Publications on the internet
Finance (No.2) Bill
|©Parliamentary copyright||Prepared 27th October 2010|
Publications on the internet
Finance (No.2) Bill
Finance (No. 2) Bill
The Committee consisted of the following Members:
Simon Patrick, Committee Clerk
† attended the Committee
Chris Leslie (Nottingham East) (Lab/Co-op): Good afternoon, Mr Caton. It is a pleasure to be back in business talking about the non-business use of business assets. Clause 19 has a series of reforms to tax law, which are complex and important in their impact.
It might be relevant to note that as we stand here talking about the Lennartz accounting procedure in respect of value added tax and other changes, my right hon. Friend the Member for Delyn, who would normally be here considering these particular measures, is on his feet in the Chamber talking about the Government’s proposal to remove vital money from pregnant women as they try their best to stay healthy. It is a shameful measure. Unfortunately, I am unable to attend the Chamber. However, I know that my colleagues on the Labour Front Bench are aware of my support as they valiantly try to rebut the worst excesses of the Administration’s nasty policy approach.
The clause seeks to amend the Value Added Tax Act 1994 to implement a set of changes that have become necessary as a result of European Union legislation in the form of technical directives. Government Members are always keen and punctilious when the European Union speaks; they immediately legislate to correct British law as a consequence. It is a hallmark of their politics and the clause is understandable, given their attitude to the European Union.
Under the clause, the current exemption, known as the Lennartz accounting mechanism, removes taxpayers’ ability to reclaim VAT paid on expenditure on land and property, such that it might be used for non-business or private purposes. Under the arrangement set out in the directive, the changes in the clause will remove the ability to use the current Lennartz accounting arrangements for ships and aircraft.
The use of Lennartz accounting for those assets is replaced by the ability of the taxpayer to adjust for subsequent changes in private use under the capital goods scheme—a related minor change to other parts of the 1994 Act—bringing the rules relating to the recovery of VAT on directors’ accommodation into line with European Union law and a set of other arrangements
As I understand it, the Lennartz arrangement enables a buyer to use assets for both business and non-business purposes, and to claim the input tax in full when the asset is purchased. It enables the buyer then to pay an amount of output tax—VAT, in this case—to relate to that non-business use at the point either of disposal or later, at a given point in time.
My understanding of the European Court of Justice decision, which was subsequently taken up in the EU Council directive, was that there was a suggestion that the United Kingdom and Her Majesty’s Revenue and Customs were not applying the arrangement correctly, that there was an excessive use of the arrangement within the UK and that therefore a change needed to be made to it.
Members of the Committee might not themselves have used a Lennartz arrangement for their own business and non-business purposes. If that were the case, I would have declared an interest. However, given that we are talking about rather wealthy individuals—those who purchase ships, aircraft or yachts—they might be more familiar with such practices than certainly my constituents would be.
However, it is important that we take the opportunity to correct the lacuna that might exist in the Bill. The clause probably attempts to do that, but several other policy changes were highlighted in the discussion on the directive that have given rise to an interesting set of questions. For example, let us consider the extent to which many taxpayers were wrongly allowed to use the Lennartz accounting arrangement and whether the Bill ensures that, when those taxpayers choose not to unravel those arrangements, there will be some obligation on them to continue to account for VAT thereafter.
The extent to which we should seek retrospectivity within our legislation is something that I have raised before in Committee. I am interested to know whether the Minister can explain the provisions in the clause that seem to ensure that the obligation to make those payments has always had effect, and that it should be treated as having always been in place. What studies have been done about the effect of that particular provision? Current legislation on the recovery of value added tax on a director’s accommodation becomes redundant, for example, as the directive and related European case law ensure that there is no entitlement to VAT recovery on the private use of such accommodation. I understand that the law in respect of those arrangements is due to be amended under the clause.
What assessment have the Minister’s officials made of the effect of removing the Lennartz form of accounting for businesses that might be affected by the change? There might be a difference in the case of those individuals who seek to use that particular accounting device, but then businesses might have a legitimate use for doing so. Has a regulatory impact assessment been made of that particular change because it could be both complex and burdensome for businesses making such changes?
Has the hon. Gentleman received many representations from external bodies advocating this particular set of cases? Was it a product of a set of tax working groups
Finally, it is my understanding that the Treasury will consider claims from taxpayers who have already entered into binding commitments for projects on the understanding that the Lennartz accounting arrangement will be available. Will the Minister say whether that is indeed the case and tell us how HMRC might deal with the issue? I have made a number of points, but in general we support the intentions behind clause 19.
The Exchequer Secretary to the Treasury (Mr David Gauke): It is a great pleasure, Mr Caton, to serve under your chairmanship once again. Clause 19 implements part of the EU VAT technical directive. As we have heard from the hon. Member for Nottingham East, for assets such as land, property, ships and aircraft, it ensures that the taxpayer reclaims VAT only to the extent that the asset is used for business purposes. Schedule 8 protects revenue at risk following a European Court of Justice decision.
By way of background, I should say that currently a taxpayer can recover all the VAT on the cost of an asset, even if the asset is used partly for private purposes. Over subsequent years, the taxpayer pays VAT back to the Exchequer in respect of its private use. That is known as Lennartz accounting, from the ECJ case of the same name, which allowed VAT recovery on private use of the asset.
Lennartz accounting gives taxpayers a cash-flow benefit by allowing them to claim all the VAT on the cost of the asset up front. Following representations from a number of European member states, including the UK, the technical directive was agreed. Lennartz accounting has been an area in which there have been considerable changes over the past few years, following high-profile ECJ decisions and a number of avoidance issues. The UK therefore supported the case for change.
