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“his amendment No. 3 touched on an issue that would not have been in dispute between us.”—[ Official Report, Standing Committee A, 11 May 2006; c. 120.]
The right hon. Lady’s more direct reaction, which unfortunately was not captured by Hansard but which I clearly recall, was, “Oh, I was going to give you that one.” Perhaps she will be kind enough, as she has indicated, to grant us that amendment and to allow what is now amendment No. 121 to be incorporated in the Bill.
Julia Goldsworthy (Falmouth and Camborne) (LD): I have only a few brief remarks. We dealt with the matter in some detail in Standing Committee. We are dealing with what is clearly a significant problem and real efforts have been made in various clauses to overcome it. The Government’s amendments are an exposition of that. Amendments Nos. 19 and 20 seek to overcome openings where there could continue to be fraud, and amendment No. 18 confers extra powers, so essentially we are talking about regulation and reporting requirements.
The Paymaster General referred to why it was not possible to reveal the draft regulations in advance. If fraudsters are trying to get around the regulations, what difference does it make if they see them in draft form? Surely their desire to get around them will be exactly the same. [Interruption.] The Paymaster General is saying “Time”, but presumably once they are on the statute book, the fraudsters will still have time to avoid the regulations.
Dawn Primarolo:
If draft regulations are available before the House has given the authority for the powers
to be used, those who study them have time to get round the regulations before the authorities can use the powers that are conferred in them. That is the difficulty. That is why there has not been a long exposure of what the powers may look like. This is straightforward, really.
Julia Goldsworthy: I thank the Paymaster General for that clarification. There is a development beyond the regulations and reporting requirements that are set out in the amendments. If the requirements are to be enforced, they need to be supported by resources. I refer to an article in The Times of 13 June, in which it is said that there are believed to be 9,000 people involved in spearheading the crime that is known as missing trader intra-community fraud, but Revenue and Customs has only 500 officers to tackle it. The article points to a lack of resources making very difficult the enforcement of whatever regulations are in place to overcome this fraud. In fact, the article goes on to say:
“There is even a suggestion that fraudsters believe the risk of detection is so low that they no longer trade actual goods but engage in a ‘virtual’ fraud where the trade exists only in the bogus documents used to support fraudulent VAT reclaims.”
What efforts have the Treasury made to ensure that it has sufficient resources to enforce the regulations?
Mr. David Gauke (South-West Hertfordshire) (Con): I should like to touch on three issues relating to MTIC fraud.
First, in Committee, the Paymaster General said that the German Government advocated applying the reverse charge generally, but she rightly said that that would create great difficulties for small and medium-sized companies, and was thus unattractive. It has been said, too, that there would be substantial fiscal consequences if we went down that route. Can the Paymaster General confirm whether that is correct? More significantly, I seek reassurance that the reverse charge approach will be neither generally applied nor negotiated away, although one member state is keen to go down that route.
Secondly, I am concerned about the effectiveness of an approach that requires a reverse charge on certain goods. In Committee, the Paymaster General said at column 135 on 11 May that
“90 per cent. of...losses from MTIC fraud arise from goods that would be targeted specifically under the reverse charge mechanism”.
“it tends to be small, high-value goods that can be circulated easily—but, of course, they are not circulated.”—[ Official Report, Standing Committee A, 11 May 2006; c. 135.]
I should be grateful if the Paymaster General, drawing on the expertise of Her Majesty’s Revenue and Customs, clarified that response. Is MTIC fraud a matter of small, high-value goods being circulated—there is, however, a missing trader, so there is VAT fraud—or is it a matter, as the hon. Member for Falmouth and Camborne (Julia Goldsworthy) suggested, of virtual transactions in which goods are not circulated at all? If it is the latter, it would be easy for fraudsters to move from the small, high-value goods to which the measures apply to other goods and services, so the Bill’s provisions would not be as effective as we would all like.
Thirdly, the Government have attempted to reduce MTIC fraud by toughening the VAT registration process—the Paymaster General will recall that I asked a question about that in Committee. Since then, I have tabled written questions on the issue, and I understand that, in the spring months, only 65 per cent. of VAT registration applications were completed within the target 21 days. Can steps be taken to improve and speed up the VAT registration, because it is worrying that it takes a substantial period to register? Complaints about registration come not just from applicants in the high-risk sector of small, high-value goods such as computer equipment and so on but from other sectors. Again, I would be grateful for the Paymaster General’s comments.
Dawn Primarolo: I shall deal quickly with the points made by hon. Members. May I tell the hon. Member for Rayleigh (Mr. Francois) that the Government are confident that the European Commission will introduce a proposal in response to our request for a reverse charge? Discussion is under way—hence the amendments—but the proposal will be submitted to ECOFIN for a unanimous decision by the 25 member states. The Commission will not submit it before it is satisfied that there is a sensible working arrangement.
