Value Added Tax

HC Deb 16 July 1984 vol 64 cc115-24

10 pm

Mr. Jeff Rooker (Birmingham, Perry Barr)

I beg to move, That an humble Address be presented to Her Majesty, praying that the Value Added Tax (General) (Amendment) (No. 2) Regulations 1984 (S.I., 1984, No. 929), dated 5th July 1984, a copy of which was laid before this House on 6th July, be annulled. It is somewhat remarkable, although understandable, that the Opposition have had to lay a prayer under the negative procedure to enable Parliament to debate about £1.2 billion which was a central part of the Chancellor's Budget statement. Were it not for this debate, the House would have had no chance to debate the change, any of the problems and uncertainties that surround it and such a large sum of money.

I do not propose to go through the details of the regulations—that is the Minister's job. I merely want to ask him a few questions. As far as I am aware, the Government are following the correct legal procedure. I say that because the Leader of the House left one of his constituents with the impression in May that these matters were being dealt with in the Finance Bill. I suspect that many people have looked in vain in the Finance Bill for this part of the Chancellor's Budget statement.

I wish to ask the Minister some questions because of speculation surrounding the background to the change. Is there still any argument between Customs and Excise and the clearing banks about the terms of the guarantees required for those who import into Britain and who will be required to pay VAT between six and eight weeks earlier than would otherwise be the case? I do not intend to divert the Minister on to other areas of policy but is he confident that there will be no blockages at the ports from 1 October when the new scheme takes effect? There has been much discussion about that in the media, especially in regard to Dover which is represented by the Chief Secretary to the Treasury. Does any trading organisation have any outstanding inquiries or queries with the Government? Are any meetings between the Government and trading organisations regarding implementation of the order still on the agenda? Have any steps been taken to protect exports from Britain if there are blockages at the ports because imports have been held up? Exports are not affected by the order but could be affected by physical difficulties in the docks. Such difficulties should be foreseen and planned for.

I did not expect to have to raise my next questions but it has been put to me by some of my right hon. and hon. Friends. Are any special arrangements due to be made to cope with the problems of importers who must pay VAT at the ports on objects that arrive and have an unknown value? I refer to objects that have been imported for auction with a view to being exported shortly afterwards. There will obviously be some difficulty in levying VAT on such objects. I assume that the Minister will give us the latest with regard to the 14th draft directive of the EEC on harmonisation of VAT at the ports. As I understand it, if an agreement could have been reached in the EEC, the Government might not have pursued this course of action in the regulations. Much to my surprise I have also discovered that there is a seventh VAT directive on works of art, which may or may not be affected by the operation of the regulations. That probably also relates to my previous question about objects of unknown value at the point of import.

The Opposition do not oppose the regulations, and any sign to the contrary was simply a misunderstanding. It is clear from the Chancellor of the Exchequer's Budget statement that importers have in general been obtaining an easement in cash flow, which could be taken as an importers' handout at the expense of domestic producers because they have not been required to pay VAT for up to 11 weeks after the importation of the goods involved. That does not apply to domestic producers. It is unsatisfactory, especially in a nation that is sinking under a tide of imports. The Chancellor of the Exchequer is right to attempt to equalise treatment, and there can be no argument about that.

The Chancellor's problem—this matter will affect the House and the nation next year—is that he used the once-and-for-all bonus of £1.2 billion that arose from moving forward the date for payment of VAT. He will gain that only for one year. He used that money in his Budget judgment for the PSBR calculations. That clearly means that next year he must find the same sum again from another source, either on a once-and-for-all basis or on a recurring basis, even to maintain the status quo of the PSBR, public expenditure and taxation. It is a target that he must reach. I do not know where he will find that money, and I do not expect the Minister to tell us, but I shall venture a suggestion.

Clearly it is on public record that the Government do not intend to maintain the existing regime of VAT indefinitely. That intention is in letters written by Ministers. It is also on public record that the Chancellor briefed the Sunday press after the Budget and, like a child sucking up to its mother, the press sucked it all in and wrote it down. It is clear that the Chancellor intended to spread the burden of VAT, either through a two-tier rate or by extending VAT to areas such as public transport, construction and fuel. That is clear from the press reports of 18 and 19 March 1984.

