Value Added Tax (Emissions Allowances) Order 2010

The Committee consisted of the following Members:

Chair: Mr Andrew Turner 

† Birtwistle, Gordon (Burnley) (LD) 

† Blunkett, Mr David (Sheffield, Brightside and Hillsborough) (Lab) 

† Gauke, Mr David (Exchequer Secretary to the Treasury)  

† Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

† Hanson, Mr David (Delyn) (Lab) 

† Harrington, Richard (Watford) (Con) 

† Hunt, Tristram (Stoke-on-Trent Central) (Lab) 

† Jackson, Glenda (Hampstead and Kilburn) (Lab) 

† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op) 

† Skinner, Mr Dennis (Bolsover) (Lab) 

† Stewart, Iain (Milton Keynes South) (Con) 

† Stewart, Rory (Penrith and The Border) (Con) 

† Stride, Mel (Central Devon) (Con) 

† Sturdy, Julian (York Outer) (Con) 

† Syms, Mr Robert (Poole) (Con) 

† Wicks, Malcolm (Croydon North) (Lab) 

† Williams, Stephen (Bristol West) (LD) 

† Wilson, Sammy (East Antrim) (DUP) 

Alan Sandall, Committee Clerk

† attended the Committee

Sixth Delegated Legislation Committee 

Wednesday 3 November 2010  

[Mr Andrew Turner in the Chair] 

Value Added Tax (Emissions Allowances) Order 2010 

2.30 pm 

The Exchequer Secretary to the Treasury (Mr David Gauke):  I beg to move, 

That the Committee has considered the Value Added Tax (Emissions Allowances) Order 2010 (S.I. 2010, No. 2549). 

The order removes supplies of emissions allowances from the zero rate of VAT. The zero rate was applied to the interim measure to stop missing trader intra-community fraud, or MTIC fraud, pending an agreed EU-wide countermeasure. The order does so by removing group 17 from schedule 8 to the Value Added Tax Act 1994. The zero rate was effective in dealing with MTIC fraud in emissions allowances because no VAT became due to or from Her Majesty’s Revenue and Customs, so removing the opportunity to steal the VAT. However, as the vast majority of legitimate trades are carried out between VAT-registered businesses that are able to deduct VAT in full, it had negligible impact on VAT revenues—apart from the significant tax protected by preventing the fraud. 

The EU-agreed countermeasure is a reverse charge accounting mechanism, similar to the UK’s reverse charge for mobile phones and computer processors, whereby the recipient of an emissions allowance has to account for the VAT on the supply. The reverse charge is equally effective in combating MTIC fraud, and the order removes the zero rate at the same time as the reverse charge is introduced. In common with the zero rate, the reverse charge mechanism has a negligible effect on VAT due to or from HMRC. Although customers receiving the emissions allowances are liable to account for the output VAT, they are able to claim credit for the reverse charge in the same way and to the same extent as they could have done if they had paid the VAT due on the supply to the supplier. For the large majority of businesses, therefore, the overall liability to tax will be unaffected by the reverse charge. 

The zero rate also applied to trades in options for emissions allowances—a belt-and-braces inclusion when it was introduced. There is no evidence of MTIC fraud in options, and in line with agreed EU legislation they will not be covered by the reverse charge following the removal of the zero rate. However, the proposed changes will not affect the separate zero rate used for transactions in futures and options traded on the UK markets covered by the Value Added Tax (Terminal Markets) Order 1999. 

UK businesses have been given seven months’ notice of the intention to implement the change. MTIC fraud in emissions allowances continues to be prevented by law in a way that legitimate business welcomes, and it is

consistent with the way in which other member states apply the optional reverse charge. I commend the order to the Committee. 

2.32 pm 

Mr David Hanson (Delyn) (Lab):  I welcome you to the Chair, Mr Turner, and I thank the Minister for his explanation of the order. The Opposition welcome the order, and we shall not oppose it. 

The zero rate emissions allowances were introduced by the Treasury on 31 July 2009 to deal with VAT fraud on emissions trading, which was a concern. The actions taken last year effectively stem potential fraud, pending an EU-wide agreement. I was pleased to hear the Minister confirm that that agreement has taken effect through the directive which provides an option for all member states to introduce a reverse charge; it was adopted in March 2010. The reason for the original order has been resolved, and the EU-wide agreement is welcome. 

