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Friendly and Industrial and Provident Societies Act 1968 (Audit Exemption) (Amendment) Order 2006

4.59 pm

Lord McKenzie of Luton rose to move, That the draft order laid before the House on 12 December 2005 be approved [14th Report from the Joint Committee].

Moved accordingly, and, on Question, Motion agreed to.

European Communities (Definition of Treaties) (Cooperation Agreement between the European Community and its Member States and the Swiss Confederation to Combat Fraud) Order 2006

5 pm

Lord McKenzie of Luton rose to move, That the draft order laid before the House on 19 December 2005 be approved [14th Report from the Joint Committee].
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The noble Lord said: My Lords, I hope the House will be able to support this order so that the EU/Swiss anti-fraud agreement can be specified as a Community treaty for the purposes of the European Communities Act, so enabling its ratification by the UK. It may help noble Lords if I briefly outline the background to this order and explain why the Government consider it important that the UK ratifies the EU/Swiss anti-fraud agreement at an early date. The purpose of the agreement is to put in place judicial and administrative co-operation arrangements, including for the exchange of information, between EU member states and the Swiss Confederation. This will enable both parties to more effectively combat fraud and other illegal activities in a number of areas, including the trade in goods and services, the charging and retention of structural funds, public procurement and in respect of money laundering. Critically, it will enable the UK to co-operate with the Swiss in order to deal with trade and illegal activities that are contrary to VAT and excise legislation. It should be noted that it does not apply to direct taxes, which for the UK are covered by separate bilateral co-operation and information exchange provisions.

When ratified and adopted, the agreement will substantially improve the existing administrative co-operation arrangements between the UK and the Swiss authorities by bringing them fully up to the level of co-operation that the UK enjoys with other EU member states. It also introduces EU standards of judicial co-operation with Switzerland, enabling us to more successfully investigate and prosecute major frauds. I should add that this Government led the way in seeking an EC negotiated settlement with the Swiss. By working with our EU partners, we have been able to secure a much better agreement than might otherwise have been the case.

I draw your Lordships' attention to why I particularly welcome the agreement and consider that its ratification would be of benefit and value to the UK. Noble Lords may be aware that the UK has suffered considerably from attacks on the VAT system by carousel and missing trader intra-community—MTIC—fraud in high-value goods such as mobile telephones and computer chips. Because of the multinational dimension of this type of fraud, effective arrangements for the exchange of information and judicial co-operation between countries are essential. There is evidence that criminals are now targeting their efforts towards non-EC countries because improved intervention and co-operation strategies within the EC are working.

Switzerland, with its central geographical location and restrictive banking regulations, is seen by fraudsters as an ideal country to use as a base for their operations, or as a country through which to divert goods. A key aspect of the agreement will be that HM Revenue and Customs will be able to request information, including details of banking transactions, on the individuals who are behind the frauds but are not necessarily named as the owners of the goods in the fraud carousel. This evidence will enable substantial
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amounts of VAT to be withheld from the fraudsters involved. Currently it is thought that a number of Swiss-based individuals are involved in VAT MTIC fraud relating to losses in the UK. If HM Revenue and Customs can use the same investigative and intelligence tools as are currently available to tackle intra-EC fraud, we believe this could have a significant impact on these Swiss-linked frauds.

Once it has been ratified and introduced, this agreement will significantly improve the ability of the UK authorities to make use of information held by the Swiss authorities and so enable them to more effectively fight VAT MTIC fraud as well as other indirect tax and customs frauds that cost the UK large sums of revenue. This order fulfils a necessary legal requirement before the UK can formally ratify the agreement. It is an important agreement which will greatly assist in our efforts to fight fraud. I beg to move.

Moved, That the draft order laid before the House on 19 December 2005 be approved [14th Report from the Joint Committee].—(Lord McKenzie of Luton.)

Lord Howard of Rising: My Lords, I thank the Minister for introducing the order and for his helpful explanation. Any action to reduce fraud or to make fraud in the European Union more difficult is to be welcomed. The hour is late and I do not wish to waste the time of the House by repeating arguments already made in the other place, but I would like to make one general comment. Admirable as is the desire to prevent the perpetrators of fraud from benefiting from their actions, does not the Minister think it more important to stop the fraud in the first place?

The European Court of Auditors has now refused to sign off the European Union's accounts for the 11th successive year. During that period, there has been much talk of the progress that is being made in cleaning up the abuse. Does the Minister agree that still to be saying that things are improving after 11 years is hopelessly inadequate? By now the accounts should be clean. No other institution, whether public or private, could get away with this sort of behaviour.