Clause 19 and schedule 8 will mean that, from 1 January next year, up-front VAT recovery on the cost of land, property, ships and aircraft will be limited to business use, with no recovery for private use. To help ensure a fair recovery of VAT over the life of the asset, the clause provides the basis for an adjustment mechanism to take account of changes in use. That will also be implemented at the same time by secondary legislation. HMRC has been working closely with external stakeholders to design an adjustment mechanism that meets business needs.
As well as implementing the EU VAT technical directive, these changes also protect revenue at risk following an ECJ decision—a Dutch case known as VNLTO. I shall attempt to help the Committee by giving the name in full: it is Vereniging Noordelijke Land—en Tuinbouw Organisatie.
Mr Gauke: The answer is no. The hon. Gentleman will be aware that that decision confirmed that many taxpayers in the UK have been wrongly using Lennartz accounting. To ensure that taxpayers do not attempt to use the decision unfairly, the changes ensure that those who have already benefited from the up-front VAT recovery afforded by Lennartz accounting continue to pay the VAT due back to the Exchequer.
The hon. Gentleman asked a number of questions, and I will try to deal with them. First, he highlighted that part of this legislation is seen to be retrospective. It is worth pointing out that the revenue protection element of the legislation ensures that VAT due under existing Lennartz accounting arrangements is protected and paid to the Exchequer. These rules simply maintain the status quo and are deemed to have always been in effect. That ensures that taxpayers who embarked on Lennartz accounting arrangements before the change of policy in January 2010 continue to pay VAT that is due back to the Exchequer. Such taxpayers, having benefited from generous VAT recovery, should not be able unfairly to avoid paying VAT that would otherwise be due as a consequence of the VNLTO case. To answer a point of information, I should say that the decision in that case was delivered in 2009, while the case was listed in 2007.
The hon. Gentleman also asked about how businesses will be affected, whether there has been consultation on that matter and whether an impact assessment has been prepared for the measure. HMRC has been consulting on the detail of the changes, which will be contained in secondary legislation. Until that detail has been finalised, it is not possible to quantify costs and benefits and, therefore, to prepare an impact assessment.
A full impact assessment is expected to be published on the implementation of the secondary legislation, which is likely to be made and laid in December. HMRC has consulted us informally on the relevant part of the EU VAT technical directive. There was general acceptance of the proposed changes. HMRC continues to discuss the implementing regulations with external stakeholders and the representative bodies. I understand that, to date, there has been positive engagement and enthusiasm for simplifying the rules for the new adjustment mechanism.
The adjustment mechanism will cater for changes in business use over the economic life of the asset, and, as I said, it will be introduced by secondary legislation. It will operate as part of the existing capital goods scheme, so taxpayers do not have to deal with two separate adjustment mechanisms. That will ensure overall a fairer covering of VAT on costs that take into account the use of the asset over the economic life.
Finally, there is a minor related technical amendment, deleting current law on VAT recovery for directors’ accommodation, which is now no longer necessary as a result of the other changes in this measure. Overall, clause 19 and schedule 8 ensure that VAT is recovered fairly and only in respect of business use. I therefore urge the Committee to allow the clause to stand part of the Bill.
Mr David Hanson (Delyn) (Lab): Welcome back to the Chair, Mr Caton. It is a wonderful experience to finish here having also been on the Floor of the House. We discussed the problems associated with that in the programme motion debate, but it worked out well in the end; we have been seamlessly transferred from the Floor of the House to the Committee Room. I am pleased to say that we have no objections to clause 20, and I am happy for the Minister to allow it to progress.
Mr Gauke: It is a pleasure to welcome back the right hon. Gentleman from the Chamber. I am grateful for his remarks. This should not be a contentious matter. Essentially, clause 20 implements the changes required to comply with the EU technical directive. The remainder of the changes required by the directive will be introduced by statutory instrument later in the year. This is a measure that relates to the wholesale supplies of natural gas. UK businesses welcomed both the introduction of the rules and the current changes.
Mr Hanson: Clause 21 amends group 8 of schedule 8 to the Value Added Tax Act 1994. The amendment changes the criteria for zero-rating supplies of aircraft and associated supplies. We broadly welcome the clause and have no problems with it, so we will not be pushing the Committee to a Division.
None the less, I have some quick questions to ask the Minister to clarify a couple of points. The current definition of a qualifying aircraft also extends to supplies made to state institutions, and that is preserved. What discussions has the Treasury had with suppliers of aircraft and of parts and services for aircraft and aircraft operators as part of the consultation on this piece of legislation? Has the Minister received any representations from individuals on this issue? What assessment has he made of the financial implications of this change for the aviation sector in the United Kingdom as a whole?
Again, we have no great difficulty with the clause. As has been indicated, we are, through EU law, requiring zero-rating on supplies of aircraft used by airlines operating for reward chiefly on international routes. The relief extends to supplies of parts and equipment for such aircraft and for certain services such as repair or maintenance. I wish to know whether the Minister has had any representations and to hear from him about the points I have made in discussing the clause.
Clause 21 makes changes to the conditions that must be met before supplies of aircraft can be made at the zero rate of VAT. It also covers supplies of parts and equipment for such aircraft and certain services such as repair and maintenance.
