The Financial Secretary to the Treasury (John Healey): I beg to move,

The Chairman: With this it will be convenient to consider the Value Added Tax (Administration, Collection and Enforcement) Order 2007 (S.I., 2007, No. 1421).

John Healey: I welcome you to the Chair, Mr. Olner, and look forward to what I hope will be a businesslike and brief sitting of the Committee. This subject is being discussed at length in the Finance Bill Committee, and we miss your presence in the Chair this year.

I also welcome hon. Members on both sides of the Committee to the proceedings, and I am sorry not be able to welcome the new shadow Paymaster General, the hon. Member for South-West Hertfordshire (Mr. Gauke). No doubt we will have a chance to do that tomorrow in the Finance Bill Committee.

The two statutory instruments concern measures to help to deal with missing trader intra-community, or MTIC, fraud. MTIC fraud is a highly sophisticated and well-organised international criminal attack on the VAT system. The fraud arises through contrived transaction chains involving the supplies of high-value goods, in most cases mobile phones or computer chips, with the tax loss occurring when the VAT charged by the supplier is not paid to Her Majesty’s Revenue and Customs, but can be reclaimed by the customer.

The Committee may be aware that in January 2006 the Government announced their intention to apply to the European Commission and the European Union for a derogation to introduce the concept of the reverse charge to which the two statutory instruments relate. We managed to secure an agreement for that derogation just before the Budget, and last month the necessary European paperwork was completed, which allowed us formally to go ahead with the measures and to introduce the reverse charge.

The reverse charge is essentially a change of accounting procedure. It means that the customer will account for and pay the VAT on the supply, as well as reclaiming the VAT on the purchase of the specified goods. In other words, the reverse charge procedure effectively removes the VAT from the transaction chain, thereby preventing the fraud in relation to the VAT on the specified goods.

The primary legislation needed to implement the reverse charge was introduced in last year’s Finance Act—you may remember that, Mr. Olner—and that was done pending agreement in Europe to the derogation. The measure was implemented with effect from 1 June this year through an appointed day order made on 10 May. We are here specifically to debate the two orders, which are subject to the affirmative resolution procedure. They are essentially details of the accounting and reporting arrangements for the reverse charge itself.

The payments on account order introduces a relief for businesses that could be adversely affected by the introduction of the reverse charge. Perhaps I might explain to the Committee under what circumstances such a business may be adversely affected—for example, where a business is liable to make payments on account when its gross VAT payments on sales and purchases exceed £2 million a year. As the reverse charge requires the purchaser, rather than the seller, to account for the VAT, businesses that also charge tax on the onward sale of reverse-charge goods—for instance, on sales to final customers—will find that their gross VAT payments increase. That could make them liable to make payments on account when they otherwise would not have to. Alternatively, if they are required already to make payments on account, it could increase the monthly amount payable under the scheme.

Under the amendment on the payments on account rules made by the order, if a business applies to HMRC, the additional tax payable on the reverse charge will be disregarded in calculating their liability to make payments on account. The second statutory instrument—on administration, collection and enforcement—inserts a new paragraph in schedule 11 to the Value Added Tax Act 1994. The original measure requires businesses to notify HMRC when they first made reverse-charge supplies. The new paragraph adds a requirement for businesses to notify HMRC when they cease to make reverse-charge supplies. It also requires businesses to re-notify if they recommence making reverse-charge supplies. That is an administrative change that will help HMRC to monitor reverse-charge supplies in order to ensure that the correct tax is accounted for by the customer receiving the goods.

I should mention, in passing, that two other statutory instruments, subject to the negative resolution procedure, also take effect from 1 June, although they are not a subject for the Committee’s scrutiny. They set out the main parts of the reverse-charge operation.

I commend the orders to the Committee.

Mr. Paul Goodman (Wycombe) (Con): Welcometo the Chair, Mr. Olner. As the Financial Secretary said, the statutory instruments are connected closely with the Finance Bill, which we are considering at the moment. I would say that you do not know what you are missing, except that you do, because you have long acquaintance with chairing Finance Bill Committees.

I apologise to the Financial Secretary at the outset for not being my hon. Friend the Member for South-West Hertfordshire, because the Financial Secretary said during yesterday’s Finance Bill proceedings, as he did just now, how much he was looking forward to engaging with my hon. Friend for the first time since his well-merited promotion to the Front Bench as shadow Economic Secretary. The only explanation that I can offer is that those on the Opposition Front Bench, like the Government, are having to cover a great deal of ground during these weeks, which we might not necessarily have been expected to do. I reassure him that I am sure that everything will have settled down after 27 June, even if neither he nor I are here to see it, and that in Committee tomorrow my hon. Friend will be dealing with the clauses that essentially set in place the reverse charge scheme, as the Financial Secretary said.

My hon. Friend will be dealing with the wide-ranging background to these statutory instruments, which includes the settlement between the Government and their European partners in relation to reverse charging that was reached in April and about which the last word has not yet been spoken, I suspect.