About a week after the Budget the Chancellor said in a radio broadcast: We are free to do what we think is right but I have no plans to move in that direction. He was talking about the fact that the Conservative Government between 1979 and 1983 were pledged not to put VAT on food, fuel, housing and transport, but that no such pledge was given in 1983. Clearly one way in which the Chancellor could scoop up £1 billion-plus is by extending VAT.

I invite the Minister at least to tell the House some of the ways in which the Chancellor could make up the shortfall that will occur because the regulations involve a large sum on a once-and-for-all basis. To try to run the economy on such a piecemeal basis, where such a large sum is involved, is unacceptable.

I said at the outset that I accept the legality of our formalities and that we must debate this Opposition prayer. Although the procedure which allows the Customs and Excise to make their own regulations is all right, there is an argument for "capping" the money. Where a regulation can affect our economy to such a great extent — it could be more than £1 billion — the original legislation should be amended so that this can be done only by affirmative order. It should not be possible for the Customs and Excise to issue regulations that could have such a devastating effect, equivalent to more than a penny in the pound on income tax, in such a way that the House of Commons cannot debate the matter. They could issue regulations when the Government cannot find time to debate a prayer. I hope that Ministers will bear that in mind when drafting the clauses for next year's Finance Brill.

10.11 pm

Mr. Toby Jessel (Twickenham)

I am second to none in supporting the ending of the postponed accounting of value added tax. It has made possible many other tax reductions in the Finance Bill. The hon. Member for Birmingham, Perry Barr (Mr. Rooker) referred to the effect of the change on articles of unknown value, such as works of art for auction, and I ask my hon. Friend the Minister whether the Government will consider the way in which the proposed measure could affect the business of fine art auctioneers in London such as Sothebys and Christies.

London is one of the great arts capitals of the world. I speak not only of museums, art galleries, architecture, the stage, concert halls, opera and ballet—thus bringing in both visual and performing arts—but of our fine arts auction houses. Those parts of London's heritage comprise a network of art and of tradition that is very important to Britain. It is a priceless national asset which should be treasured and fostered. If we damage one strand we can damage all of them, because visitors to Britain derive much pleasure, enjoyment and interest from those activities, which in turn can generate their spending on other parts of London's heritage.

The fine art auction houses are in a highly competitive business. London is in sharp competition with New York, Geneva and increasingly with venues in the far east and other parts of the world where articles of art and history are auctioned. If international sellers can easily choose to go elsewhere because they do not like London — they are free to do so—marginal factors can tip the balance and affect their choice, and those effects can snowball. Many art objects that are sold in London have been imported for sale only to be re-exported if they are brought by foreigners, and deferred VAT would straddle that time interval, which is typically two or three months and can be as much as four. If those people must pay VAT where they did not have to pay it previously, although they can reclaim it on export, the cost of interest in the meantime must be financed by someone. That is bound to increase the overall cost of the operation and to undermine London's position as a centre of the international art market.

The amounts involved are not huge from the point of view of Government revenue. I have not attempted to work our the figure and I do not know whether the Minister of State has sought to do so. However, at a rough guess, I believe that it amounts to probably less than £2 million a year, and might even be less than £1 million, for the whole of the art market. That is not large in terms of Government revenue, but by sheer nuisance value it could in the long run significantly damage the prosperity and earning capacity of the British fine art auction market. Such damage would, I suggest, be out of all proportion to the marginal increase in revenue that the Government might receive.

I ask the Minister to consider whether he and the board of Customs and Excise can find some way of solving this difficulty.

Sir Peter Mills (Torridge and Devon, West)

I share exactly my hon. Friend's views and believe that something must be done. Is not the simple answer a delay of payment of VAT until these things are actually sold and exported?

Mr. Jessel

I am grateful to my hon. Friend. That is what happens at present, because the tax is, and has been, deferred, but that is now in jeopardy because of the change proposed in the Budget. I warmly agree with my hon. Friend and am grateful for his intervention. In view of that added weight, I hope that my hon. Friend the Minister will carefully consider this matter.

