HL Deb 07 December 1976 vol 378 cc550-78

4.10 p.m.

Viscount AMORY rose to move, That this House takes note of the Forty-eighth Report of the European Communities Committee of last session on the Draft Sixth Directive on Value Added Tax (R/1746/73 and R/2268/74). The noble Viscount said: My Lords, I have pleasure in moving that this House takes note of the Forty-eighth Report of the European Communities Committee of last Session on the Draft Sixth Directive on Value Added Tax. I am actually moving this at the invitation of the noble Lord, Lord Mais, who has asked me to introduce it on his behalf. He was the Chairman of the Sub-Committee which studied this matter, and I was myself a member of the Sub-Committee.

I should like to begin by saying how much we are looking forward later on to the maiden speech of the noble Lord, Lord Grantchester. Your Lordships may be interested to know that the report before you today is the outcome of the work of a joint Sub-Committee of your Select Committee, composed of Members of both Houses. The experiment, certainly in this case, seems to have worked out well. I confess I am no expert on VAT. In the distant past when I was at the Treasury there was no such tax in existence here. We had then the simpler purchase tax. Now, VAT is established as part of our taxation system, bringing in the very substantial revenue which involves, I understand, about 1¼ million traders.

This report is the second which has been submitted to your Lordships by the Select Committee. The Twelfth Report, dated 29th August 1974, contained a section on the proposals for the harmonisation of VAT. Your Committee then recommended that, although there were a number of aspects of undoubted importance to the United Kingdom which this House would want in due course to discuss, any debate should be deferred until further progress had been made in specifying the proposals.

A good deal of progress has been made, particularly recently; but clearly a good deal of detail still remains to be settled. Since the proposal is that the harmonisation arrangements should come into force on the 1st January 1978 and that the individual countries will have to take whatever steps are necessary to adjust their own systems by that date, it will be seen that there is little time to spare. Indeed, the European Parliament became extremely worried recently about this time problem, and the noble and learned Lord the Lord Chancellor has received a copy of the resolution passed by that Parliament and forwarded to the Council of Ministers, expressing their concern that the Draft Sixth Directive has not yet been adopted, and urging that quicker progress should be made so that it can be adopted and therefore come formally into force by the 1st January 1977—in a few weeks' time—so as to give time for the Member States to take preliminary action. If this new Directive covering the new arrangements does not become effective by 1st January 1978, the VAT revenue will continue to be collected as at present, computed not on the precise yield in various countries but as a share of national GNPs.

There was one meeting of the Fiscal Council of Ministers, held on 21st October, to consider how further progress could be made. Another one has been called for the 16th December, with the object of making as much progress as possible before the end of the current year; that is to say, before the end of this month. There now seems to be some hope that the Draft Directive may be adopted before 1st January next, although it will still leave a number of minor matters—quite a lot in fact—to be settled later.

The purpose of the Draft Sixth Directive is to establish a common system of assessment and administration of VAT in the Member States—a common basis of calculation, as it were. It does not seek to harmonise the rates of VAT, or the rate structures, which can continue to be fixed by Governments of Member States. Whether one day the harmonisation of rates, as well as of assessment and administration, will be sought, depends on the progress towards monetary and fiscal union and is, we have been assured from all sides, a question which is very far into the future. I suppose we can consider that eventually, perhaps, the harmonisation of rates would be reconcilable with the permanent aims of the Community.

The Council decision of April 1970 provided that the Budget of the EEC should be financed entirely from three sources: the agricultural levies (a very big proportion at present); customs duties; and, thirdly, up to 1 per cent. rate of VAT levies on a uniform basis. That is what we are talking about this evening. These three sources are together called "own resources"—a term which implies the money to be made available to the Community as its revenue.

The Draft Directive also seeks to eliminate some distortions to competition which it is felt arise from the current diversity of the national VAT systems. The Select Committee had the advantage of a great deal of written evidence and some very useful oral evidence, which later was printed with this report. It is clear that while many of the proposals are in line with current United Kingdom procedures, some will need action under subordinate legislative orders and some will need primary legislation. Those, of course, will come up for consideration in Parliament in the usual way.

