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Mr. Gray and Mr. Eland stated that HMRC was improving but was “not there yet”.

Mr. Redwood: My hon. Friend is making a good case. Could he give me some idea of the length of time for which he thinks it reasonable for Revenue and Customs to delay considering an application?

Mr. Gauke: I am grateful to my right hon. Friend. I will deal with some of these points in more detail in a few moments. HMRC’s standard target is 21 days —15 working days. There may well be circumstances in which additional time is necessary, but at the moment there are regularly delays of three, four, five or six months. That is unacceptable.

Let me consider some of the performance figures. HMRC accepts that last summer’s performance was unacceptable. In June 2006, 109 complaints were made, and in July 2006 the figure was 96. I have the most up-to-date figures from answers to parliamentary questions, which show that the number of complaints had increased to 131 in April 2007 and 133 in May 2007.

Perhaps the most important figure is the percentage of applications that were processed within 21 days of receipt. In May, June and July 2006 it was 56, 57 and 57 per cent. respectively. Again, the most up-to-date figures that I have are from parliamentary answers. Although in January HMRC officials were looking for a substantial improvement, and recognised that there had been a problem the previous summer, the figure was still a mere 60 per cent.; anecdotal evidence suggests that it may have declined since then. However, even if 60 per cent. of applications are tackled within the 21-day target period, that means that of approximately 280,000 VAT applications a year, some 112,000 are not tackled in that time. That is a substantial number. Given that I believe that the target has been missed by some margin, we are talking about a reasonably major issue.

The concern was further highlighted last week in an article that John Arnold, the chairman of the tax faculty of the Institute of Chartered Accountants in England and Wales, and Neil Gaskell, its technical manager, wrote. Their introductory remarks are worth quoting:

They go on to argue that accountants have been running up approximately £100 million worth of chargeable time as a consequence of trying to deal with HMRC’s inefficiencies and errors. They estimate that only 20 per cent. is passed on to clients. None the less, the problem affects accountants and clients.

How bad is the problem according to HMRC? Mr. Arnold and Mr. Gaskell state in their article that HMRC claims that 95 per cent. of applications are processed within 30 days; I remind hon. Members that the target is 21 days. Let us consider the assessment that the accountants make of the various VAT registration offices. They note that Newry takes 30 days, and Wolverhampton takes 34 days to open applications. Performance appears to be slightly better in Carmarthen, but there are no details. Hon. Members should note that we are considering the time taken simply to open applications.

The accountants’ article refers to HMRC’s figure of 30 days, although an article in last week’s Financial Times cited 38 days. Does that figure mean that processing takes place 30 days from receipt, or 30 days from opening applications? If it is taking more than a month simply to open applications, we are contemplating serious problems. As Mr. Arnold and Mr. Gaskell say, it suggests that the 30-day claim is somewhat “misleading”.

One of the problems that the tax faculty article identified is the large increase in the number of applications for VAT registration, which the Government’s legislation on managed service companies has caused. I am sure that we will revert to that subject later because it has caused a substantial increase—approximately 20,000—in applications. The VAT application officers have simply been unable to cope with that.

6.15 pm

The issue raises several questions, and I would be grateful if the Financial Secretary could answer them. Do the Government accept that performance in dealing with VAT applications is declining? Does the Financial Secretary have any further up-to-date figures? Does he maintain that 95 per cent. of cases are tackled in 30 days, or 38 days? Does that time run from receipt of applications or opening of applications?

The accountants have raised concerns about the closure of the Newry VAT office. What will be the effect of that? HMRC appears to have acknowledged that it will cause further delays. What steps did HMRC take to mitigate the problems that the proposals for the managed service companies caused? Was it anticipated that they would cause an increase in VAT applications? What was done to tackle that? Are the problems exacerbated by attempts to reduce HMRC staff? Is that a wider problem in HMRC? Are legitimate companies that are trying obtain a VAT registration feeling the impact of attempts to reduce staff? How targeted are the problems relating to VAT registrations at companies that are in high-risk areas for missing trader intra-Community fraud? The problem appears to be much greater than simply a handful of companies in key high-risk areas, such as mobile phones or specific electronic goods.

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The second cause of concern is VAT repayments. In Committee, I provided several examples of difficulties with VAT repayments. Again, there is clearly a relationship with MTIC fraud; indeed, it is even stronger. The system of extended verification, which has caused delay in several cases, is undoubtedly an attempt—on the face of it, a successful attempt—to tackle MTIC fraud.

Two statistics are wheeled out. First, in 95 per cent. of cases in which traders are subject to extended verification, participation in or profit from MTIC has been found, or sufficient suspicion exists to warrant further investigation—“sufficient suspicion” in the opinion of HMRC, presumably. There is a distinction between cases in which someone subject to the extended verification system has been found to participate in or profit from MTIC fraud and those in which sufficient suspicion exists. Is it possible to break down the figure of 95 per cent. to ascertain how many traders fall within each category?

