The
Committee consisted of the following
Members:
Atkins,
Charlotte
(Staffordshire, Moorlands)
(Lab)
Beresford,
Sir Paul
(Mole Valley)
(Con)
Blizzard,
Mr. Bob
(Lord Commissioner of Her Majesty's
Treasury)
Browne,
Mr. Jeremy
(Taunton)
(LD)
Buck,
Ms Karen
(Regent's Park and Kensington, North)
(Lab)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Gauke,
Mr. David
(South-West Hertfordshire)
(Con)
Love,
Mr. Andrew
(Edmonton)
(Lab/Co-op)
Moss,
Mr. Malcolm
(North-East Cambridgeshire)
(Con)
Newmark,
Mr. Brooks
(Braintree)
(Con)
Pearson,
Ian
(Economic Secretary to the
Treasury)
Pound,
Stephen
(Ealing, North)
(Lab)
Pritchard,
Mark
(The Wrekin)
(Con)
Purchase,
Mr. Ken
(Wolverhampton, North-East)
(Lab/Co-op)
Riordan,
Mrs. Linda
(Halifax)
(Lab/Co-op)
Walley,
Joan
(Stoke-on-Trent, North)
(Lab)
Glenn Mckee, Committee
Clerk
attended the
Committee
The following also
attended, pursuant to Standing Order No.
118(2):
Soulsby,
Sir Peter
(Leicester, South) (Lab)
First
Delegated Legislation
Committee
Monday 20
October
2008
[David
Taylor in the
Chair]
Value Added Tax (Finance) (No. 2) Order 2008
4.30
pm
The
Economic Secretary to the Treasury (Ian Pearson): I beg to
move,
That
the Committee has considered the Value Added Tax (Finance) (No. 2)
Order 2008 (S.I. 2008, No.
2547).
The
order is relatively straightforward and uncontentious. It amends VAT
exemption for fund management services, following a European Court
judgment and, in doing so, it creates a level playing field for value
added tax between all similar funds competing for investment by the
United Kingdom general public. The order revokes and replaces the Value
Added Tax (Finance) Order 2008 that was laid in the House on
17 July. It clarifies the scope of the original changes and introduces
a de minimum provision. That follows further consultation between Her
Majestys Revenue and Customs, businesses and their
representatives, and deals with specific concerns regarding overseas
funds that are marketed in the
UK.
The
management of closed-end funds, including investment trust companies
and venture capital trusts, is now exempt, reducing the overall value
added tax cost for them, which has been welcomed by the Association of
Investment Trust Companies. However, exemption brings a VAT cost for UK
fund managers who can now no longer recover VAT on their purchases.
That negative impact has been mitigated by capturing only those
overseas funds or sub-funds that are marketed to the UK general public,
and so compete directly with UK-authorised funds. Overall, it means
equality of VAT treatment between UK-authorised funds and similar funds
managed from the UK, which compete directly in the UK market. I commend
the order to the Committee.
4.32
pm
Mr.
David Gauke (South-West Hertfordshire) (Con): It is a
pleasure to serve under your chairmanship, Mr. Taylor.
Although I have already welcomed the Economic Secretary to his new post
on the Floor of the House, I do so again. This is the first time that I
have had an opportunity to discuss a statutory instrument with him,
although I do not know whether it is the first time he has debated one
in his capacity as a Treasury Minister. The order might not quite be on
a par with a 10p rate of income tax, capital gains tax, vehicle excise
duty or non-doms, but I welcome the hon. Gentleman here to perform the
task that Treasury Ministers have to do every so often, which is to
revoke what the Treasury has done only a few months
previously.
The
Minister has explained the order briefly. I have a few questions to ask
him, but perhaps I can first expand on what he said. The exemption from
VAT in respect of financial services, specifically the management of
special
investment vehicles, was narrowly defined previously and related
essentially to the management of authorised unit trusts and open-ended
investment companies. The European Court of Justice determined that the
JP Morgan casethe full title of which I shall not
give, as it would take much of the afternoonwas too narrowly
defined and, as a consequence, the Government sought to expand the
exemption in accordance with that
case.
