VALUE ADDED TAX (Hansard, 16 January 1980)

§ The Minister of State, Treasury (Mr. Peter Rees)
I beg to move, That the Value Added Tax (International Services) (No. 2) Order 1979 (S.I.,), 1979, No. 1554), a copy of which was laid before this House on 3 December, be approved. The order exempts from VAT supplies of certificates of deposit made to persons outside the European Community and the Isle of Man. The change means that from the date of the operation of the order supplies of certificates of deposit will be exempt where they are made to persons in the United Kingdom or elsewhere. The order is necessary to stop a loss of revenue resulting from the zero rating of supplies of certificates of deposit when made to persons outside the European Community and the Isle of Man.
A certificate of deposit is a form of security which is defined in the Exchange Control Act 1947. There is a note in the order to be attached to schedule 4 to the Finance Act 1972 defining it. In short, it is a form of receipt which may be issued when a deposit of money is lodged with a bank at a fixed rate of interest for a fixed period of time. It is a negotiable document and may be traded for its face value, plus the accrued interest during its currency before final redemption. Banks and other institutions whose business is not wholly or mainly the dealing in securities are allowed, under the VAT general regulations, to disregard the value of such supplies in calculating their deductible input tax. As from 1 January 1978, an alteration was made which would allow dealings in securities such as the certificates of deposit in which there is a growing trade for very large amounts to be zero rated so that the banks' inputs could be set against their taxable outputs. This has resulted in the recovery of input tax by banks and similar institutions at a rate of £20 million a year and is almost entirely due to certificates of deposit.
This was not contemplated by the House or the Customs and Excise when the original orders were introduced, because the true input tax relative to a certificate of deposit is negligible—it is merely the VAT on paper and the overheads. Under the calculations made for determining the amount of the input tax 1828 to be recovered, the full value of the zero-rated certificate of deposit enters into the calculation. There have been detailed discussions with the British Bankers Association, with the consultancy committee of the accountancy bodies, with the Unit Trust Association and the Association of Investment Trusts. They all agree in fairness that this drain on the Exchequer should be staunched.
Those institutions whose main business is dealing in securities—such as unit trusts and investment trusts—have to take their exempt and their zero-rated supplies into account in compiling their VAT returns, so that there is no artificial distortion as in the case of banks. On that basis, I hope that the House will recognise that this is a modest order that will prevent a drain on the Exchequer, and I hope that after due exploration hon. Members will approve it tonight.

§ Mr. John Horam (Gateshead, West)
I am delighted that the Minister of State has made a speech tonight. We were rather disappointed late last night when the hon. and learned Gentleman did not appear at the time to know exactly what were his responsibilities in respect of the Third Reading of the Petroleum Revenue Tax Bill. We were deprived of his Pickwickian charm and enchanting flow of rhetoric, to which the House is accustomed on these occasions, and also deprived of our opportunity of asking him further questions about PRT.
When I saw the prominence with which the Isle of Man featured, I thought that perhaps we were to pursue some fascinating tax loophole, well known to the hon. and learned Gentleman in his previous capacity—perhaps one that he even helped to exploit—which, as poacher turned gamekeeper, he was about to destroy for all his erstwhile clients. That is not the case. We are dealing with certificates of deposit which are basically negotiable receipts given by banks for money deposited with them.
The hon. and learned Gentleman explained that before 1 January 1978 these deposits—the international, not the domestic, version—were an exempt category for VAT purposes. However, on 1 January 1978, to conform with EEC law, international deposits of this kind became zero rated, That meant that banks could reclaim VAT paid on them and, since 1829 they involved very large sums—the certificates of deposits are denominated in very large sums—they would have reclaimed a large amount of tax on them. Therefore, the Customs and Excise, I presume, argued that that was unfair and it wished in this order to revert to the pre-1978 system of exempting rather than zero rating them.
The Opposition accept that this is a sensible order and do not intend to oppose it. But why was it not apparent in 1978 to the Customs and Excise that the result that we have seen would flow from the order that was laid at that time? Why did it make the change on 1 January 1978 with the consequences that it wishes to reverse so soon afterwards? I am sure that it will say that it did it to comply with EEC law. If so, why does it now have to change back? Is it now out of line with EEC law as a result of changing back? What is the practice in other EEC countries which presumably are subject to the same EEC rules and regulations as the United Kingdom? It seems odd that the Customs and Excise should have done a U-turn so rapidly on this point. Perhaps the hon. and learned Gentleman will be able to enlighten the House briefly on that matter.
Secondly, will the result of the order in any way affect the supply of these deposits, or will it merely affect the profits or the tax paid by the banks?
Finally, are very large sums involved? I take it that the point of the order is that there is a loophole of which the banks are taking advantage to increase their profitability. We know that bank profits have been extremely high in the past year or two. Are very large sums involved, or are we talking about relatively small amounts?
I do not expect the hon. and learned Gentleman to answer those three matters immediately—he may not have the figures to hand—but I hope that he will make a stab at enlightening the House on them.