As with many other EEC Directives, the original draft is apt to seem unduly rigid and perhaps unnecessarily detailed—certainly one could call them all very detailed indeed; but in this case there is some welcome evidence that in the discussions which have taken place spasmodically over the last three years, and much more actively over recent months, rather more flexible arrangements have become acceptable, and real attempts have been made to reconcile the differing national procedures and attitudes. Your Committee were glad to hear from the Department of Customs and Excise that, provided that this desire to achieve reasonable flexibility continues, it now seems unlikely that any major modifications of the United Kingdom's VAT system will be necessary. This information is the more welcome as, in the course of the evidence which we received, we got the impression that while in the United Kingdom, at the beginning, the administrative consequentials of VAT were regarded with a great deal of apprehension, now that people have become accustomed to the regulations and procedures they have become tolerably accepted, and any changes resulting from the draft Directive were regarded by most of our witnesses with a good deal of concern. They much preferred the possibility of keeping our system just about where it is. I am talking not about rates, but about the system of collection.

As mentioned in paragraph 21 of our report, VAT is, of course, a tax on consumption and, unfortunately, the United Kingdom consumes a higher proportion of its GNP than the other Member States. This will involve a heavier burden on the United Kingdom than if contributions had continued to be on the basis of GNP shares. In paragraphs 22 and 23, your Committee make the important point that as the VAT rates are not to be harmonised the Member States will be able to continue using VAT as a general economic regulator, as a means of influencing specific sectors or to achieve social objectives. In paragraph 24 your Committee referred to the proposed VAT Committee to be set up in the EEC, composed of representatives of Member States, which will deliver what are called Options on matters concerned with the detailed operation of the Directive. That seems a thoroughly sensible idea, but an important aspect of it is exactly what powers that Committee will have. Assurances have been given that the Council of Ministers will insist on that Committee being purely advisory; but it seems that it may have some power of executive decision in minor matters, and this seems to your Committee to be one of the points which needs to be cleared up as soon as possible.

In paragraphs 26 to 30 of your Committee's report attention is drawn to five issues which we think of particular importance and which we believe your Lordships will wish to consider. The first one is zero rating, the preservation of which is of great importance both for social reasons and because it applies to export goods and services. Your Committee welcome the firm commitment, which has been given on behalf of Her Majesty's Government, that no change involving the abolition of zero rating on necessities can be considered or agreed to.

Various concessions have been made since the original draft Directive was drawn up, most recently at the Fiscal Council on 21st October last, where agreement was reached that Article 28 —I do not propose to take your Lordships through these somewhat weighty Directives in detail, and I trust you will not ask me too many questions about them, but they are easily obtainable—should be amended, so that Member States are allowed to retain those zero ratings which were in force on 1st January this year, at any rate until the abolition of fiscal frontiers which, as any of your Lordships who are in touch with the EEC will know, is an occurrence which is a considerable time away. This goes further than the situation outlined in our report. At the end of paragraph 10 of the report your Committee request that further information should be given on this point by the spokesman of the Government when the report is considered in this House. No doubt the noble and learned Lord, Lord McCluskey, will tell us whether the situation is broadly as I have described it, or whether he has any information to give us which is still more up to date and definite.

In passing, may I remind your Lordships of the difference between zero rating and exemption, of which you are probably all aware. In the case of zero rating, the statistics have to be kept and the input tax paid and recovered in due course. In the case of exemptions, no input tax paid can be recovered but traders can, if they wish, include in the prices they charge the cost of what has been invoiced to them. It is also worth remembering that zero rating is in no sense contrary to the principles of the EEC. The understanding is that, while current zero rating can be continued, no new zero ratings are to be introduced, though the actions of two Member Governments are at present under examination. The important point is that as any decisions of the Council to terminate zero rating would require unanimous agreement under Article 99 of the Treaty of Rome, Member States are protected against termination without their individual consent.

The second issue of importance concerns the exemption of small traders. The current United Kingdom limit of exemption for small traders is £5,000 per annum terminal sales. The Draft Directive proposal sets out a uniform limit of 4,000 units of account, or about £1,650 a year, which would mean a severe reduction in the United Kingdom's limit of £5,000. We were advised that such a change would be likely to bring in another quarter of a million additional traders, with no proportionate increase in revenue. It would therefore be extremely expensive in administration, and extremely frustrating to small traders. Indeed, there seems a strong case for some increase above the current United Kingdom limit, which was fixed some time ago, because of the impact of inflation.