We are required to apply the zero rate of VAT to a number of supplies connected with international transport, including supplies of aircraft used by airlines operating for reward chiefly on international routes. UK law applies the relief based on the aircraft’s weight and design by way of a proxy for the EU criterion, rather than by direct reference to the user of the aircraft. While that broadly achieves the intention of EU law, as international carriers tend to operate large aircraft, there is a mismatch at the edges. For example, purely domestic airlines also benefit from the zero rate, provided that their aircraft meet the weight test.
The scope of the UK zero rate currently also includes supplies of aircraft made to state institutions, such as the Ministry of Defence, as the right hon. Gentleman has pointed out. The zero rate in respect of those supplies remains unaffected by the proposed changes.
Therefore, there will in future be two categories of supply that might be zero-rated: supplies of aircraft to airlines operating internationally, regardless of the weight; and existing zero-rated supplies of aircraft to state institutions. Although supplies to airlines operating chiefly on domestic routes, to non-airline businesses for corporate use or to individuals will now be standard rated, businesses normally entitled to recover VAT will be able to recover the tax charge under the normal rules.
The right hon. Gentleman asked about discussions with the industry and what help it is being provided with to cope with the change. HMRC officials met with industry representatives in August 2009 to discuss the changes, followed by an informal consultation between 1 October and 30 November 2009, to establish the impact on the various parts of the industry and to help determine workable solutions to any problems. In May 2010, HMRC produced draft guidance that it shared with the industry. Following feedback and a further meeting, revised guidance was circulated to representative bodies in June 2010.
It might also be worth highlighting that the measure is likely to affect a limited number of supplies—to low hundreds of businesses—as in most cases the status of the airline will be self-evident, as most contracts are with regular suppliers.
Mr Hanson: Clause 22 also amends group 8 in schedule 8 to the Value Added Tax Act 1994 to update the status of the provider of a zero-rated passenger transport service that operates in connection with the supply of
Unlike with the previous two clauses, which were passed without controversy and on which I received no representations from the industry in my capacity as an Opposition spokesman, I have received some comments from bodies in connection with clause 22. It is important that we examine those concerns, given that that is the purpose of such a Committee, and that the Minister at least places on record his response to them.
The main representation we have received is a note from the Chartered Institute of Taxation, a copy of which I am sure the Minister will have seen. The institute’s submission to HMRC at the time of the consultation—the note is dated 3 September 2010—states that it has concerns arising from the fact that the clause is too widely drafted. It states that the clause could
It emphasises that it is only the terms that might impact on the ability of firms other than the universal service provider to compete that are taken into account. I would welcome the Minister’s response to those concerns.
Secondly, the Chartered Institute of Taxation has raised the issue that disputes could arise between taxpayers, who might take the view that a service was freely negotiated, and the post office, which considers that it was not and that it is therefore within the exemption. Again, it is important that we consider that particular point, which is made in the letter of 3 September from the Chartered Institute of Taxation. The institute says that the emphasis should be on ensuring that the Bill is as clear as possible. Although we have not tabled amendments to the clause, this is an appropriate moment for the Minister to give clarity on those particular points made by the Chartered Institute of Taxation.
Aside from the letter of 3 September sent to Ms Jane Hyde of HMRC, I would welcome the Minister’s view about what impact assessment the Treasury has carried out on the impact of the clause on Royal Mail’s customers who are purchasing the relevant services and will now have to pay VAT. That might be referred to in the documentation, but given that I have been flitting between the Chamber and Committee, I have not noticed whether that is the case. I would welcome some consideration of whether a proper impact assessment has been undertaken and what its outcome was.
This is a speculative comment, because the House will shortly consider plans on the full privatisation of Royal Mail, but I wish to clarify whether the clause is fully provided for in the event of both Houses agreeing to the further privatisation of Royal Mail in the future. Will the clause have any impact on the current and future status of Royal Mail?
Subsection (1) sets out that a universal service provider is defined within the meaning of the Postal Services Act 2000. I expect that that Act will be changed as a result of the Postal Services Bill, which the House will consider shortly. I want to clarify whether the clause and any future changes to legislation will be compatible. Obviously, the Opposition will take a very strong and robust view on the Postal Services Bill. However, I wish to know what consideration the Minister has given to the issue, because a number of matters relating to the universal service provision, which is referred to in the clause, require at least some consideration by him. I would welcome him referring to the points raised in the letter I mentioned, as well as his comments on the impact assessment and, indeed, on the Postal Services Bill.
Mr Gauke: As we have heard, clause 22 amends the existing VAT legislation in relation to supplies of postal services by Royal Mail to remove some of its services from exemption. It also amends the law relating to zero-rated passenger transport services made by Royal Mail by replacing an obsolete reference to the Post Office company. Royal Mail, as the only public postal service provider in the UK, has historically been eligible to exempt from VAT all its postal services, including those provided by any of its wholly-owned subsidiaries. However, postal services provided by other postal operators, both before and after full deregulation of the postal sector in the UK on 1 January 2006, are liable to VAT at the standard rate.
Following a challenge from one of Royal Mail’s competitors, the European Court of Justice confirmed in April 2009 that Royal Mail, as the operator providing the public postal service, is the only body in the UK that is eligible to exempt postal services from VAT. In drawing that conclusion, the Court recognised that many of Royal Mail’s services are subject to regulatory conditions and requirements that have been imposed only on Royal Mail under the terms of its licence, and not on any other postal operator.
I want to pick up the point that my right hon. Friend the Member for Delyn made about the Postal Services Bill. There has been speculation that TNT or Deutsche Post could take over the running of the Royal Mail through a wholesale privatisation of the service. What effect would that have on the European Court of Justice’s judgment, and did the Government take legal advice in advance of the Bill’s Second Reading tomorrow?
