Cross-Border Tax Obstacles

The Committee consisted of the following Members:

Chair: †Hugh Bayley 

† Blackman, Bob (Harrow East) (Con) 

† Connarty, Michael (Linlithgow and East Falkirk) (Lab) 

† Duddridge, James (Lord Commissioner of Her Majesty's Treasury)  

† Garnier, Mark (Wyre Forest) (Con) 

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

† Hanson, Mr David (Delyn) (Lab) 

† Love, Mr Andrew (Edmonton) (Lab/Co-op) 

Michael, Alun (Cardiff South and Penarth) (Lab/Co-op) 

† Ollerenshaw, Eric (Lancaster and Fleetwood) (Con) 

† Smith, Henry (Crawley) (Con) 

Williams, Stephen (Bristol West) (LD) 

Wilson, Sammy (East Antrim) (DUP) 

† Wright, David (Telford) (Lab) 

Alison Groves, Committee Clerk

† attended the Committee

European Committee B 

Monday 4 April 2011  

[Hugh Bayley in the Chair] 

Cross-Border Tax Obstacles 

[Relevant Document: European Scrutiny Committee, 16th report of Session 2010-11, HC 428-xiv, chapter 3.]  

4.30 pm 

The Chair:  Does the member of the European Scrutiny Committee wish to make a statement? 

Henry Smith (Crawley) (Con):  Thank you very much, Mr Bayley. It is a privilege to serve under your chairmanship. It might be helpful if, as a member of the European Scrutiny Committee, I take a few moments to explain the background to the document and the reasons why the Committee have recommended it for debate. Among other matters, the Europe 2020 strategy emphasises the importance of empowering European Union citizens to play a full part in the single market. The Commission’s “EU Citizenship Report 2010: Dismantling the obstacles to EU citizens’ rights”, and its communication on the Single European Act both identified several cross-border taxation issues that the Commission believes pose a barrier to EU citizens operating in the single market. 

In the communication for debate, the Commission identifies what it perceives to be the most pressing cross-border tax problems that EU citizens face and outlines possible solutions. Several of the tax obstacles the Commission highlights are those it has previously identified in the two earlier communications. The present communication is accompanied by a staff working document that provides more detail of instruments available to citizens for resolving cross-border tax obstacles, and of previous instances where the Commission believes that member states’ tax laws have been in conflict with EU law and have caused problems for citizens in cross-border situations. 

The European Scrutiny Committee has commented that the communication deals, obviously, with the important issue of cross-border taxation and touches on potentially troublesome matters. It also noted that it is a discussion document and that the Government are taking a robust stance on a potential encroachment on national tax sovereignty. Nevertheless, it recommended the document for debate so that members of the Committee can reinforce the need to avoid any encroachment on national tax sovereignty, which, of course, my hon. Friend the Minister has outlined as the Government’s position elsewhere. 

The Chair:  I call the Minister to make the opening statement. 

4.33 pm 

The Exchequer Secretary to the Treasury (Mr David Gauke):  It is a great pleasure to serve under your chairmanship, Mr Bayley. I thank my hon. Friend the Member for Crawley for his introduction, and I am

pleased to have the opportunity to discuss the Government’s policy on the European Commission documents. The communication before the Committee sets out the Commission’s views on some of the cross-border tax obstacles that European citizens face and suggests possible solutions, and an accompanying working document provides greater detail on the instruments available to EU citizens for resolving cross-border tax obstacles. The working document also gives instances where the Commission believes that the member states’ tax laws are in conflict with EU law and have caused problems for citizens in cross-border situations. 

I am conscious that the Committee has particular worries about the communication’s possible implications for tax sovereignty, and I intend to deal with those in due course. However, I wish first to put the documents in their broader context. The communication is one element of the European Commission’s wider agenda to tackle potential obstacles to the single market. The Government believe that improving the functioning of the single market is key to encouraging growth and job creation throughout Europe. Ensuring that the single market works for citizens is a key part of this. It is clearly in the Government’s interests that United Kingdom citizens and businesses be able to reap the benefits of the single market, but on this matter—the taxation of citizens—it is not clear that action has to be taken at an EU level. 

