§ Mr. FreemanI beg to move amendment No. 161, in page 11, line 36, leave out
'£3,000 and 1½ per cent.'and insert'£10,000 and 5 per cent.'.I sense that there is broad support on both sides of the House for the amendment, and I am grateful to the Minister for the courteous and encouraging way in which he has considered our discussions about its terms. The purpose of the amendment is to raise the minimum error threshold before the penalties of clause 14 apply.1158 It may help the House if I explain briefly what the clause provides at present and what the amendment would substitute for it, because the language in subsection (2)(a)(i) and (ii) is difficult to follow.
As the Bill stands, if the true amount of tax due in a quarter is between nil and £10,000, the error threshold is 30 per cent., that is from nil to £3,000. If the error is greater than that, the automatic penalties provided in clause 14 will come into play, that is the 30 per cent. penalty and the recovery of the tax. If the true amount of tax due is between £10,000 and £200,000, the error threshold is £3,000, and if it is above £200,000 the 1.5 per cent. provision comes into play. Therefore, the error threshold starts at £3,000 and rises to 1.5 per cent. of the true amount of tax due.
Under the amendment, if the true amount of tax due is between nil and £33,333, the error threshold is 30 per cent. of the true amount of tax due. If the tax due is between £33,333 and £200,000, the error threshold is at £10,000, and if the tax due is above £200,000 the 5 per cent. provision comes into effect.
The practical effects of that are that the error thresholds are increased for all companies where the true amount of tax due in any quarter is greater than £10,000. That is equivalent to £40,000 per annum. The amendment would benefit companies where the true amount of tax due is greater than that. The benefit is not confined purely to medium-sized and large companies, but to what many involved in business and industry would regard as small companies. The Confederation of British Industry, the Institute of Taxation and many companies throughout the country will welcome the amendment, and I commend it to the House.
§ Mr. HayhoeI am happy to say that the Government accept the amendment, and I join my hon. Friend the Member for Kettering (Mr. Freeman) in commending it to the House.
§ Amendment agreed to.
§ Mr. HayhoeI beg to move amendment No. 5, in page 11, line 42, after 'periods', insert
beginning after the day appointed under subsection (8) below'.The purpose of the amendment is to safeguard taxpayers by ensuring that there can be no possibility of retrospection, either directly or through the operation of the totting up test in respect of the civil penalties and serious misdeclaration under clause 14, breaches of regulatory provisions under clause 17, and of interest on tax under clause 18. The amendment implements assurances which I gave to the Committee, and I commend it to the House.
§ Mr. BlairAs I understand it, the amendment will prevent retrospective totting up, and that is its sole effect.
§ Mr. HayhoeThat is my understanding. The amendment is in pursuance of my undertaking to the Committee when my hon. Friend the Member for Tatton (Mr. Hamilton) raised some points.
§ Amendment agreed to.
§ Mr. HayhoeI beg to move amendment No. 137, in page 12, line 20, at end insert
'but if for any period there is an understatement of credit for input tax or an overstatement of output tax, allowance shall be made for that error in determining the tax for that period which would have been so lost.'.1159 My hon. Friend the Member for Bristol, North-West (Mr. Stern) is unable to he present this evening. As I was going to accept the amendment, I gladly move it and accept it in the same breath.
§ Mr. BlairI wish to ensure that I understand the effect of the amendment. Will the Minister confirm that if a trader has understated both the input and output tax—in other words, he is understating the volume of the business — and if he is brought up for one understatement, he will be given credit for the other?
§ Mr. HayhoeIt is the net position that will be dealt with. It seemed reasonable and fair.
§ Amendment agreed to.
§
Amendments made: No. 6, in page 12, line 28, after 'section', insert
'nor be taken into account under subsection (2)(b) above'.
No. 7, in page 12, line 29, leave out from 'person' to end of line and insert `concerned'.—[Mr. Hayhoe.]
§ Mr. HayhoeI beg to move amendment No. 8, in page 12, line 31, leave out
'that he exercised all due diligence and'.
§ Mr. SpeakerWith this it will be convenient to take the following amendments:
Government amendments Nos. 10, 11, 14, 17 and 27.
Amendment No. 175, in clause 33, page 34, line 45 at end insert
'save where the insufficiency of funds arises directly from the fact that the person has not received the payment from his customer in respect of which value-added tax is due and has not been paid.'and Government amendment No. 28.