Mr Gauke: The right hon. Member for Delyn also made several points about the Postal Services Bill. I am sure that you will be pleased to hear, Mr Caton, that I have no intention of opening a debate on that Bill this evening. Many hon. Members will recall that Lord Mandelson pushed forward such proposals not so long ago, albeit sadly without achieving much. Provisions for the universal service provider exist in other European member states, and there is an opportunity for zero-rated arrangements in those areas. We anticipate that that will be the case, even if there is a change in structure.
The matter is not directly relevant to these changes, but there is no reason why the clause could not be implemented in law. If there is a need to examine the matter again, we will have to do that on a case-by-case basis, depending on the circumstances and arrangements. However, for example, there is no reason why the fact that VAT is not payable on stamps should change where there is a universal service obligation on Royal Mail.
It is worth pointing out that Royal Mail operates under a significantly different legal regime from that of its competitors, but the European Court of Justice ruled that the exemption does not apply to supplies made by Royal Mail for which the terms have been individually negotiated, or which can be dissociated from the service of the public interest. The Court’s ruling means that the exemption for postal services must be applied on a narrower basis, and the clause applies that from 31 January 2011. That date reflects the need to regularise the position as soon as possible while giving Royal Mail sufficient time to make the necessary IT changes.
Most of Royal Mail’s services will remain free of VAT, including stamps and normal deliveries—so-called social mail—so private individuals will be largely unaffected. Those services provided by Royal Mail that are not subject to price and regulatory control in the public interest, or which are individually negotiated, will become liable to VAT at the standard rate. The principal services affected are Parcelforce, door-to-door mail—that is unaddressed mail—Mailroom and other contract services. The customers who will be primarily affected will be those businesses and other bodies that purchase the affected services from Royal Mail and are unable to reclaim all the additional VAT incurred. The Government have consulted Royal Mail, as the sole provider of the affected services, as well as the Postal Services Commission and representatives of the private postal markets.
The Government are mindful of the possible impact of proposed changes to the regulatory framework for postal services and have noted the comments made in response to the consultation, including by private operators. We will therefore review the VAT legislation in mid-2011, in line with any changes being made to the regulatory framework, and take action as appropriate to ensure that it supports the development of a fully competitive postal services market.
The right hon. Member for Delyn mentioned disputes arising over the application of the exemption. We will consider those case by case, but do not expect minor changes to affect the exemption. He also asked whether the exemption was too widely drafted and whether it would be a barrier to competition. VAT not being a barrier to competition is the key to the development of the postal services industry. We will continue to keep the VAT position under review as the regulatory framework develops, as I have mentioned.
Retaining certain services within the exemption, pending their deregulation by the market regulator, is consistent with the court’s decision and ensures that the VAT treatment does not give rise to any unwelcome distortive effects.
I was asked whether there was an impact assessment—there is not. It is normal practice to publish an impact assessment on significant policy changes, but this is a
I should like to say a word about Postbus. The clause also amends the law relating to the zero-rating of passenger transport by Royal Mail to replace an obsolete reference to the Post Office company with the designation “universal service provider”. In practice, zero-rating applies to Postbus, which is a rural bus service that Royal Mail provides in conjunction with its postal services. The scope of the zero rate remains unchanged as a result of the amendment.
Chris Evans: I return again to the Postal Services Bill, in which it is proposed that Post Office Ltd and the Royal Mail should be separate companies, with Royal Mail being privatised and the Post Office remaining—there are suggestions that it could be run as a mutual or remain in public hands. If the proposal goes through, will it have any effect on the clause?
Mr Hanson: The clause changes section 4 of the Tobacco Products Duty Act 1979 and is designed to change the process for calculating duty on long cigarettes. The changes come into force at on 1 January 2011. Again, I welcome the measure, which was previously introduced by the Labour Government as a technical change to tackle tax avoidance. I have no problems with the clause. I just want to test the Minister on a number of issues.
First, the proposal sets the taxation changes for substitution, to ensure that long cigarettes are 8 cm long, rather than 9 cm, as in the 1979 Act. Further changes set out in paragraph (1)(b) deal with each 3 cm portion of the remainder of a cigarette being taxed at a different rate. Would the Minister give us some idea why he chose those figures? The average length of a cigarette, excluding the filter, is about 6 cm, so why was 8 cm chosen, rather than, say, 7 cm? I accept that there would be a rise in taxation, but why did he choose 8 cm per cigarette? Why have 3 cm on top of the 8 cm, which effectively equates to another cigarette? What criteria did the Treasury use? Why not 2 cm, or 4 cm? Those figures represent material changes and differences on
Mr Hanson: I would be interested to hear what the hon. Gentleman’s interest is. If he is a smoker, the bottom line is that he should give up—[ Interruption. ] Indeed, he should follow the Deputy Prime Minister’s example and try to give up.
The point is that the measure was introduced by the previous Labour Government, and I am pleased that the Minister has taken it up, because we were concerned that people could effectively pay less tax on cigarettes. Once the larger cigarettes are in the country, they could be removed to form other cigarettes, which could then be sold on without tax having been paid. The average length of a cigarette, excluding the filter, is currently around 6 cm. The figure that was used previously was 9 cm, and the Minister has chosen 8 cm. He could have chosen 7 cm, so why did he choose 8 cm? A larger cigarette is in fact larger than the average length of 6 cm, at 7 cm. What was the rationale behind that decision?