I want to confine myself to examining the detail of the statutory instruments. I should make it clear that we welcome the introduction of the reverse charge regime. It would be hard for us not to, as we have been calling for it since before the deal that agreed it was reached. We believe that it will play an important part in the fight against MTIC fraud in relation to mobile phones and computer chips. Today is the sixth day that it has been in operation.

The new regime will be a major exercise for many businesses. It will engage a great deal of HMRC attention during the early, introductory period and it could have consequences elsewhere in the European Union, as other EU countries do not have the same derogation, as far as I know. The regulatory impact assessment states quite clearly:

Ploughing through the assessment, it becomes quite clear that suppliers will be expected to obtain the VAT numbers of all their affected customers, make accounting system changes, notify HMRC within 30 days of making their first supply to which the reverse charge applies and train staff in the new procedures. Customers, as well as undertaking similar training, will need to make system changes and inform their supplier that they are VAT-registered.

The Financial Secretary may be aware that Keith Warburton, chief executive of the Professional Computing Association, said recently:

I understand, on doing some reading, that software packages are beginning to come on to the market. In light of that challenge, will the Financial Secretary tell us what help HMRC has put in place for firms seeking advice about the implementation of reverse charging; is there a helpline, for example? For how long will any special help last? What assessment has been made of how reverse charging will affect the internal workings of HMRC? How many of its staff have been moved off other duties to deal with its introduction, and for how long?

As to the situation after the agreement was reached in April with regard to the derogation, the Economic Secretary was quoted as saying:

Why did the Government opt for two years rather than three? Is the Financial Secretary aware of any reliable estimate of the degree to which fraud may move to other EU countries—a concern that he knows has been voiced? Will he say more about the advanced co-operation procedures to which the Economic Secretary referred?

Finally, article 2 of the statutory instrument on administration, collection and enforcement refers to regulations. I presume that they are yet to be introduced. Perhaps the Financial Secretary will confirm whether that is the case, and if so, whether they will be introduced under positive or negative procedure.

Julia Goldsworthy (Falmouth and Camborne) (LD): Welcome to the Chair, Mr. Olner. It feels slightly strange to be in Committee Room 9, rather than 10, where I seem to have been every day for a number of weeks.

We, too, support the principle behind reverse charging and the statutory instruments are part of introducing that system. Clearly, there is significant fraud that needs to be addressed and these measures try to tackle it. However, it is important to pause for a moment to remember that legitimate companies also deal in the particular items that have been subject to the most abuse. These statutory instruments and those made by negative procedure have tried to address those problems.

I have a couple of questions in relation to the impact that these changes have on legitimate businesses and on HMRC. As the hon. Member for Wycombe mentioned, there is an issue about suppliers needing to show the VAT registration numbers of their customers. I would appreciate some comments from the Financial Secretary on what HMRC is doing to ensure that, to the best of its knowledge, anyone who is affected by these issues is informed. Will he also comment on what kind of additional burden the measures will create for those companies because, as we have heard, it is not clear that it will be easy for businesses to come by that information and be sure that it is accurate, as well as to have the equipment and the software to log the information?

I also noted from the regulatory impact assessment that HMRC admitted to being

I understand that that is primarily because of how the trade classifications work on its own system, so there may be some businesses that do not primarily deal in those issues but would still fall into the scope of the regime. I would therefore appreciate the Financial Secretary’s comments on whether HMRC has any plans to change its own systems so that it would be able to capture which businesses are likely to fall within that regime, regardless of what their primary business is.

The regulatory impact assessment suggests that the number of businesses that are likely to be affected will probably fall in the hundreds rather than the thousands, and there is a clear description of the kind of training and changes that will be needed within businesses. How confident is the Financial Secretary that one additional HMRC officer will be sufficient to deal with those administration issues, given that there might be some teething problems? Is there any spare capacity for the redeployment of additional staff if there are any initial teething problems?

Finally, the regulatory impact assessment mentioned the redeployment of officials who are currently engaged on MTIC fraud to other areas. I would like the Financial Secretary to comment on the number of officers currently deployed in that area and on how many he expects to be redeployed after those changes have been put in place.

John Healey: Many of the points that the hon. Lady has made are similar to those raised by the hon. Member for Wycombe. I shall try to work my way through them, but hon. Members should by all means say whether I have covered them inadequately or not at all. First, I welcome the welcome for the reverse charge regime from the hon. Gentleman. He did not go as far as to say it, but I take it that he must also welcome the Paymaster General’s success in negotiating the derogation in Europe. That required the unanimous support of all member states and, of course, that is sometimes hard to achieve. That required us, over the course of the past year, to adjust the proposition for the reverse charge that we wanted to bring in.