10.16 pm

Mr. Ian Wrigglesworth (Stockton, South)

I do not seek to oppose the regulations, but I wish to draw attention to some anxieties about them that have been expressed to me. Before doing so, I support what the hon. Member for Birmingham, Perry Barr (Mr. Rooker) said about placing a limit on the size of funds covered by regulations of this sort. We are talking about substantial sums of money. There seems to be a case, which should at least be considered — possibly at the time of the next Finance Bill — for a change in the way in which we deal with matters of this sort.

I do not wish to oppose these measures because they introduce equalising treatment for exports and imports, and clearly it is to the advantage of our economy that we should be on all fours with other countries.

I wish to express anxiety about the immediate impact that the introduction of these regulations will have. They will affect small importers, of whom there are many, whose cash flow will be hit considerably and who may find it difficult to get the guarantees necessary from the banks to sustain the burden placed on them by this change. Many small importing firms engaged in quite legitimate business will, I believe, be hit hard by the imposition of these regulations later in the year. I should be grateful if the Minister can assure us that he has their plight in minds, and I shall be interested to learn of the ways in which he feels he can help people in these difficulties.

The hon. Member for Perry Barr spoke of the possibility of some congestion at Dover. That could happen at other ports if goods are delayed through the deferment of VAT no longer taking place, and consequently it may take some time for companies to raise the funds. Indeed, they may possibly not pick up the goods at all. That may be so in a small minority of cases, but considerable fears have been expressed that this may lead to delays and congestion. I should be grateful if the Minister could reassure us on that point.

Both those things may combine to cause considerable difficulties for manufacturing businesses, as well as art and auctioneering businesses, which import raw materials and parts and whose supplies could be interrupted by the introduction of these regulations. I should like to think that the Government had borne these worries in mind in drafting and introducing the regulations. I should be grateful if the Minister could give some assurances about them.

10.20 pm

Mr. George Walden (Buckingham)

I support what my hon. Friend the Member for Twickenham (Mr. Jessel) said. I agree with the economic logic of this measure, but if logic is pushed too far and is too pure it gives rise to anomalies, and there has been an anomaly in respect of the art market.

The philosophy of the measure is to give equal VAT treatment to imports and domestic sales, but the effect on the art market will be precisely the opposite. If, for example, an exhibition is mounted here of pictures that are imported, in future the VAT will have to be paid at the moment of importation. Probably only a few of those pictures will be sold—I seem to remember that even Cézanne and Matisse were not immediate sell-outs—and the rest will go back abroad. During the long interval an extended loan will be made to Her Majesty's Customs and Excise. No worthier body for such a loan could be imagined, but it is hard on the people financing that loan.

My point is essentially the same as that of my hon. Friend the Member for Twickenham. This is a self-evident anomaly which I hope it is not too late to correct.

10.22 pm

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

I intervene on the basis of the implementation of the instrument rather than its principle. The arguments about the principle have long since been made and are past. The change has been visited upon us. But I wonder what steps the Government took, subject to the obvious constraints of Budget secrecy and the difficulties that that produces, of trying to consult the trade about the effects of the change made by the Chancellor of the Exchequer.

I am worried about the combination of the congestion plus the higher costs involved, and perhaps I can tempt the Minister to say how the position has changed now that interest rates have altered since the decision was taken. All these together may be considered as some sort of non-tariff barrier on imports. If that happens and if the congestion is as bad as some of the worst estimates suggest, that will be bad for trade generally.

I am told that the Government have received about 22,000 applications for delaying payments to the 15th of the following month. If that is true, they will have to process an application every two minutes to be ready for 1 October in a sensible way. There are 50,000 firms involved, and the effects will be felt most drastically by the small companies involved, which have to pay these higher rates and cope with the additional bureaucracy.

I reinforce what was said earlier about the Government's position under the 14th VAT directive. Does it mean that the old system, which is technically the system that has been adopted by the EEC, is out of the window for all time? It is right to ask the Government for their long-term views and what they think about the 14th directive now that this change has been made.

If my information is right, 60 per cent. of our trade is with the EEC and 70 per cent. of that is what is known in the trade as "innocent" consignments. VAT is waived on these consignments. Customs officers will now have to check their "innocence", their guarantees and their security if VAT is to be paid. That must involve the Customs and Excise in a great deal of additional work.

