HC Deb 11 July 1972 vol 840 cc1446-54

5.30 p.m.

Mr. Sheldon

I beg to move Amendment No. 14, in page 4, line 37, leave out from "treated" to "as" in line 38.

Mr. Deputy Speaker (Miss Harvie Anderson)

With this we can also discuss Government Amendment No. 15.

Mr. Sheldon

Looking at the history of this matter it is surprising that we have spent so much time on what is such a small point. The reason for the Amendment springs from debates in Committee when we tabled a proving Amendment to test what the Government had in mind. The result was surprising. It was fairly clear to us that the purport of the Clause was not obvious to those responsible and we found a good deal of complication and contradition which we tried to resolve in Committee. In the last resort we found that there was a lack of clarity in the drafting, and the Financial Secretary said that he would go away and try to clear it up. With that assurance we left the matter.

There are certain elements that are still not clear. What happens under the Clause is that a person who puts a process on particular goods is defined as producing goods rather than supplying services. It is still worth while giving the example I gave in Committee of the vitreous enameller whereby a vitreous enameller will receive certain parts from a gas stove manufacturer to be enamelled and returned for assembly. There are other, similar, kinds of operation. Such a person is obviously a supplier of services. Clause 5(3) says: Where a person produces goods by applying to another person's goods a treatment or process he is treated as supplying the goods so produced and not as supplying services. My hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) took up the question of the bespoke tailor and asked whether such a tailor making up a garment from cloth supplied by the customer would be charged VAT on the making or on the whole garment.

It is astonishing that at this stage it is still unclear. The issue is simple. If the supplier supplies goods he is charged on the value added tax of those goods; if he supplies a process then he should be charged VAT on the process. Under subsection (3) if he supplies a process to a person's goods he is considered as supplying the goods and, as we understand it, that means that VAT is charged on the whole of the goods. If a person is supplying the process he should be charged on the process. Will the hon. Gentleman finally clarify this? If he is in some doubt as to what our intentions are may I quote to him from the Committee proceedings of 24th May in which he said, speaking of the Bill: It says that, where a person applies to another person's goods a treatment or process, he shall be regarded as supplying the goods so produced and not supplying services. In reply to my hon. Friend the Member for Heywood and Royton he said: In the case of processing, if it is in fact a process, the consideration will be the processing charge and that is the value on which the tax will be chargeable."—[Official Report, Standing Committee E, 24th May, 1972; c. 208–20.] To me these are still contradictory. My hon. Friend and I have failed to resolve what should be a simple matter. It is clear that the firm which treats the goods supplied for processing will have value added tax charged on the process. Do I carry the hon. Gentleman with me?

Mr. Higgins indicated assent.

Mr. Sheldon

I fail to understand why the simple language that he used did not find its way into Clause 5. It is simple language which is legally quite clear and permits of no other explanation. Although the Clause has been changed it has not been changed materially, because according to the Clause tax will be charged on the goods not the process.

Mr. Higgins

Hon. Gentlemen opposite will realise that there has been a con- siderable amount of confusion about the matter covered by their Amendment and also by Amendment No. 15 which seek to clarify the drafting of the subsection. When we discussed it in Committee there were a number of extraneous reasons why the proceedings were not as clear as they might have been.

We are naturally anxious that the drafting of the Bill should achieve our objective, and I am assured that if the House accepts Government Amendment No. 15 the position will be satisfactory. I cannot recommend the House to accept Amendment No. 14. I will try to explain why, although I am in a slight difficulty in that as we are on Report and not in Committee I have to try to persuade the hon. Gentleman in one fell swoop rather than in a series of interventions. The matter is not simple, but I will try to explain it as well as I can.

The effect of Amendment No. 14 would be to classify all processes and treatments applied by one person to another person's goods as supplies of services for VAT purposes and not as supplies of goods. There are two snags to this. The first objection is that it would be contrary to the EEC Second Directive—and I can say that as the hon. Member for West Ham, North (Mr. Arthur Lewis) has left. That is not the overwhelming consideration. It would also in some cases be contrary to common sense.

Let me give an example of the effect of Amendment No. 14. It would be absurd that the processes of sawing up logs into planks, cutting the planks into lengths and nailing them together to make boxes should not be regarded as constituting the production of boxes merely because the boxes were being supplied to the original owner of the logs.

As I say, there are objections to the Amendment, and I hope that I shall manage to persuade the hon. Gentleman that there is something to be said in favour of Amendment No. 15 and that the whole Clause will be satisfactory if our Amendment is accepted.

The Opposition's desire is, effectively, to see all processes classified as services. That no doubt reflects the continuing suspicion that classifying them as the production of goods will mean that the goods bear extra tax. I think that is what is at the back of the hon. Gentleman's argument.

