Value Added Tax (Education) Order 2013
The Committee consisted of the following Members:
Ainsworth, Mr Bob (Coventry North East) (Lab)
† Birtwistle, Gordon (Burnley) (LD)
† Bradley, Karen (Lord Commiss ioner of Her Majesty’ s Treasury)
† Bruce, Fiona (Congleton) (Con)
† Burns, Conor (Bournemouth West) (Con)
† Dakin, Nic (Scunthorpe) (Lab)
† de Bois, Nick (Enfield North) (Con)
Denham, Mr John (Southampton, Itchen) (Lab)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
† Hemming, John (Birmingham, Yardley) (LD)
† Hendrick, Mark (Preston) (Lab/Co-op)
† Latham, Pauline (Mid Derbyshire) (Con)
† Lopresti, Jack (Filton and Bradley Stoke) (Con)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
Qureshi, Yasmin (Bolton South East) (Lab)
Shannon, Jim (Strangford) (DUP)
† Stuart, Ms Gisela (Birmingham, Edgbaston) (Lab)
† Wheeler, Heather (South Derbyshire) (Con)
David Slater, Committee Clerk
† attended the Committee
First Delegated Legislation Committee
Monday 21 October 2013
[Katy Clark in the Chair]
Value Added Tax (Education) Order 2013
4.30 pm
The Exchequer Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the Value Added Tax (Education) Order 2013 (S.I. 2013, No. 1897).
It is a great pleasure, Ms Clark, to serve under your chairmanship for the first time. In anticipation of questions from the hon. Member for Birmingham, Ladywood, I welcome her to her new post of shadow Treasury Minister. I hope she finds it as interesting and enjoyable as I did. I also hope that she serves in it for many years to come.
The order withdraws the VAT exemption that applied to supplies of business research made between eligible bodies, with effect from 1 August 2013. We made the change because the European Commission, acting on a complaint by a UK taxpayer, began pre-infraction proceedings against the UK maintaining the exemption because there was no legal basis for it in the EU VAT directive.
To provide some background, most research carried out in the UK by eligible bodies is publicly funded and not treated for VAT purposes as a business activity. All such research activities are unaffected by the order and will continue free of VAT. All other research is already subject to VAT at the standard rate, with the exception of business supplies of research made between eligible bodies. Eligible bodies are, in the main, schools, universities, colleges, non-profit-making bodies such as charities, and public bodies such as local authorities and Departments. Business research in that context means research that is provided to a recipient for a consideration.
In 2011, the UK received notification from the European Commission that its exemption for business supplies of research between eligible bodies did not comply with European legislation. The European Commission referred to a 2002 decision of the European Court of Justice, when Germany was infracted for applying a similar exemption to research. In that case, the European Court judged that supplies of research were not covered by the exemption. Following that decision, the UK had no grounds on which to defend our continued use of the exemption, and we therefore agreed to withdraw it from 1 August 2013.
Before we moved to withdraw the exemption, Her Majesty’s Revenue and Customs held a consultation to ascertain the impact of the loss of the exemption on affected parties and to consider whether measures were necessary to mitigate that impact. The majority of respondents accepted that the UK had no option but to withdraw the exemption, but asked that the Government permit grandfathering of all contracts in place at the time of the withdrawal to allow existing contracts to run their full life and remain exempt from VAT. The Government have agreed to that request and, accordingly, the order includes a transitional rule that allows grandfathering for all existing contracts.
The order therefore ensures that supplies of business research between eligible bodies made within the scope of written contracts in place before 1 August 2013 will continue to benefit from the exemption for the life of the contract. The transitional arrangement applies to contracts under which work is already in progress, as well as to those under which work has yet to commence, provided that the contract was in place at 1 August 2013.
The order does not permit changes to be covered by the exemption if a contract is varied after 1 August 2013, although the terms of the original contract will continue to benefit. That is to prevent abuse and attempts to extend contracts indefinitely to continue to benefit from the exemption.
Following pre-infraction action by the Commission, we had to withdraw the exemption for business research between eligible bodies. The Government, however, have taken steps to protect the interests of those already engaged in such supplies for the life of their contract. The order therefore delivers exactly what the suppliers of research requested through the consultation responses and I commend it to the Committee.