An EEC report in 1981 on difficulties encountered in international traffic stipulated that the collection of VAT under the new system led to more border delays than anything else, while directive No. 83/643 on procedures and formalities at Community borders asked for customs formalities to be kept to the minimum. It seems that the changes that we are discussing will do nothing to assist that. I am certainly worried about the knock-on effect on exports if ports are clogged up.

If the Government are to make any sense of the regulations, much more effort is needed to ensure that companies are aware of the effect of the change, so that the majority have their papers in order to minimise the delay. The Chancellor of the Exchequer should use his influence to ensure that the banks take as relaxed a view as possible in trying to help small clients with their cash flow problems. He should also consider, when special cases can be made, waiving the requirement to guarantee cheques to pay VAT.

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) was right to ask about how we will deal in future with regulations involving vast sums of money. This procedure is inadequate. We should look at that for the future.

Having studied the 1980 order that the regulations amend, I think that there is an irrefutable case for the consolidation of some of these regulations. The 1980 order is a pig's breakfast. Will the Government give us some idea of what they expect to happen when the scheme is implemented and what is to happen to the principle of the 14th EC directive?

10.26 pm

Mr. Patrick Cormack (Staffordshire, South)

My hon. Friend the Minister of State, Treasury will be relieved to know that I do not intend to make a long speech. We have been round the VAT course regularly recently, but I wish to support my hon. Friends the Members for Twickenham (Mr. Jessel) and for Buckingham (Mr. Walden).

My hon. Friend the Member for Buckingham said that there was a certain logic in the regulations. Unfortunately, logic and common sense do not always go hand in hand, and the regulations are a good example of that.

My hon. Friend the Member for Twickenham made a point that should not be lightly dismissed when he spoke of London being the centre of the world art market. There is considerable anxiety, particularly in our major auction houses, about the implications of the regulations. I hope that my hon. Friend the Minister of State will pay proper regard to the impeccably sensible suggestion made by my hon. Friend the Member for Torridge and Devon, West (Sir P. Mills) in a brief but trenchant and telling intervention. If the Minister meets that point, he will go far to allay the fears raised in recent days.

10.28 pm

Mr. D. N. Campbell-Savours (Workington)

I shall be brief and I apologise for not having been here earlier, but I was otherwise engaged.

Representations have been made to me about the implementation of the regulations. I supported the proposal in the regulations, particularly as I have had some experience of clearing goods through Dover. However, I understand that at the time of the Budget it was not clear, particularly to clearing agents in Dover, what effect the proposal might have.

I am informed that much confusion is expected by clearing agents and hauliers and that hauliers are worried that if there are inaccuracies in the documentation, particularly the VAT entry submissions, landing officers may decide to hold up vehicles, which may stand idle at Dover at a cost of about £120 a day.

I refer particularly to Dover because at that port there are many trailer units accompanied by tractors. There is no driver or tractor accompanying most commercial goods cleared by Customs, but much of the trade through Dover comprises tractor-accompanied containers on trailers.

Perhaps the Minister will address himself specifically to the problems of the small agent. Mr. Richard Pelts, the manager of the Anglo Overseas Transport Company, which has an office in Dover's eastern dock, spoke about a complication that would arise over a guarantee and said: Even if we do provide guarantees for all our customers, we could still get caught up in delays, not of our making. Of course, that view is also expressed by many clearing agents in Dover, as well as by many hauliers.

