HC Deb 07 July 1992 vol 211 cc191-200

—(1) In section 20 of the Finance Act 1985 (repayment supplement in respect of certain delayed payments or refunds) after subsection (3) there shall be inserted—

"(3A) In determining for the purposes of regulations under subsection (3) above whether any period is referable to the raising and answering of such an inquiry as is mentioned in that subsection, there shall be taken to be so referable any period which—

  1. (a) begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and
  2. (b) ends with the date on which the Commissioners—
    1. (i) satisfy themselves that they have received a complete answer to the inquiry, or
    2. (ii) determine not to make the inquiry or, if they have made it, not to pursue it further,

but excluding so much of that period as may be prescribed; and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person or body making the requisite return or claim or of an authorised person or of some other person."

(2) In section 38A of the Value Added Tax Act 1983 (interest in certain cases of official error) after subsection (8) there shall be inserted—

"(8A) In determining for the purposes of subsection (8) above whether any period is referable to the raising and answering of such an inquiry as is there mentioned, there shall be taken to be so referable any period which—

  1. (a) begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and
  2. (b) ends with the date on which the Commissioners—
    1. (i) satisfy themselves that they have received a complete answer to the inquiry, or
    2. (ii) determine not to make the inquiry or, if they have made it, not to pursue it further,

but excluding so much of that period as may be prescribed; and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person referred to in subsection (1) above or of an authorised person or of some other person."

(3) Subsection (1) above shall apply where the requisite return or claim is received after the day on which this Act is passed.

(4) Subsection (2) above shall apply where the claim is received after the day on which this Act is passed.'.—[Sir John Cope.]

Madam Speaker

With this it will be convenient to consider the following amendments: (a), in line 7, after 'Commissioners', insert

`, intending to act, with no unreasonable delay,'. (b), in line 9, after 'Commissioners', insert ',acting with no unreasonable delay,'. (c), in line 23, after 'Commissioners', insert ', intending to act with no unreasonable delay,'. (d), in line 25, after 'Commissioners', insert acting with no unreasonable delay,'.

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The Paymaster General (Sir John Cope)

Following the Keith report, the Finance Act 1985 brought in a package of measures that were aimed mainly at improving compliance by taxpayers registered for VAT in furnishing their returns and payments. It also introduced the so-called "repayment supplement". Under that provision, Customs pays a surcharge if, in a normal case, it takes more than 30 days to process a claim for repayment of VAT.

The period of 30 days was considered appropriate for Customs normally to process and pay such claims. The period would count from the date of receipt of the claim by Customs until the date on which payment was authorised. Where that exceeded 30 days, a supplement of 5 per cent. of the value of the claim, or £30, whichever was greater, would be and has been paid from that time.

However, it was also recognised that it was necessary for Customs to have time to undertake other activities during that period, such as making verification inquiries and correcting errors. Where those inquiries were genuinely pursued by Customs, provision was made in section 20(3) of the Finance Act to provide for such periods to be left out of account in reckoning the net qualifying period of 30 days, and therefore deciding whether to pay a repayment supplement. In effect, the clock stops while Customs is making important inquiries to verify the claim.

Customs has operated on that basis since the repayment supplement regime took effect in October 1986. However, a recent VAT tribunal case, which later turned into a High Court case—the Commissioners of Customs and Excise v. L. Rowland and Company (Retail) Ltd.—has shown that the law as it stands allows Customs to leave out of account only the period from when the query is raised with the claimant until the claimant provides an answer to Customs. The time taken for Customs to consider whether to raise a query with the claimant and the time taken for Customs to consider the answer to that query are not to be allowed within the 30 days.

The original intention of the repayment supplement was to exert pressure on Customs to improve its efficiency. It was not intended to bring about a reduction of Customs' necessary efforts to protect the Revenue and taxpayers' interests at large, as opposed to the specific taxpayer's interests in the claim. That would be contrary to its responsibilities for the care and management of the tax.

When Lord Keith originally produced his report, it was suggested that there should be an overall period of 60 days rather than 30 days, to embrace all functions. However, when those proposals were exposed for public consultation, queries were raised and the Government then considered that 30 days, exclusive of the time for reasonable inquiries, would be fairer for claimants, and that is how the law was written. At least, that is how it was intended to be written.

As I said, the recent case of Rowland and Company has decided that that is not how the law was written. The purpose of the new clause is to make the law clear, as the Government and, I assume, Parliament at the time intended and as it has been operated by Customs in the intervening period. It will give Customs the essential freedom to look into claims for the repayment of VAT before they are paid, to prevent the losses of tax to the detriment of taxpayers generally.

