the reductions in energy usage in the commercial and public services sector that they have already described as cost-effective and practicable. For 2010, that means a reduction in energy usage of at least 10 per cent. compared with 2005, and a further reduction in energy usage of 10 per cent. below 2010 levels.

The Government have already explicitly acknowledged the need for binding energy efficiency targets by introducing in the Housing Act 2004 a target to achieve a 20 per cent. increase in energy efficiency in the residential sector by 2010. The Bill simply completes the policy picture by introducing similar binding targets not only for the domestic and residential sector, but for the commercial and public services sector.

Question put and agreed to.

Bill ordered to be brought in by Dr. Alan Whitehead, Mr. Elliot Morley, Mr. Michael Meacher, Mr. Tim Yeo, Chris Huhne, Colin Challen, Helen Goodman, David Howarth, Mr. Nick Hurd, Bob Spink, Kitty Ussher and Mr. Edward Vaizey.

Climate change (commercial and public services sectors)

Dr. Alan Whitehead accordingly presented a Bill to make provision about the reduction of greenhouse gases; to promote energy efficiency and the consumption of renewable and low carbon energy in the commercial and public services sectors; to provide for the Secretary of State to report to Parliament on energy usage in the commercial and public services sectors; and for connected purposes: And the same was read the First time; and ordered to be read a Second time on Friday 20 October, and to be printed [Bill 209].

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Orders of the Day

Finance (No. 2) Bill

Not amended in Committee and as amended in the Standing Committee, further considered.

Clause 19

Missing trader intra-community fraud

1.47 pm

The Paymaster General (Dawn Primarolo): I beg to move Government amendment No. 18, page 22, line 6, at beginning insert

Mr. Deputy Speaker (Sir Alan Haselhurst): With this it will be convenient to discuss the following: Government amendments Nos. 19 and 20.

Amendment No. 121, page 23, line 3, at end insert—

Dawn Primarolo: Clause 19 provides for a change in the VAT accounting provisions for sales of specific goods to tackle missing trader intra-community fraud. That fraud is an organised criminal attack on the VAT system, which, in 2004-05, is estimated to have cost up to £1.9 billion in stolen VAT.

This change of accounting provision, known as the reverse charge, will be introduced once the necessary derogations from the sixth VAT directive have been agreed. It will apply to sales of certain specified goods between VAT-registered businesses. When the reverse charge applies, it is no longer the seller’s responsibility to account for and pay the VAT on the sale to Her Majesty’s Revenue and Customs, but that of the customer. Subsection (13) of new section 55A, which clause 19 introduces, of the VAT Act 1994 provides for amendments to be made to that Act by Treasury order where it is necessary and expedient for the reverse charge.

Amendment No. 18 allows a Treasury order under this provision to amend the VAT Act to confer power on the Commissioners of Revenue and Customs to make regulations or exercise any other function. The amendment is necessary to ensure that the power can be tailored to introduce any change in the manner most appropriate to the circumstances. By that, I mean the evolving fraud being perpetrated. I appreciate that this is a wide power, but it is a necessary one, and of course it will receive proper scrutiny by this House.

Amendments Nos. 19 and 20 reflect concerns highlighted following discussions with the European Commission about the need to ensure that the reverse charge mechanism does not create opportunities for further revenue loss—a matter that I am sure will also be of concern to Members of the House. The amendments allow HMRC to introduce secondary legislation, first, to require VAT-registered persons trading in the specified goods to which the reverse charge will apply to submit reports of those
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transactions and notify HMRC when they first make supplies of those goods; and, secondly, to apply the existing penalties for similar statements in respect of intra-Community sales for inaccurate statements or non-submission of statements, as well as existing penalties for a failure to make any required notification.

John Bercow (Buckingham) (Con): As the Paymaster General rightly says, the amendment is widely drawn, and that might be entirely justified. She indicates that the power would be subject to proper scrutiny. Can she tell the House whether the provision would be subject to the negative procedure of the House or its affirmative counterpart?

Dawn Primarolo: The affirmative procedure will be necessary. I know that Members, including the hon. Gentleman, fully appreciate the importance and urgency of tackling this fraud and of the Department having the necessary powers. None the less, the House should still scrutinise how the powers are intended to be used and how they are used.

I will go further and say that the details of the reporting requirement and how it will affect business means that there needs to be discussions with business as well. We have to make sure that there is the minimum impact, particularly regulatory impact, on businesses generally. The reporting requirement should be kept to an absolute minimum. The provisions will need to take into account consultation on those elements. Thus far businesses have been totally supportive of the Government’s actions—they have been consulted—because they are well aware of the dangers that such fraud poses not only to the Revenue, but to their activities as legitimate businesses that can be undermined by fraud.