This question, I think, is an important one. Your Lordships' Committee were left in no doubt whatever by the witnesses that a reduction in the proposed exemption limit down to four units of account, or anything like that, would be regarded with the deepest concern by the small traders affected and also by the taxation authorities. The present position seems to be more cheerful than that in this respect. At the Ministers' meeting on 21st October a much higher exemption limit of 10,000 units of account, which would be equivalent to about £6,000 in sterling, was considered but without, we believe, a formal decision being taken. That would bring the limit above the current United Kingdom level of £5,000. Alternatively, Member States may be allowed to retain what limits they like, with compensatory arrangements for payment or withholding, if national limits are higher or lower than the Community exemption.

As regards the administration of VAT, your Lordships' Committee were impressed by the arguments adduced both by the witnesses we saw and those whose evidence we read against any further complication of the regulations or procedures. At present in the United Kingdom they seem to be working fairly well, but any unnecessary move towards absolute uniformity in methods of collection might well prove counterproductive. The substitution of monthly for quarterly collection periods might be an example and would most certainly be unpopular with traders here. The present indications are that there would be no interference with the present quarterly system, but I should be most interested in anything that the noble and learned Lord, Lord McCluskey, is able to tell us.

In passing, perhaps I could mention that there is something called partial exemption. The evidence we obtained, particularly from the legal profession, was that partial exemption is not a good idea. There would be almost the same costs of administration as would be involved with full exemption. The legal profession would prefer zero rating or, if necessary, total rather than partial exemption, or that it should be left as it is at present. I have already referred to the uncertainty about the exact powers of the VAT Committee which will certainly need clarification. Finally, there is the important question of the efficiency of the collection of VAT in each Member State upon which the ultimate yield will depend. Your Lordships' Committee feel sure that our Ministers will want to ensure that there will be some way of checking yields against liability. The very important audit court may be able to help here.

If I may make a general remark about our witnesses, we thought that while some had taken a great deal of trouble to inform themselves about the EEC proposals and were experts on the subject, there were others who did not seem to us yet to have taken much trouble to inform themselves about the possible impact of VAT on their interests. They had not, in some cases, passed on their views to the authorities who are negotiating. That, so far as it existed, we thought was a pity.

I think that I have said enough—perhaps your Lordships will consider more than enough. There are still some important problems to be settled in this Draft Directive; but if reasonable flexibility and much less rigidity in detail continues as the policy to be pursued, your Lordships' Committee conclude that a reasonable degree of harmonisation in assessment and administration should then prove attainable without major changes in the United Kingdom system in the foreseeable future.

Your Lordships' Committee would like to thank very much all those who gave up their time to submit evidence to us. They would also like to thank their staff of specialist advisers for their invaluable help and the Clerks of this House who, as always, have once again been a source of tremendous strength to the Committee. If noble Lords ask me any questions I hope that they will preface them with the kindly school examiner's instruction not to attempt more than three questions. Any of the harder questions will be transferred instantly to the noble and learned Lord, Lord McCluskey. My Lords, I beg to move.

Moved, That this House takes note of the Forty-eighth Report of the European Communities Committee of last session on the Draft Sixth Directive on Value Added Tax (R/1746/73 and R/2268/74).—(Viscount Amory.)

4.36 p.m.

Baroness ELLES

My Lords, we are very grateful to my noble friend Lord Amory for introducing the Forty-eighth Report of the Select Committee on the European Communities. He has set out most clearly and carefully the areas of difficulty which have arisen in relation to amendments to the Draft Sixth Directive on value added tax. We shall also be hearing during the debate the noble Lord, Lord Grantchester, who is to make his maiden speech. There appears to be no subject debated in your Lordships' House which does not have at least one expert to speak upon it. Value added tax is no exception because the noble Lord, Lord Grantchester, is the President of the value added tax tribunals. Therefore I do not believe that we could have a greater expert on this subject than him. The noble Lord will be able to contribute a great store of wisdom, knowledge and experience, and we shall certainly look forward to hearing him not only today but in the future.