Some weeks ago, an article appeared in the Financial Times under the headline, Taxing Times at the Ports". It was written by Mr. Andrew Taylor, and its opening paragraphs set out simply and clearly the general view of those who use the facilities at Dover. He said: Britain's bustling south east and east coast ports could face chaos and confusion this autumn. Lorries may be held up for many hours and imports delayed as a result of the Chancellor's plans to raise an extra £1.2 billion in VAT payments by the end of the financial year. The warning is made by Mr. Jonathan Sloggett, chief executive of the Dover Harbour Board, which runs one of Britains busiest ports handling billions of pounds of trade each year with the Continent. Mr. Sloggett warns that changes in the way in which VAT on imports is to be collected—to be introduced on 1 October—will seriously disrupt traffic in key ports like Dover and threaten the future of hundreds of small import businesses In the same article there is a reference to the problems faced by small agents who find difficulty in raising the required bank guarantees to cover the VAT liabilities of the firms for which they act as hauliers. The House deserved to be given an undertaking that all those businesses, particularly in Dover, will be fully protected through the introduction of this arrangement. Even now there are still people who are confused and concerned about the implications of this scheme. There is a feeling that the larger freight agents, who are in a position to raise the necessary bank guarantees, are in a better position than those who are not as well-heeled or whose trade references are not so substantially backed by assets.

Therefore, we need some undertaking that the smaller hauliers and freight agents will be thoroughly protected and that the larger operators will not be able to benefit from Government legislation at the cost of the smaller ones.

10.33 pm

The Minister of State, Treasury (Mr. Barney Hayhoe)

I thank hon. Members for having given a general welcome to the regulations. As a Member of Parliament rather than as a member of the Government I share the concern expressed about the procedures being followed. However, according to legal advice, we are following those procedures absolutely correctly. As hon. Members will realise, I questioned whether we were proceeding in the right way, and I was assured, on the legal advice available, that we were proceeding in the only proper way under the law.

However, I think it only appropriate to draw the attention of my right hon. Friend the Leader of the House to the points made about the procedure, and whether it is appropriate that such a significant sum—£1.2 billion—should be raised by regulations. They have been properly laid in accordance with the law of the land, and are subject to a negative resolution of the House, but I shall make that point to my right hon. Friend the Leader of the House. It is obviously not a matter for me to decide, but it may well be a matter for the Select Committee on Procedure.

This is the formal way in which we implement what the Chancellor said in his Budget statement about the change in the arrangements for VAT of imports. The change received a broad welcome in all parts of the House since it was thought wrong to continue to allow British industry to be at a competitive disadvantage because our fellow members of the European Community would not implement the 14th directive and operate a postponed accounting system throughout the Community. We ought to convince our fellow members that this was the best way were were supported in our stand by the Commission, but we failed to achieve success. It seemed right, therefore, to make the change.

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) asked whether the problems between the Customs and Excise and the clearing banks over the terms of the guarantee had been solved. At the meeting on 5 July all outstanding points were dealt with to the satisfaction of both parties. The form of the guarantee presently available, when it is reprinted, will contain miniscule alterations. All concerned accept that it is satisfactory. No further delay should occur because of the uncertainty about the form of guarantee, although banks may be unwilling to give guarantees for other reasons. I hope that the substantial number of applications for guarantees — totalling not 20,000 but 30,000—will be processed at goodly speed.

Several hon. Members mentioned worries about hold-ups at the ports. Particular reference was made to Dover and to comments by the person running the Dover harbour board. I do not wish to introduce a note of controversy into the debate, but whatever the difficulties flowing from this measure, they are as nothing compared with the difficulties flowing from the strike that is stopping the movement of freight and therefore damaging—

Mr. Campbell-Savours

Will the hon. Gentleman give way?

Mr. Hayhoe

No. One must put these matters in perspective. Those who are affected by the present ban on freight and the blockage of freight through Dover are the people referred to in the discussions that we have had tonight.

Mr. Campbell-Savours

Does the Minister accept that advance clearance can be obtained for freight held tip abroad—a facility available, at Dover—and that there should be no delay in documentation?

Mr. Hayhoe

I do not know whether that applies to what I was saying. Little additional documentation is required and little, if any, physical checking for the majority of import entries. More customs staff are deployed to help with that small additional paperwork and about 100 additional staff are being deployed to help implementation.

Customs planning is based on the need to keep traffic flowing smoothly. The main delaying factor is likely to be the failure of importers and agents to establish either adequate deferment guarantees or to make funds available quickly. If importers meet those obligations, the delays should be minimal.

