Value Added Tax (Place of Supply of Services) (Exceptions Relating to Supplies Not Made to Relevant Business Person) Order 2014
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Bebb, Guto (Aberconwy) (Con)
† Burt, Alistair (North East Bedfordshire) (Con)
Doran, Mr Frank (Aberdeen North) (Lab)
Dowd, Jim (Lewisham West and Penge) (Lab)
† Gauke, Mr David (Financial Secretary to the Treasury)
† Grieve, Mr Dominic (Beaconsfield) (Con)
† Hamilton, Mr David (Midlothian) (Lab)
† Hemming, John (Birmingham, Yardley) (LD)
† Lavery, Ian (Wansbeck) (Lab)
† McPartland, Stephen (Stevenage) (Con)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Neill, Robert (Bromley and Chislehurst) (Con)
† Pearce, Teresa (Erith and Thamesmead) (Lab)
† Russell, Sir Bob (Colchester) (LD)
Simpson, David (Upper Bann) (DUP)
Sutcliffe, Mr Gerry (Bradford South) (Lab)
† Zahawi, Nadhim (Stratford-on-Avon) (Con)
David Slater, Oliver Coddington, Committee Clerks
† attended the Committee
Third Delegated Legislation Committee
Monday 3 November 2014
[Annette Brooke in the Chair]
Value Added Tax (Place of Supply of Services) (Exceptions Relating to Supplies Not Made to Relevant Business Person) Order 2014
4.30 pm
The Financial Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the Value Added Tax (Place of Supply of Services) (Exceptions Relating to Supplies Not Made to Relevant Business Person) Order 2014 (S.I., 2014, No. 2726).
It is a great pleasure to serve under your chairmanship, Mrs Brooke.
The order is the last part of the legislative changes to amend the UK’s VAT system so that supplies to UK consumers of broadcasting, telecommunications and electronically supplied services, known collectively as digital services, will be taxed in the UK. Currently, intra-Community supplies of digital services to non-business customers are subject to VAT in the member state where the supplier belongs. The order, exposed for consultation prior to the Finance Act 2014, provides for a change to the place of supply rules by introducing a special rule for digital services supplied to non-business consumers that changes the place of supply from where the supplier is established to where the consumer belongs.
The change was agreed with our European partners in 2008 as part of a range of measures to ensure taxation in the place of consumption and is being implemented across the EU with effect from 1 January 2015. It will create a level playing field for businesses, ensuring that suppliers of digital services located in countries with low VAT rates, such as Luxembourg, can no longer undercut UK-based businesses. It means businesses will pay UK VAT on digital supplies to UK consumers no matter where they are located. It will raise £300 million pounds a year.
The change could increase the administration costs of suppliers, as they are potentially liable to register and account for VAT in each member state where they have customers. Therefore, along with our European partners, we are also introducing an IT system called the mini one stop shop, which will give suppliers the option to register in just one member state. They may then account for the VAT due on supplies of digital services in respect of all their EU customers in the other member states on a single VAT return. The legislative provisions for this form part of the Finance Act 2014. After strong lobbying from the UK, the EU agreed to ensure that app stores or other internet portals will normally be responsible for accounting for the VAT on downloads to consumers, which will simplify accounting for many small businesses and prevent many of them from needing to register in other member states or for the mini one stop shop. HMRC estimates that there will be an impact
on 34,000 businesses and the total additional costs of complying with the change to be £2.2 million per annum, taking into account the benefits of the mini one stop shop.The order will help to ensure that UK businesses are placed on an equal footing with their overseas counterparts, that services are taxed in the country of consumption, and that an incentive to locate in a country with a low VAT rate is removed. I commend the order to the Committee.
4.33 pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve under your chairmanship, Mrs Brooke.
As the Minister explained, the statutory instrument before us today is the final stage of the 2008 European agreement on changes to the VAT place of supply of services rules. The changes mean that digital services are taxed in the place they are consumed and, as a result, that countries with lower VAT rates will no longer be able to undercut UK-based businesses. Specifically, the order achieves that by changing the place of supply rule for VAT purposes for most supplies of broadcasting, telecommunication and electronic—or BTE—services to customers.
As the Minister said, a consequence of the change is that an administrative burden will be placed on small businesses, which will now have to register for VAT in each of the member states in which they make supplies to non-business persons. During the passage of this year’s Finance Bill, the Minister and I discussed at length the establishment of the mini one stop shop scheme, through which businesses can register in the member state in which they are established. They will be able to submit one mini one stop shop VAT return for all their intra-EU BTE supplies, which will save them from having to register for VAT in every single EU state. The explanatory memorandum for the order states:
“HMRC is discussing implementation of the measure with small businesses through a working group.”
Have the members of the working group voiced any concerns about the implementation of the measure, and how are those concerns being addressed? In Committee on the most recent Finance Bill, the Minister was able to reassure us that the UK IT system that will be needed for the change is on course to be delivered on time, and it would be helpful if he could update the Committee on the progress of those IT systems.
The changes will take effect from 1 January 2015, and I am pleased to see that guidance about them is now available on the HMRC website. Will the Minister tell us how the change that we are discussing and the associated guidance have been publicised to businesses—I believe the Minister mentioned 34,000-odd—that will be affected? Those questions aside, the measure has our full support.
Sir Bob Russell (Colchester) (LD): Can the Minister give us an assurance that there are no Channel Island loopholes that will be exploited?
4.36 pm
Mr Gauke: I thank the hon. Member for Birmingham, Ladywood for her words of support. As she has said, the matter we are discussing is familiar to her and to
those of us who were lucky enough to serve on the Finance Bill Committee earlier this year. First, let me address the question of administrative burdens and whether any concerns have emerged from the working group. As I said earlier, it is worth pointing out that the mini one stop shop will significantly reduce the initial administrative burdens that the change may place on small businesses. We have led on EU changes that will require app stores and electronic marketplaces to account for VAT on sales that are made through them. That will help a large number of businesses that sell through such platforms, because they will not have to register or account for VAT in the countries where their customers belong.Small businesses may face some additional compliance costs, but they will also benefit from a level playing field, with larger companies based outside the UK having to account for UK VAT on UK suppliers on the same basis as small companies based here. Obviously, we will keep administrative burdens under review. When it comes to specific concerns raised by members of the working group, they have raised the need for guidance, but, as the hon. Lady acknowledged, such guidance has been published on the HMRC website and on the EU website.
On the IT system, UK registration opened a couple of weeks ago on 20 October. So far, more than 100 companies have signed up to use the UK mini one stop shop system. HMRC is not aware of any businesses experiencing difficulties with registration, but any businesses that have difficulties should contact HMRC for assistance.
On what is being done to publicise the changes, HMRC has published guidance and is engaged with industry stakeholder groups and their representatives. It has also engaged with the media to encourage articles in relevant publications and it continues to promote the change through a variety of outlets, including through digital media such as YouTube and Twitter. The European Commission has published interim guidance on its website and is currently partaking in roadshows around Europe; there was one in London in June in which HMRC participated.
My hon. Friend the Member for Colchester asked whether there were any loopholes in terms of the Channel Islands. He will be aware of the steps the Government took to ensure that low value consignment relief would not be abused. On the general question of whether the Channel Islands can be used to create a loophole, I would say that no matter where the supplier is established, the supply will be taxable where the customer belongs. Therefore any supplier in the Channel Islands will be liable to account for VAT on the supply to UK customers. The design therefore does not allow for the type of abuse that may concern him.
I hope that those points of clarification and information are helpful to the Committee and that we can all support the order.