The Report itself shows the value of the Scrutiny Committees of both. Houses sitting jointly, particularly when a matter both technical and of wide effect is to be studied. Together, the members of both Committees brought out the political and technical aspects during the examination of witnesses. A great many organisations were prepared to give evidence, even though, as my noble friend pointed out, some of the witnesses were not so well prepared as others. In itself this is a tribute both to the organisations themselves and to the way in which the Joint Committee conducted its inquiries. We are very grateful indeed for the work of those who served on the Joint Committee which examined the Draft Directive. What was impressive was the way that the members of the Committee themselves encouraged organisations to take part in lobbying the Commission to find out what was happending and to see what they could do about putting across their own case. If anybody were to accuse the Commission of being bureaucratic, I think that Members of your Lordships' House would compare that kind of advice very favourably with what would happen if one were advised to go to any Government Department to find out what one could do to change draft legislation in this country.

The Draft Directive on the harmonisation of value added tax has been before the Commission since 1973. The amendments that we are considering today were already prepared, mainly by the European Parliament and in the Economic and Social Committee, in 1974. Therefore the Commission cannot be accused of rushing through these proposals. On the contrary, if "own resources" are partly to be provided from a contribution of up to 1 per cent. of value added tax as from 1st January 1978 as opposed to the original date of 1st January 1975, the uniform basis of assessment must be agreed soon. In fact, I understand that it is hoped that agreement will be reached at the forthcoming meeting of the Finance Ministers later this month.

It is also relevant to this debate to know that if the amendments in the document which is before your Lordships—R/2268/74—are not broadly accepted and a common position is not arrived at during the Finance Ministers' meeting, the Council has agreed, at the request of the President of the European Parliament, to have further consultations with the European Parliament under the conciliation procedure. So it means that if a satisfactory conclusion is not reached at the Council of Ministers there is still an opportunity for democratic discussion through the procedures of the European Parliament.

From the evidence in the report, the three areas of concern appear to be the question of zero rating, exemption level and a single standard rate. My noble friend Lord Amory has already outlined the matters relating to these subjects, but I should like to comment in particular on the first two. The single standard rate of course remains within the competence of the national Government, so it is not strictly relevant to the Draft Directive, although of course if simplicity and ease of administration were objectives of the tax, it could hardly be neglected. Rates and coverage, exemption and cut-off points for small firms vary considerably from State to State, and I should like to take this opportunity of paying tribute to the work done by my former colleague in the European Conservative group, Sir Brandon Rhys-Williams, for having defended and emphasised with success in the European Parliament back in 1974 the concept of zero rating—of great importance for us. In fact, the need was strongly emphasised by many witnesses, particularly by the NFU, and it is a most valuable social and economic weapon, particularly in times of inflation. Therefore it is important that the Council of Ministers should agree to the retention of this concept, even regardless of the elimination of fiscal powers.

Can the Minister confirm, therefore, that the concept of zero rating will be retained as a valuable economic and social weapon in the armoury of individual Member States—in particular, of course, our own—and that in fact it will not be eliminated except by the unanimous decision of the Council at any future date. If the objective of the fixed Directive is the creating of a uniform base for assessment regardless of rates, it would seem to be advantageous as a basis for raising revenue to keep the base wider and retain zero rating rather than alternatively to increase the number of exemptions.

The cut-off point for small traders, to which my noble friend has already referred and under which small traders would be exempt from registering, except on a voluntary basis, is one which should remain as flexible as possible. It is clear from the practice in application of VAT in other Member States that there is now a considerable difference both in the level of exemption and the measure of the means of application. The combined effects of inflation and wide fluctuations in exchange rates must make a nonsense of having an immutable figure written into the Directive, unless of course it is to remain a notional figure only to be used for purposes of calculation.

The considerations for the small trader obviously have to be finely balanced between his loss of being able to reclaim his inputs and the cost of administration involved if he is registered. It is not irrelevant to recall that taking a basic wage in 1972 as 100, it is now in the region of 210, more than double—an increase also reflected in the cost of administration of VAT reclaims for a trader, and I think this is relevant when we are considering the level of exemption for small traders.

As implemented in the United Kingdom, 4,000 units of account is not a practical figure, as my noble friend has already pointed out. Somewhere in the region of 10,000 units of account, at what we now call the basket exchange rate, would be more realistic unless a simpler and less costly way of administering the tax is found. This proposal should be considered and, if necessary, the figure could be revised annually in the light of fluctuations in inflation rates and exchange rates.

