Finance Bill

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Kitty Ussher: I urge the Committee to resist the new clauses and I shall explain why. This is an important subject and it is important to debate it. However, the proposed new clauses will mean, as the hon. Gentleman said, that any funds beyond those used to provide a minimum retirement income via an annuity could be placed in a so-called retirement income fund and taken out as required. We urge Committee members to resist the proposed new clauses because they are unfair and would mean that, by the time someone retired, due to the effect of the favourable tax treatment, a significant proportion of their pension fund would comprise tax relief: some £17.5 billion, nationally, in 2007-08. To allow better-off pensioners to take advantage of that by spending that relief at will when others do not do so because they cannot afford it, is simply not fair. To do so would be to take money from the normal taxpayer to benefit the richest. That is why we do not support it.
Some specific issues could also arise. For example, such a measure could encourage tax avoidance, because somebody could become non-resident just before they were 75, withdraw all the fund at 75, free of UK tax, and return in the next year, which would lead to a cost for the Exchequer and, potentially, boost inheritances in a way that is also unfair. We urge all Committee members to oppose it.
Mr. Hoban: The Minister’s arguments have not advanced the debate very far. The Treasury has deployed this line on a number of occasions, but it does not recognise how some of the issues can be dealt with. For example, it is possible to levy an additional tax charge on inheritance that removes that element of the savings that is generated by tax revenue. It is estimated that about 55 per cent. of the unutilised fund on death is down to tax benefits. So there is a way of trying to square that circle by applying a higher tax rate.
The Government fail to recognise that, although at the moment only a certain small group of people may benefit from this proposed measure, the reality is that ever more people will go down the route of being part of defined contribution schemes. Of course, in 2012 the personal account, which is a defined contribution scheme, will come into place and the defined benefits schemes will be closing down. More and more people, even those on relatively modest incomes, who have saved under defined contribution schemes throughout their lives, will find that they have built up a pension pot on retirement that could benefit them if they opted out of compulsory annuitisation.
The Government are digging their heels in, but the tide is moving against them on this policy and it is time that they started taking these challenges seriously. I urge Treasury Ministers to listen to the logic of the arguments. I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.

