GROUPS CONTAINING BODIES OF DIFFERENT DESCRIPTIONS

HC Deb 23 January 1997 vol 288 cc1089-96

Question proposed, That the clause stand part of the Bill.

4.18 pm

Ms Dawn Primarolo (Bristol, South)

I would have wished to move amendment No. 8. Is that not in order? May I have some guidance, please?

The Chairman

That amendment was not selected. The debate is on clause 40 stand part.

Ms Primarolo

I am grateful for that information. I can make the points in this debate that I would have made on our amendment, had it been selected. I hope that that is in order.

The notes on clauses explain that clause 40 clarifies how members of VAT groups, who have a special status, are treated, and prevents potential tax avoidance. When the Chancellor of the Exchequer made his Budget statement on 26 November 1996, he made several important points that relate directly to this clause and to a number of others. He said: Inland Revenue tax experts will be redeployed to investigate even more rigorously how some big, sophisticated companies seem to pay so little tax. They will make sure that companies are paying what they owe, and what we"— the Government— intended they should owe… There will be more resources in the Revenue and Customs to stem the growth of the shadow economy … There will be more Customs and Excise officers to tackle value added tax and other tax abuse, including … more to target the smuggling of alcohol… The 'spend to save' package will cost £80 million over the next three years to secure … revenue and expenditure savings of well over eight times that amount—£6.7 billion."—[Official Report, 26 November 1996; Vol. 286, c. 163.] Given the Chancellor's explicit statements relating specifically to companies, I feel that we should seek further scrutiny of the arrangements to allow VAT groups of companies. I also seek an assurance that the Government have considered the possibilities for tax avoidance that may be created by the existence of such groups. Although we do not propose that the present arrangements should be disturbed at this stage, we think that an assessment should be made, as problems have occurred in the past.

In this and previous Finance Bills, the Government have expended considerable effort on trying to close VAT loopholes, some of which have been potential loopholes rather than giving rise to significant loss of revenue. At the same time, the Government have allowed VAT group treatment to continue virtually unchanged. In discussing the relationship during debates on previous Finance Bills, they have told us that this treatment of groups costs the taxpayer some £400 million, because VAT that would otherwise be chargeable has not been charged. Clause 40 addresses the position again.

It should be put on record that the amount of revenue that would be involved if the present arrangements were disturbed might not be £400 million for very long, because companies could reorganise themselves in order to realign their tax affairs. The withdrawal of VAT group treatment might well impose a greater administrative burden on both the taxpayer and Customs and Excise, and in that sense it would not be a sensible strategy. None the less, the arrangements should be scrutinised.

Clause 40 is designed to ensure that, when a VAT group includes a company that is entitled to zero rating or exemption as a result of some special status, that zero rating or exemption does not extend to the rest of the group. Special status companies include insurance companies, education institutions and charities. Customs describe the provisions as dealing with a potential problem. If he is in a position to disclose the information, I should be grateful if the Minister could explain the potential problem and say how much revenue may have been at risk.

Overall, clause 40 appears to achieve its objective, and seems unlikely to cause significant problems. Several universities rely on their education exemption not extending to their trading subsidiaries. The debate revolves around the loss of VAT receipts. The Government have had problems for several years in forecasting likely income from VAT receipts. It would be helpful if the Government could show that the group companies arrangement does not continue to provide loopholes.

Many clauses contain anti-avoidance provisions, which are especially important given the Minister's declared objectives. The previous Minister responsible for VAT, the right hon. Member for Wells (Mr. Heathcoat-Amory), wrote to me on the matter on 31 May 1996. I had sought an assurance on potential VAT anti-avoidance problems with the group relationships. He said: Customs give a high priority to anti-avoidance activities. A new Headquarters branch has been set up to co-ordinate anti-avoidance policy as a response to more aggressive tax planning and marketing of avoidance schemes. Additional resources have been deployed to enable the branch to monitor and evaluate new avoidance schemes and propose measures, including possible legislative changes, for countering them. The branch is supported by a national network of Tax Avoidance officers whose role is to identify and report avoidance schemes and to provide advice to local visiting staff. So far, so good.

Specifically, the group relationship is being examined—big companies that make tax returns individually and, in particular, companies that are grouped for tax purposes. A shortfall of some £5.5 billion has been identified—no small amount—from three possible causes. The first is a shift in consumer spending; certainly the group relationship would give an opportunity to build on that. The second is an increase in tax avoidance, or, as it is politely called, tax planning. Thirdly, it could be straightforward non-compliance and evasion—the growth of the shadow economy.

As the Government have spent so much time and effort establishing the unit and explaining the problems of VAT collection, and given the considerable press speculation, we need more guidance from the Minister about why he does not intend to scrutinise the group arrangements more closely than is provided for in clause 40.

