Mr.
Timms: Clause 75, along with clauses 76 and 77, implements
a package of changes to the VAT treatment of cross-border trade. It was
agreed by European Finance Ministers in 2008. The clause introduced
schedule 36, which changes the place of supply rules for cross-border
supplies of services, and it is worth bearing in mind that it is purely
about services. Those rules determine where VAT on the cross-border
supply of services will be due, and from whom. They apply across the
European Union, so avoiding the possibility of double taxation or
non-taxation. We are also taking an opportunity to consolidate the
rules so that they are more sensibly grouped together in the Value
Added Tax Act
1994. Those
changes will modernise the EU VAT rules to ensure that they keep pace
with changes in business practices, the impact of globalisation and
advances in technology. A package of changes to simplify and modernise
VAT treatment of cross-border trade was, as I said, unanimously
adopted. The new rules are part of that package agreed in February 2008
and will be phased in from 1 January 2010. They aim, as far as
possible, to achieve taxation at the place of consumption, so ensuring
that UK VAT is paid on supplies made to UK customers regardless of
where the supplier is located. I think that the new rules better
achieve the aim of taxing services where they are consumed. They ensure
that in the future UK VAT will apply to most services supplied to UK
customers.
The hon.
Member for Fareham, perfectly fairly, relayed concerns that had been
expressed about aspects of the clause. If we had had those discussions
much earlier in the process, many more concerns would have been
expressed. People feel that Her Majesty’s Revenue and Customs,
by and large, has done quite a good job in dealing with some of the
potential difficulties for small businesses. He raised a question about
the time of supply. The objective of the change in the time of supply
rules on the cross-border supply of services is to align the time at
which the supplier includes a transaction on the European Community
sales list—we will talk about that shortly—with the time
at which a customer will have to record that transaction as a reverse
charge on the VAT return.
The hon.
Gentleman asked what the cost of all that will be. An impact assessment
was published on Budget day detailing the estimated cost to businesses
of implementing the measures in the clauses. It is estimated that up to
220,000 businesses will be affected. They will need to understand the
changes and adapt their existing accounting systems. The continuing
annual costs are thought to be in the region of £5 million,
making an average quantified cost of just less than £90 per
business, which will vary depending on the extent to which a business
is affected by the changes. The impact assessment also included a
one-off cost of almost £30 million for an estimated 1.3 million
VAT-registered businesses to spend an hour just checking that they are
not affected by the requirement to submit the EC sales lists. We are
talking about a total cost of some tens of millions across
businesses.
HMRC is taking
an active approach to informing businesses about the changes. The hon.
Member for Fareham rightly asked how we can be confident that people
will know about the changes. It is important that we achieve certainty
at as early a stage as possible for changes of this kind. We were the
first member state to publish legislation and interpretation—on
22 December. We published initial guidance on 1 May, covering all
aspects of the cross-border VAT changes coming into effect on 1 January
2010, and that guidance will be updated as further queries are
highlighted or issues already identified are resolved. HMRC and
Treasury officials will continue to discuss any outstanding issues of
interpretation and
implementation.
John
Howell: On interpretation, I am conscious that the
Chartered Institute of Taxation has raised the concern that there would
still be differences between member states. Will the Minister assure us
of the process for resolving those differences, and tell us how that
would be communicated to
businesses?
Mr.
Timms: The arrangements will apply to the whole of the
European Union. There have been concerns about whether every country
will be as timely as we will be in implementation. The indications are
encouraging on that front, at least as far as the bigger countries in
Europe are concerned. It has been suggested that there could be some
points of details on which there could initially be some differences of
interpretation, and HMRC will be ready to talk to businesses about
those if they prove to be a difficulty. It is perfectly possible that
there might be some teething problems, but HMRC will understand if
businesses face a little difficulty to begin with because of issues of
the kind that the hon. Member for Fareham has referred to. We are
talking to others at the Commission to ensure that businesses receive
clarification as quickly as
possible. I
shall finish, perhaps slightly self-indulgently, by quoting an
accounting firm that praised HMRC for the “open and
pragmatic” approach being taken here. I have mentioned that we
were the first to publish the legislation. HMRC has done a good job. I
am not saying that there will be no difficulties, but they will be
manageable and
minimal. Question
put and agreed
to. Clause
75 accordingly ordered to stand part of the
Bill. Schedule
36 agreed
to. Clause
76 ordered to stand part of the
Bill.