A second question—and I think I am entitled to three, as my noble friend indicated—arises out of the fixing by the Commission of a cut-off point. Would this figure also apply to de-registering?—because at the moment as the Minister will be well aware, the de-registering figure is £4,000, whereas the registration figure is £5,000. I have always thought that this gap often operates unfairly to small traders.

The Customs and Excise Department, which has implemented the VAT legislation, should be encouraged to study further the methods of assessment and collection in other Member States. However able and competent they may be—and this they undoubtedly are—there are certainly areas of application of VAT which could be improved, and I will give one example from personal experience. France, Germany and the United Kingdom all have different systems for the repayment of VAT to a non-national purchaser who is removing goods from one country to another. To put it very simply, if I go shopping in Germany I can get my VAT paid back to me in the shop in which I buy the object so that I have extra marks to spend on more goods in Germany. In France if I buy something, as I did in Paris, I get the VAT refunded at the airport, so that at least one can spend one's French francs in the duty free area at the airport. But in the United Kingdom if you are a foreigner and you buy goods in London, for instance, you have to go through a great deal of paper work and you are not refunded the VAT on your goods except by post several weeks later in the country of your residence. This means that the country is losing sterling and the opportunity for the purchaser to buy further goods in the country before leaving the United Kingdom is lost. This is just a small example.

So often we read in the evidence that other countries cheat and other countries are not as competent as the United Kingdom, but quite frankly one gets a little tired of reading anything quite so chauvinistic, and much as I admire the Customs and Excise and many other Departments of Her Majesty's Government, sometimes I think that if they crossed the Channel and had a little practical experience of how things worked they might have a better impression and a wider knowledge.

To conclude, I agree entirely with the opinions set out in the report. Further study should be made about the efficiency of collecting VAT and the methods of checking yields against the real liability of Member States. This is where the new audit court will undoubtedly fulfil a very useful role. My noble friend Lord Amory has certainly done your Lordships a great service in introducing the report today and explaining the modifications proposed to the original draft. It was encouraging that he was able to point out that modifications have been accepted by the Commission, and undoubtedly further modifications will be made before the Draft Directive is brought into force. So we welcome the report which has been put before your Lordships today, on a subject which, although it may appear to be reserved to specialists, cannot fail. voluntarily or involuntarily, to affect everyone in this country.

4.48 p.m.

Lord GRANTCHESTER

My Lords, I ask for your kind indulgence for a few minutes to pass a few comments on this report and the Sixth Directive. Also, in opening, while thanking the noble Viscount, Lord Amory, and the noble Baroness, Lady Elles, for their kind words of introduction, I admit that those words have made me feel doubly apprehensive.

When I was first appointed to my office as president of the value added tax tribunals in the United Kingdom one of the instructions that was given to me fairly forcibly by all concerned was that it was part of the duties of the tribunals, and my duties in relation to the tribunals, to ensure so far as we could do so, that there was no unfair trading and unfair competition within the United Kingdom. Just looking at the administration of value added tax in the United Kingdom, if a tribunal sitting in Edinburgh were to decide that a particular supply of goods and services in Scotland did not attract a liability for tax but another tribunal sitting in Cardiff in relation to an identical supply in Wales held that it did attract a liability for tax, then one trader would he getting an unfair trading advantage vis á vis the other.

In relation to the Sixth Directive, the Community and the Commission are looking at the administration of the tax—and, of course, it is a Community tax—from the Community point of view; that is, in the way it is administered throughout the countries in the European Economic Community. Therefore, they are concerned that there is no unfair trading within the Community. Just as within the United Kingdom one does not want a trader in one part of the country to be able to sell his goods and obtain a trading advantage because the tax is imposed differently in one part of the country from another, so the Community and the Commission in Brussels will not wish the tax to be operated by Member States in such a way as will produce unfair trading conditions and advantages to traders in one Community country to the detriment of the others.

My Lords, in considering the Draft Sixth Directive, I suggest we should consider that we are going to come under increasing pressure from the Commission to harmonise our value added tax structure with the other countries. This pressure will increase. In the report that has been promoted, the question of harmonisation of the possible unfair benefits and unfair advantages is not really dealt with to any great extent. Only Professor Prest among witnesses before the Committee dealt with this point in any great detail. I suggest that we should recognise that, looking at the tax from the point of view of the Commission, the Commission will increasingly put pressure on the United Kingdom to bring its rates in line with the rates of the other Member States, and to harmonise its administration with theirs. The reason why this is not dealt with in any great detail in the report is, I think, that if anyone is getting benefits at the moment, it is the United Kingdom, where the value added tax collected, to take an example, is less than one-third of the value added tax collected in Germany, and almost a third of the value added tax collected in France.