2.15 pm
That links to the point made by the hon. Member for South-West Hertfordshire (Mr. Gauke). We are confident that we will secure agreement, because this is a matter not just for the UK but for all European member states—indeed, Germany has been mentioned, and its preferred option is a general reverse charge. However, that would cause reporting problems for small businesses and people who are not involved in illegitimate activity, and would completely change the structure and orientation of VAT. The Commission is aware that the problem is urgent and that we need to find a solution. The UK and other member states understand why the Germans want a complete reverse charge, but have made it clear that that is not desirable. We are doing all that we can to ensure a speedy solution, but we must reach the right agreement with the Commission and, after discussions, we must be able to deliver it.
May I remind the House of the nature of the powers that are being sought? The provision allows only amendments necessary for the implementation of the reverse charge, and it cannot be used to increase anything else, including the amount of tax payable. As I have said, it is subject to affirmative resolution. It is not an open-ended power—it is necessary purely for the implementation of the reverse charge—so it will lapse three years after Budget 2006. The Conservative Government introduced a similar power in 1993, but it lacked a sunset clause. I believe, however, that a time limit is necessary to ensure that we tackle the issue properly.
I have dealt with the hon. Member for Rayleigh’s points about the extent of MTIC fraud. The latest estimates for 2004-05 cover a range of figures, and £1.9 billion is at the top end. However, that represents a 30 per cent. reduction in MTIC fraud since 2001-02 as a result of the Government’s strategy. We have to wait for the pre-Budget report, even in subsequent years,
because we require data from European Union member states on the nature of such fraud, which take five or six months to be processed, hence the PBR is an appropriate point for an update.
Mr. Francois: I thank the right hon. Lady for her explanation of the timings. She said that the figures cover a range, and that we will be given an updated estimate in the autumn 2006 PBR. Given her knowledge of HMRC, does she think that by that stage the figure will rise above £1.9 billion, or will it fall below it?
Dawn Primarolo: I am not in a position to make such a forecast, but the hon. Gentleman will accept that the purpose of the reverse charge is to disrupt the fraudsters. VAT registration and repayment are subject to challenge by HMRC. It will be difficult to assess the strategy that is running in parallel—plan B, as the hon. Gentleman put it—because we hope that HMRC will not need to make those challenges in the first place. People may try to defraud, but our intention is that they should not be successful.
The hon. Member for Falmouth and Camborne asked about resources. I refer her to column 1090W of the Official Report of 17 May, where I gave the full list to her hon. Friend the Member for Kingston and Surbiton (Mr. Davey), showing the extra resources and the work that is being undertaken by HMRC. I also gave the figures in Committee. Hon. Members should be cautious about believing what is written in the newspapers.
On the question about VAT registration—whether the transaction is fictitious or real and how the Government are dealing with it—the answer is that it can be fictitious, as is increasingly the case, or real. The real is dealt with in the Bill by the stamping of goods, tracking and record keeping, which is the subject of other clauses. That will be effective where there is fraud in the chain, as opposed to the whole chain being fraudulent.
There is the fictitious as well, and I shall give two examples. In August 2005 four people were found guilty of carousel fraud resulting in an estimated loss of £40 million in VAT. They used fictitious companies and false invoices, with the proceeds being sent to a Hong Kong bank account. They received sentences of 22 years. In December 2005 jail sentences totalling eight years were handed down to two men involved in a £58 million fraud. The fraud involved mobile phones purchased from fictitious companies and sold to other mobile phone brokers. The phones never found their way into the legitimate market. It was a perpetual fraud, and the reverse charge is specifically directed at that aspect of carousel fraud. The hon. Member for South-West Hertfordshire is right that we need to look carefully at whether that might mutate into other high value goods.
Part of the discussion with the Commission is about what measures will be available to member states to counter such fraud. We need a careful balance so that there is not a reverse charge on all goods. Intelligence and an understanding of how MTIC frauds are perpetrated are needed. There will not be a general tightening of VAT registration. The Department is undertaking rigorous checks at the point of registration where it seems that something is not quite as it should be—missing information
or a company that has been dormant for a long time suddenly submitting a high claim on VAT or seeking to become active again. Bogus businesses must be prevented from entering the VAT system, so the Department is doing its best to target those checks. If there was a general holding up of VAT registration, the numbers that I gave would have been considerably higher.
The Department is approaching, sensibly and proportionately, a serious problem in the tax system not just for the UK, but for other member states where this type of fraud can be committed. I hope the House will agree the amendments today and that I can report soon on the progress of negotiations on the reverse charge and the start date of its operation.
Amendments made: No. 19, page 22, line 40, at end insert—
‘(2A) In section 65 of VATA 1994 (inaccuracies in EC sales statements)—
“(7) This section applies in relation to a statement which is required to be submitted to the Commissioners in accordance with regulations under paragraph 2(3A) of Schedule 11 as it applies in relation to an EC sales statement.”, and
(b) in consequence of the amendment made by paragraph (a) the heading becomes “Inaccuracies in EC sales statements or in statements relating to section 55A”.