The
first statutory instrument laid before the House on 17 July 2008
extended the exemption to certain closed-end vehicles, investment trust
companies, venture capital trusts and offshore trusts, or at least that
has how it has been determined. It has been seen as too wide. Paragraph
4.6 of the explanatory note to todays order
states:
HMRC
consulted key stakeholders on the draft Finance Order. Following the
laying of the Finance Order of 17 July 2008 and after further
consideration some stakeholders expressed the view that the Finance
Orders definition of off-shore funds would operate to exempt
management services which were not intended to be included in the
exemption. HMRC, following further consultation with key stakeholders,
has concluded that the definition of off-shore funds provided for in
the Finance Order requires further refinement.
That is where we are
today with a revised order and a revised definition of offshore funds.
The exemption applies to schemes or sub-funds of umbrella schemes
recognised pursuant to the Financial Services and Markets Act 2000
which have never been marketed in the UK or are not at this time
marketed in the UK, unless 5 per cent. of their shares or units are
held by UK
investors.
Will
the Minister confirm that it was the policy intention of the first
order that the exemption for offshore funds be limited to sub-funds
marketed to UK investors? In other words, there has been no policy
change and no change of interpretation on the part of the Treasury of
the European Court of Justice judgment relating to JP Morgan. Will he
confirm that the issue is purely one of
drafting?
Ian
Pearson indicated
assent.
Mr.
Gauke: I can tell that the Minister will confirm that when
he responds. Perhaps he will also expand on why that point was not
picked up on in the consultation process. Did the Treasury receive any
representations before the first order was laid raising the concern
that the definition was too broad? Clearly representations were
received after 17 July, but were there any warnings before
that?
There
are winners and losers as a consequence of the ECJ judgment. The
Association of Investment Trust Companies was party to the JP Morgan
case and welcomes moves that mean that it will not pay for VAT. The
Investment Management Association has raised concerns, however. UK
investment companies providing services to offshore funds will be at a
competitive disadvantage with regard to the recovery of income tax,
which is a point that the Minister
made.
Will
the Minister indicate what the net cost to the Exchequer will be of the
broadening of the exemption? But for this statutory instrument that
revokes the earlier one, would there have been an additional cost to
the Exchequer? How much will we be saving for the Exchequer by passing
the exemption? Will he also confirm that the consequences of the ECJ
judgment will be backdated
so that venture capital trusts and investment trust companies can claim
for VAT that was paid when it should not have
been?
The
Investment Management Association has questioned why it is necessary to
extend the exemption to offshore funds at all, given that there is an
ongoing EU review of VAT and financial services. Why does the Minister
feel that the order is necessary now? What progress does he anticipate
in the EU review of VAT and financial
services?
The
order involves withdrawing the exemption for trust-based schemes, which
are schemes where the asset relates to only one real property. I
understand from the explanatory notes that none of the trust-based
schemes are authorised to market their units in the UK. The explanatory
notes state
that
they
do not sit with the principles expressed in the JP Morgan
judgment.
Has
the Treasury received any representations with regard to the withdrawal
of the exemption for trust-based schemes? Is there any opposition to
the proposal? If so, what are those
objections?
Finally,
could the JP Morgan judgment have a wider application than the order
suggests? In documents produced and observations made by professional
bodies following the JP Morgan case, it was suggested that the
management of pension funds might fall within the scope of that
judgment and would therefore be exempt from VAT. The order relates to
fund management, but will there be any implications for fund
administration?
The order is
not particularly controversial, although it throws up a number of
questions, as I hope I have identified. My colleagues and I look
forward to hearing the Ministers response, but I think that I
can say that we do not intend to press it to a
Division.
4.40
pm
Mr.
Jeremy Browne (Taunton) (LD): May I, too, welcome you to
the Chair, Mr. Taylor, although I enjoy your perceptive
scrutiny of the Executive in the House and therefore I hope that you
will not have to spend too much time gagging yourself by taking the
role of referee, rather than participant, in our
deliberations?
I
commend the Minister on the brevity of his introductory remarks,
although I hope, as I am sure do many members of the Committee, that he
will be less brief when responding and take the opportunity to address
the serious points that have been made, because I share much of the
analysis put forward by the hon. Member for South-West Hertfordshire. I
shall try to add one or two points to those that have been
made.
It
would be helpful for the Committee if the Minister informed us why such
an extraordinarily rapid change has taken place since the original
order was brought before us on 17 July? After only a few weeks of
parliamentary sitting time, that has been torn up and new rules and
regulations have been introduced. The pace of things in the Treasury
seems bewildering. Does he, as a new Minister, have a sense of why it
all went so badly wrong before he arrived and how he might introduce a
little rigour and proper parliamentary process to the Department so
that such grave errors are not made in the
future?