It does not stop there. There is a record of aggression, either by intimidation or by dismissal, against employees of the European Union who draw attention to misdemeanours. If such behaviour—that is, the dismissal of employees—occurred in this country, any employer would be in the courts in no time at all. I find it incomprehensible that the Government would surrender any part of our rebate in order to swell the pool into which so many dishonest fingers are dipping. It seems to be entering the world of make-believe to permit the dishonesty but to ask if you could have the proceeds. Notwithstanding that, I welcome the order.

Lord Newby: My Lords, on these Benches we too welcome the order. I have four specific points to raise with the Minister. In terms of the fraud most likely to be caught by the order, he said that we are talking about the VAT-missing trader or carousel fraud,
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which has reached almost phenomenal levels. We are talking about extraordinary sums. There was a report in the press last week that the Government were considering amending the VAT accounting regime—at source, as it were—so that VAT would no longer be accountable on certain kinds of goods being imported. I wondered whether that was an idea that had any substance or whether it was just being floated by the journalist.

When the order was debated in another place, the Paymaster-General explained that it covered only indirect taxation, because direct taxes were covered by bilateral agreements and the EU has no remit. She hoped that the UK would shortly sign a protocol with Switzerland on the taxation of savings and that this would cover much of the direct tax side where fraud might take place. Could the Minister indicate whether, when that protocol is signed, there will still be other areas of taxation—on the personal tax side, which might not technically be savings taxes—where there is no agreement with Switzerland? Is the protocol currently being negotiated one of a series or, hopefully, from the Government's point of view, would it then give comprehensive coverage?

In the other place, they debated whether the current discussions with the Swiss on direct taxation would give UK investigators greater access to Swiss banking information. I believe that the Paymaster-General said that it would, although Swiss banks still have rules about disclosure of information that are less forthcoming than elsewhere. I wondered whether the Government felt able to persuade the Swiss to be rather more forthcoming on the information that they are prepared to make available when fraud is being alleged.

Finally, the noble Lord, Lord Howard, on the subject of signing off the EU accounts, made the point that no other public or private body would get away with it. The Minister might correct me, but at least one British government department has not had its accounts signed off for many years. If that is the case, I would be most grateful if he could confirm it.

Lord McKenzie of Luton: My Lords, this debate has ranged wider than I assumed that it might. I will start with the point that the noble Lord, Lord Howard, made. I also thank him for his support—seemingly somewhat grudging—for this instrument.

The noble Lord referred to fraud in the EU. This agreement is not just about VAT fraud in the UK. It covers a whole range of things which potentially affect all our partners, including the likes of charging or retention of structural funds. That is one of the key elements preventing the Court of Auditors routinely signing off the accounts. Progress is being made—the double-entry book-keeping system has apparently been a change in the system—and the UK has been at the forefront of pressing some of those developments, but I think your Lordships would agree this is not satisfactory, and more progress needs to be made. There is no doubt that this, and the access it gives to information, particularly about funds that are drifting into Swiss bank accounts, is potentially very helpful in
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that direction. Whatever the argument about the rebate, I do not see that it is impacted by this. So far as we are concerned, the big gain is to tackle VAT fraud, but I hope that his party is not saying that, should it come to government, it would wish to scrap the VAT system. That would be an interesting assertion and an interesting development.

The noble Lord, Lord Newby, supports the order, and I thank him for that. He talked about changes in the VAT accounting regime. That might have been a reference to something called the reverse supply, a mechanism that may mitigate some of this fraud. I believe it was a mechanism that dealt with fraud when gold was going through similar processes, but if it is something other than that I will be happy to write to him.

The noble Lord referred to the agreements with Switzerland and what they cover. On 31 January, HMRC announced an agreement at official level of a protocol to the 1977 UK-Swiss double tax treaty, which covers income tax, capital gains tax and corporation tax. We hope the protocol will be signed shortly and then published. It builds on the commitment on the savings directive agreement. I am not sure whether it will provide comprehensively all the flows of information we need, but it is an important step on the way. As well as this EU agreement, the continual growth of improved double tax bilateral agreements is important.

The noble Lord asked about the issues of banking secrecy, and whether this agreement would give greater access to banking information. It will enable the UK to gain access to information on Swiss bank accounts of both intelligence and evidential use. In most indirect tax cases that is not possible. In particular, it should be noted that the contracting party to this agreement cannot invoke banking secrecy as grounds for rejecting a request for co-operation. Again, that is an important step.

The noble Lord probed more widely about the state of audit of the UK accounts. I can say only that that is not covered by the brief I have before me. I commend this order to the House.

On Question, Motion agreed to.

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