Select Committee on European Communities Eleventh Report



Letter from Lord Tordoff, Chairman of the Committee, to Dawn Primarolo MP, Financial Secretary to the Treasury

  Sub-Committee A and the Select Committee have scrutinised these two documents.

  We agree with the Government that EC-level decisions on rates of excise duty and VAT should remain subject to unanimity in the Council. However, we are concerned that differences in interpretation and implementation of the Sixth VAT Directive and of the excise Directives lead to legal uncertainty for traders and governments and to the risk of double taxation or non-taxation.

  We should be interested to know the views of traders engaged in cross-border transactions in the Community on the proposals now put forward by the Commission. It appears from your Explanatory Memoranda that consultation on these issues has either not taken place at all or has been directed broadly at the whole of the Commission's proposed VAT work programme. It we are right, we suggest that a consultation exercise on these specific issues should now be carried out.

  If, following a consultation exercise, traders were known to support the adoption of proposals on the lines of those suggested by the Commission, we think that the Government's opposition to these limited proposals would not be in the best interests of the full and equitable operation of the Single Market.

  This letter does not raise the scrutiny reserve on these documents.

12 November 1997

Letter from Dawn Primarolo MP, Financial Secretary to the Treasury, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 12 November, concerning the scrutiny of these documents.

  I am pleased to learn that your Committee supports the Government's determination to maintain unanimity as the basis for EC decision-making on important indirect tax issues, although I am rather surprised that your Committee limits that support for unanimity to questions of excise duty and VAT rates. The Government firmly believes that the importance of maintenance of unanimity extends much more widely. In addressing the points that you raise in your letter I shall seek to explain why we take this view. I am sorry if the Explanatory Memoranda which I submitted in July are in any sense deficient in this regard.

  While the Commission in its twin proposals seeks to draw a distinction between questions of tax/duty rates and other issues (arguing that the former are of such political sensitivity as to remain subject to unanimity, while the latter are suitable" for QMV decision making), the Government believes that the principle of unanimity is of importance in a much wider field of indirect tax matters. We are not persuaded that QMV would be appropriate or acceptable in the fiscal areas that the Commission proposes.

  The Government shares your Committee's concerns about the potential problems associated with differences in interpretation and implementation of EC VAT and excise Directives, but does not feel that such potential problems justify such a radical change as a substantial shift to QMV decision-making on the basis of Commission-generated implementing Regulations. Such a shift - which would effectively vest in the Commission the power to bring forward detailed Regulations, which in turn would be decided upon in the relevant Committee by QMV - would represent a wholly unacceptable development. Put simply, even outside the specific issue of rates, were certain decisions in the VAT area to be the subject of such QMV decision-making there would be a serious risk that such decisions could prove to be equally damaging to the UK's interests.

  Perhaps it would be useful if I illustrated this argument with one or two examples. If the Sixth Directive were to be substantially subject to such QMV decision-making there would be an inherent risk that decisions would materially affect the scope of the tax (by, for example, determining the definition of economic activity or of the taxable person), the rate of tax applicable to certain activities (by, for example, determining the scope of the exemptions), and indeed the management of the tax (by determining, for example, the registration threshold, reporting/accounting requirements upon business, or the methods of audit and control).

  Decisions on such VAT issues by QMV at the EC level would very probably often fall to the disadvantage of the UK - either in terms of the revenue effect on the Exchequer, or more probably, in terms of the burdens and constraints placed upon business. There is, I readily acknowledge, a tension here between the desire for greater uniformity of application/operation of the EC VAT regime (which the Commission contends will be achieved through vesting it with implementing powers), and the importance we attach to maintenance of the flexibility available to Member States to tailor their VAT systems to their own domestic needs and priorities. On balance we believe that it would be a serious mistake if sacrifice such important flexibility to the goal of uniformity.

  On excise the position is slightly different in that there is a very limited degree of Qualified Majority Voting for certain specified administrative mattes. However, the basic principle in terms of our commitment to unanimity for fiscal issues, beyond what could be regarded as purely administrative, stands.

  You ask specifically about the views of traders, and suggest formal consultation on these proposals. Given the Government's firm commitment to the maintenance of unanimity in tax matters I think that formal consultation would be a rather artificial exercise (and be seen as such by business). That is not to say that UK traders have not had the opportunity to comment, both through the usual channels of communication which Customs maintain, and in representations to Ministers. Some do favour the more prescriptive route proposed by the Commission, seeing this is a means of achieving greater consistency and certainty at the EC level. Others are much more wary, recognising that it might well have adverse implications for the UK VAT system and for UK businesses. In particular, qualms have been expressed about the principle of any delegation (below the Council) of decision-making on VAT. The Institute of Directors has, for example, arguing that matters of interpretation should continue to lie with the courts.

  On the excise side, where we have been consulting traders about ways to tighten up on fraud, there have been calls for greater consistency in the arrangements for the movement of duty suspended goods within the EC. We are currently considering how best to achieve this objective.

  Finally, I note your letter does not raise the scrutiny reserve. Perhaps it would be helpful if I updated you on the status of the negotiations on these two proposals. Both have had an initial airing in the relevant Council working groups. The VAT Committee proposal was firmly opposed by the vast majority of Member States, and it looks most unlikely to make any progress. The Excise Committee proposal met with a somewhat less hostile reception from Member States. It is possible that in further discussion of this proposal the Commission may seek to make it more palatable to the Member States by limiting the scope of its application to an extended range of administrative matters.

18 December 1997

Letter from Lord Tordoff, Chairman of the Committee, to Dawn Primarolo, Financial Secretary to the Treasury

  Thank you for your letter of 18 December about these documents.

  I have passed your letter to Sub-Committee A for further consideration. Your letter sets out in more detail than your earlier Explanatory Memoranda the Government's position on these issues. In the light of this further consideration I shall write to you again. In the meantime, this letter does not raise the scrutiny reserve.

13 January 1998

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