The issue of VAT receipts and companies' ability to minimise their obligations to pay VAT is building up considerable pressure, and not only because VAT is now set at 17.5 per cent. and is a significant revenue source. In his reply on clause 40, I should be grateful if the Minister would make a clear statement on VAT-grouped companies; on whether the Government will continue to monitor and investigate VAT relationships; on whether it may be necessary to revisit the issue of VAT groupings, on precisely which potential loophole clause 40 is intended to close, on how much revenue will be protected, and on whether alternative tax-planning strategies will be open to companies so that they can minimise payments to the Exchequer—which would only be bad for citizens.

4.30 pm

Mr. Paddy Tipping (Sherwood)

Clause 40 is important because it provides the Committee with an opportunity to examine the issue of tax loopholes. The clause deals with Groups containing bodies of different descriptions and the way in which those groups are able to manipulate VAT payments. It also sets out the way in which loopholes or potential loopholes—perhaps in the insurance industry, or for educational institutions—could be closed. The sum involved—potentially £400 million—is not insignificant.

I was impressed by figures provided in the Red Book, on page 69, on the shortfall in VAT receipts. Halfway down the page, it states: VAT receipts in 1995–96 would have been £6 billion higher. It also contains lengthy speculation—on which I should like the Minister to comment in his reply—on the various reasons why VAT receipts have been much lower than predicted.

The Red Book goes on to state: VAT receipts have picked up this year, and it looks likely that 1996–97 will see the first rise in the VAT/consumer spending ratio since the late 1980s". I should be grateful if the Minister will confirm whether that is likely to happen.

Among the various reasons given by the Red Book for VAT receipts falling so far short of predictions, one is particularly applicable to clause 40. It states: better tax planning and increasing tax avoidance by companies is a significant factor. The clause potentially closes tax loopholes, but it leaves it open to companies to review the situation and to indulge in reorganisation. I suspect that tax planning consultants will give advice on that matter.

There is an interesting tension in that the Minister, his advisers and Customs and Excise are engaged in combat with a group of highly paid and well-organised professionals. I do not think that they would put it in those terms, but it is the reality. It is important that the Government have the people necessary to be on the winning team.

I was particularly interested in some comments that the Chancellor made in his Budget speech. He said that he recognised that there was a problem and that some measures needed reinforcing. He talked at some length about a range of "spend to save" initiatives, and said: As part of our continuing fight against tax and benefit fraud and tax loopholes, I am introducing a package of measures called "spend to save" … There will be more resources in the Revenue and Customs to stem the growth of the shadow economy … There will be more Customs and Excise officers to tackle value added tax and other tax abuse".—[Official Report, 26 November 1996; Vol. 286, c. 162–3.] The Chancellor said that his proposals would cost the public purse £800 million, but would bring in eight times that amount—£6.7 billion.

I hope that the Minister will confirm that clause 40 will close the £400 million loophole, but the "spend to save" package is extremely ambitious—spending £800 million over three years to bring in £6.7 billion over three years will take a great deal of doing. I support the commitment—it is right that we should go for it—but it is an ambitious target, which, if not met, will leave a hole in the finances which will have to be filled by a future Government.

How many Customs and Excise staff will be working specifically on the technical issues of VAT avoidance? I am conscious of the fact that I am an outsider, a non-professional, but I read the financial press and I see the advertisements from and publicity surrounding VAT consultants. I am anxious about the impression given and the rewards that appear to accrue to such consultants' clients.

In summary, I support clause 40. I am pleased that the Government are closing the loophole, or the potential loophole. I believe that companies will employ experts to try to find a way around the proposal. It is right that we attempt to tackle fraud and abuse, but the targets that the Government have set themselves are very ambitious. I hope that they can be achieved, and I am pleased that resources are to be put into Customs and Excise to tackle the problem.

There seems to have been a real change in the Government's approach. In the past, they appeared content to allow Customs and Excise staff to decline in number, but there is now a change of emphasis—perhaps a recognition that civil servants such as Customs and Excise staff are valuable in dealing with this highly technical problem. I hope that the Government succeed, but I remain slightly sceptical.

Mr. Stephen Timms (Newham, North-East)

I rise to support the amendment—

The Chairman

Order. If the hon. Gentleman had been here at the beginning, he would have noted that amendment No. 8 was not on the selection list; I clarified that point. I remind the hon. Gentleman that this is the clause stand part debate.

Mr. Timms

I am grateful to you, Mr. Morris, for that clarification.

I welcome the clause, because it signifies, as my hon. Friend the Member for Sherwood (Mr. Tipping) explained, a change of heart by the Government and a recognition that the hole in the VAT receipts is now the biggest threat to public finances and to control of the public sector borrowing requirement.