There has been widespread consultation between the Customs and all interests. There have been about a dozen seminars in London, Brighton, Bristol, Southampton, Manchester, Gateshead, Glasgow, Canterbury and so on. A widespread series of meetings has been held so that all the detailed points could be discussed. Those meetings have gone well, and many of the worries have been dissipated. I hope that there will be a smooth transition in bringing in the new system. On the inter-relation with exports, the port managements, in co-operation with Customs, will do everything possible to ensure that any delays for traffic coming into Britain will not affect traffic going out.

I was asked about meetings with trade organisations. I have already referred to the seminars. I have read in the press that people want to see me and I have just received a letter from the British Importers Confederation, making a specific request for a meeting. I have readily agreed to a meeting with trade interests.

The point that has exercised the minds of a number of my hon. Friends—including those for Twickenham (Mr. Jessel), for Torridge and Devon, West (Sir P. Mills) and for Buckingham (Mr. Walden)—has been the special problems of the art world. A substantial number of hon. Members will have received representations on that point. I have had consultations with some of those affected. Officials are already discussing the difficulties with the various trade interests, to seek solutions that overcome their difficulties without undermining the Chancellor's Budget expectations. It was no part of the Chancellor's Budget to erode or undermine the position of the British art market as the centre of, the auctioneering efforts. I know that some hon. Members are worried about the bloodstock industry, where similar considerations apply. All those matters are being discussed, and I hope that we can find ways to overcome the difficulties.

I was grateful for the general support of the hon. Member for Stockton, South (Mr. Wrigglesworth). He referred to the problems of small importers. The Customs are holding discussions. However, £1.2 billion is being raised by the changed provisions, and that cannot be raised without some additional burden being shared by those having to meet that substantial sum. There is no magic about it—it will be that amount of money coming to the Government earlier than they would otherwise expect. I would not wish to pretend otherwise.

The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) referred to background. There have been long discussions. In 1980, a careful look was taken at the whole position, and at that time the decision was against going ahead. In 1983, the NEDC concerned with the knitting industry made a powerful case both in public and in the NEDC in favour of the changes. There have been discussions in the NEDC and elsewhere, and the Chancellor took those into account in reaching his judgment. Of course, the Chancellor did not involve the NEDC or those who make representations either way in his decision—it was a decision made by him on the basis referred to in the House.

I was asked about the long-term position of the Government. I reiterate what the Chancellor said in his Budget statement, that we still support the 14th directive. We would like to see the postponed accounting system, which we now have, continued. If the miracle occurred and our partners in the Community all made the change before 1 October, there would be no difficulty in the Government taking the necessary action, as the Chancellor said he would. But that is living in a world of fantasy, because we know that that will not happen. However, if at a later stage, we or others can persuade the Community to move to the postponed accounting system, the Chancellor has made it clear that he would be prepared to tell the House that we should revert to the arrangement.

Mr. Rooker

Regarding the importation of goods for the art world, while we are grateful for the Minister's remarks, may I remind him that it is four months since the Budget? I find it remarkable that, based on the representations that I have received and my knowledge of the matter, this matter, has just arisen. There was no mention in press notice No. 895 issued on Budget day, that this change would be made by order; one assumed that it would be made as part of the Finance Bill. However, the final sentence of the press notice read: There will be consultation with representations of trade bodies affected in due course. Did not the Government think of the art world at that time? Or has the art world come to the Government? It seems odd that such an important industry should be in this position four months after the Budget.

Mr. Hayhoe

I am not entirely clear about the timing, but the first representations that I received directly from the art world were in the course of the last few weeks. I am aware that documents have been circulated, but perhaps they were concerned with other major events. As for the bloodstock industry, which I said was a related matter, it reacted and discussions will take place. I hope we shall find ways of resolving these problems. It is clear that the whole House wishes, if it is at all possible, to find a way to resolve the issue so as not to damage the art market interest and the associated interests that go with it.

Mr. Cormack

Will my hon. Friend not say "if it is at all possible," because it is possible?

Mr. Hayhoe

I will not be tempted by my hon. Friend, who tries it on quite regularly, and gets roughly the same response each time. I hope that he will accept that I have gone a considerable way to indicating where my thoughts lie in the matter. I hope that officials, with good will, can find the appropriate solution.

Mr. Rooker

I beg to ask leave to withdraw the motion.

Motion, by leave, wihdrawn.