Alec Shelbrooke (Elmet and Rothwell) (Con): I am slightly confused about what you are trying to drive at here. Are you talking about the taxation for Joe Public going to the shop, or about taxation for wholesalers moving cigarettes around? Your last comment confused me slightly, although that could be my ignorance.
Mr Hanson: I will try to help the hon. Gentleman, as I am sure will the Minister in due course. I am talking about a tax-avoidance measure. People were bringing into the country cigarettes that were longer than the average size of 6 cm. That is a way of avoiding tax, because they could bring in 12 cm cigarettes, cut them in half and effectively have two cigarettes for every one for which they had paid tax. The previous legislation, the Tobacco Products Duty Act 1979, gave the figure of 9 cm, which would equate to two cigarettes, so if someone came in with a cigarette that was 10 cm long, it would be taxed as two cigarettes, rather than one. The Bill will reduce the 9 cm figure to 8 cm. If we are trying to prevent people from bringing in more tobacco and claiming that it is one cigarette when in fact it can be chopped down to make two, what is the rationale for choosing 8 cm, rather than 7 cm, which is an alternative figure?
Charlie Elphicke: I put it to the right hon. Gentleman that one of the biggest problems with cigarettes is the tax differential. In the UK they are taxed very highly, but in many places on the continent they are taxed at aMr Hanson: I accept that the hon. Gentleman is speaking up for his hard-working constituents. He makes an interesting point about differential tax rates across the European Union, but that is not the subject of today’s debate. The key point is that EU directive 95/59 obliges EU member states to supply a specific quantity-based duty on cigarettes, levied at an amount per 1,000 cigarettes. A tax-avoidance measure has come to light, and the Minister is introducing a provision today to change that in cases where over-long cigarettes are manufactured in the expectation that consumers will cut them into two or more cigarettes before smoking them, because that has the effect of halving the amount of duty paid.
I have no objection to the tax-avoidance measure, but I would have tested the Minister. I tried to table an amendment, but it was ruled out of order because it raised the duty, quite rightly, by reducing the length to 7 cm. Perhaps the Minister will give me a justification for the figure of 8 cm, rather than 7 cm. Similarly, as I have mentioned, clause 23(1)(b) states that each 3 cm portion of the remainder of the cigarette shall be deemed an additional cigarette. Again, if we are trying to avoid taxation, there is an argument to look at reducing that figure further. The whole purpose is to ensure that people pay duty on their 1,000 cigarettes at the agreed rate of duty. If, for example, we reduced the 3 cm on top of the proposed 8 cm, to 2 cm, it would presumably have an impact. I am testing the Minister about the justification for the figure of 3 cm as opposed to 2 cm or 4 cm. It is important that the record shows the thinking behind that decision.
This may seem a trivial point, but it is not. We are talking about the length of cigarettes, but I would welcome a view about what happens to the width of cigarettes. It is possible for duty to be levied on a cigarette that is part of the 8 cm and 3 cm, and is within the 1,000 cigarettes that form part of the taxation cohort. It would be possible for somebody, should they so wish, to manufacture a cigarette that is twice as thick as a normal cigarette, to disembowel that tobacco and reconstitute it into 2,000 cigarettes from a 1,000 cohort brought into the country. If taxation avoidance is the shared motivation behind the clause, I would be interested to know what steps are being taken on the width of cigarettes. Has the Minister given any consideration to that, as well as to measures on the length of cigarettes?
Alec Shelbrooke: I am listening carefully to what is being said, but it seems that on the measure that you are trying to press to the Minister, a loophole could be found, whatever the response. You have moved from halving the length of a cigarette to doubling its width. If the demand is out there to do such things, surely whatever law is passed and whatever definition is used, the legislation
Mr Hanson: That is an argument to do nothing and never to take any tax-avoidance measures at all. I am simply saying to the Minister that the legislation passed in 1979 sets out the length of a cigarette in relation to duty. A cigarette of more than 9 cm would qualify as two cigarettes for duty purposes. That is a way in which we can look at importation for those who wish to bring in a 10 cm or 11 cm cigarette, cut it in half and sell it as two cigarettes to people in the community, thereby avoiding duty. Whatever our political differences, we do not want to avoid taxation by back-door means. I simply say to the Minister that the length is being reduced from 9 cm to 8 cm and there could be an argument to tighten the measure further, from 9 cm to 7 cm for example. Why is it 8 cm?
I have already said this, but I shall say it again for the sake of further clarity and to ensure that we have a full debate on the matter. When we add each 3 cm portion of the remainder of the cigarette, it will be considered as a further cigarette. Why 3 cm and not 2 cm? If we are looking at tax avoidance, I would have thought that the tighter the regulation, the more opportunity there was to send a strong signal and ensure that the appropriate duty is paid. With those few comments, I am happy to hear what the Minister says.
Stephen Williams (Bristol West) (LD): I welcome the clause. It may dismay some of my coalition colleagues, but I do so in my role as Chairman of the all-party group on smoking and health. The measure deals with tax avoidance from a Revenue perspective, but it also achieves important public health outcomes. I can tell the right hon. Member for Delyn that whether cigarettes are measured by length, width, weight or nicotine content as a proportion of the substance that is wrapped in paper it is important to ensure that the duty is properly paid.
Contrary to what many people think, the real price of cigarettes in the 21st century is little different from what it was in the 1970s, because living standards have risen. It is true, as one of my colleagues said earlier, that taxation is relatively high here compared with taxation by some of our European neighbours, but the price that people pay for cigarettes in the UK relative to their disposable income is rather low compared with the figure 30 or 40 years ago.