The UK already seeks to ensure that we minimise cross-border tax obstacles. For example, we remain committed to tackling double taxation on cross-border transactions. For that purpose, the UK has an extensive network of tax treaties, which is reviewed regularly and updated. This includes tax treaties with all other member states. The Government are also committed to simplifying the tax system not only domestically but for all UK taxpayers with tax affairs in other EU member states. We are committed to making the single market work for citizens, so we have expressed our willingness to engage with the Commission on the issues outlined in its communication. As part of that, we will consider the details of any future communications or proposals on specific aspects of cross-border taxation that it brings forward. We will also take on board the views of the European Scrutiny Committee when setting out our positions. 

We certainly welcome one aspect of the communication: the Commission’s focus on ensuring that all EU citizens have access to clear and timely information and advice on tax-related issues. That is consistent with the coalition Government’s broader commitment to the promotion of greater transparency when setting domestic tax policy. However, we are not convinced that there is a strong single-market case for taking action at EU level on the issues identified in the Commission’s communication. We will use our ongoing engagement with the Commission to question any assumption that, in such policy areas, a European solution is necessary or appropriate. As with any EU initiative, the Government want any proposal for EU-level action in those areas to be based on evidence that clearly demonstrates where variations in tax policy give rise to significant obstacles that cannot be dealt with effectively by existing agreements between EU member states, bilateral agreements and countries’ unilateral relief arrangements. 

Many of the issues covered in the communication lack the evidence needed to make a strong case for European intervention. In some cases, such as car registration taxes, the issues addressed in the communication are not relevant to the UK. In other areas, such as income tax and taxes relating to property, applicable reliefs or exemptions are generally available to citizens throughout the EU. For that reason, such elements of the UK tax system are not significant obstacles to EU citizens operating across national borders. I stress that many of the infringements highlighted by the Commission did not affect the UK. Furthermore, in areas where we recognise that a risk exists that citizens might be adversely affected, such as double taxation, we are confident that existing mechanisms provide an acceptable solution. 

We do not want to see the Commission rush to propose any legislative initiatives in those policy areas. In fact, we should be clear that, even in cases where EU action might be appropriate, that does not necessarily mean that a legislative solution is required. The Commission has suggested that varying levels of co-ordination and co-operation between member states might be appropriate to address issues such as double taxation and incompatibilities with different tax systems. Although the communication does not detail what that might involve, the Government believe that informal member state co-ordination between countries is a better means of addressing that type of cross-border tax issue. 

Finally, I want to address tax sovereignty, which the European Scrutiny Committee highlighted in its report. The communication is a discussion document; it makes no legislative proposals. As the Committee is aware, many issues addressed in the communication relate to direct taxation. The Commission could bring forward proposals in those areas, for legislative or non-legislative action, if it believes they are necessary for the functioning of the single market. However, the Government have made it clear that we remain of the view that direct taxation falls primarily within the competence of member states. As tax matters, the Government also expect decisions on such matters to be subject to unanimity, and we will press for that to be the case. 

Let us be clear that we are committed to upholding tax sovereignty and subsidiarity. It is important that member states have the flexibility to shape their own tax policy to suit their economic circumstances and to compete in a global environment. We will consider any proposal from the Commission in that light. Meanwhile, we will continue to engage with the Commission as that work develops. We will ensure that the European Scrutiny Committee is updated on those developments, and we will give it the opportunity to scrutinise the legislative proposals if and when they emerge. 

The Chair:  We now have until 5.30 pm for questions to the Minister. As the document is detailed and “techie”, it makes sense to allow Members to ask a question and several supplementaries if they so wish. Although Members can indicate at any stage that they wish to ask a question, it would be helpful if they gave me a feel now of how many are thinking at this stage of doing so. 

Mr David Hanson (Delyn) (Lab):  It is a pleasure to serve under your chairmanship, Mr Bayley. 