The House will be aware that the whole structure of VAT, particularly the fact that we have a zero rate on a wide range of items, means that repayment is a large feature of VAT. Many traders never actually pay VAT. They are registered for it and they receive repayments each month because essentially they are in a zero-rated business.

Customs receives and processes almost 2.5 million claims for VAT repayment each year, with an overall value of some £23 billion in tax. The repayment of tax is therefore an important matter; hence the importance of the repayment supplement. More than 90 per cent. of the claims are authorised for payment within 10 days of their receipt at the VAT central unit in Southend, which handles the administration for Customs and Excise. That reflects both an efficient system and a high desire to act promptly in the interests of claimants.

Less than 2 per cent. of all claims need further inquiries before verification of repayment, and that is when the clock stops for a time during the 30-day period. Those are the claims which carry the greatest potential risk to the Revenue, which is why it inquires into them—and it is the inquiry time referrable to those cases for which the amendment seeks to provide.

At the same time, we were anxious to ensure that, while there is the necessary protection for the Revenue, the individual claimants and taxpayers should be in a fair position vis-a-vis Customs and Excise. Apart from the new clause, Customs and Excise is producing a code of conduct relating to its processing of claims for repayment. It will say how claims are received and dealt with and the points at which the repayment supplement clock stops and starts.

In particular, the code will describe how, on stopping the clock while verification inquiries are under way, due regard is given to any unreasonable delay that might occur. It will also make more visible the safeguards that are built into the system to ensure that such time will count against Customs and towards the 30 days that would qualify a claimant for repayment supplement.

Mr. A. J. Beith (Berwick-upon-Tweed)

If 30 days must be defined more generously to give Customs reasonable time to deal with these matters, is not seven days a little unreasonable for everybody involved to digest the new clause and to determine whether it will work satisfactorily?

Sir John Cope

I agree, but I shall return to that point.

Apart from the code of conduct—this is relevant to the right hon. Gentleman's point—Customs and Excise is already undertaking a review of the repayment supplement regime to determine whether changes should be recommended in addition to the introduction of the new clause. As before, there will be a full consultative process, starting, I hope, in September or October, at a similar time to the production of the code of conduct, with the aim of reaching conclusions before the end of the year. Customs will also be seeking time further to strengthen its procedures.

Mr. John Watts (Slough)

As there has not been an opportunity for consultation on the new clause, is my right hon. Friend prepared to consider consultation on the code of practice when it is published? If there are helpful suggestions from those interested in these matters, they might then be taken into account in a way that they cannot be in the consideration of the new clause.

Sir John Cope

Yes, Customs will discuss the draft code of practice with those with whom it is in touch, but initially there will not be public consultation. The idea is to publish the code of practice as soon as possible, together with the review, so that both can be considered together. If necessary, the code can be modified subsequently.

As both the right hon. Member for Berwick-upon-Tweed (Mr. Beith) and my hon. Friend have said, we tabled new clause 1 quickly, in response to the High Court case. That was important, because substantial repayments are involved. It is also right, however, to proceed with the code of conduct and the review, to give an opportunity for further comment.

4.15 pm

The new clause continues the existing practice into the future. We must also consider whether we ought to seek to give the new clause retrospective effect, so that the procedure followed by Customs and Excise since 1986, when the repayment supplement was introduced, can be retrospectively endorsed. We decided not to do that, because it would be inappropriate. Instead, we are accepting the High Court's interpretation of the law in respect of retrospective claims and claims made up to the date that the Bill receives Royal Assent in a few days' time.

The recent High Court judgment will be applied retrospectively. Customs and Excise will publicise the conditions that must be met to qualify for the new repayment supplement under the new interpretation, and will invite traders to apply for such repayments. Claims will have to be considered right back to the days when the supplement was first introduced, in 1986. That is a considerable administrative task that will take some time to complete, but it is right that it should be undertaken.

There will be some cases which have not come to full effect in the tribunal or the courts, as the Rowland case has, but which are nevertheless pending. They are easy to spot and to deal with. There will be other cases that Customs does not know about, where we shall have to rely on traders to submit claims. We will publicise as much as possible the opportunity to make claims under the new provision, so that we can put right any payments and bring them in line with the High Court's interpretation.

I hope that the House agrees, given the large sums of money involved, that we are right to move quickly, and not retrospectively to appeal against the High Court judgment of the law as it was first formulated in 1985. I commend new clause 1 to the House.