The clause is one of a small number of provisions aimed at improving the alarmingly poor rate of VAT collection. I hope that the 1Government will keep a close eye on its effects of the clause. As I understand it, Customs and Excise is saying, "This is a potential problem. We do not really know why the hole has appeared in VAT collection. This is one possibility, or one contributing factor." If we are to solve the problem, it is of the greatest importance that we watch carefully the effects of the clause and the other measures that are being taken to try to put the problem right.

My hon. Friend the Member for Sherwood mentioned the "spend to save" initiative, which stands alongside the clause and is designed to try to tackle the problem. It is remarkable that the Red Book projects that, to secure about £2 billion from reduced fraud, about half a billion pounds of extra spending will be needed in social security—rather less than £200 million in the Inland Revenue, and just £100 million in Customs and Excise.

The Government anticipate that, for a very small amount of extra spending—£100 million—they will raise an extra £2 billion in VAT, which will be a welcome addition. I hope that the clause will contribute to that process. We are talking about a very small amount of extra spending, from which a large amount of extra revenue is anticipated. I hope that we shall keep the whole exercise under scrutiny to ensure that it goes in the right way, because the amounts involved are so large.

My hon. Friend the Member for Sherwood suggested that many people have been wondering why it took the Government so long to realise that the problem had arisen, and why, as recently as last May, the then Paymaster General said that the Customs and Excise review would enable it to reduce staffing levels while maintaining or improving outputs."—[Official Report, 16 May 1996: Vol. 277, c. 567.] Clearly, that has not been the case, and the clause may be a sign that the Government are recognising the problem and doing something about it.

The Treasury has accepted, as part of the broader "spend to save" initiative, that it should publish data on the overall achievements of the initiative, monitoring spending and savings against the published targets. I hope that, in that spirit, the Government will accept that it will be valuable to monitor what happens as a result of the implementation of the clause—to monitor whether it helps to bring in some of the missing VAT revenue and to consider whether some other initiative is required as well to crack the problem.

The Exchequer Secretary to the Treasury (Mr. Phillip Oppenheim): I warmly welcome the Opposition's support for our measures against VAT avoidance. In this bipartisan spirit, I am prepared, generously, to overlook their previous criticisms.

When we have closed loopholes, we have suddenly been accused of putting up VAT rates. That accusation was made, notably, in a leaflet produced by the Opposition entitled "Twenty-two tax increases". One "increase" was a loophole that we closed by imposing VAT on gold granules. Nevertheless, converts, however belated, are always welcome. The Opposition's support is part of their current fashion of poodling along behind us. That is something, in a generous spirit, that we all welcome.

The hon. Member for Sherwood (Mr. Tipping) asked about the current position on VAT receipts. They are 10 per cent. up over the past year on current figures, which reflects the uplift in the economy, the effect of closing loopholes in the previous Budget, and the effect of measures in this Budget.

The hon. Gentleman also asked about the number of new staff who would be devoted to combating VAT avoidance. There will be 1,100 VAT staff, additional or retained, dealing with general high-profile cases and areas of VAT avoidance that we consider particularly sensitive. An extra 100 customs men and women will be put on specific fraud issues. That is quite a large increase over the previous estimated totals for the year.

4.45 pm

I am also delighted that the Opposition chose this particularly high-profile clause out of all the clauses they could have chosen for debate on the Floor of the House. The hon. Member for Bristol, South (Ms Primarolo) asked why clause 40 was necessary, and whether we had any indication that there might be avoidance problems in the area it covered.

It is part of good tax management to anticipate where problems may come from, and we had some indication from tax planners and tax lawyers that they might probe in this area. There were one or two cases in which the results were a little ambivalent, so we thought that it was good fiscal management to ensure that any loophole was closed in advance, although we do not have any evidence at the moment that there is any revenue loss. We estimate, however, that the revenue protection as a result of the clause will be £50 million, which is quite a significant sum.

The hon. Lady also asked why we were not doing more than introducing the clause. The answer is that we are doing more, because clause 41 also addresses potential group abuses. Last year, schedule 9A was designed to counter most of the existing group abuses and it appears to have succeeded. Obviously, one can sometimes move in advance of loopholes and close them, but sometimes it is not possible. Loopholes sometimes become apparent unexpectedly because, as the hon. Member for Sherwood rightly said, highly paid tax accountants and lawyers are swarming over company accounts and wanting to sell their services, and they come up with wheezes. As soon as they do, if we have not anticipated the loopholes, we try to close them.

The hon. Member for Bristol, South and some of her hon. Friends went a little further, and asked why we could not get rid of the group concession altogether. She asked whether we should not scrutinise the matter more closely; I think that that was the purpose of amendment No. 8, which was not called.

