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Finance (No. 2) Bill
Not amended in Committee and as amended in the Standing Committee, further considered.
1.47 pm
The Paymaster General (Dawn Primarolo): I beg to move Government amendment No. 18, in page 22, line 6, at beginning insert
‘An order under this subsection may confer power on the Commissioners to make regulations or exercise any other function,’.
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, in page 23, line 3, at end insert—
‘But no order may be made under this subsection on or after 22nd March 2009.’.
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
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 may 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. Nonetheless, there should still be scrutiny by the House of those powers, how they 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 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
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, 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.
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:
“The Guardian recently reported that carousel fraud jumped by 50 per cent. in the first quarter of the year—and has swollen by more than 500 per cent. in the past 12 months. Tax losses in Britain alone are more than £5bn this year.”
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:
“The alarming scale of carousel fraud indicates that the scam is spiralling and this year will far exceed the Government’s estimate that it cost £1.9 billion in 2004-05.”
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.
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:
“Under the reverse charge procedure the suppliers of the goods do not account for VAT on their sales when selling to other VAT-registered businesses. Instead, it is the responsibility of the purchaser of the goods to account for the VAT, although they can recover this VAT in the normal way.”
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
Government amendments—can the Government give us any examples of
how the power is likely to be used in practice without inordinately
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 was minded to grant us the amendment had it been pressed at the time. For the information of the House, the Hansard record stated:
“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 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 up 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)—
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