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