4.34 pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure for me, too, to serve under your chairmanship for the first time, Ms Clark. I thank the Minister for his good wishes in my new role. I look forward to having many hours of debate with him, particularly in Committee on the Finance Bill, and hope to relegate him to the shadow Treasury team in May 2015.
As the Minister explained, the order has been introduced because the current exemption for VAT on research that flows from one eligible body to another falls foul of the principal VAT directive. The UK is a world leader in research. It is home to six of the world’s top 20 universities, according to last month’s world university rankings. Our research base is a real competitive advantage, and an important factor in why innovative businesses choose to locate here. Making sure that there is clarity for institutions that carry out research and often enter into very complex research contracts, which can span many years, is therefore important.
It is clear from the summary of responses to the consultation, which was carried out earlier this year to assess the impact of the change, that there has been real confusion in the research community about what research is or is not now exempt. Will the Minister outline what else HMRC can do to ensure that the VAT guidelines are as clear as possible?
I particularly have in mind the treatment of collaborative research, which was often raised during the consultation, with many institutions, universities and leading research charities asking questions about it. HMRC has produced an additional briefing note, but has the Minister considered providing more worked-through and detailed case study examples based on the detail of the consultation responses —unfortunately, they have not been published—to help universities and charities while the removal of the exemption beds in? In relation to that, what discussions has the Minister had with Universities UK, the leading research charities and the research councils about the type and format of any such guidance to ensure that it is as useful and relevant to research institutions as possible?
From the documents provided by HMRC, I am not sure that we are any closer to understanding precisely how much research now comes within the exemption. Certainly, most research is either grant or block funded, or is business research. It has always been understood that exempt research is a relatively small component of overall UK research, but will the Minister shed more light on what sort of percentages of total UK research we are looking at? That will be important in considering the impact of the change.
There has been concern that an increase in the cost of research will lead to a corresponding reduction in the volume of research activity that can be undertaken within the current fixed-funding environment. What steps will the Government take to monitor the impact on UK research volumes, and what discussions about that has the Minister had with his colleagues, particularly those in the Department for Business, Innovation and Skills, given their role in relation to the overall science budget?
Finally, one issue raised in the initial consultation document was that some universities and providers of business research will need to amend their partial exemption methods and agree them with HMRC. Will the Minister update us on that?
4.38 pm
Nick de Bois (Enfield North) (Con): Thank you, Ms Clark, for giving me the opportunity to say a few words. I shall not detain the Committee long.
It is disappointing, yet again, to be sitting in a Committee Room when our VAT rates are clearly decided not here at home, but by persons far away in Europe, who determine who will and will not be exempt from our VAT. That is disappointing, but, as yet, there is obviously nothing that we can do about it. I am sure that, as 2017 approaches, such issues will be discussed more robustly.
I will ask some specific questions based on the explanatory notes and what the Minister has kindly told us. Is it possible for him to give us some context for the order, so that we can determine the actual value of research that was not previously captured by VAT, but may now be captured? If the Minister has that information, it would be useful to have it on the record.
I am also concerned about monitoring and review, which are words often bandied around with good intention by all Governments. The problem, however, which has been rightly identified in this case, is identifying the activities that are VAT exempt for business or outside the scope of VAT for non-business, which will be changed, and identifying what is and is not VAT exempt will be quite a challenge. From my experience in business, I know that, however reasonable Ministers are, HMRC can behave with an enthusiasm and diligence that are unhelpful to those struggling to find their way around new directives, in particular when such directives can vary from country to country. It may be a good idea for the Minister to conduct a formal review after a year and to take on board representations from those affected by the measure to see whether the aspirations set out in his words today about monitoring and review can be put to the test. I am sure he does not want to impose difficulties on people who will be applying the forthcoming changes.
On the regulation of small businesses, the explanatory note states:
“This legislation applies to all businesses; it does not impact unduly on small businesses and they are unlikely to be affected by it.”
Without understanding the context or the scope of the people most likely to be affected by the changes, it is difficult to comment on whether they are “unlikely” to be affected, but the fact that the legislation may affect all sizes of business means that it will still be onerous on smaller businesses to have to comply with more regulation, whether or not the same regulation is applied to large or small businesses. If the Minister can shed any light on the number of small to medium-sized businesses that may be affected, that will at least provide some clarity as to how the change will affect such businesses in future.