The hon. Gentleman asked me about the change from three years to two years. That adjustment was made as a result of those discussions and helped us to secure the agreement. We also changed the de minimis threshold, which helped us to secure the agreement. The important thing is that, for the first time, we have the derogation and we are now legislating to put it into place, particularly for the two types of goods to which it will apply at the outset—computer chips and mobile phones. There is general agreement that it should stop the opportunities for MTIC fraud on the trade of those goods almost point blank.

That brings me to the answer to the third point that has been raised, on the extra staffing implications for the introduction of the reverse charge. Those are impossible to know precisely at the outset; it depends largely on how the fraudsters respond to our latest operational and legislative moves. However, in general I would expect the specific impact of the reverse charge probably to be that a number of the HMRC officers currently dealing without this legislation with MTIC problems relating to mobile phones and computer chips might be freed up to deal with other types of fraud and risk that HMRC has to tackle. HMRC generally deploys its operational and enforcement resources according to the risks that it identifies.

David T.C. Davies (Monmouth) (Con): Presumably a cost-benefit exercise has been undertaken and one would assume that the cost of putting on extra members of staff would be far less than the total amount that has been lost due to that kind of fraud. Does the Financial Secretary have an estimate of the total amount of revenue that the Chancellor has lost as a result of that fraud?

John Healey: I will do better than that and shall send the hon. Gentleman a copy of the publication that we produced alongside the pre-Budget report in December 2006. That is our annual update of the indirect tax losses and includes the estimated losses from MTIC fraud and an outline of the new methodology that we were using at the time. He will see that we published a range, which suggested that in 2005-06, the loss to the public purse from that fraud was between £2 billion and £3 billion. It is a very serious scale of fraud. As I said earlier, it is highly organised, sophisticated, international and quite clearly a directly criminal activity designed to strip money out of the public purse.

Mr. David Burrowes (Enfield, Southgate) (Con): I hear the Minister’s comments about the possibility of freeing up staff for other energies and focuses, but does that also meet the concerns that have been raised by my constituents and businesses who say that they are subjects of investigations along with others? Many legitimate businesses are concerned, as many others are, about the time that it is taking to follow through with a number of inquiries, particularly with other inquiries from Members. Perhaps the freeing up of staff to focus on investigations and to move on will enable those matters to be dealt with more promptly and expeditiously.

John Healey: The hon. Gentleman has taken us into some different territory and another aspect of the way in which we are trying to deal with the problem, which is an extended verification procedure for clearing the repayment of VAT to traders. It is regrettable that we have to do that, because it can delay the repayments that companies have been used to getting, but we have found that, so far, only 1 per cent. of the cases that have been withheld for the extended and more thorough verification have subsequently proven not to be linked in some way to MTIC fraud. In 19 out of 20 cases that we have dealt with, in which we have withheld payments and investigated thoroughly through the extended procedure, it has been demonstrated that there is a connection, in some way, with a fraudulent supply chain. I regret the delays and problems that that may be creating for legitimate business, but HMRC has taken this step with as great a diligence and consciousness of the impact on business as it can.

The hon. Members for Wycombe and for Falmouth and Camborne asked what HMRC has been doing to alert businesses to the prospect of the reverse charge and advise them on how to deal with it. Since the announcement in January 2006 HMRC has had regular meetings with business representatives to discuss that issue. We have set up an online HMRC contact address for businesses that want more information. We have consulted on the practicalities of the implementation and published information sheets and business briefs, and we will continue to make available as much information as is requested, to help smooth the introduction of the reverse charge and to make its operation by businesses effective.

The hon. Member for Wycombe asked me about the risk of such fraud mutating to other European countries. There is a specific and a more general answer to that. The specific answer is that as part of our terms in gaining derogation, the UK has to report on the impact of the derogation by the end of March 2009. Part of the impact that we have to report on is the effect on other member states, so we pay close attention to that effect, as will other member states. More generally, other member states simply do not have in place something that we have had for about four to five years in the UK—a way of measuring, and a determination to try to measure, the scale of this type of fraud. In many cases the member states themselves do not know the position, scale and nature of this type of fraud that might be being perpetrated in their countries.

As part of the commitment discussed yesterday at ECOFIN, further information exchange and enhanced co-operation between the member states and with the Commission on this area of fraud is something that we are determined to play a continuing and leading role in.

On the other two other regulations that the hon. Member for Wycombe asked me about, both are in place and took effect from 1 June 2007. The first lists the goods to which the reverse charge applies—namely, mobile phones and computer chips—and makes clear the de minimis threshold. In other words, any supplies below a £5,000 threshold do not fall under the requirement for a reverse charge. The second regulation is also introduced by negative procedure. It introduces consequential changes for accounting provisions for VAT and need not detain the Committee any longer.

Question put and agreed to.

Resolved,

Resolved,

That the Committee has considered the Value Added Tax (Administration, Collection and Enforcement) Order 2007 (S.I. 2007, No. 1421).—[John Healey.]

Committee rose at five minutes to Three o’clock.