My all-party group took evidence during the summer recess. While many of my colleagues were enjoying better climes, I was taking expert witness evidence in order to submit a report to the Government. The report was sent to Treasury Ministers, and I hope that officials have passed it to my colleague. It shows that price is still an important determinant in attacking a substance that is inherently addictive, and that people can be persuaded to change their behaviour as a result of the cost.
Although there are tax-avoidance reasons for introducing the clause, there are excellent public health reasons for tackling smuggling and the avoidance of duty. We can build on the important measures put in place with
I wish to add to what was said by my hon. Friend the Member for Dover. I believe that the focus of his comments was slightly wrong. I gave up smoking on 1 August, and I can tell the Committee that it is one of the hardest things that I have ever done. Although the price of cigarettes, and the level of tax, caused me to complain, it never stopped me buying them. We must therefore be careful when saying that raising taxation would help, because people make cutbacks elsewhere to feed their drug habit—and that is exactly what it is. I detect from what the right hon. Member for Delyn said that there is cross-party support for the measure, but I wonder whether our debate will achieve anything or whether it is just a testy argument.
Mr Gauke: As we have heard, clause 23 is intended to prevent the avoidance of tobacco duty. I hope that it will be some comfort to my hon. Friend the Member for Bristol West to know that in last week’s spending review announcement additional sums were given to HMRC to allow it to take further action to reduce cigarette smuggling. It is something that the Government take seriously.
Those seeking to avoid the element of tobacco duty applied specifically to the number of cigarettes produce what are known as long cigarettes, which are designed to be broken or cut into shorter sections by the smoker. The final number of cigarettes is thus greater than the quantity used for duty calculation purposes. We are aware that some brands of long cigarettes are 8 cm or more in length. Under the new rules, they will be classed as being four or more cigarettes. We therefore hope that the legislation will be useful in that respect. Clause 23 will amend legislation so that for cigarettes longer than 8 cm, excluding the filter, each additional 3 cm will be treated as an additional cigarette for the purposes of specific duty calculations. For example, a cigarette of 12 cm would be treated as three cigarettes.
The right hon. Member for Delyn asked what the reason was for those particular measurements. We are amending legislation that dates back to 1979 to ensure that UK legislation remains aligned with EU directive 95/59, which itself has been amended and updated. This is an example of our complying with European measures, and it is clearly important to co-ordinate at a European level, for reasons that I do not need to go into. Tobacco duty is an important contributor to the public finances. It contributed approximately £9 billion in 2009-10, with cigarette duty alone contributing approximately £8 billion.
Our decision to include the measure in the Budget will help to protect tobacco duty revenues. Almost all UK brands are unaffected, although one or two businesses that manufacture or are niche importers of long cigarette brands might be somewhat upset. Smoking is the single biggest cause of preventable illness and early death in the UK, so tackling tax avoidance with the measure will
On the size parameters, the EU consulted relevant parties to decide the definitions. Width is not currently an avoidance issue, with companies making extra-wide cigarettes, because it is relatively easy to break up long cigarettes, but not wide ones. I am sure that if we start to see wide cigarettes being produced, we might return to the issue in future Finance Bills.
The clause will come into force on 1 January 2011. It supports the Government’s policy of tackling tobacco tax avoidance, while helping to maintain the high price of cigarettes. It will help to reduce smoking and lower the financial, social and personal costs associated with smoking.
Mr Hanson: This is an important issue, but I will try to be relatively brief. Clause 24 sets out the criteria for a range of issues in relation to landfill tax, and to determining material to be subject to a lower rate of that tax. My only complaint about the clause is that it gives the Treasury considerable leeway in determining those issues. Proposed new subsection 4 sets out the Treasury responsibilities in determining which material is to be listed under the clause:
There is nothing at all about formal consultation with any interested parties about what could be a major change to the Treasury’s responsibilities. Amendment 10 proposes to add to the proposed new subsection two new paragraphs, (d) and (e). All that we are trying to do is to ensure that those who are interested are formally consulted and that, post that period of consultation, we know, collectively, what they have said.
Amendment 11 is, from my perspective, a probing one, about how much notice the Treasury should give of the changes that it could make in the listing of criteria for determination at a lower rate. The amendment states that six months’ notice be given, but my interest in doing that is to find out how much notice the Treasury intends to give if it does make changes to the listing. We need clarity, so that changes will not be made overnight that cause difficulty to those people whose daily business—or indeed any other matters—will be affected by the clause.
The final amendment in the group is amendment 14. Again, far be it from me to worry that the Treasury might have wide-ranging powers that it can do what it wishes with and not refer back to the House of Commons, because those are important matters of state. However, we need to look at them in detail. Clause 24(6), which I will read for the benefit of the Committee, states:
That simply says to the Treasury that it can go away and make any changes that it likes because it considers the factors to be relevant. It does not clarify what factors the Treasury might consider relevant, why the Treasury have considered those factors to be relevant, and how people who are affected by any changes the Treasury bring forward know that those factors were relevant. It gives the Treasury a free hand to make changes without reference to any other individual.
It simply says that if the Treasury makes changes under subsection (6) (b), it must, at the time of listing, publish what those factors are. That is in the interest of transparency, so that the Treasury is not accused of doing things in its dark recesses without consultation or public transparency on those issues.
I welcome the Minister’s view on those comments. I hope that he will accept consultation and the publication of consultation responses, and that he will ensure that there is transparency in clause 24 over and above what the clause currently outlines.