My Lords, I would suggest that in relation to this problem we should rely on the Committee mentioned in Article XXX to report from time to time on the ways that the tax administration in the EEC countries might be said to be working unfairly, and to advise the various Ministers concerned as to how they could avoid this unfairness continuing in the future. Another way in which, perhaps, the United Kingdom is benefiting, and could be said to be benefiting unfairly, is this. Every day when I look out of my tribunal window into Oxford Street, I see numbers of visitors from France and Germany, over here buying up goods imported by this country from France and Germany, and taking those goods home. These visitors are doing so because they believe—and perhaps this is correct—that they can buy those goods here more cheaply than they could buy them at home. If our low rates of tax are contributing to this, we must expect pressure to be brought to bear to remedy this, because people in other Member States will not willingly allow this situation to continue indefinitely. That is one comment I would like to make on the report.

My Lords, my other comment is this. As has been stated to your Lordships, value added tax is a tax on consumption. Both in the United Kingdom and in the whole Community, what we really need is an efficient, effective and fair tax on consumption. I suggest that value added tax as it now works throughout the community is not really all that efficient. When paying a tax on consumption, the person who pays the tax, and on whom the tax really falls, is the ultimate consumer, the man or woman who goes into the shop and buys the goods, or obtains services for money. That is the person, whether or not he or she knows it, who is providing all this tax. There is the tax on consumption, but the tax is administered so that all transactions have to take value added tax into account. When he buys the raw materials, the manufacturer has to have the tax chargeable on that transaction calculated and entered. When the manufacturer sells the manufactured goods to the wholesaler, again tax comes into that transaction. But in those transactions between persons carrying on businesses where the seller is supplying goods or services in the course of his business, and the recipient of the supply is obtaining them for the purposes of his business, the net benefit of all this to the Revenue is nil. Let us see how this works.

Let us take the case of a wholesaler, as an example, who buys a quantity of goods from a manufacturer. When he pays for those goods, included in the amount he pays is a sum of money in respect of the tax, the tax chargeable on that supply. Therefore, the wholesaler will pay that tax to the seller, the manufacturer, who will collect it, and he will pay it over to the revenue. But, probably, even before it is paid to the Revenue, the wholesaler, the purchaser, has the right to reclaim the whole of that tax from the revenue to set it off against other liabilities he has to the revenue, so it all comes back to him. It is all a tripartite game, in which the tax goes round from purchaser to seller to Commissioners, back to the purchaser, and the real benefit to the Revenue is nil.

I cannot, for my part, think that this is an efficient tax. I would hope that when valued added tax is made general and harmonised within the Commission we could get out of this situation, which is not very difficult. There are at the moment spheres, certain transactions, into which the tax does not enter at all. That is to say, for example, transactions between companies within a group, transactions between small groups of traders in, for example, the London Metal Exchange. In these transactions, supplies between these parties, no tax enters into the matter at all.

The whole tax could be made a lot more efficient if most transactions between registered traders were excluded entirely from the tax, because it is collected at the end of the line. Therefore, when a manufacturer sold goods to a wholesaler you could not get the manufacturer having to work out with his employees on pocket calculators two-twenty sevenths of some mystical sum and collect it from the purchaser; he would not make out his tax returns and pay the tax over to the Commissioners, and the purchaser would not have to make out his calculation just to get the same sum back again. What one wants is a much bigger extension of the present very limited system of excluding tax entering into transactions between business people. If one did that, then large numbers of persons who are now very busy filling up returns, working out the tax, and no doubt a number of people employed by the Commissioners who are very busy checking these returns, could all do something else, one hopes more useful, including, in the case of the Commissioners, a more thorough policing of the transactions at the end of the day, where there is a benefit to the Revenue. This is one way in which the tax, I suggest, might be made more efficient.