A conclusion was obviously reached about the grandfathering of arrangements following the consultation. I am sure that that has been welcomed, but will the Minister tell the Committee what, for example, were the top three concerns that emerged from the consultation and what drove the grandfathering solution, because the consultation was based on a premise of, “You’re going to have to take it or leave it, because we are stuck with this.”? We have managed to introduce grandfathering rights, which is obviously a helpful concession, but what were the top three concerns? If he can help with that, it will be much appreciated.
4.43 pm
Nic Dakin (Scunthorpe) (Lab): I rise briefly to draw attention to a long-standing anomaly relating to eligible bodies, which embraces schools, including academies and free schools—even 16-to-19 free schools—but not sixth-form colleges. Young people attending sixth-form colleges are therefore disadvantaged compared with young people attending other institutions.
4.44 pm
Mr Gauke: I am pleased that the order has provoked a number of points and questions, which I shall now address.
It is perhaps a fortuitous coincidence for the hon. Member for Birmingham, Ladywood that this area of tax law relates to her previous experience as shadow higher education spokesperson, which shone through as she brought her knowledge and expertise to this subject. Let me warn her, however, that it is not often that such debates are quite so closely linked to higher education.
The hon. Lady’s first point related to ensuring sufficient clarity for those likely to be affected by the changes. Work is in hand around the guidance that HMRC will produce. I am loth to give a precise date, because it could be a hostage to fortune, but I am assured that the guidance will be updated as soon as possible. HMRC is considering examples for inclusion in the guidance, which is a point the hon. Lady raised.
The hon. Lady asked with whom we had discussed the matter. HMRC has discussed it with the British Universities Finance Directors Group, and the Department for Business, Innovation and Skills has, as she would expect, been informed of developments.
The hon. Lady asked what percentage of UK research is impacted. I cannot go much beyond what she said, which is that the majority of research carried out by eligible bodies or charities is non-business and, therefore, outside the scope of VAT, so it will not be affected by the measure. It is worth pointing out that an eligible body or charity that makes supplies of business research will have to charge the recipient VAT on those services.
However, that, in turn, will allow them to reclaim VAT incurred on costs relating to that supply, which they would previously have been unable to reclaim.At this stage, it is worth addressing the point raised by my hon. Friend the Member for Enfield North about the scale of the issue. He asked me to put the measure in context, and it is expected to increase receipts by about £50 million per annum. It will affect about 100 to 200 charities and universities that provide exempt supplies of research. To address the point about the effect on small businesses, the reality is that the majority of eligible bodies are not small businesses; mainly universities will be affected.
On the question whether there should be a formal review after a year, a review is ongoing. We keep all aspects of the tax system under review, and this is no exception.
On the point made forcefully and, I might almost say, predictably by my hon. Friend on the role of the EU, the European Court has already ruled on supplies of research services for a consideration not covered by the VAT exemption. It is clear, and I think it was accepted by the majority of the respondents to the consultation, that the UK’s exemption is unlawful. We simply could not defend it successfully if the matter were considered by the European Court. Failure to address the point may have led to greater uncertainty for eligible bodies and charities that might be adversely affected by the change, and if we had not introduced these measures, they would have continued to face some uncertainty.
We expect the implementation costs for those affected by the withdrawal—this is part of the concern raised regarding SMEs—to be negligible. There will be one-off familiarisation costs, as well as systems changes so that invoices can be issued that include VAT at the standard rate, but there are not expected to be any ongoing costs. Providers charging VAT on their supplies will be able to reclaim any VAT incurred on costs relating to that supply, which they would previously have been unable to reclaim.
As to what drove the grandfathering solution, it was an attempt to lessen the impact on the bodies affected. We have tried to do everything we can to minimise the impact on those affected, which is why we introduced the grandfathering solution.
I acknowledge the familiar point raised by the hon. Member for Scunthorpe, which was perhaps predictable as the operation of VAT more generally is close to his heart due to his experience before coming to the House. We continue to look at those issues and his point is duly noted.
I hope that I have managed to respond to, and provide useful clarification on, the concerns raised by the Committee. In light of my remarks, I hope that the Committee will allow the order to proceed.