John Bercow: I am extremely grateful to the right hon. Lady for giving way again and for her helpful earlier reply. It is a matter of concern to me that when regulations of this sort are introduced they should as far as possible be subject to widespread advance consultation, and I have asked the Leader of the House if we could be sure on these occasions that, wherever possible, draft regulations are issued before the passage of the Bill. Might that happen in this instance?

Dawn Primarolo: The regulations are not available at this point. It would be foolish to reveal to the fraudsters, in advance of receiving agreement on the reverse charge, exactly how it will operate. However, it will be necessary for the regulations to come before a Committee through the affirmative procedure, and it stands to reason that they will have to be available for the Committee to read, with an explanatory memorandum. As I have said before—I know that the hon. Member for Rayleigh (Mr. Francois) appreciates this—I am doing my best to make as much information as possible available to the House without prejudicing the Department’s position in dealing with this important matter.

I come finally to amendment No. 121. A similar amendment was tabled in Standing Committee, although it was not moved. Recognising the importance that the Opposition placed on the matter, I indicated to them that had they moved it I would have accepted it, and here it is again, so I repeat my
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assurance. The amendment seeks to insert a sunset provision, namely, that if the orders have not been made by 22 March 2009 the powers cannot be used. I do not think that it is necessary, but I see no problem with it, and if it reassures the Opposition that this matter will be dealt with in a timely fashion I am, as I indicated, prepared to accept it. We need to sort out the matter a lot earlier than 2009.

Mr. Mark Francois (Rayleigh) (Con): I am tempted to say thank you and sit down quickly, but there are a few points that need to be made.

I rise to move amendment No. 121 in my name and those of my hon. Friends. It seeks to insert an additional sunset provision into clause 19.

Mr. Deputy Speaker: Order. The hon. Gentleman does not have to move the amendment at this stage; we are debating the group of amendments. If the question is eventually to be put, I will ask him to move the amendment formally at the appropriate time.

Mr. Francois: I am very grateful for your procedural advice, Mr. Deputy Speaker. As the Paymaster General said that she was going to accept it the amendment, I wanted to take no chances whatsoever.

As we heard, the right hon. Lady said in the Standing Committee that she was minded to accept the amendment. We have brought it back to the Floor of the House on Report to test her commitment to that, and I am pleased to say that she has honoured her pledge, for which I am grateful.

I want also to comment briefly on Government amendments Nos. 18 to 20, particularly No. 18, which appears to confer on Ministers a wide-ranging regulation-making power. It is therefore right that we should focus on that at least briefly before we allow the measure to be included in the Bill.

Clause 19 refers to missing trader intra-community fraud, or MTIC fraud, as it is more popularly known, which is now a multi-billion-pound problem across the European Union. We debated the issue at some length in the Standing Committee on 11 May, and I do not intend to reprise the whole debate on the Floor of the House, but there are a few points that need to be reiterated in debating these amendments.

The problem of MTIC fraud has become so widespread that the Office for National Statistics now adjusts UK trade figures to take into account estimates of MTIC fraud. As the ONS points out, by definition the extent of such fraud is difficult to measure accurately. However, HMRC, in a press release dated 26 January 2006, estimated UK VAT losses from MTIC fraud to be between £1.1 billion and £1.9 billion for 2004-05. It is interesting that the Paymaster General used the £1.9 billion figure a few moments ago. In April 2006 the Government announced the first annual fall in VAT revenues since the UK started collecting the tax in 1973, largely because of a significant rise in estimated carousel fraud, which is a particular breed of MTIC fraud.

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Dawn Primarolo: I am happy to correct the record: there was a substantial fall in VAT receipts in the 1990s under a Conservative Government.

Mr. Francois: I am not questioning that that occurred; I am saying that in this instance VAT receipts have fallen and the Government’s explanation for that is fraud. I want to press the Paymaster General on the exact extent of the fraud in a moment.

On 30 May The Guardian estimated that the cost to the UK alone of MTIC fraud is now running at about £5 billion a year. Nicholas Watt wrote the following:

On 11 June, in an article in The Sunday Telegraph, Jasper Copping and Robert Watts, under the headline “Carousel gangs cheat UK out of billions”, said:

This seems a suitable opportunity to ask the Paymaster General to update the record. Given that her figures relate to 2004-05, and we are now in 2005-06, and in the financial year 2006-07, can the right hon. Lady provide an official updated estimate of the scale of the fraud as the Treasury now understands it to be? All the signs are that the scale of the fraud is rising, so we would believe it to be in excess of £1.9 billion a year. The Guardian is talking about £5 billion and The Sunday Telegraph is talking about some billions of pounds. To clear up the confusion, will the Paymaster General tell the House the latest Government estimate of the scale of MTIC fraud and its cost to the Exchequer? Part of their argument for the powers that are being sought, and the amendments, is that they are needed to combat the fraud. Therefore, the House will want to know how bad the Government think that the problem is and what the trend-line is.