Dr. John Marek (Wrexham)

I sympathise with the plight of the Paymaster General, in that an unfavourable judgment was made against him, and there is perhaps a case for acting quickly to put matters right—especially as the Finance Bill is before the House. Among the representations I received, however, is one from the Institute of Directors. I will quote from a letter dated 7 July that it sent to the Paymaster General: Indeed, when the New Clause was drawn to the attention of the Joint VAT Consultative Committee yesterday afternoon, Customs were unable to comment on the grave concern raised immediately by the business and professional representatives, because they said that they could not pre-empt your statement that is, the Paymaster General's statement— in the House". As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) implied, time has not been allowed for debate and careful consideration.

Although there has been a problem as a result of the recent court case, the Opposition believe that the new clause swings the balance very far in the direction of Customs and Excise and that Customs and Excise will be able to decide almost as it wishes when the clock will stop and when it will start ticking again.

The Opposition raised the issue in a previous debate on 16 May 1991 in Standing Committee B. During our deliberations on clause 16, entitled "Interest of Overpayments etc.", I said: I do not say that Customs and Excise would deliberately take weeks or months over an investigation, but this is not a perfect world. No interest would be paid while an investigation was in hand. There should be a clear provision as to the date from which interest should be paid. If Customs and Excise has received money from a taxpayer which earns interest in a bank, why should that interest be kept if there was an error?"—[Official Report, Standing Committee B, 16 May 1991; c. 67.] During the passage of the Finance Bill in 1985, Mr. Barney Hayhoe, who I think was the then Financial Secretary, said during a debate on clause 20: if we get it wrong one year, and experience shows that changes are needed, we can seek to put it right the following year. Indeed, large chunks of each year's Finance Bill put right the mistakes or errors of judgment of our predecessors." —[Official Report, Standing CommitteeB, 21 May 1985; c. 185.] If so, this is a considerable error and misjudgment, because it will cost about £100 million or £150 million for the past six years. The new clause should be got right in the first instance. I do not pretend that the Opposition's amendments (a) to (d) would put it right, but they would redress the balance which favours the Customs and Excise should the clause be passed unamended. They would impose a requirement on Customs and Excise not to act with unreasonable delay. It would have to be expeditious and not say that it might want to institute an inquiry so the clock should be stopped. It does not even have to tell the person into whose accounts it is inquiring whether it has stopped the clock.

Under the new clause, the Government are aggregating to themselves all the power to be master and disposer of the issue. The Opposition believe that that is wrong and that the customer, client or person who pays value added tax should know that his or her affairs were to be run properly, that any investigation would be undertaken expeditiously and that there would be no unreasonable delay.

There are other issues which should be explored, but I want to be expeditious myself. If there is not to be 30-day statutory period, why should it not be 40 or 50 days? The subject should be discussed with the various interests involved. There should be a review and a right of appeal, but the new clause makes no such provision. We cannot discuss all the issues on Report, but they should be discussed with the interests involved.

I accept that it is not of the Government's making that the court case happened so recently, but because it did happen so recently, the issues have not been discussed with the appropriate interests. Perhaps it would be best for the Government to withdraw the new clause, and bring back later an agreed statutory instrument, if that is possible. As it is, they will have to pay claims for five years. If the Government were to withdraw the new clause, and if there were general agreement between the industry and the Government, the Opposition would expedite the progress of any legislation which would have to be introduced.

However, that is unlikely to happen, and the Opposition believe strongly that, if accepted, amendments (a) to (d) would go some way towards redressing the balance which undoubtedly needs to be redressed in favour of the consumer, customer or person who pays VAT.

Mr. Michael Stern (Bristol, North-West)

I can best put the clause in context by contrasting it with what would be the position the other way round. If I, as a VAT payer. was due to pay some VAT and informed Customs and Excise that I was doubtful about the amount, or indeed about the legality, of my liability and I therefore wished to stop the clock for an indeterminate period while I investigated whether there was a liability, I can imagine the size of the raspberry that I would get from Customs and Excise.

There has always been a disparity between the right of the taxpayer to receive compensation for the fact that his money is being held by the Treasury, and the duty of the Treasury to compensate the taxpayer for the fact that his money is being held. That disparity is being strengthened, and even made wider, by the clause.

The Paymaster General referred to substantial sums at stake in the clause. I hope that he will be more specific. We are not talking about the overall cost of repayment supplement in relation to VAT overpayments. We are talking about the cost of repayment supplement which is currently payable because Customs and Excise has not made inquiries and has delayed matters beyond 30 days. In all other cases, the clause will not affect the issue. How much does my right hon. Friend believe will be saved by rushing through the clause, when the process of consultation which he is proposing, and which is welcome, for the latter part of the year would enable a fairer and less disputed clause to be introduced?

