Third Standing Committee on Delegated Legislation

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Third Standing Committee on Delegated Legislation

The Committee consisted of the following Members:

Chairman:

Mr. Eric Forth

Cable, Dr. Vincent (Twickenham) (LD)
†Fabricant, Michael (Lichfield) (Con)
†Fisher, Mark (Stoke-on-Trent, Central) (Lab)
†Hamilton, Mr. Fabian (Leeds, North-East) (Lab)
Key, Robert (Salisbury) (Con)
Kramer, Susan (Richmond Park) (LD)
†Lloyd, Tony (Manchester, Central) (Lab)
†Mann, John (Bassetlaw) (Lab)
†Moon, Mrs. Madeleine (Bridgend) (Lab)
†Primarolo, Dawn (The Paymaster General)
†Reed, Mr. Andy (Loughborough) (Lab/Co-op)
Scott, Mr. Lee (Ilford, North) (Con)
†Spring, Mr. Richard (West Suffolk) (Con)
Taylor, Mr. Ian (Esher and Walton) (Con)
†Waltho, Lynda (Stourbridge) (Lab)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
Mark Etherton, Committee Clerk
† attended the Committee

 
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Monday 18 July 2005

[Mr. Eric Forth in the Chair]

Value Added Tax (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order 2005

4.30 pm

The Paymaster General (Dawn Primarolo): I beg to move,

That the Committee has considered the Value Added Tax (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order 2005 (S.I. 2005, No. 1724).

Good afternoon, Mr. Forth. I hope that the order will not be contentious. [Interruption.] I did say “hope”. The order extends the scope of the VAT schemes that users are required to notify to Her Majesty’s Revenue and Customs, adding two new listed schemes and a new hallmark. Listed schemes are essentially descriptions of known avoidance schemes, and the requirement to notify them falls on VAT-registered users with a turnover of at least £600,000. The information required is simply the number assigned to the scheme.

The first new listed scheme concerns phone and similar services. The avoidance involves using cross-border face voucher cards to create a situation in which the retail supply of the phone services is not taxed in any member state. The second new listed scheme is more complex in detail. It involves partly exempt businesses that occupy commercial property and pay VAT on renting the property, which they cannot recover in full. The scheme involves removing that VAT on rentals by changing the leasing arrangements while still occupying the property. In economic terms, nothing of substance has changed, except that the tenant no longer pays VAT on renting the property.

In the main, such schemes previously involved a partly exempt business fully recovering VAT on the capital costs of buildings, either itself or through a subsidiary. It was able to do that by putting in place a taxable lease, or a chain of leases, which meant that it paid VAT on its rentals. That VAT would be only partly recoverable by the partly exempt business.

The new listed scheme involves changing the arrangements of the lease structures, solely to stop incurring that VAT on rentals. In such circumstances, the business achieves a VAT advantage from manipulating the legal form of the lease arrangements, while changing nothing of substance as regards its use of the building. The new scheme will require disclosure of the use of such exits from paying VAT on rentals.

Finally, I turn to the new hallmark. Hallmarks are provisions associated with avoidance. A requirement to notify a hallmark falls on VAT-registered businesses with a turnover of at least £10 million. One
 
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of the main purposes of the scheme must be to obtain a tax advantage. The information required essentially involves details of how the scheme is intended to work.

The new hallmark is the use of face-value vouchers in two specified situations. The first involves the issue of vouchers with a low expected redemption rate—under 75 per cent. The normal commercial redemption rate on gift vouchers is 90 per cent. or more, but some visitor attractions are selling vouchers with very low expected redemption rates, simply so that they can pay an artificially low amount of VAT on what is really a single admission. The second situation involves the issue of vouchers to members of the same corporate group, which has been a feature of various avoidance schemes.

The changes to the listed schemes and the hallmarks will come into force on 1 August 2005. Provisions in the current Finance Bill will ensure that a taxpayer does not have to notify one of the new listed schemes if they have previously notified it as a hallmarked scheme.

These extensions are a proportionate response to specific avoidance schemes. The disclosure rules are a key part of the Government’s strategy to tackle avoidance and ensure fairness. They provide Her Majesty’s Revenue and Customs with better information, which allows for a faster and more targeted response to abuse of the tax system. I commend the order to the Committee.

4.35 pm

Mr. Richard Spring (West Suffolk) (Con): What a pleasure it is to see you presiding over the Committee this afternoon, Mr. Forth.