2 pm

Dawn Primarolo: The Government update the position on MTIC fraud in every pre-Budget report. The hon. Gentleman’s observations about the Office for National Statistics and the trade statistics do not relate directly to either VAT that is claimed or paid out. The correct figures will be available in the PBR, as they are every year following the application of the strategy for reducing MTIC fraud.

Mr. Francois: I thank the right hon. Lady for that reply. She may recall that when we debated this matter in Standing Committee on 11 May, I pressed her for some clarification based on last year’s PBR figures. If I recall correctly, we did not get an updated figure at that time. If the right hon. Lady is saying, having read yesterday’s debate, that we will definitely get an updated figure in the PBR this autumn, that is to be welcomed. It would have been more helpful if we could have had an updated estimate for the House today, bearing in mind the importance of the powers that we are about to agree to. However, we look forward to seeing the updated figure in the PBR.

5 July 2006 : Column 843

The Government’s solution to the problem, as set out in clause 19, is essentially to introduce a so-called reverse charge procedure for certain categories of goods that can be specified by secondary legislation. This is intended to combat fraud by passing the duty to account to the Government for the VAT further down the chain to legitimate businesses. As the HMRC press release of 26 January 2006, which outlines the process, explained:

This means that HMRC is not put into a position where it may have to make repayments of VAT where the corresponding tax on the purchase has not been paid to HMRC.

A similar procedure was adopted some years ago to combat missing trader fraud in the gold bullion market, apparently with some success, and the intention is essentially to apply the same solution here. However, the Government’s solution, including that which is set out in the amendments, depends on the Government obtaining a derogation from the sixth VAT directive in order to apply the reverse charge in situations where it was not originally envisaged.

On 1 June, a little while after our debate on these matters in Standing Committee, the Financial Times reported that the EU tax commissioner, Mr. Lazlo Kovacs, was saying that the UK would most probably receive a positive response to the derogation request. On 7 June, there was an ECOFIN meeting in Brussels, which was rather famously attended by the Chancellor of the Exchequer at short notice. Was the matter discussed there? As we return to the subject on Report, which I welcome, I take the opportunity to ask the Paymaster General to update the House on progress in seeking the derogation that is necessary for the procedure to come into effect. In essence, what is the latest state of play in our negotiations with the Commission on this matter?

Similarly, when do Ministers anticipate that they will be in a position to issue the orders to implement this element of the strategy? I repeat the question that I put to the Paymaster General in Standing Committee on this issue, which she really did not address at that time. Given the history of our negotiations with our EU partners in recent years, what is our plan B if, for any reason, the derogation is not granted? Given the scale of the problem, what do the Government intend to do then?

I come now to Government amendments Nos. 18 to 20. As I understand it, the essence of amendment No. 20 is to confer a regulation-making power on Ministers to set out reporting requirements on suppliers in relation to the operation of the reverse charge. Amendment No. 19 appears to be essentially contingent on amendment No. 20, in that it allows for a penalty regime if reporting requirements are not complied with correctly as specified by Ministers in the regulations. This seems reasonable, but why was the provision not included in the Bill?

Conversely, amendment No. 18 confers on Ministers a relatively wide-ranging regulation-making power in the context of the operation of the reverse charge procedure as a whole. As this is potentially quite a broad power—certainly compared with the other two
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Government amendments—can the Government give us any examples of how the power is likely to be used in practice without tipping off the fraudsters? For instance, will the power be used only to specify the types of goods to which the reverse charge procedure will apply, or is it intended to be used more widely than that?

Given the scale of the power, I had intended to ask the Paymaster General whether it would be subject to the affirmative resolution procedure. However, my hon. Friend the Member for Buckingham (John Bercow), in his usual perspicacious manner, has already elicited that information in an intervention. I am pleased that the Paymaster General has, quite rightly, told the House that the process would go through in practice after the affirmative resolution procedure has been adopted. We thank the right hon. Lady for that assurance, which we welcome.

I move on briefly to amendment No. 121. The powers to introduce the reverse charge procedure are potentially quite powerful. They are therefore subject to the sunset provision contained elsewhere in the clause. The purpose behind the amendment is to introduce an additional sunset provision with regard to the adjustment of output tax. This seems a relatively non-controversial additional safeguard provision, and one that we hope might be accepted.

The Paymaster General rightly recalled that she said in Standing Committee that she would have been minded to grant us the amendment had it been pressed at the time. For the information of the House, the Hansard record stated:

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