My right hon. Friend referred to a recent legal case as being the occasion for the clause. It is fair to point to tribunal decisions which were reported last year and which should have given an indication of the need for further legislation. I refer my right hon. Friend in particular to the decision concerning Anthony Albert Aston under the reference MAN/90/499 in VAT Tribunal Decisions. In that case, a claim was made by Customs and Excise that it should not have to pay repayment supplement because it had spent some months investigating whether it had ordered a cheque to be issued. Rightly, that claim was objected to by the tribunal. May we be assured that the new clause, and code of conduct resulting from it, would not give rise to the denial of repayment supplement in a case such as that?

The review of the working of the clause will be welcome. After all, as the hon. Member for Wrexham (Dr. Marek) said, in a minority of cases it will be open to Customs and Excise to be judge and jury in its own cause. I hope that, as part of the review, an option to be considered will be a return to the Keith recommendation of an absolute time limit—of 60 days or what other time may be considered appropriate—within which no repayment supplement will be paid and after which repayment supplement will automatically be paid. By that means, the taxpayer will at least know where he stands.

Mr. Beith

We are faced with a paradox. The provisions that we are discussing relate to Customs and Excise taking too long to deal with complaints from taxpayers and needing the capacity to adjust the start and stop of the 30-day period to avoid being landed with repayments. Yet that part of Customs and Excise concerned with the introduction of legislation can work to a far stricter timetable. Indeed, there does not appear to be any time limit on that. Within 20 days of the High Court decision, it saw to it that a new clause was slapped on the Order Paper, and seven days later we are debating it. That is well within the 30-day limit. Perhaps that section of Customs and Excise could transfer some staff to the department that deals with VAT payers' inquiries. That would ensure that they were all dealt with within 30 days, and the clause would not be needed.

We are witnessing an incredible amount of haste. That haste is justified by the Paymaster General on the basis that tremendous sums of money are involved. But our understanding, from Customs and Excise information, is that the vast majority of cases are considered within 10, not 30, days. Surely only a small minority of VAT cases will risk falling foul of the procedure if the new clause is not accepted.

As was pointed out by the hon. Member for Wrexham (Dr. Marek), various bodies, including the Institute of Directors, are extremely concerned about the way in which the matter has been handled. The institute writes: We can understand that Customs should find the decision in the Rowland case unpalatable, but we regard it as totally unacceptable that the Government should table a New Clause … on the 1 July Order Paper a mere 20 days after the High Court decision and without any kind of prior warning for the Report Stage debate today 7 July. This is exactly the sort of practical matter which does not involve large sums of revenue but which requires detailed consultation with the representative bodies of taxpayers and their professional advisers. 4.30 pm

The Law Society has made similarly strong representations. In the society's opinion, the proposed new legislation will render it unlikely, in most cases in which Parliament thinks it appropriate for Customs and Excise to pay repayment supplement or interest, that that supplement or interest will be paid. That is partly because it would always be open to Customs and Excise to claim that, in its opinion, an inquiry was necessary, even if it subsequently changed its view and decided not to make any inquiry into the claim. Another reason is the fact that, although a taxpayer may have provided complete and satisfactory answers, time will start running only once the Commissioners have satisfied themselves that they have received a complete answer to the inquiry. The inquiry may have to be taken all the way up the line to headquarters; all kinds of factors may have caused problems.

Many people who deal with such matters on a day-to-day basis feel that the new clause is not urgently needed. They believe that it will cause severe difficulties, and that it may well defeat Parliament's intention of providing restitution for the taxpayer in cases that have involved unnecessary delay. The Paymaster General tried to offer a way out by telling us that a code of conduct was being produced, but I gather that even that will not be subject to consultation initially, so that it can be implemented quickly.

The fact that the code of practice is being produced at the same time as the review implies that, once the review begins, the code of conduct already brought in will fall to be considered along with the new clause as a whole. That is a rather backwards way of dealing with the matter, and I do not think that the Paymaster General has convinced us that the present scale of risk to the Revenue justifies such proceedings.

Sir John Cope

Both the hon. Member for Wrexham (Dr. Marek) and the right hon. Member for Berwick-upon-Tweed (Mr. Beith) referred to the letter from the Institute of Directors, which mentioned the speed with which the new clause had been tabled. I gave the reasons for that earlier.

Let me reassure the right hon. Member for Berwick-upon-Tweed that I did not table the new clause in a half-hearted way. I consider it an important measure: some £30 million a year would be involved without it. At yesterday's meeting with the Institute of Directors and others, Customs and Excise found themselves in a slight difficulty. They had a good idea of what I was likely to say today—particularly about the code of conduct and the review, which we have been discussing ever since the High Court case. Indeed, we had discussed our possible course of action to some extent before the completion of that case. We were able to move as quickly as we did partly because of contingency planning. I hope that the House will consider that wise, in the circumstances.