I
thought it strange that the Minister did not spell out the revenue
implications for us. I, too, would be interested to know what those
will be for the Exchequer and
whether he or his Department has made any assessment of whether the
changes to the tax regime will lead to behavioural changes. One of the
difficulties when estimating revenue implications is that people do not
operate against the same backdrop of assumptions. Does the Minister
think that there will be behavioural changes as a consequence of the
new
order?
Will
the Minister also touch more on the representations he has received,
particularly since 17 July, because as he will know, there is
widespread concern about insufficient regulation and tax avoidance,
particularly in the current climate? Against that backdrop, it is only
reasonable that the Committee is informed of what motivated him to go
down this path and of which groups from outside were most enthusiastic
in asking the Department to travel in that direction.
Finally, to
what degree have the Minister and his Department co-operated with, or
at least exchanged views with, comparable economies such as France,
Germany, Italy and the United States on their approach to the issue?
Does the UK seek to be in line with economies that are roughly
equivalent to our own, or does it seek to have a harsher view to try to
accrue more revenue? Indeed, might we see some tax advantages of having
a regime that is more relaxed than comparable economies? It would be
interesting to know what approach other countries are taking and how
that has informed the Treasurys
decision.
The
Chairman: Order. I allowed some comments on the current
economic circumstances, which led to a question that asked for the
Ministers analysis of the causes. I hope that the
Ministers response will focus solely on the exemption of
special investment funds from VAT, which is the purpose of the
order.
4.44
pm
Ian
Pearson: I will indeed agree to abide by your strictures
in this matter, Mr. Taylor. May I first thank the hon.
Member for South-West Hertfordshire for welcoming me to my role as
Economic Secretary to the Treasury and confirm to him that this is the
first statutory instrument for which I have been responsible as a
Minister? I have already taken a Bill through Committee and had the
pleasure of debating the Dormant Bank and Building Society Accounts
Bill with the hon. Member for Taunton.
First, let me
explain why we are returning with this statutory instrument. This is a
very technical area and no representations made before 17 July raised
the point that is at issue. Once it was raised, which was after the
previous instrument was introduced, we looked again at the drafting.
The point of concern was overseas funds that were umbrella schemes with
separate funds. The intention was always to deal with each sub-fund
separately so that the management of only those sub-funds marketed in
the UK was
exempted.
We
thought that the original draft order made that clear but during the
summer business representatives argued that, as drafted, it exempted
management of the whole umbrella scheme as the recognised overseas
scheme. That was open to interpretation and so for clarity, and to give
businesses the certainty that they seek, this new order has been
drafted. I am happy to confirm to the
Committee that the policy intention has not changed. I can also advise
the Committee that the net cost to the Exchequer of these measures is
nil.
The hon.
Member for South-West Hertfordshire is right to say that VAT will be
backdated following this judgment. He also asked how much the
Government will save. We estimate that it will be up to £50
million, which would have been paid by offshore funds, but, as I say,
the policy intention was always as we are debating it today. There are
clearly costs to fund managers, which we estimate to be in the region
of £50 million per annum, but there is a corresponding benefit
to the funds which will now have the services of the fund manager
counting as exempt supplies.
I was also
asked about other VAT proposals, with the suggestion that we should
perhaps wait until the EU VAT proposals have been agreed. The Andersen
judgment is that outsourced insurance-related services should be
subject to VAT. We have not implemented that in the
UK, pending the outcome of the EU VAT proposals, and the EU Commission
has given us assurances that they will not oblige us to do so. The hon.
Member for Taunton also raised the issue of other countries and the
hon. Member for South-West Hertfordshire asked what else was in the
pipeline.
Clearly it
will be for all other EU countries to take note of the Claverhouse
European Court of Justice judgment and to modify their procedures and
practices accordingly. Because the judgment was made against the UK, we
are the first country to implement these arrangements. However, in
accordance with normal practices of European law, other jurisdictions
will have to follow in this matter. Other EU member states will have to
consider the judgment and apply it accordingly. Generally, officials
are discussing it as part of the EU review of VAT legislation, as I
have already indicated. I think that that covers the points that have
been
raised.
Question
put and agreed
to.
Committee
rose at ten minutes to Five
oclock.