That is not the position. The value of a supply of goods for VAT purposes is the consideration that changes hands for the transaction concerned, less the tax. When a processor sends goods back to the owner and makes a processing charge, the tax will be levied on the processing charge and not on the full value of the goods. That is equally true whether the process falls within Clause 5(3) and is regarded as the production of goods or whether it is a less radical process and classified as a service. I appreciate that hon. Gentlemen opposite are concerned that that is not the case. I am assured, and I believe, that the position is not as they fear.

Mr. Sheldon

I understand the explanation which the hon. Gentleman has given. It obviously accords with common sense and is what one would expect to see in the Bill, but where is to be found in the Bill?

Mr. Higgins

If I may continue, I would prefer to give an explanation at some length, if the hon. Gentleman will be patient, because it is important to get it right

The contention, which appears in the proceedings of the third Sitting of the Committee on 24th May in columns 192 to 222, appears to be that the subsection as drafted would cause tax to be chargeable on the transactions described in the debate on the basis of full value, that is to say selling value, of the goods produced. In fact, the subsection—and it will be clearer if we accept Government Amendment No. 15—has no such effect. Its only effect is to attach to a particular kind of transaction the label "supply of goods" instead of the label "supply of services". As I pointed out repeatedly in Committee, the labelling follows the EEC directive, and the nature of the label is important in some respects, but not on the aspect about which the hon. Gentleman is worried.

5.45 p.m.

The incidence of the tax is in some cases affected according to whether the label is the "supply of goods" or the "supply of services". The most important way in which the incidence of the tax may be affected is in connection with the tax point, that is the time at which the tax is considered to arise on the transaction. There is a slight complication here, in that there are Government Amendments to Clause 7 which will make alterations to the actual tax, but I suggest it would not be advisable to pursue that at this stage.

Whether it is the supply of goods or the supply of services makes a difference to the treatment as far as the tax point is concerned. Therefore, the Clause seeks to define whether a particular transaction is a supply of goods or a supply of services. It will be appreciated that the precise tax point makes a difference. For example, if there is a change in the rate it can make a difference, and it can also make a difference towards the end of the trader's accounting period.

I think it was appreciated in Committee that whether it was treated as a supply of goods or a supply of services made a difference. As I emphasised repeatedly, that is the purpose of the rather complicated words which we are discussing. Indeed, in exceptional circumstances the distinction between goods and services can make a difference to the tax liability of the supply, that is to say, if it is zero-rated, and so on. There are other complications, whether the supply is gratuitous, and so on. I do not think the House will wish to go into those points, which we discussed at considerable length in Committee.

It was thought by the hon. Member for Ashton-under-Lyne (Mr. Sheldon) in Committee, and it is still thought by him, that a supply of goods must always mean a supply at the full value, that is to say the selling value, of the goods. That is not so. The value of a supply of goods for VAT purposes, the value at which the tax is charged, is normally the consideration that changes hands on a particular transaction less the tax itself. When a processor sends goods back to the owner after completing the processing and makes a charge for the job, the consideration for the transaction is that charge, not the full value of the goods; and the tax will apply accordingly. That is equally true whether the process constitutes the production of goods or whether it is a less radical process classified as a service.

The subsection refers to processes and treatments which result in "producing goods", that is to say, goods which are different in character from the material which existed before the process of treatment was carried out; say a suit or dress made from a length of cloth. Less radical processes, such as cleaning, dyeing, repairing or the vitreous enamelling mentioned by the hon. Member for Ashton-under-Lyne, are not within the subsection and are supplies of services. In their case also the tax is based on the charge for the job.

Mr. Sheldon

When the processor returns those goods on which the process has been carried out, does he charge VAT on the total cost of those goods, being allowed the input tax on the goods coming to him before processing is effected, or does he charge VAT on the cost of processing alone?

Mr. Higgins

I thought I had clarified the position. Part of the problem may arise on the definition of "value" in Clause 10 (2). I have sought to spell out the position as clearly as I can. I have tried to explain that the hon. Gentleman's fears are unfounded if he believes that in some way this provision causes tax to be charged on the transactions which it describes on the basis of the full value, that is the sale value of the goods. That is not the case. It does not have that effect. Its only effect is to attach a label as to whether it is a transaction in goods or in services, but the consideration will be the amount paid for the process.

We have studied carefully all the comments made in Committee, and particularly the remarks of the hon. Member for Ashton-under-Lyne. We came to the conclusion that he was on a false point. However, we thought the position could be tidied up and have now tabled Amendment No. 15 which we thought would make the position clearer. Amendment No. 15 seeks to delete the words "the goods so produced" and to substitute "goods". We are content that the provision will achieve the objectives which I have stated and which were originally intended by the draftsmen. Much of the confusion in Committee arose because of the use of the expression in the Bill "the goods so produced".