New Clause 21

Missing trader fraud
‘HMRC shall lay a report before Parliament every three months on the measures taken by the Government to combat missing trader intra community (MTIC) fraud and the effects those measures are having on the VAT compliance system generally.’.—[Mr. Gauke.]
Brought up, and read the First time.
Mr. Gauke: I beg to move, That the clause be read a Second time.
New clause 21 relates to missing trader intra-community fraud, an important matter that we have considered in the past two finance Bills. The most common or notable form of MTIC fraud is carousel fraud, which is, to use the Treasury’s words,
“a circular trading pattern that allows the same goods to be imported or exported many times, with an unpaid VAT liability and a corresponding VAT repayment being created in each turn of the carousel”.
MTIC fraud is significant fraud that has cost the Exchequer several billion pounds a year—last year, HMRC assessed the figure at £2 billion to £3 billion a year—in recent years. Admittedly, there has been a change in methodology for calculating that figure—it was somewhat higher, at about £4 billion to £5 billion. Such is the significance of the fraud that the Office for National Statistics believe that it distorts our trade figures.
It is a hugely important matter that has been the focus of attention from the Treasury and HMRC, and I am sure that all Committee members recognise that it is necessary to address it seriously. There is evidence, which I suspect we will hear in a moment, of significant improvements in tackling MTIC fraud. The new clause gives me the opportunity to ask for further details about those improvements. We saw signs of them last year during a debate on a similar new clause, when the Government showed signs of improvement in 2006-07. I should be grateful for confirmation of the numbers, and for some assessment of what has happened in 2007-08.
One reason for the improvement is the reverse charge, which we discussed at some length during the debate on the Finance Act 2006. Essentially, the direction in which VAT was paid was reversed to counter fraudsters’ efforts. The revisions that we debated in 2006 could come into effect only after certain derogations had been obtained from the European Union. In the interests of time, I will not go into an exposition of how lengthy and difficult a process that was, but it took many months for the Government’s proposals to be negotiated and agreed. Negotiating difficulties arose, and it is widely believed that the French used the UK’s request as a rather strong bargaining tool in other matters.
Three points are worth noting from the negotiations. Amendments and concessions had to be made to the Government’s original plans. The reverse charge was narrowly applied to mobile phones and computer chips. The reason for choosing those particular goods is that they are the goods most commonly used for MTIC fraud. However, fraudsters are cunning people, and there is a widely recognised danger that the fraud can mutate to other products. Is there any evidence that MTIC fraud has mutated into other products, as per the concerns that were expressed last year?
The second concession was that the de minimis amount for which the reverse charge could apply was increased from £1,000 to £5,000. That is likely not to be too significant, but the third aspect is more significant. The original request for a derogation made by the Government was for three years, and instead we got two years. That means that the issue is up for renewal relatively soon. Given the difficulties in negotiating the original derogation, which I mentioned, it would be helpful to have some indication of what progress is being made.
I raise those points because this is an important matter and it is important that Parliament has an opportunity to scrutinise and to gain an understanding of what is happening. That is why we tabled new clause 21, which would require the Government to lay a quarterly report before Parliament outlining the measures that have been taken to combat MTIC fraud and the effect that those measures are having on VAT compliance systems generally.
I assume that we are looking to extend the derogation. The reverse charge appears to have been substantially effective in tackling MTIC fraud, so the Committee would be concerned if there was any question that it would not be extended. The potential cost to the Exchequer is in the billions of pounds.
The second key element of the Government’s strategy to tackle MTIC fraud was the extended verification procedure for VAT repayments. New clause 21 draws attention to the fact that we would want a report to cover the effect that the
“measures are having on the VAT compliance system generally”.
Companies, particularly importers and exporters of mobile phones and computer chips, feel that they are being treated unfairly, that they have not received the VAT repayments they are due and, as a consequence, that they are out of pocket for some substantial sums of money.
Mr. Hammond: Is my hon. Friend aware of the problem that has befallen many new but legitimate businesses that happen to operate in that area? The additional checks that HMRC is carrying out have led to long delays in registration for companies operating in those types of businesses.
Mr. Gauke: I was going to touch briefly on VAT registrations, but I first wish to complete my remarks on VAT repayments. The Government presented a lot of evidence last year to suggest that the extended verification procedures were extremely well targeted, and that something like 95 per cent. of the parties involved in cases of extended verification were somewhere in a chain—perhaps they were not directly involved—in which MTIC fraud occurred. I would be grateful for an assessment of whether the extended verification process is as effective and as well targeted as the Government claimed last year. Do they still hold that view after a further year’s experience?
My hon. Friend raised the important point of delays in VAT registration. I am sure that the Minister will say, and we should acknowledge, that there have been substantial improvements in registration times. I do not think that anyone would disagree that they were frankly abysmal a year or so ago. They have improved significantly, although it is worth pointing out that the HMRC targets and figures that we see on the matter relate to what are described as low-risk cases. There are still high-risk cases. Any light the Minister is able to shed on what is happening with the high-risk cases and the time it is taking to process them would be greatly appreciated. We would also appreciate further information on whether they are targeted.
8.30 pm
In the course of my remarks, I have asked many of the questions to which I would hope answers can be provided to Parliament on a regular basis. That is the purpose of new clause 21, which deals with a matter of considerable public concern to those who are interested in the public finances and the fact that a substantial fraud needs to be tackled. Equally, it is of concern to new businesses seeking to obtain VAT registration and to existing businesses seeking to receive VAT repayments. The matter has placed HMRC under considerable strain.
In the light of all those issues, we think it would be beneficial if Parliament was provided with a quarterly report so that it is better informed about the matter. In essence, the issue is not controversial. I believe both sides of the Committee want to address it but not to leave innocent businesses in an unfair and unfortunate position. We think that we would be in a stronger position to address those concerns if more information were made available to Parliament so that we can have a better informed debate.
Jane Kennedy: Annual estimates of MTIC fraud are published with other indirect tax fraud estimates alongside the Chancellor’s pre-Budget report, and they show, as the hon. Gentleman mentioned, that the level of attempted fraud reduced by around £1.5 billion in 2006-07 on the previous year. The UK is the only EU country to produce such annual estimates of this fraud.
Mr. Gauke: I am sorry that the Financial Secretary does not want to engage on this important matter on this occasion. I would have been grateful in particular for an update on how the figures are looking for 2007-08, but we are not going to get them, at least not this evening.
Although I am not persuaded by the Minister’s short rebuttal, I do not intend to press new clause 21 to a vote. I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.