I have a couple of questions. I hope not to delay the Committee for too long, but I would welcome answers to them. The first relates to the order itself, and I have raised the matter with the Minister before. I confess that when I was a Minister, on occasion I and other Ministers did something similar, but I note that the order came into force on 1 November 2010. Today is 3 November. Although we do not oppose the order, in the event that the Opposition and some Government Members did not support it, things would be slightly more complicated, given that the order came into effect earlier than the debate that should confirm it. It is within the Government’s power to lay such orders before the House at such a time and in such a place so that there is time for them to come into effect after the Committee has considered them. 

While I welcome the Minister’s comments today, I am putting down a marker. I would hope that, as a courtesy to both sides of the House, orders could be placed in time for them to be considered before they came into force. If the Committee wished to oppose them it could then do so without the complication of an order coming into effect and being unpicked later by the House. It is a matter of common courtesy to all Members to do that. As I said, Mr Turner, I may have done it myself on occasion in the past, but it does not stop it being a principle that I wish to raise now in opposition. 

The Minister mentioned that the order comes into effect in six or seven months’ time. What representations has he received from businesses selling or purchasing emissions allowances and what consultations did he undertake before laying the order? What information is he distributing to ensure that those who undertake emissions trading know about the order and have a clear understanding of what it does? Is the Treasury confident that the new directive as a whole is workable? Has he or his officials made any representations to the European Union about the enforceability and workability of the order? 

Is the Minister satisfied that the new EU directive is sufficient to combat fraud in this area? Could individuals find alternative ways to use the carbon emissions trading scheme to gain benefits for themselves that are illegal and avoid either taxation or other measures? If there are any technical breaches of the order—I do not think there will be—are there any wider penalties that could

be applied to companies that do not operate within the regime in the order? I welcome the order. We have no problems with it but I would be grateful for the Minister’s comments on those few points. 

2.36 pm 

Mr Gauke:  May I thank the right hon. Gentleman for welcoming the order and for his constructive comments? He highlighted the fact that the date of the order is 1 November, and it is understandable that he did so. He kindly acknowledged that this was an issue that he had faced himself as a Minister. It would be even more helpful if he could tell us what his response was at the time. None the less, let me have a stab at a similar type of response. He is absolutely right to make this point. This was our first opportunity for a slot to debate this. It is an order that requires an affirmative resolution. It has to be laid and made to take effect within 28 days. That is the customary position. He is also right to say that it comes into effect in seven months’ time. He makes a reasonable point, but it is customary in these circumstances that the debate does not always precede the date of the order. Of course, were the Committee to reject the order it would be withdrawn in good time before it affected anybody. His points have been noted. 

Mr Hanson:  I think he will find that that is the answer that I gave. 

Mr Gauke:  I am even more grateful to the right hon. Gentleman. I feel reassured by that. He asked about consultation on this. It is not always possible to consult on anti-fraud measures, but in this case, HMRC had informal discussions with business at the time the zero rate was introduced and business indicated that either a zero rate or a reverse charge would be an acceptable measure to stop the fraud. A zero rate was the only option available under domestic legislation at that time, but now that we are able to introduce a reverse charge we do not anticipate any complaints from business. Indeed, we have not had any representations from business suggesting that there is a change in their position on this. 

The right hon. Gentleman asked whether the new reverse charge would be enforceable and effective. It will be subject to the same VAT compliance and enforcement regime as all other aspects of VAT. Those businesses suspected of involvement with fraud are subject to active monitoring for compliance. That is a matter that HMRC takes very seriously. It has a civil and criminal intervention strategy to tackle MTIC fraud, which includes criminal prosecutions, preventing fraudsters joining the VAT register and denying input of businesses that know or should have known of the fraud. 

The right hon. Gentleman also asked about penalties for any technical breaches. Breaches of the reverse charge are subject to the penalties for incorrect VAT declarations, whether caused by error or carelessness or whether deliberate or deliberate with concealment. There are increasing penalties depending on those circumstances. HMRC will take a light touch with penalties in the first six months for technical breaches where the breach does not lead to a tax loss. Clearly that is something that we would monitor. 

On the subject of consultation and the information that has been provided to businesses, we have published the draft legislation. HMRC sent information direct to businesses and to trade bodies, so we believe that businesses are informed of this change. Do we think it is effective and are there other ways for fraudsters to benefit? HMRC and law enforcement agencies across the EU advised on the scope and effectiveness of a reverse charge. We are satisfied that for emissions allowances trade fraud it is an effective measure. Of course, we are keeping all these things under review. The potential for loss to the Exchequer of MTIC fraud, as it develops, is considerable and the Government will continue to look at it very closely. I hope that those comments are helpful and satisfy the Committee. I hope that the order can be agreed to this afternoon. 

Question put and agreed to.  

2.43 pm 

Committee rose