§ Mr. HayhoeThe amendments give effect to the undertakings that I gave in Committee to reflect upon the need for the provision concerning "all due diligence". Upon reflection, and taking account of the arguments put from both sides of the Committee, I am now bringing forward these amendments, which I hope will be welcomed and supported by the whole House.
§ Mr. BlairI have no difficulty with the Government amendments, but amendment No. 175 takes us in a slightly different but important direction.
At present, under clause 33, if a trader attempted to provide a reasonable excuse for any conduct that was unlawful under the VAT provisions, the effect of subsection (2) of that clause would be to prevent an insufficiency of funds to pay any tax due being deemed by the commissioners or the VAT tribunal to be a reasonable excuse; in other words, the definition of "reasonable excuse" is drawn in such a way as to exclude the situation in which someone cannot pay because of an insufficiency of funds.
Amendment No. 175 would add, at the end of subsection (2), the words
save where the insufficiency of funds arises directly from the fact that the person has not received the payment from his customer in respect of which value-added tax is due and has not been paid".It is important to note that the amendment does not relieve the trader or person concerned of the obligation to pay the VAT. Yesterday, on one of the new clauses, the discussion related to whether, in circumstances where a customer had not paid the VAT to the trader or taxpayer, the taxpayer could then count that as a bad debt. The 1160 Government resisted that amendment. I could see why they did so, because it would have relieved the trader altogether of the obligation to pay.Our amendment does not relieve the person concerned of the obligation to pay; it simply relieves that person, if the commissioners or the VAT tribunal so desire, of the harsh system of automatic penalties and the different rates of interest in circumstances where that non-payment of VAT has genuinely been caused through no fault of the trader. In other words, it gives a power to the Customs and Excise or the VAT tribunal to take into account insufficiency of funds in carefully prescribed circumstances when deciding whether there is a reasonable excuse for non-compliance.
That does not mean that the commissioners or the VAT tribunal would have to take into account insufficiency of funds arising in those circumstances — they would not have to describe that as a reasonable excuse — but it does not exclude from the definition of reasonable excuse the circumstances in which an inability to pay arises directly from the customer not paying the trader and the trader having sought from him VAT in respect of that invoice.
The prescribed circumstances are very tight. The insufficiency of funds must arise directly from nonpayment by the customer. We are therefore discussing a fairly limited range of situations and a case in which a trader may issue an invoice for a large amount. By so doing, he is liable for VAT upon it. If the customer refuses or fails to pay, the VAT trader may be in difficulties in meeting the VAT liability because the customer has not honoured the invoice. The insufficiency of funds arises directly from the conjunction of an invoice being issued, a liability to pay, and the customer not meeting that liability.
With great respect, I suggest that such a narrowly drawn discretion as contained in the amendment is in the interests of equity. We know that there are small businesses which can have major cash flow problems as a result of VAT liabilities. We know that, particularly in certain trades, it can be difficult to secure payment of invoices from customers. It seems unfair that those cash problems can result in the serious VAT penalties under these clauses in circumstances in which, through no fault of the trader, the customer refuses to pay the trader.
I repeat that this does not relieve a trader of the obligation to pay VAT; it simply relieves, or gives the commissioners of the VAT tribunal discretion to relieve, the harsh penalties prescribed by these provisions of the Bill in circumstances where the problems arise directly from the failure of a customer to pay.
The Government boast of their record on small businesses. Of all the VAT subjects which we will discuss tonight, I think that none is closer to the heart of small businesses than the difficulties which can arise in the circumstances I have described.
I ask the Minister to consider carefully whether he can accept the amendment. It would allow for fairness in the treatment of businesses and traders, but it would not relieve people of the basic obligation to pay. It is a way of easing the burden of these penalties in circumstances in which, through no fault of the trader, a great financial difficulty can occur.
1161 I appeal to the Minister, in terms of a fairly tightly drawn clause, to consider whether he can allow the amendment, which I believe would greatly increase the justice of these provisions.
§ Mr. Tim SmithThis group of Government amendments will be widely welcomed, I think, because the Bill as drafted would have required the taxpayer to meet a double test to establish a defence: first, a reasonable excuse and, secondly, due diligence. I think that that would have caused confusion. Therefore, I am grateful to my right hon. Friend the Minister for having introduced what I think will be a valuable simplification.
