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.