Ms Primarolo

I would like to clarify that point, because I would not like the Minister to mislead the Committee. I asked whether the Government had scrutinised the question whether VAT groups, which were provided under the existing arrangements, were in themselves opportunities for avoidance. If the Minister checks the Hansard record tomorrow, he will see that I was not proposing that the groups should be disturbed now.

Mr. Oppenheim

I am sensitive to the hon. Lady's sensitivities in this area; they are very touching. The Opposition should not—[Interruption.] Would the hon. Lady like to make that comment again at the Dispatch Box in exactly the same terms as she made it just now?

Ms Primarolo

The debate would be helped enormously if we could conduct it in a grown-up fashion. I do not wish to trade insults with the Minister, and I hope that he does not wish to do so with me.

Mr. Oppenheim

As I said, I have noted the hon. Lady's sensitivities. She stood at the Dispatch Box and was quite critical of Government policy. It is reasonable for a Minister to probe the Opposition about what their policies are and to point out that the hon. Lady said in her opening remarks that we should look at the possibility of changes to the group concessions that we have given.

My response, if the hon. Lady will listen to it rather than trading insults that she is, understandably, not prepared to confirm from the Dispatch Box, is this. We constantly scrutinise the position of groups, and where we think abuses are happening, we will close the loopholes. That is precisely what clauses 40 and 41 are about. If the hon. Lady thinks that there is scope to go further—if she will listen to the response to her question—she should make it clear to the Committee. We will make available any information she wants with regard to this matter. If it is the Opposition's policy to go further, they should make it absolutely clear.

The Government do not at the moment want to go further than closing the potential loopholes described in clauses 40 and 41, because the facility was originally introduced to provide administrative advantages, giving businesses an alternative to organising themselves on a divisional basis. The VAT position of a company organised in divisions and a group of companies should therefore be the same.

Steps could be taken to remove companies that are involved in exempt or partially exempt businesses from groups, because that is, as was rightly identified, an area of revenue loss. The likely reaction, however—it is likely in all sectors except, possibly, insurance—is that businesses and organisations will respond by vertically integrating to achieve a position similar to a single entity organised on a divisional basis. That will almost certainly wipe out any revenue gain.

It would be very difficult to argue that that is not a legitimate business move rather than a tax-avoiding move. To keep regulation to a minimum, and on the grounds that such a measure would be particularly onerous to business and especially difficult practically to act on, we have decided to go no further than the proposals in clauses 40 and 41.

The other point of which Opposition Members should be mindful is that many of the groups involved are not businesses—although some of them are in the insurance sector. Many are charities and educational institutions. That is why we are very keen to tread very sensitively.

Clause 40 clarifies how members of VAT groups who have a special status are treated, and prevents possible tax avoidance. The VAT liability of some supplies is dependent on the status of the person providing those supplies. For example, a supply of insurance is exempted only if provided by a permitted insurer. Where such a body is the representative member of a VAT group, some tax planners have suggested, as I said, that the status should be automatically passed to other members of the group.

If that were to be so, businesses would be able to reorganise their affairs so that the VAT reliefs associated with the representative member of a VAT group could be shared by all other group members, to the detriment of the Exchequer and the public services that it finances. It would also be contrary to the original intention of grouping provisions. The measure is designed to clarify the current position, close potential opportunities for abuse, and therefore, in effect, maintain and reinforce the status quo.

Ms Primarolo

May I put on record our acceptance of the Minister's kind offer to supply us with whatever information we require during the course of our deliberations in Committee on the clauses on VAT and potential loopholes? I am sure that it will assist greatly in our deliberations.

Mr. Oppenheim

The offer that I made the hon. Lady—I can understand why she wants to expand the concession into a major loophole—is of further information on the situation regarding groups, as described in clauses 40 and 41, with a view to changing her policy to take away the group concession. We would supply any information in relation to that—

Ms Primarolo

No.

Mr. Oppenheim

More generally, any reasonable request for information will not be refused.

Ms Primarolo

Another Tory promise has already been broken. The Minister made his offer when I gave way to him during my earlier speech.

Consistency is a wonderful quality, which politicians do not always display. I remind the Minister that, in Standing Committee D on 14 March 1995, his predecessor said that there was no need for extra Customs and Excise staff, and that, as the Government, they could maintain and improve the collection of revenue with fewer staff rather than more. The Opposition are very pleased that it has now been agreed that we were right last year to say that resources were needed.

This debate is important, despite the bristling between the Minister and me, which I am sure will develop and illuminate the Committee. I hope that it will not deter us from proper scrutiny of the Bill, with which the House charges us.

Question put and agreed to.

Clause 40 ordered to stand part of the Bill.

Clause 68 ordered to stand part of the Bill.