The second figure that HMRC uses is the 1 per cent. of withheld VAT, which is subsequently found to have been correctly claimed and properly payable. The test of “correctly claimed and properly payable” is higher than that for being involved with MTIC fraud. I sought further clarification through parliamentary questions without success about whether it could be argued that an element of the VAT funds that are not being repaid do not relate to MTIC fraud but to a technical, perhaps minor, breach of the claim form. I should be grateful for that further clarification.

There is a concern that staffing underlies many of the problems, especially those with VAT registration. In Committee, I raised the case of Viking Garages, and a professional adviser to the company pointed out, in connection with VAT repayments:

Do the Government recognise that there is a problem, and a staffing issue? If so, what steps will they take to improve the position?

Both issues hamper legitimate business. There is concern that the delays are preventing us from dealing accurately with MTIC and from taking well-targeted action, but there is broader anxiety that the legitimate needs of legitimate business have not been facilitated by HMRC. New clause 4 highlights and attempts to address those concerns. For 12 months, professional bodies and members of the Conservative party have sought to improve something that HMRC has recognised is a serious problem. I hope that the Financial Secretary accepts that there is a problem, and will provide reassurance that those concerns will be addressed.

Mr. Philip Dunne (Ludlow) (Con): I support the powerful case made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) for new clause 4, particularly on the repayment of VAT. Some 1.8 million businesses are VAT- registered, and they submit 7.6 million assessments each year. In the year ending March 2006, 85 per cent. of those assessments were paid on time, which means that a substantial number were not. The new clause would assist the Revenue in sharpening up its act, and would both help it to catch up with those who have not paid their VAT bill on time and ease the burden on businesses that have not received their repayments on time. In the absence
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of such a provision, the Revenue has paid insufficient attention to the efficiency improvements that are needed following its combination with Customs and Excise.

The Revenue is quick to fine businesses that do not submit their returns on time. Indeed, if a business is two weeks or more late in filing its return, a default fine is automatically imposed. In the year ending March 2006—the latest year for which figures are available—the Revenue issued 250,000 late filing penalties, which is an increase of 10,000 on the previous year. The total value of VAT-related penalties earned by the Revenue that year was £270 million. That is a significant source of tax revenue, which HMRC could clearly increase, given the proportion of fines that have not been paid. However, there is an imbalance, as HMRC’s performance in refunding overpayment is not subject to anything like such rapid equivalency. Indeed, businesses can apply for compensation only once an inquiry launched by HMRC into VAT irregularities is completed. As we heard from several hon. Members in Committee, that may take a very long time indeed, even for businesses that trade legitimately and supply the information requested by HMRC. They do not receive such payments as a result of HMRC’s inefficiencies.

I am dealing with a constituency case that involves a company whose VAT payment for March 2006 is under investigation. It was not notified of the investigation until six and a half months later, in mid-October. An overpayment had been made, so the Revenue may have suspected MTIC fraud—indeed, it transpires that that was the case—and it launched an inquiry. Fourteen months later, the company is still waiting for the inquiry to conclude. There is a catalogue of errors in HMRC’s systems, with which I will not bore the House—but to illustrate the challenges facing companies I should explain that that business, having failed to receive a refund of the significant overpayments in its March return and its subsequent May return, received a demand from the Revenue regarding the non-payment of corporation tax. The Revenue decided to pursue the company through the courts for the tax, which amounted to roughly 20 per cent. of the VAT overpayment due to the company. The company got into cash flow difficulties as a result of the Revenue retaining its funding, and business more or less ceased. It was only as a result of my intervention with Mr. Gray at HMRC that the Revenue backed down from its demand for corporation tax and stopped pursuing the company into liquidation through the courts. Fourteen months later, however, despite repeated correspondence with Mr. Gray on the company’s behalf, there is no resolution in sight.

If the Government accepted the new clause, the Revenue would be obliged to report regularly on its performance, so it would have a salutary effect both on the way in which HMRC chases up people who default on payments and on cases in which overpayments have not been refunded. As a final illustration, may I rehearse for the House a point that I made in Committee about online filing and HMRC’s woeful performance in meeting its own targets? By March of this financial year, HMRC aims to achieve a target of 50 per cent. of VAT returns filed online. As of March—the end of the last financial year—only 9 per cent. of returns were filed online. The new clause would encourage substantially greater efficiencies in HMRC, so it should be supported.

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Julia Goldsworthy: I shall be brief, because the hon. Member for South-West Hertfordshire (Mr. Gauke) outlined very clearly a significant problem in VAT registration and repayment. It is important to underline the impact of such problems on businesses. Hon. Members have given examples of businesses that have ceased trading as a result of delays, so we should not underestimate the problems on the ground. As always, it is difficult to balance the interests of law-abiding businesses with the need to tackle the fraudulent endeavours of people trying to cheat the system. Liberal Democrats have always made it clear that they are sympathetic to the Government’s efforts to tackle the issue. MTIC fraud is a significant problem that costs the Treasury billions of pounds a year, so we support the Government’s efforts to introduce a reverse charging system to overcome it.