Clause
77Information
relating to cross-border supplies of services to taxable
recipients Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: Let me comment in passing on the Minister’s
self-indulgent remark about HMRC being congratulated on being open and
pragmatic. I would have hoped that it should not be noteworthy that
HMRC is open and pragmatic. It sounded as though that was the exception
rather than the norm. I shall leave that thought hanging in the
Minister’s mind for the time
being. I
said in my brief remarks on clause 75 that I would return to the
European sales list, which is a requirement for companies to make a
periodic report of services supplied to other businesses in EU member
states. The following information should be included in the EC sales
list: the VAT registration number of the business to which services
were supplied, and the total value, excluding VAT, of such
supplies.
1.45
pm Two
issues have been flagged to me, one of which has already been dealt
with. That is the point that my hon. Friend the Member for Henley made
about interpretation.
Mr.
Robert Syms (Poole) (Con): My hon. Friend the Member for
Henley is also on the Equality Bill, which is why he zips in and out of
this Committee. He is a very important
individual.
Mr.
Hoban: Clearly, not only the Exchequer Secretary is in
transitional arrangements. My hon. Friend the Member for Henley is so
assiduous in his parliamentary duties that he feels that serving on one
Committee is simply not enough; he must have two on the go at any point
in time.
The issue
that has been raised is whether the treatment of supplies is exactly
the same in each member state. There is an obligation on the supplier
to know what the treatment of supplies would be in the other member
states, for the purposes of complying with the European sales list. The
Minister went some way towards reassuring the Committee on that point
by talking about the pace of implementation and the fact that the
implementation of this measure will be tighter than we are normally
used to with the implementation of directives. If there is any
additional information that he can give on that subject, that would be
helpful.
The Minister,
in his response to my question, referred to the cost of changes in
accounting systems. One of the issues that has been raised in that
regard is that at present most accounting systems cannot cope with
producing the European sales list. That is a concern, because of course
the clause relates to the new harsher penalty regime and to clause 92,
which deals with the obligations of senior accounting officers. There
is concern that although the intention may be that businesses should
comply with the measure, the systems they have in place may not be
appropriate to comfortably provide accuracy of tax accounting. As the
Government consider the measure, it is important that they ensure that
businesses have the right IT support for the European sales lists, so
that they are not subject to penalty under clause 92 or the other
tougher penalties being introduced in that part of the
Bill.
Mr.
Timms: At present, VAT-registered businesses that supply
or sell goods to other member states file a declaration known as an EC
sales list with HMRC, to notify HMRC that a cross-border transaction
has occurred but no VAT has been charged. The sales list records the
member state of destination, the customer’s VAT registration
number and the value of the goods supplied. HMRC forwards that
information to the customer’s tax authority,
so that it can cross-check that the customer has entered the purchase or
acquisition in their records and will account for the VAT. Clause 77
ensures that HMRC can introduce equivalent regulations for cross-border
supplies of services. The alteration is necessary because of the change
that is being made with effect from 1 January 2010, which we have
discussed. In
future, therefore, VAT will be paid and recovered, subject to any
partial exemption restriction on most cross-border services by the
business customer on their VAT return, similar to the way that VAT is
currently accounted for on cross-border supplies of goods.
Conceptually, there is nothing very new, but the extension to services
is new. Unless the current sales list regime for goods is extended to
services, there is a risk that EU tax authorities will be unaware of
cross-border supplies of services and, as a result, they may lose
significant amounts of VAT. This is an important provision to monitor
compliance and to help in the fight against VAT fraud.