I thank the Paymaster General for her explanation. We discussed the disclosure of VAT avoidance schemes in the Standing Committee debates on the Finance Bill, and clause 6 closes the gap in reporting rules by requiring businesses to disclose when they use schemes that give a tax advantage that does not appear on their VAT returns.

That move was announced in the Budget and, at the same time, the Government said that they would add two new prescribed schemes that business would be required to disclose and that would add another hallmark requiring disclosure. The order adds that hallmark and those schemes.

I shall ask a few questions about the order before making more general comments on the disclosure system to which the order adds, if I am permitted. The explanatory memorandum states that a draft of the order was published and that HMRC received comments on the draft from the Institute of Indirect Taxation, which were taken into account in the final version of the order.

I have noticed several differences between the draft version and the original. Under the surrender of relevant lease prescription, for example, paragraph (b) has been added, as has a provision that the surrenderer must continue to occupy 80 per cent. of the area previously occupied.

 
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Will the Paymaster General state whether those differences are the result of input from the IIT or whether the original has been changed because of internal pressures in HMRC? Furthermore, will she explain the purpose of each of these most substantive changes?

We have become used to regulatory impact assessments being relatively inconsequential and uninformative, but the tax avoidance impact assessment published with the order and the Finance Bill takes that to the next level. At no point does it assess the order’s impact on tax avoidance. Its name therefore strikes me as somewhat misleading. Quite apart from there being no assessment of the increase in revenue likely to result from the order, there is no estimate of the costs to business of the additional disclosure requirements that the order imposes. Has the Paymaster General made any such estimates?

The Government, in introducing the order, obviously see the need to add schemes involving cross-border vouchers and lease surrender to the prescribed list of schemes that must be declared, and to introduce face-value vouchers as a hallmark of schemes that must be disclosed. As the Standing Committee wondered during consideration of the Finance Bill, however, how successful is this disclosure scheme?

The Paymaster General tells us that almost 800 VAT disclosures have been received. So far as I am aware, few, if any, have been legislated against. We had a long debate in Standing Committee on whether disclosure was working if the Government chose not to legislate against any of the schemes being disclosed.

That having been said, I accept the order in principle and we do not propose to press it to a Division.

4.38 pm

Dawn Primarolo: I shall answer the hon. Gentleman’s questions briefly, dealing first with the IIT and his point about the figure of 80 per cent.

There was consultation on the draft order, and although points were made, no concrete examples could be given of genuine commercial transactions that might be caught. Since those discussions, the Government have targeted the scheme even more narrowly, as the hon. Gentleman rightly spotted with regard to the slight changes to the order, by introducing the requirement that the tenant occupy substantially the same area of the building following the scheme.

 
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It is hard to see why a group company would surrender its lease from another group company and still occupy 80 per cent. of the same area of the building if it did not have a VAT advantage in mind. The IIT raised certain issues, but no specifics could be provided. Considering that absence, it is difficult to see how the point can be taken forward.

The hon. Gentleman referred to the 80 per cent. condition. The area condition will ensure that disclosures are not required where an occupant surrenders or terminates their lease because they want to occupy less of a building. We are trying to take that into consideration, but, as I have said, an 80 per cent. condition will ensure that avoiders cannot escape from having to disclose the scheme by making a nominal reduction in the area occupied.

The hon. Gentleman also asked about the effectiveness of the disclosure rules, which we have discussed a number of times, including in the Finance Bill Committee. The purpose of disclosure is to provide information about schemes that are being used, so that the legislation can be appropriately enforced, whether that means making inquiries or raising an assessment. Where it is necessary to legislate, that will be done. However, the main point about the new arrangements in the order is that the first tranche of disclosures under the new rules will not be submitted until December, given the time delay. At that point, HMRC will inquire into the facts surrounding each case concerning whether the scheme has worked.

The hon. Gentleman made a general point about compliance costs and estimates. The impact assessment for clause 6 of the Finance Bill and the order indicates that we have received no comments at all from business, either during consideration of the Bill or since the publication of the order, with the exception of the comment from the institute, which has been referred to. It is therefore impossible to comment on what businesses might feel the costs are, because they are not making a disclosure on compliance to us as the tax authorities in the first place.

One hopes that that means that businesses are compliant. They will face no additional costs, and the hallmarks and the new schemes are a timely reminder that businesses should not use such schemes. On that basis, I commend the order to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the Value Added Tax (Disclosure of Avoidance Schemes) (Designations) (Amendment) Order 2005 (S.I. 2005, No. 1724).

Committee rose at seventeen minutes to Five o’clock.

                                                                                           

 

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Prepared 19 July 2005