§ Mr. Peter Rees
I am flattered that the Opposition should be so keen to hear my rhetoric, even at a late hour. I should be the last person—although perhaps the Patronage Secretary may have a different view—to cheat them of these opportunities. It is not perhaps for me to go over 1830 the events of last night. I am deeply sorry if the hon. Member for Gateshead, West (Mr. Horam) or his hon. Friends did not have an opportunity to air their views on what was admittedly an important matter. We had a Second Reading debate and a full Committee stage upstairs. However, that is now history.
I note and register with appreciation what the hon. Gentleman said, and I assure him that, in so far as it lies in his power, on future occasions he will always hear my rhetoric if he is minded to do so.
I congratulate the hon. Gentleman on his lucid and succinct analysis of an admittedly extremely complex, if narrowly defined, area.
The hon. Gentleman asked three questions, and I am happy to respond to all of them here and now, because they were—dare I say—exactly the same questions as I put to the Customs and Excise when I was attempting to master this intricate subject.
The hon. Gentleman asked why this point was not apparent in 1978. If I were not such a generous-spirited person, I might say that that was a question more appropriately to be directed to those who were occupying this Front Bench in the years before 3 May last year. Indeed, he might have asked his right hon. Friend the Member for Llanelli (Mr. Davies), who perhaps could have given him a more appropriate answer. I put that question to the Customs and Excise, and, in particular, I asked what the trade in sterling certificates of deposit had been.
The figures can be extracted from the Bank of England statistics, although there is no precise breakdown between the trade in certificates of deposit inside the Community, plus the Isle of Man, and outside. I hope that the hon. Gentleman will forgive me for that. We have not been able to make a precise breakdown but he can cross-check agains the Bank's statistics.
However, I will give the figures that I have. In 1975 the trade was about £3,000 million; in 1976 it was £3,340 million; in 1977 it was £4,640 million; in 1978 it was £3,810 million, and in 1979 it was £3,850 million. So they were fairly considerable sums.
The hon. Gentleman then asked me whether we would be out of line with 1831 the sixth directive. It is important to reassure ourselves that there is no breach of our obligations there, and I am happy to assure the hon. Gentleman that this is not so.
I was then asked whether the profits of the Bank would be affected. I do not think they will, except in the sense that the Bank will not be able to recover its inputs on this range of transactions. In the sense of gross profits the answer is "Yes", but in the sense of profits for corporation tax purposes the answer is "No".
It is thought that we shall be preventing banks and similar institutions from setting about £20 million of inputs against their outputs—that is, about £20 million in VAT. By reference to the enormous sums that we are accustomed to bandy across the Dispatch Box when we discuss public expenditure, that is not a large sum. None the less, I hope that the House and the Opposition will consider that it is worth moving this modest order to staunch this flow.
I hope that I have reassured the hon. Gentleman, who, with his customary courtesy and lucidity, has explored this problem for the Opposition. On that basis, I hope that the House will approve this modest yet important order.