The Minister will be relieved to know that the Opposition broadly support his approach. It is our view that direct taxation is formed primarily at the behest of the national

Parliament of each member state, and that is a matter of principle we will stick to. The document does give rise, however, to some issues that I want to press the Minister on. 

First, the Minister says in paragraph 7 of the explanatory memorandum that the Commission 

“will actively pursue citizens’ complaints about Member States”. 

Is he aware of any complaints being made against the UK tax system by citizens of the EU, and how do we compare with other countries on such complaint issues? 

The Chair:  Order. It might make sense and be easier for the Committee if questions were asked one at a time. 

Mr Gauke:  All member states will have questions raised from time to time. It is worth highlighting that complaints about taxation constitute only 3% to 4% of all the complaints the Commission receives about the operation of the single market. There are some issues that perhaps do not apply to the UK, such as car registrations, which I have mentioned. Given that—with the exception of Northern Ireland’s border with the Republic of Ireland—we do not have land borders with other EU member states, some of the complaints do not necessarily apply to us. There is an issue, under inheritance tax rules, about the treatment of non-UK-domiciled spouses, and complaints have certainly been made about that. 

It is difficult for me to give a comprehensive answer to the right hon. Gentleman, who asks a perfectly fair question. There is no particular evidence to suggest that the UK has more complaints in this area than most other member states, but complaints are obviously made from time to time. He will be aware that considerable litigation has gone to the European Court of Justice on various matters under the single-market regime over many years. 

Mr Hanson:  I turn to my second question—I have four questions only, Mr Bayley, so I hope this will not be too onerous for the Minister. Is he aware of any current UK tax legislation that the Commission is monitoring? Has it suggested that any such legislation is incompatible with EU law? 

Mr Gauke:  Such matters do arise from time to time. Last autumn, the right hon. Gentleman and I served on the Committee that considered the Finance Bill, in which some changes were made as a consequence of the fear of infraction proceedings. The UK Government will, where we have a strong case, seek to resist any infraction proceedings, and we are in correspondence with the Commission on a range of matters. Obviously, from time to time we take the view that it is necessary for us to reform our laws to reflect concerns about compatibility with EU law; that is not a new matter. We will of course continue to defend the UK system robustly from challenges where we believe that our interpretation is correct. 

Mr Hanson:  On value added tax, will the Minister give me an assurance that there will be no changes to the system that currently ensures that children’s clothes, books and food are exempt? There is a difference of opinion within EU member states on that issue, and I

want the Minister to ensure that we retain the power to levy VAT at the level we choose, rather than its being chosen by colleagues in Europe. 

Mr Gauke:  I am grateful for the right hon. Gentleman’s question. He will be aware that the Chancellor made commitments in last year’s Budget about not seeking to extend VAT to essential items, including food. That remains our position, and we will protect those zero-rates. They are fully safeguarded under existing EU agreements. EU VAT matters are subject to unanimous agreement and are therefore protected by the UK’s right of veto. The right hon. Gentleman is right that VAT is governed by EU law and directives, and that restricts flexibility, unless we obtain a derogation. A good example is that a reduction in the rate of VAT on road fuel could only be achieved by a derogation, which we believe would be highly unlikely. However, we do have the option of reducing fuel duty, and I am pleased that the Government took the opportunity to do so in the last Budget. That is a more effective way of reducing the tax burden on motorists than a lengthy, and probably fruitless, attempt to reduce the rate of VAT on road fuel. 

Mr Hanson:  In the Minister’s explanatory memorandum he has placed time scales on items 8 i, ii and iii. However, there are no time scales on items 4 and 5, which relate to passenger car taxation—an issue he has mentioned—and to the responses to the green paper on the future of VAT, including the one-stop shop concept. Why has he placed time scales on the former but not the latter; and if they do in fact exist, what are they? 

Mr Gauke:  Again, I am grateful for that question. It is not possible to provide with the necessary degree of confidence and certainty time scales for the items that the right hon. Gentleman highlights. I will write to him with further details when we are able to assess the likely time scales. 