My hon. Friend may recall that I sent him a redraft of some of these clauses prepared by Mr. St. John Price, a VAT practitioner. Mr. St. John Price felt, as I think many people do, that some provisions of the Bill are still extremely complicated and difficult to follow. Can my hon. Friend tell me what has happened to those proposals?
§ Mr. HayhoeTo reply first to my hon. Friend, I have a letter in draft in response to my hon. Friend. Perhaps I should not seek to do more than give him a soupcon of an hors d'oeuvre by saying that it is not as simple as his constituent has led him to believe or, indeed, as I said in Committee, as simple as I dearly wish it could have been. I will be writing to him. With his permission, if other hon. Members wish to have copies of that correspondence, I would be happy to co-operate. I am delighted that the Government amendments removing the due diligence provision have been generally welcomed.
The hon. Member for Sedgefield (Mr. Blair) made various points about amendment No. 175. Clause 33(2) provides that
an insufficiency of funds to pay any tax due is not a reasonable excuse.It limits the circumstances in which the benefit of this defence may be claimed. The purpose of the amendment is to remove this limitation where the taxpayer can show that an insufficiency of funds results directly from nonpayment by his customer and thus to permit more taxpayers to avoid the penalties, in particular the default surcharge.The hon. Gentleman made out a persuasive case on the basis of the hard cases that he used as a foundation, of which all right hon. and hon. Members are aware, because of our contact with constituents. However, like the hoped-for simplicity of the drafting of these clauses, it is not quite so easy. The Opposition amendment would begin to undermine the basic concept of VAT: that tax becomes due at the time of supply or in the issue of the tax invoice, subject to its being issued reasonably promptly. These matters were referred to yesterday in our debate on new clause 11.
The amendment effectively changes the tax point to the date of payment for the supply, since it would allow nonpayment by customers to be the basis of a perpetual claim to the reasonable excuse defence against all sanctions for non-payment of the VAT in question. Under the guise of helping the hard cases, for which there is great sympathy, it could drive a coach and horses through the surcharge arrangements and would open the floodgates to representations about and appeals against surcharge of varying degrees of sincerity. To expect Customs and Excise or, on appeal, the VAT tribunal to distinguish the 1162 small minority of cases of genuine difficulty without letting in larger numbers of less deserving cases, thus eroding the revenue benefits of the surcharge, would be almost impossible.
We have already established the unfairness to the complying trader of allowing the non-complying trader effectively to have an interest-free loan from the taxpayer by withholding and hanging on to the tax. It is not just the revenue which would be at a disadvantage. His local and honest neighbour who is trading properly and paying his taxes would be equally at a disadvantage.
Although I accept the honourable intentions behind the amendment, it would be a move towards providing a total VAT bad debt relief by the back door. These matters were considered in the Committee debate to which my right hon. and learned Friend the Chief Secretary to the Treasury replied. We have made a significant move on bad debt relief by linking it to the provisions of the Insolvency Bill, but we have not gone as far as many hon. Members wish in providing the complete VAT bad debt relief that this amendment would provide.
Furthermore, it would be a vehicle for abuse. It would make it possible for one taxpayer to supply an associate, perhaps even companies in common ownership, who does not pay for the supplies but claims the input tax. The input tax can be reclaimed on the basis of the invoice by companies who do not need to have made the payment. That is the other side of the coin to which I referred in our debates on clause 11 yesterday. The possibility of fraud and abuse would be opened up if it were possible for the input tax to be claimed back. Inter-associate debts could be run up with impunity, no output VAT would be accounted for under the Opposition's dispensation, but the input tax would be paid by the Customs and Excise, to the detriment of the Revenue.
I accept that the intention of the hon. Member for Sedgefield is to meet the hard cases that we all know about, but I hope that I have persuaded him that his amendment would go a long way beyond that. We may return to the general matters at a later date but not, I suspect, tonight.
§ Mr. BlairBy leave of the House, I express my gratitude to the Minister of State, who made a good and persuasive case, though I wonder whether the results of our amendment would be as bad as he makes out.
The debate has shown the need for flexibility in the system. That need runs through the mitigation arguments and this debate.
§ Amendment agreed to.
§ Amendment made: No. 9, in page 12, line 35, leave out from 'person' to 'furnished' in line 36 and insert `concerned'.—[Mr. Hayhoe.]