Mr Gauke: Clause 24 brings greater clarity to the process by which the Treasury determines the materials that receive the lower rate of landfill tax. The Opposition amendments suggest yet further transparency and clarity is needed, and furthermore suggest that additional primary legislation is required to achieve that. However, as the right hon. Member for Delyn is aware, the proposals on better tax policy making that the Government published at the Budget make clear that we are already committed to ensuring that all tax changes are subject to a full process of consultation and scrutiny that goes well beyond what the amendments would achieve.
To reiterate, the Government have committed to consult at each identifiable stage for all tax changes; to give weight to simplicity in the tax system, alongside other policy objectives; to examine the case for further
Amendment 10 seeks that the Treasury should consult interested parties and publish their responses. I must emphasise that the clause we are introducing is the result of a lengthy consultation process and itself brings greater transparency to the process by which the materials listed in the lower rate order are decided. Indeed, the changes that we will make next year to the list of lower-rated wastes set out in the Treasury order as a result of this clause and the publication of the criteria are the first changes to the order in 14 years. The Treasury’s decisions on the materials to be listed in the lower rate order will not be taken in isolation, but will take into account the advice and guidance from the Department for Environment, Food and Rural Affairs, the devolved Administrations and the environment agencies, and I hope that the right hon. Gentleman is reassured by those comments. Amendment 10 is therefore not necessary.
Amendment 11 would require the Treasury to give six months’ notice before any changes are made. The revised order will be laid before Parliament before the end of 2010. The right hon. Gentleman asked specifically about that. It will come into force on 1 April 2011. The landfill industry is already well informed of the changes and laying the order well in advance will give that industry the certainty that it requires. The Government also intend to provide certainty on tax changes, and therefore this amendment is not necessary.
On amendment 14, which seeks to make public any factor that the Treasury considers relevant when determining the materials to be listed, two important points must be considered. First, the amendment supposes that the clause, as it stands, gives undue scope to the Treasury to change materials that are listed in the lower rate order, but that does not fully understand the nature of the clause. The Committee should note that the clause states that the Treasury is compelled first to have regard to the published criteria under subsection (5) and then to two other relevant factors. I reassure the Committee that it is not a matter of giving the Treasury any real discretion when listing the materials, but the arrangement will ensure that the criteria that we publish, while providing greater clarity on how the lower rate is decided, will not be unduly restrictive and prevent wider issues from being taken into account. It provides for the possibility that other indirect environmental or even non-environmental factors may become important to delivery of the landfill tax’s primary objectives in the future.
Secondly, to address the fundamental issue raised by amendment 14, it is simply not possible to publish every factor that the Treasury considers when introducing a taxation change. Such decisions are made as part of the normal Budget process, when all taxes can be taken into
In conclusion, these amendments, although clearly tabled with the best of intentions and rightly probing our thinking in this matter, would add to the complexity of the tax codes. In addition, one of them is technically deficient, and another would be unfeasible to fulfil in practice. Moreover, they are unnecessary in the light of the more efficient, overarching changes that we have publicly committed to make to the entire tax policy making process. I therefore urge the right hon. Gentleman to withdraw those amendments.
Mr Hanson: I will withdraw the amendments, Mr Caton, but I want to test the Minister still further. On amendment 11, I have heard what the Minister has said about orders being laid before the House and all those issues, but clause 24(1) gives the following powers to the Treasury:
I want it to be clear. When clause 24 states “from time to time”, what notice will be given, not this time, but in future times, in relation to any changes that are made? Will the Minister give an indication of what the likely time scale will be for any changes that are made under this wide-ranging clause, which gives the Minister and the Treasury powers to make such changes, and how much notice will be given? The reason that I have simply put “six months’ notice” is to test how long the Treasury will give in the event of further changes being made by the Minister.
Mr Gauke: I am grateful to the right hon. Gentleman for confirming that he will withdraw his amendments. As to whether the criteria that we have set out in the clause will be reviewed and revised, we will look at that each year as part of the normal Budget process. I would also highlight, as I mentioned in my earlier remarks, the commitment the Government have made to greater consultation to ensure that those affected by possible changes, whether in regulations or primary legislation, receive proper notice of them. For example there will be a minimum of four weeks’ consultation on tax changes by secondary legislation. By raising these matters he has enabled me to put on record our desire to ensure that we do not have surprises for those people who will be affected by changes when determining which material is subject to the lower rate, that there is proper engagement with the industry and that there is an opportunity for the industry to consider and adapt to changes that are made under these powers.
Mr Hanson: I am grateful to the Minister. I hope that he treats our amendments in the spirit in which we proposed them and ensures that we do have some discussion because clause 24 gives significant powers to the Treasury to revise the criteria for listing in due
This amendment is similar to the previous amendment. I picked 12 weeks as a random figure to test how much notice will be given to those whose daily lives will be substantially affected by the changes mentioned in the clause. There was no indication in the Bill as to when or how these changes could be brought forward. Subsection (2) states:
That is a very big power. The Treasury may by order appoint any day it so wishes. It could appoint a day by order with two weeks’ notice, four weeks’ notice, six months’ notice, 12 months’ notice or whatever it wished to do. I wanted to probe the type of notice the Treasury envisaged giving in relation to the changes that are proposed, if agreed by both Houses, under this clause.