(2B) In section 66 of VATA 1994 (failure to submit EC sales statements)—
“(10) This section applies in relation to a statement which is required to be submitted to the Commissioners in accordance with regulations under paragraph 2(3A) of Schedule 11 as it applies in relation to an EC sales statement.”, and
(b) in consequence of the amendment made by paragraph (a) the heading becomes “Failure to submit EC sales statement or statement relating to section 55A”.
(2C) In section 69 of VATA 1994 (breaches of regulatory provisions), in subsection (1) (failure to comply with a requirement imposed under provisions mentioned in the paragraphs in that subsection), after paragraph (b) insert—
“(ba) paragraph 2(3B) of Schedule 11; or”.’.
No. 20, page 22, line 44, at end insert—
‘(3A) In Schedule 11 to VATA 1994 (administration, collection and enforcement), in paragraph 2 (accounting for VAT and payment of VAT), after sub-paragraph (3) insert—
“(3A) Regulations under this paragraph may require the submission to the Commissioners by taxable persons, at such times and intervals, in such cases and in such form and manner as may be—
(a) specified in the regulations, or
(b) determined by the Commissioners in accordance with powers conferred by the regulations,
of statements containing such particulars of supplies to which section 55A(6) applies in which the taxable persons are concerned, and of the persons concerned in those supplies, as may be prescribed.
(3B) Regulations under this paragraph may make provision, in relation to the first occasion on which a person makes a supply of goods to which section 55A(6) applies, for requiring the person to give to the Commissioners such notification of the supply at such time and in such form and manner as may be specified in the regulations.”.’— [Dawn Primarolo.]
No. 121, page 23, line 3, at end insert—
‘But no order may be made under this subsection on or after 22nd March 2009.’.— [Mr. Francois.]
Mr. Mark Hoban (Fareham) (Con): I beg to move amendment No. 122, page 155, line 21, leave out from second ‘the’ to end of line 22 and insert ‘earlier of—
(a) two years after the end of the accounting period; or
(b) the deadline for filing corporate tax returns in the EEA territory concerned.’.
Mr. Deputy Speaker: With this it will be convenient to discuss amendment No. 15, page 155, line 21, leave out
‘immediately after the end of the current period’
‘when the claim for group relief was made’.
Mr. Hoban: Both amendments seek to amend the deadline by which group relief claims can be made in regard to losses made in other European economic area countries where the group relief payments are to offset profits incurred in the UK.
The background to schedule 1 is a case involving Marks and Spencer, which sought to use various provisions of European treaties to enable losses incurred in other EEA territories to be offset against profits in the UK. The European Court of Justice found in favour of Marks and Spencer, albeit with strict limitations on the circumstances in which that relief could be claimed. There were several issues on which further guidance was needed, including the timing of making a claim, which is the subject of both amendments.
When we discussed these matters in Committee, the Government approached the task of implementing the ECJ’s judgment and a subsequent judgment by Mr. Justice Park, who was asked to rule on specific elements of the ECJ’s judgment, including the timing of the claim, as restrictively as possible. They sought to narrow the circumstances in which claims could be made, whereas one of the arguments that I made on behalf of the Opposition concerned effectiveness.
In Mr. Justice Park’s later judgment on the case, he commented:
“A principle that runs through the whole of community law and has been enunciated by the ECJ in numerous cases is the principle of effectiveness: procedures in Member States must not render practically impossible or excessively difficult the exercise of rights conferred by Community Law”.
That is the principle of effectiveness, which I want to explore.
The ECJ conferred upon UK companies the right to claim group relief in certain circumstances on losses incurred by subsidiaries in other EEA states. That is enshrined in schedule 1, but we need to consider whether the procedures set out there meet the terms of Mr. Justice Park’s judgment—whether they
“render practically impossible or excessively difficult the exercise of rights conferred by Community Law”.
I would argue that the time of the claim does make it practically impossible or excessively difficult to exercise the rights.
We should remember that UK companies claiming group relief on UK losses have up until two years after the end of the accounting period in which those losses are incurred to make a claim. One might ask why they need two years. I suspect that there is no scientific reason for that, but it enables groups to go through the necessary steps. It enables them to draw up the accounts of subsidiaries and determine the scale of any losses incurred. It enables them to revise accounting estimates, and to assess the write-down in the value of assets, such as stock and debtors; and it allows the parent company to calculate the extent to which losses can be carried back against profits made in earlier years. The auditors can audit the accounts, and any adjustments between accounting and taxable profits or losses can be made. Companies need to go through a drawn-out process to assess such profits, to ensure that the auditors have signed off such profits and to calculate taxes and profits properly.
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