The Economic Secretary to the Treasury (Ian Pearson): I beg to move,

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 Majesty’s 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.

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 case—the full title of which I shall not give, as it would take much of the afternoon—was 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 today’s order states:

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

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 Minister’s response, but I think that I can say that we do not intend to press it to a Division.

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 Treasury’s decision.

Ian Pearson rose—

The Chairman: Order. I allowed some comments on the current economic circumstances, which led to a question that asked for the Minister’s analysis of the causes. I hope that the Minister’s response will focus solely on the exemption of special investment funds from VAT, which is the purpose of the order.

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.