All that remains is to deal with what are called exempt supplies, that is, supplies where, although no tax is charged or paid as such, the purchase price for the goods or services contains hidden tax. In the scheme I am suggesting those sorts of transactions could bear tax for which the supplier accounts fully to the Revenue, regardless of whether the supply was made to another trader for the purpose of his business or to an individual consumer who was at the end of the line. In this way the tax could be simplified. I should like to suggest that our representative on this Committee which is to be set up under this Sixth Directive be instructed to consider with the other members of the Committee how this value added tax, the Community tax, could be made generally efficient, effective and fair in all Member States.

5.5 p.m.

The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)

My Lords, I think I can properly say that this has been a valuable debate and we do appreciate the work of and express our warm thanks to the members of the Joint Committee, and, of course, particularly the Chairman and other Members of this House. We would like to thank those who gave evidence before the Committee and helped to enable the Committee to produce such a cogent report, and, of course, those who have taken part in this debate. I should like specifically, of course, to mention and congratulate Lord Grantchester on his maiden speech. It cannot often happen that one who has made his own maiden speech just, it seems, a few days ago should already be congratulating another on doing the same. It is indeed my pleasure. I had the pleasure of meeting Lord Grantchester not very long ago, before either of us entered this House. As Lady Elles predicted he would, he brought expertise, as so often happens, to assist the House in its deliberations. I shall return in a moment to look at the particular points he put before us.

It would be repetitive if I were to attempt to explain the proposals. The noble Viscount, Lord Amory, in introducing the debate did that, and the joint report in fact does it much better than I could. Accordingly, I will not attempt a general exposition of the Sixth Directive, which is massive in length and complicated in detail; and I shall not attempt indeed to summarise the report, which speaks for itself. But may I pick up the particular points which have been made in debate.

First, I would join with the noble Viscount, Lord Amory, in saying that the sitting of the Joint Committee as a Joint Committee was indeed a success; one has only to study the evidence to see how valuable that arrangement was; and, of course, the report is so valuable partly because of bringing together, if I may put it without disparagement, the political emphasis of the Members of another place and the expert objective emphasis of Members of this House. There is not, as the noble Viscount said, very much time, and indeed there is an element of haste here. I shall return to that when I address myself to what the noble Baroness said.

The noble Viscount mentioned harmonisation of rates, and indeed this was a point which the noble Lord, Lord Grantchester, picked up. There is no proposal in the present draft Directive for harmonisation of rates, as the noble Viscount acknowledged. That is a matter which, if it is to come at all, lies in the future. I may just say, however, in that context that while the noble Lord, Lord Grantchester, was speaking about harmonisation of rates I looked through my brief, and I find, on a quick count, that there are at the moment no fewer than 20 different rates prevailing in the nine member countries of the EEC. So harmonisation of rates does not seem to be something which is just around the corner. I think the lowest rate is of the order of 5 per cent. and the highest something of the order of 45 per cent. So there is a very considerable range of rates from country to country. The noble Viscount spoke of the desirability of achieving as much flexibility as possible so as to avoid major changes in the United Kingdom VAT system. I think I can give the House the assurance that the noble Viscount sought; we do not see that the Directive in its final form will be such as to cause major changes in the United Kingdom system.

If I may pick up in a little more detail the particular points mentioned by the noble Viscount, first, perhaps I may take his remarks about the VAT Committee. The Directive is a complex and wide-ranging Directive, and it is, of course, reasonable, as the noble Viscount acknowledged, to provide some forum other than the Council of Ministers itself in which Member States can come together to discuss the detailed points arising in the course of the implementation of the Directive. That is not really a matter for Ministers; it is a matter for some such body as is proposed. But we acknowledge that this is a sensitive area, and in this sensitive area of fiscal policy the Government are certain that it would be wrong, at the present stage of the development of the Community, to set up machinery under which measures could be imposed upon Member States against their better judgment.

This is a generally held view in the Community and we do not expect the proposals for a VAT Committee in the form as originally drafted in the Draft Directive to survive. In the Government's view what is needed is a committee which will provide a forum for a consultative procedure but with no power to impose measures on Member States against their will. I hope that the noble Viscount will accept that as the assurance that he sought. The most suitable procedures for such a committee can best be settled when the substance of the rest of the Directive has been finally agreed, but that is the overriding matter, that it will not have power to impose measures on Member States against their will. This is a matter which will come up for discussion in that sense on 16th December.