This point was raised in Committee by the hon. Member for Islington, South-West (Mr. George Cunningham) and I was impressed by his arguments. He drew attention to the fact that we were talking about the goods so produced as against merely the goods. This is reflected in Amendment No. 15 and I am convinced that the drafting is now tidied up by the change which we now propose.

I feel that the fears of the hon. Member for Ashton-under-Lyne are not valid and that the disadvantages he seeks in this respect will not come to pass. I advise the House not to accept Amendment No.14, which has at least two objections to it, but to accept the Government Amendment No. 15 which makes the intention clearer than was previously the case.

Mr. Dalyell

Woe betide the Financial Secretary if the hon. Member for West Ham, North (Mr. Arthur Lewis) reads his words in Hansard tomorow. The truth is that we are in a hubble-dubble about this matter. The phrase "hubble-dubble" exactly describes our state of mind. I should like to quote what the Financial Secretary said in Committee and I recall that he was a little petulant when he said this: I gladly do so again because I recognise that the hon. Gentleman has a genuine doubt. I have sought to clarify it for him, and I repeat, for the third time, that the intention is to collect VAT from processors by making them accountable for tax on what they charge for work under contract. When the hon. Gentleman asked if the tax was to be on the full value of the goods, I replied that the normal workings of the credit mechanism would operate and that the value of the supply—that is, the processor's charge for the job—would be the consideration."—[Official Report, Standing Committee E, 24th May, 1972; c. 218.] From what he said this afternoon, I did not gather that the value of the supply was to be the consideration.

I also wish to pursue the tax point. What precisely does the Treasury mean by the phrase "not the full sale"? I hope that the Financial Secretary will ask for the leave of the House in order to reply on this matter which is a point of some consequence.

Mr. George Cunningham (Islington, South-West)

I am grateful to the Financial Secretary for tabling Amendment No.15, which I think meets the point I raised in Committee. I am not saying that there are not other difficulties which I foresee, but certainly the difficulties I saw in Committee are met by the Government Amendment. It may not have given rise to any difficulty, but as the provision was drafted there could have been doubt about the ambiguity of language. This would have been particularly regrettable for a number of processors in my constituency.

Mr. Sheldon

May I, with the leave of the House, say that what we are discussing is a subsection which has to do with the merchant converter. He is a person who obtains articles manufactured by other people and sends them out to a third person for subsequent processing for sale by himself. The subsection covers that situation quite well. Where the provision falls down is in the way in which it covers the problems of the processor himself.

The Financial Secretary repeatedly said that the processor himself, let us say somebody who is chromium plating a piece of metal, will pay VAT only on the cost of that process. That is understood but one can charge VAT on that process in two different ways. One can say that VAT will be charged on the process alone. One finds what is the cost of the process, the invoice price, and charges VAT on that process, or one can say that that firm will receive the article to be processed and that article will cost, say £1. When the article is sent back it will contain 50p worth of processing and will be sold back for £1.50. The VAT could then be on the sum of £1.50 less the input tax of £1.

We have failed to get any explanation from the Financial Secretary as to which method will be used. Subsection (3) says that the person who processes goods will be treated as supplying the goods. It was suggested that the way in which the accounts were to be made up relates to the second example which I gave.

Mr. Higgins

Perhaps, with the leave of the House, I may seek to clarify the position. I have sought to set out the purpose of the provision, namely to attach a label on whether something is a supply of goods or a supply of services, since this makes a difference in terms of tax. To take the example put forward by the hon. Gentleman, when the materials are handed over to the processor by the owner, there is no charge, no tax, no input tax deduction. He charges tax on that process which is the consideration for that supply. That is what the position normally will be. I am still puzzled why the hon. Gentleman should have problems over this matter.

Mr. Sheldon

If that is the simple explanation, it is a pity it is not in subsection (3). Why do we have to have all these other words? Nothing the hon. Gentleman said about the real significance of the provision is contained in subsection (3). It is a trivial matter to raise, but repeated discussion and comment has failed to produce an explanation in legislative form in the Bill. The reason may be—thismay certainly be the view of my hon. Friend the Member for West Ham, North (Mr. Arthur Lewis)—that this provision has not translated very well from French. Whatever the reason, it is a pity that we have wasted so much time on such a simple matter. Why, if that is so, did not the hon. Gentleman go back and put it in?

We do not want to waste any more time on this matter. It is a great pity that the Clause is still badly drafted. It is obviously drafted in this way to meet some international requirements rather than the British requirements of understanding what the legal position is and should be. However, in view of the discussions which we have had I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 15, in page 4, line 38, leave out 'the goods so produced' and insert 'goods'.—[Mr. Higgins.]

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