I am sympathetic to the intention behind new clause 4, but I wonder whether it is too bureaucratic. If HMRC officials are already struggling to deal with repayment applications, the provision might make the spiral even worse. If I have any hesitation, it is about the fact that the proposal may be more time consuming for officials who are struggling to cope with the new measures that have been introduced as a result of reverse charging and the verification process. They are trying, too, to cope with restructuring and staff cuts, which have had a wider impact on the system. I should be grateful if the Minister told the House the average time that it takes an HMRC official to process applications for repayment and to deal with verification.

Finally, I do not know whether the Minister will accept the new clause, but businesses are seeking genuine assurances from him that the wider HMRC reforms and efficiency changes will not have a negative impact on their ability to complete the VAT verification process or to seek repayment. Efforts to counter MTIC fraud should not affect law-abiding businesses. Above everything else, with respect to the hon. Member for South-West Hertfordshire, who tabled the new clause, ultimately that is what small businesses seek from today’s debate.

6.30 pm

Mr. Redwood: Business is looking for greater speed and greater co-operation from all parts of Government, and I am delighted that my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) has highlighted the need for improved performance in the important area of VAT refunds and VAT registration. The asymmetry has already been illustrated in one respect. If a business files late, there is an automatic penalty. If the Revenue and Customs is late in returning, that is bad luck on the business concerned.

There is another asymmetry that is relevant and extends more widely across Government: the asymmetry between the standards now expected of a world-class business in terms of error and delay, and the standards that we have grown used to expecting from Government. A world-class business would think it bad to have an error rate as high as 0.1 per cent., and it would expect very little delay in service or product delivery to its customers, yet we are discussing an organisation where 40 per cent. of the initial registrations and 14 per cent. of the refunds are delayed. Those are massively large
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figures representing millions of cases of late refunds over a reasonable period, which would not be acceptable in the private sector.

It is the Government’s job and a Minister’s task to engage with senior officials and administrators to try to lift Government standards to something like those that world-class competitive businesses must hit or go out of business. As we have heard, small businesses and some big businesses can be extremely embarrassed if an important refund is much delayed, because they budget their cash flows to very fine tolerances. If a large cheque from Revenue and Customs is missing, that can make a big difference to the business’s future and therefore to the jobs represented by that business.

James Duddridge: I thought that I had left VAT returns behind when I moved from business to politics, although as the Financial Secretary knows, I maintain a keen interest in VAT issues as HMRC has three main buildings in the constituency that I represent, two of which deal with VAT issues. With reference to my local VAT office, I have had a number of discussions about job cuts in HMRC, and from the Front Bench my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) expressed concerns about the impact of job cuts on already worrying performance figures. I support new clause 3 in particular, as it is right that we examine the performance figures in detail.

My second point involves a recent constituency case. A constituent recently visited me who was concerned that an internet-based competitor was selling goods without paying any VAT. I wrote to the Financial Secretary, who took the matter extremely seriously, although for understandable reasons he wrote back to say that he could not correspond about a third company and reveal details. From my investigation of the matter, there seems to be concern in the industry that, because of carousel fraud, the performance figures of HMRC were adversely affected. That was affecting not only repayments and the processing of applications, but other fraud issues relating to VAT. I should appreciate reassurances from the Minister that non-carousel fraud is being investigated equally and that resources are not being sidetracked because of carousel fraud.

Finally, in my discussions with a number of people about the case that I mentioned, concerns were raised that managed service companies are submitting thousands of new companies for VAT registration on a daily basis. Can the Financial Secretary allay my concerns or put a number on the VAT applications coming through daily and monthly? Will he confirm reports that up to 20,000 applications in bulk have been submitted to HMRC in one day? That would explain some of the performance figures and performance concerns.

Mr. Newmark: When the issue of timely VAT repayment was raised in Committee in the context of MTIC fraud, the Financial Secretary commended me for speaking with some passion on the subject—at least, I think it was a commendation. It will come as no surprise to him, then, that I want to return to it.

As my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) told the Public Bill Committee, the problems with timely VAT registration and repayment have been a matter of some interest to
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the Treasury Committee. The acting chairman and the director general of enforcement and compliance at HMRC both admitted to the Treasury Committee that VAT registration was an area in which HMRC was under considerable pressure.

However, my interest, or rather my passion, stems from the fact that I have seen the effect that the pursuit of MTIC fraud can have on a business when it causes significant delay in VAT repayment. I therefore welcome new clauses 3 and 4, because they both improve parliamentary oversight and introduce some form of benchmarking in HMRC’s treatment of VAT. However, the first depends on the second if it is to be effective. The value of scrutiny depends, to a large extent, on the existence of benchmarks and standards of reasonable behaviour. That is particularly important in respect of MTIC fraud.

First, there is a consensus that tackling MTIC fraud is necessary and beneficial. However, the unintended consequence of that consensus is that scrutiny becomes more challenging, because we must be careful that an attack on the effectiveness of the repayment system is not construed as an attack on anti-avoidance itself.

Secondly, the Government are fond of telling the House how fiendishly complicated MTIC fraud is and how HMRC is engaged in a running battle to outwit its perpetrators. The reasoning is that complication justifies delay. The logical outcome of the endless race between fraudsters and HMRC is that as complication increases, so must delay. That was the essence of the Financial Secretary’s argument in Committee. He told me:

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