Mr Gauke: Amendment 19 specifies that any order to make schedule 9 effective must allow 12 weeks’ notice. I appreciate the concern that the right hon. Gentleman has raised and the desire to ensure that HMRC provides adequate notice to taxpayers before making the changes proposed by schedule 9 is entirely understandable. My argument, however, is that the amendment is not necessary. Under previous commitments made by Jane Kennedy, when she was Financial Secretary during the 2008 Finance Bill debate, HMRC established a practice of producing a draft appointed day order in advance of the effective day where it is possible to do so. This practice has extended to an appointed day order applying the harmonised interest rules to the bank payroll tax, for example, and to several appointed day orders in relation to penalties. These include penalties for incorrect returns and failures to notify, as well as associated orders in relation to national insurance contributions.
As the Committee will be well aware, HMRC publishes much of its draft legislation for comment on its website. No adverse comments have been received on any of these regulations. Furthermore, HMRC demonstrated its commitment to continuing this process by publishing the draft order for the late payment penalty regime for pay as you earn three months before it became effective in April this year. I propose that this practice continues for orders that will be made under the power given in these provisions.
In contrast to this tried and tested practice, one well used by the previous Government, amendment 19 gives no detail about how the 12-week notice period should be implemented, and how any change would be made.
I appreciate the right hon. Gentleman’s thinking in raising the matter. Given, however, that in amendment 19 he seeks to ensure that HMRC provides sufficient notice of changes being made under the clause, and given that such notice is already provided in a clear and easily accessible manner, I ask him to withdraw his amendment.
Mr Hanson: Again, it was simply designed to be a probing amendment. Undoubtedly it is technically deficient, because in opposition we do not have the resources of the Treasury. It is intended to obtain an indication from the Minister of what level of notice would be given, and of how that notice and changes under clause 25 would be considered. I wanted him to state on the record that the changes will be subject to a proper process that is understood by those outside the House as well as by the massed ranks of the Treasury. On that basis, I beg to ask leave to withdraw the amendment.
Mr Hanson: I will sound like a tired record by the end of the evening, because this point is similar to those that we have made about previous amendments. Before clause 26 is implemented, it should be subject to 12 weeks’ notice, which is a random figure plucked from the air to test the Minister as to how, when and under what circumstances he will advance the measures in the clause.
We want to ascertain what notice individuals will receive, how that notice will be delivered by the appropriate authorities in the Treasury, and how that will work in practice. I expect that the Minister will say more or less what he has said before, but that will be worth while in order to put it on the record for future discussions.
Believe it or not, the Finance (No. 2) Bill will become the Finance (No. 3) Act when it receives Royal Assent, which new members of the Committee may find confusing. Within 12 months of Royal Assent, we would like a formal review of the operations of the clause under the proposals in amendment 18. Again, it is a testing amendment; I have received representations from, among others, the Chartered Institute of Taxation, which has
I am happy for the Minister to outline to the Committee the reasons why he believes that the provisions will not bear down on smaller businesses, and to answer the concerns raised by the Chartered Institute of Taxation. Alternatively, he can accept amendment 18 and agree to review the situation after 12 months so that if problems are perceived with the penalties charged and the effect on companies that have to pay, the system can be examined and formally reviewed by the Treasury.
That is in contrast to the informal reviews that undoubtedly take place regularly. Either way, my purpose in tabling the amendment was to give the Minister an opportunity to allay the fears of the Chartered Institute of Taxation, either now or 12 months after Royal Assent.
Mr Gauke: I am grateful to the right hon. Gentleman for allowing me the opportunity to consider two amendments to clause 26. Amendment 17 is identical to amendment 19 to clause 25, which we have debated. I will not use the response “I refer the right hon. Gentleman to the answer that I gave some moments ago”, but I will give him a proper answer.
As I said, HMRC has a procedure in place to provide notice of changes of the kind proposed in the clause. The publication in advance of draft appointed day orders on the HMRC website provides taxpayers and advisers with time to adjust and certainty about HMRC’s actions. That practice, introduced by Jane Kennedy in 2008 when she was Financial Secretary to the Treasury, has been welcomed by interest groups.
Amendment 18 seeks to make the provisions in clause 26 subject to a formal review 12 months after Royal Assent. The clause completes the alignment of late filing penalties across all taxes and duties administered by HMRC by including the remaining indirect taxes and excise duties in the new late filing penalty framework that legislated for direct taxes last year. It is important to remind the Committee that all new policy measures are subject to a formal evaluation process within three years and that that requirement will apply to the changes within the clause.
HMRC is committed to reviewing the policies that it implements. An implementation oversight forum with a majority of external members was established by the previous Government to consider the changes brought about after the review of powers, deterrents and safeguards.
The new provisions in clause 26 were designed after an extensive consultative process, and the measure has been subject to three consultations since August 2008. HMRC intends to continue that collaborative approach in measuring the effectiveness of the new penalties. It would be somewhat odd to provide for such a review but not to allow for a review of the changes introduced by the right hon. Member for East Ham (Stephen Timms) last year.
The right hon. Member for Delyn alluded to CIOT comments about the concern that the fixed penalties were too high for frequent filing obligations and that that could lead to disproportionate penalties. We have considered the rates for fixed penalties carefully and agree that we do not wish disproportionate penalties to arise. That is why HMRC responded to concerns raised during the consultation by reducing the maximum fixed penalty for monthly filing from £400 to £200.
HMRC is monitoring closely implementation of the new penalty provisions. I am pleased to report to the Committee that since introduction in April 2010, the early results on the improvement of employers’ payment of pay-as-you-earn have been encouraging. HMRC will continue to work closely with private sector representatives on the implementation of late filing and late payment penalties. Given those comments and assurances, I hope that the right hon. Gentleman will withdraw his amendment.
|©Parliamentary copyright||Prepared 27th October 2010|