Mr Hanson:  The Minister has said he will report back to the Committee, but I would be grateful if he said when, how and in what form. Although we have a broadly shared objective, I would still welcome an assurance on when he expects the response to the Commission’s document to be completed and the discussions undertaken. When will the position be sufficiently finalised to be reported to the Committee? 

Mr Gauke:  The Committee will be aware that I contacted the European Scrutiny Committee through an explanatory memorandum in January. This Government will continue to respond, as did the previous Government, as and when appropriate. 

To return to an earlier question, perhaps I can provide clarity on the point the right hon. Gentleman raised about paragraph 8. The Commission has given no time scale for car taxation, so it is not possible to provide one. The deadline for the consultation on the VAT green paper is 31 May 2011. I hope that is clear. 

As I said, we will inform the European Scrutiny Committee of our thoughts as and when appropriate. We endeavour to be as informative as possible, and to

notify the Committee in a timely manner. It will depend how matters develop with the Commission. However, I can assure the Committee that we will continue to inform it through explanatory memorandums as appropriate. 

Michael Connarty (Linlithgow and East Falkirk) (Lab):  I am pleased to serve under your chairmanship, Mr Bayley. I will not tempt the Minister to give details at the moment, but I hope he will in future give specific details of the infraction proceedings and what we are being challenged on, so that the European Scrutiny Committee is aware of where the difficulty lies. 

My concern is the problem of taxation bleeding into social security. Social security is not a matter that is controlled by unanimity. The document refers to cross-border pension taxation. People will recall the shock to the system when it looked like France was about to deny expatriate Brits full access to the health service. Given that the Government have just declared their intention to merge national insurance and taxation contributions, how are they going to ring-fence the social security element of national insurance, should they actually do so? 

Mr Gauke:  First, I thank the hon. Gentleman for his comments on infraction proceedings. I will see what information we can provide to the European Scrutiny Committee, of which he was the Chairman in the last Parliament, serving with much distinction. I will see what we can do to provide as full and up-to-date information as possible. 

I will state the Government’s position on income tax and national insurance contributions. We announced in the Budget that we will begin a process to see whether it is possible to merge the operation of national insurance contributions and income tax, the desire being to improve the administration of the tax system and make it simpler for employers. However, we recognise the value of the contributory principle. 

We are not talking about the full abolition of national insurance contributions; those will continue. However, the hon. Gentleman raises an important and significant point of detail, in that we have to take into account the different regimes that exist at the European level for a social security contribution as opposed to a direct tax. We recognise that, and the Treasury and Her Majesty’s Revenue and Customs are working on a consultation document, to be published later this year, setting out how we intend to proceed and looking at whether we can merge the operations. Let me make it clear that we are not talking about the full-scale abolition of national insurance contributions. 

Michael Connarty:  I have a minor request of the Minister. Will he assure me that the document that has been worked up will look in detail at the Europe-wide implications of any possible changes? Expats working in the EU are worried that they may lose their social security rights and particularly health provision if we get it wrong. 

Mr Gauke:  The hon. Gentleman is absolutely right to highlight that issue. It is one of the reasons why we believe that reform in this area is best achieved in a

deliberative and consultative manner. That will enable us to bring out such issues, which are important and may have a significant impact on a large number of people. The Treasury and HMRC are well aware of the issue, and we can examine it in the consultation document that will be published later this year, and more fully over the course of the consultation, to ensure that there are no unintended consequences. It is worth pointing out that social security is not harmonised at the European level. 

The hon. Gentleman brings great expertise to the matter and he is right to highlight that we need at least to recognise the possible complications at EU level, of which we are aware. 

Resolved ,  

That the Committee takes note of European Union Document No. 5037/11 and Addendum, relating to the Commission Communication on Removing cross-border tax obstacles for EU citizens; recognises the Government’s continuing commitment to strengthening the single market while upholding the principles of tax sovereignty and subsidiarity; shares the Government’s view that any resulting legislative proposals should be examined carefully for their implications for UK tax policy and competence; and supports the Government’s position that decisions on tax proposals within the EU should be subject to unanimity.—(Mr Gauke.)  

4.53 pm 

Committee rose.