Finance Bill

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John Healey: I welcome the welcome that both Opposition spokesmen have given to the principle of the clause and their endorsement of it as a sensible policy that moves things in the right direction.

I welcome the hon. Member for Bristol, West to the Committee. It is clear from his biography that he brings to it significant professional experience of tax affairs, which he gained before being elected to Parliament. I look forward to hearing his contributions to our debates. I say to him that we are careful to monitor the impact of changes we introduce, particularly when they reform the basis of the taxation system, and that for substantial changes we usually put in place a significant process of evaluation.

I think that the hon. Gentleman and other Committee members will appreciate that the long-term impact of the sort of changes that have been touched on this morning might take some time to become clear. However, the Inland Revenue's initial evaluation of the company car tax reforms that was published alongside the Budget in 2004 shows that, as far as we can trace and quantify, the tax has had two significant effects, both of which are environmentally beneficial. It has led to a reduction both in the amount of business mileage that is driven and in the carbon dioxide emissions of the company car fleet. Both were key purposes of the reforms. We will monitor the impact of the reform as part and parcel of our evaluation of such tax changes.

In response to the hon. Member for Cities of London and Westminster I say again, clearly and emphatically, that the measure is not designed as a revenue raiser. He asked which vehicles will produce a tax saving for their drivers or for the businesses that have them as part of their fleet. That will depend on the precise details of the design of the scheme, which
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we are currently discussing with the industry. If he looks at the structure and design of the scheme that we have put in place for VED—or, indeed, for the company car tax—he will see that it is scaled in a way that gives incentives and signals to encourage people to drive more fuel efficient and less polluting cars. We want the same design for this scheme.

I fear that I would stray beyond the terms of clause 2 were I to get into an exposition of road pricing, but perhaps I can answer the hon. Gentleman's question in the following way. Clause 2 is a further reform that is consistent with and moves in a similar direction to the reforms we made to vehicle excise duty in 2001, company car tax in 2002, and the direct tax fuel scale charge in 2003. Our aim in the detailed design of this scheme and the reforms that we have already put in place is consistency in this part of the tax system—consistency in terms of the signals given to businesses and company car drivers, the incentives that have an impact on behaviour where we can put those in place, and the way in which businesses administer the schemes that we establish.

Clause 2 ordered to stand part of the Bill.

Clause 3

Credit for, or repayment of, overstated or overpaid VAT

11 am

Mr. Spring: I beg to move amendment No. 61, in clause 3, page 5, line 8, leave out 'relevant date' and insert

    'last day of the month next following the end of the next prescribed accounting period'.

The amendment seeks to tie the rules in the normal three-year time limit for VAT in respect of claims and assessments: that is, three years from the day that the relevant VAT return should be submitted, being a month after the end of the accounting period. At present the clause runs for three years after the period ends.

Dawn Primarolo: The clause provides for the extension of the defence of unjust enrichment by the Revenue and Customs to all claims for VAT credit where the tax has been overcharged and over-accounted for in error. Under the existing law, the defence is available only where claims are made for repayment of VAT that was overpaid but was not due. Inevitably, the time limit for such claims begins to run from the date the tax is overpaid, whereas the time limit for correcting errors for the Revenue and Customs to assess in respect of under-declared VAT runs from the end of the prescribed accounting period in which the error occurred.

Where VAT has been charged in error, clause 3 marks a shift from claims being made for repayment of overpaid VAT to claims being made for a credit of VAT that has wrongly been accounted for. The clause aims to ensure that there is consistency and simplicity for the taxpayer as to when the three-year time limit runs from. Having broken the link with payments, it is sensible for the three-year period to run from the end of the prescribed accounting period in which the
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accounting error was made. Accordingly, that is what the clause does.

Unfortunately, the amendment fails to define from which prescribed accounting period the three years should run and fails to take account of the existing three-year limitation period on the correction of errors and the three-year limitation period that the Revenue and Customs has for assessing under-declared tax. The amendment is therefore not justified. I understand how difficult it is to draft amendments to the Finance Bill. I think that the hon. Gentleman was looking for consistency by ensuring that the same rule applied and that the three years started at the same point. Unfortunately, the amendment cannot be justified because it does not do that. It makes sense for all statutory means of error correction to be subject to the same time limit, and that is what the clause does.

I reassure the hon. Gentleman that businesses will know clearly about the time period; it will be the same period from the same starting point, and that is wholly justified where we are ensuring that the defence of unjust enrichment is covering all areas and time periods.

I hope that the hon. Gentleman will accept that this is a probing amendment and will withdraw it. If he feels unable to do so, I will regrettably have to ask my hon. Friends to oppose it.

The Chairman: Before I call on the hon. Member for West Suffolk to respond, I should say that every Committee member will have spotted that I failed to turn over the page while reading out the amendment being debated. I apologise to the Committee.

Mr. Spring: The Paymaster General was correct to say that we were trying to establish some consistency. As she will accept, the VAT rules are complicated and bureaucratic; we were simply trying to get some order into the issue. I accept her point about the distinction, and the assurances that she has given. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 ordered to stand part of the Bill.

Clauses 4 and 5 ordered to stand part of the Bill.

Clause 6

Disclosure of value added tax avoidance schemes

Question proposed, That the clause stand part of the Bill.

Mr. Spring: This measure extends the scope of the disclosure regime to situations in which the VAT advantage does not affect the taxpayer's VAT return—for example, because the VAT relates to exempt supplies and the scheme is intended to reduce the amount of irrecoverable VAT that is effectively a straight cost to the business. The definition is also extended to cover a reduction in the amount of VAT incurred by non-taxable persons. That will bring offshore arrangements that were not previously caught by it within the scope of the disclosure
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regime. That, of course, will mean an increased compliance burden for affected taxpayers.

It is interesting that the VAT disclosure regime is continuing to request the disclosure of schemes, but no action is being taken to introduce any anti-avoidance legislation in response. That may be because there is no possibility of amending UK legislation within the European Union directive or because Her Majesty's Customs and Excise is awaiting the outcome of certain European Court of Justice cases to determine whether it has sufficient grounds to introduce anti-avoidance legislation. I should like some clarification on that point, the theme of which will consistently run through our proceedings.

One of the more contentious issues arising from the redefinition of a tax advantage is that under the existing rules only taxable persons are required to notify a scheme when a tax advantage arises. Therefore, the onus is placed on the supplier to notify HMRC when a recipient of the tax advantage is not registered for VAT. That may not be possible if transactions pass through several third party companies before the end recipient benefits. Again, additional burdens are placed on legitimate businesses.

There is a lack of Government activity on disclosed VAT avoidance schemes. At HMRC's large business forum in May, it indicated that it had received details of more than 700 VAT avoidance schemes. The Government have not sought to close down any of those in this or the previous Finance Bill. On Second Reading of the Finance Bill, the Paymaster General cast doubt on that number of 700, which had been raised by my hon. Friend the Member for Runnymede and Weybridge. Yet the statistic is there for all to see in an Inland Revenue presentation on the Inland Revenue website: 729 VAT schemes have been disclosed.

In the same large business forum, HMRC debated the tax gap—that is, the tax not collected due to non-compliance, defined to include tax avoidance. The Government's apparent inaction appears to be fuelling the tax gap. It is possible that concerns about EU law are once again preventing the Government from closing down some of the VAT avoidance schemes. If the Government are not going to use the VAT disclosure scheme to close down avoidance, should not those rules be reduced, to remove, at least, the compliance burden on business and enable HMRC to concentrate on more fulfilling matters?

I ask one final question. Why are the Government not using the information gathered under the 700-plus schemes to take action to shut down the tax gap?

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