Secondary
legislation will be laid later this year, with an effective date of 1
January 2010, setting out in detail the new reporting requirements for
EC sales lists for goods and services. I have provided a draft for the
Committee. The changes, along with those in clause 75, were consulted
on before the Budget, and a summary of responses was published on
Budget day. Businesses have raised concerns about the practical
implementation of making the changes by 1 January 2010, some of which
were echoed today. HMRC has established a joint Government-business EC
sales list working group; I hope that the Committee agree that that is
an open and pragmatic thing to do. The group will discuss the issue and
identify ways of keeping the administrative burden to a minimum. The
changes ensure compliance with the new rules contained in clause
75. The
hon. Member for Fareham pressed me a little further about consistency
in rules, along the same lines as the hon. Member for Henley when he
was with us. As I said earlier, I am aware that there have been
business concerns about the potential for different
interpretations—in particular, the danger of double taxation. It
is conceivable that people could find themselves paying VAT in two
countries if the measure does not work as smoothly as it should, so we
have been talking to the Commission to clarify areas where there could
be difficulties, and we will update the guidance as soon as those
issues have been resolved.
I can tell
people who may be concerned about the matter that if a business makes
reasonable attempts—including, for example, discussing the VAT
position with the customer—and those attempts have failed to
ascertain what the correct VAT treatment is in the member state where
the customer is based and to which the service is being supplied,
businesses may choose to assume that the UK VAT treatment will apply to
those supplies, on the basis that it should be consistent with the EC
directive and therefore with the law in other member states. That is
another open and pragmatic option that people might bear in
mind.
There could
be some teething problems, but I hope that they will quickly be
resolved. As long as business is able to demonstrate that it is taking
steps to comply with the new legislation at the earliest opportunity,
there will be no question of HMRC penalties. As the hon. Member for
Fareham said, we will be debating later the question of
penalties.
On the
question of accounting systems not being able to cope with the new
sales lists, it is not that they cannot provide ESLs but that the time
of completion is not always certain. HMRC is discussing that point with
businesses. Question
put and agreed
to. Clause
77 accordingly ordered to stand part of the
Bill.
Clause
78Effect
of VAT changes on arbitration of rent for agricultural
holdings Mr.
Mark Todd (South Derbyshire) (Lab): I beg to move
amendment 181, in
clause 78, page 39, line 37, leave
out ‘rate’ and insert
‘amount’. I
welcome you to the Chair, Mr. Atkinson. I have no doubt that
what I have to say will test the openness and pragmatism of my right
hon. Friend the Financial Secretary.
The clause is
an attempt to resolve an unintended consequence of the interaction
between the Agricultural Holdings Act 1986 and the Value Added Tax Act
1994, triggered by a court judgment in December last year. That
judgment held that when there is a change in the amount of VAT payable,
it constitutes a change in the amount of rent payable. Under the
Agricultural Holdings Act, that triggers a three-year moratorium on a
rent review being referred to arbitration—a common means of
resolving farming rent disputes.
Before that
case, it was understood that regardless of whether VAT was charged, the
sum of any tax was immaterial to the legal right to determine disputed
rent. In clause 78, the Government seek to resolve the problem by
asserting that neither the levying of the tax, which is dependent on
the status of the individual lessor, nor any change in the rate of the
tax will be taken into account when determining a right to arbitration.
That might appear to resolve the issue entirely, but it would seem that
it does
not. Agricultural
tenancies often comprise both a house and land, which are treated
separately for the purposes of complying with VAT legislation.
Commercial land is VATable, but a house is not. However, those two
components are often pooled into one rent for a holding. The clause
might not address a change in the balance of the rent between the two
component parts, one of which is VATable, while the other is not. That
might occur naturally according to market circumstances; for example,
if the rent on a commercial holding were related to a return that one
might achieve from it, and the rent on a house were related to the
value of the property, the two elements might vary over time. Such a
change in the balance is entirely feasible, but it does not appear to
have been anticipated in the Government’s narrow change, which
merely refers to a change in the rate of VAT, rather than in the amount
of VAT that may be attached to the
rent. There
may be two ways to resolve the issue. The first option is to accept my
amendment. I would be delighted if that happened, because it would be a
first for me, having served on a Finance Bill Committee at least three
times, although it may be even more—I cannot remember. The
second option, which might well suffice,
is for the Government to give a clear statement about how the change
applies and an understanding of how Her Majesty’s Revenue and
Customs would treat VAT in those
circumstances. | 