New Clause 27

Gift aid averaging scheme
‘The Treasury shall, before the publication of the 2008 Pre-Budget report, prepare and lay before the House of Commons a feasibility study, including an assessment of the cost and revenue implications, of implementing a system of automatic refund of tax credits in respect of gift aid contributions using an averaging process.’.—[Mr. Hammond.]
Brought up, and read the First time.
Mr. Hammond: I beg to move, That the clause be read a Second time.
This is an important new clause, and there is much that I could say about it. However, in view of the Committee’s evident desire to progress, I shall try to be brief.
The Government have undertaken a consultation about the gift aid scheme. We believe that the scheme is important. It encourages charitable giving, and at a time when charities and voluntary sector organisations are playing an increasing role in delivering public services and acting as contractors to public bodies, it is important that they retain their independence. Independence, of course, comes from having an independent financial base. A substantial donor base for any charity means that it can enter into publicly funded contracts without compromising its independence and essential ethos.
We argue that the gift aid system is in need of simplification to ease the administrative burden on charities, but the link between tax relief and donations is important to preserve the principle that charitable donations should be made out of gross income.
The purpose of the new clause is to probe the Government’s thinking on the issue and to find out what assessment they have made of the validity of the approach it suggests, which is an automatic refund of tax credits in respect of gift aid contributions using an averaging process. At present, every time a gift aid contribution is made, the taxpayer has to complete a form. Those forms have to be processed, the charity in question has to preserve the documents for a significant period and there is a considerable burden of administration, both for the charities in question and for HMRC.
The Government consultation that I referred to earlier did not lead to any substantive changes. It was sparked by the proposals in the 2007 Budget to reduce the basic rate of income tax—the other side of the coin to the now infamous abolition of the 10p rate. Although a reduction of the basic rate of income tax is welcomed by taxpayers, it also means that charities receiving gift aid donations receive somewhat less in tax credit for each £1 of donation that they take.
When the then Chancellor announced the consultation on the gift aid scheme, charities had quite high hopes and they put forward a number of proposals, which I shall not go into in detail because of the time. One of the proposals that had wide support from the charitable sector was a revenue-neutral averaging scheme. It would mean that instead of keeping individual records for taxpayers who made charitable donations, charities would receive from HMRC a tax credit based on an averaging of the tax credit due, recognising that part of the donor base are taxpayers at the standard or higher rate, part may be UK resident and domiciled non-taxpayers who are on incomes that are too low, although it is unlikely that they would be a significant component, and part may be high earners who for one reason or another are not paying UK income tax.
I emphasise the fact that the proposal was that the credit rate should be set at a level that was revenue neutral. It was not an attempt to increase the net income of the charitable sector or to deprive HMRC of any of its tax revenue, but an attempt to create a win-win situation where less of that valuable money is lost in administration costs. The charitable sector was rather disappointed with the Government’s response, which was to announce a welcome but temporary transitional arrangement to recognise the burden on charities of the reduction in the basic rate of income tax, but with no guarantee that it would be extended.
The new clause asks the Government to produce a report on the feasibility and the costs and benefits of implementing such an automatic rebate-averaged system. The purpose of tabling it is to probe the Government, to try to understand whether they have any intention of going further with the suggestions that were put to them during the consultation, and whether the charitable sector might hope that over the next year or so the Government will come forward with further thinking in this area. It is with some consideration that I say over the next year or so, because it is certainly an area that we, in government, would want to look at. I do not expect the Financial Secretary to make a commitment today because many issues would have to be considered, but we would be interested to hear whether she at least accepts that the principle is worthy of further investigation and whether she intends to undertake such an investigation.
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