The Customs and Excise officials were unwilling yesterday to pre-empt what I would tell the House. The House has a right to know things, and sometimes becomes rather upset if they are leaked rather than presented to it first. It is a difficult balance to achieve immediately before a ministerial statement, although in many cases we are keen to consult widely, and usually do so.

Dr. Marek

I understand that, but can the Minister say something about the review and whether he will try to reach an agreement with the industry and the interests involved about how Customs and Excise will stop and start the clock? If he could assure the House that the review would take these matters into consideration in order to arrive at least at an unofficial method of procedure to be followed by Customs and Excise that was satisfactory to the interests involved, it would go a long way towards helping hon. Members on this side of the House and, I suspect, a lot of Conservative Members.

Sir John Cope

Yes. I mentioned earlier that claims are initially sent to the VAT central unit in Southend. During the initial checking process, some of the claims—about 2 per cent.—are selected for further inquiries. The rest have a smoother passage. If the VAT central unit decides to make further inquiries, they may be inquiries either with the local VAT office—that is, local to wherever the trader happens to be—or with the Customs and Excise investigation branch or an outside agency. It is at that point that the clock stops. It is when the points that have been raised that cause the clock to stop in that way have been cleared up that the clock restarts.

A number of hon. Members have suggested that there is no way in which Customs and Excise is accountable for its management of this system. From time to time it has to justify to the VAT tribunal, to Members of Parliament and, through Members of Parliament, to the parliamentary Commissioner its actions in this respect. Customs and Excise is, therefore, subject to the checks that I have just mentioned.

My hon. Friend the Member for Bristol, North-West (Mr. Stern) is concerned about the disparity between the taxpayer and Customs and Excise. If the taxpayer has reasonable excuse which Customs accepts, the clock stops for the taxpayer, too. My hon. Friend asked whether there should instead by an absolute timetable of 60 days or another period, as was originally suggested by the Keith committee. That is one option. Nevertheless, if we can arrive at a code of conduct and if the results of the review are satisfactory to most people who are involved, I think that the 30-day period, plus a clock-stopping system that is generally acceptable, is the best approach. That is the way that I should prefer to approach it, if possible. I accept, however, that it may not be easy to achieve.

The right hon. Member for Berwick-upon-Tweed criticised the order of events. I accept his criticism in some respects. I refer to the timing of the Finance Bill relative to the timing of the High Court case. We thought that the High Court case would not be heard until the autumn, but, somehow or other, the High Court succeeded in clearing its in-tray faster than it normally does and got round to it. It seemed to me that it would be wrong not to use the opportunity that that presented in the interests of taxpayers at large—that is to say, of revenue to the Government.

The code of conduct will to some extent be an interim one while the review takes place. I have no doubt that we shall want to refine it in some ways, or certainly consider doing so, during the review process.

I have some information on the tribunal case to which my hon. Friend the Member for Bristol, North-West referred. That case had to do with the actual date of payment; it was not a reasonable time inquiry. The case was not appealed by Customs and Excise, which might have to consider appealing if there were another similar case. But I do not think that it is on all fours with the case with which we are dealing in this new clause.

My hon. Friend the Member for Bristol, North-West also asked about the cost. The cost would be about £30 million a year if we did not pass the new clause.

Incidentally, the Institute of Directors also drew attention to the fact that the clause inserts into the Finance Acts similar provisions about the stopping of the clock in interest cases. That is dealt with in the second part of the clause. These cases are related to official error. It is, of course, a much smaller matter, because it is a question of interest at an annual rate for a few days while the clock is stopped. However, I think that it is sensible to keep the wording of the two parts of the Finance Acts in line with one another, and that is why we have introduced the second part of the new clause, which I commend to the House.

Dr. Marek

I listened with interest to the Paymaster General who made some encouraging noises to the effect that there will be a review and a code of conduct. I know that he will carry out that review to the best of his ability and I hope that he will try to reach agreement with the interests involved. It is a matter which we can come to again on next year's Finance Bill; there is no problem about that. We will have to keep an eye on it.

I had intended to ask my hon. Friends to support me in the Division Lobby, because we believe that there is an important principle at stake here, but I think that we should be charitable to the new clause. We shall wait and see what happens, reserving our right to come back to the matter on the Finance Bill in a year's time; and we shall not press our amendments to a Division.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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