The next matter which I should look at following the order which the noble Viscount took was the matter of zero rating. Indeed, this is a matter which was referred to as well by the noble Baroness. Let me make it clear—I hope again this is the assurance that speakers sought—that the Directive, we expect, will now permit the United Kingdom to retain all the zero ratings which we now have in force and to make marginal adjustments where necessary to deal with specific problems. I think I should inform the House that the present zero rating system covers a considerable range of goods at the moment. In fact, our existing zero rates already cover some 30 per cent. of consumer expenditure, and a further 18 per cent. is exempt from the tax. There are of course the differences, noble Lords will appreciate, between zero rating and exemption. A further 18 per cent. is either exempt from the tax or is outside the scope of its application.

Viscount AMORY

My Lords, would the noble and learned Lord allow me to ask him whether the percentage in the United Kingdom which is either zero rated or exempted is higher than in any other country in the EEC? That is my impression. Certainly the figure that the noble and learned Lord quoted of 30 per cent. sounds familiar.

Lord McCLUSKEY

Yes, my Lords, it is. I can answer that affirmatively. Indeed, there are countries which do not have any significant zero rate at all. It is very nearly 50 per cent. of consumer expenditure which is not liable to the tax. It must be said that our existing zero rates and exemptions already extend so widely across the range of the more essential categories of expenditure that it is difficult to think of substantial extensions to the zero ratings that any future Chancellor, taking into account both the social and the fiscal considerations, might wish to make.

Let me emphasise that the Sixth Directive will not in this respect impose any significant new constraint upon this country's budgetary freedom. The obligation not to extend the scope of zero rating is not entirely new in so far as it is contained in the draft Sixth Directive. It is already implied in the second VAT Directive which was an established part of Community Law when we entered the Community. The obligations under the second Directive were accepted then, and of course no one would seek to resile from them.

What we can properly claim is that we have in the discussions following upon the drafting of the Sixth Directive, in fact achieved a small measure of additional freedom because we can now maintain our present zero ratings and make some marginal adjustments. Indeed, we published some orders on 6th December and two of them make very marginal extensions to zero rating. These simply illustrate that the freedom of which I speak has been achieved. I think that that is the assurance that was sought. Unless some further assurance is sought on the matter, I can perhaps turn to deal with the matter dealt with by the noble Viscount and the noble Baroness, of the exemptions for small traders, the turnover limit.

As has been pointed out in the debate, the original draft Directive would have allowed exemption from registration for traders whose turnover was below 4,000 units of account, and at the rate then prevailing that was some £1,650 a year—very much less, of course, than is the figure in this country at £5,000. The background to this is that the limits which the Member States have set for bringing small traders into the scope of the tax vary very widely. Indeed Belgium and Italy have no exemption at all. Our figure of £5,000 is the highest in the Community, with the exception, in part, of Ireland. Our threshold of £5,000 a year of taxable turnover is certainly higher than most. Naturally one would expect that the pressure would be to bring down that figure. But, although final agreement on this part of the Directive awaits decision, hopefully on 16th December, I think we can now properly say that the fears are unfounded.

The noble Viscount referred to what took place on 21st October, but the solution which seems likely to be confirmed is that in calculating their own resources contribution Member States will leave out of account the inputs and outputs of traders whose annual turnover is below 10,000 units of account—about £6,000 at the current rate. They will thus be free to retain their existing practice for traders with turnover below that level.

That, admittedly again picking up the point that the noble Viscount referred to, would leave a problem if a Member State were to wish to set its own exemption limit above the equivalent of 10,000 units of account, since the Member State would then be expected to make an own resources payment relating to the business done by traders in that State whose turnover was below the national exemption limit but above 10,000 units of account. But of course this would be likely to represent only a small part of the Member State's own resources contribution, and some means could no doubt be devised for estimating it.

Viscount AMORY

My Lords, I apologise for interrupting the noble and learned Lord again, but I think it will save time rather than me coming back to ask him afterwards. I am sure he is right in what he has said. From the latest information, does the noble and learned Lord know, if the EEC limit is to be £6,000—that is, 10,000 units of account—and if we chose in this country to have a higher limit, whether we could do so with the com pensatory arrangements to which he has referred, so that we should be fair with other countries? Or does this latest suggestion of 10,000 units of account no longer envisage individual countries having freedom to fix their rates at what they like?

Lord McCLUSKEY

My Lords, as I understand it, individual countries will not be prohibited from in fact fixing their own limit above that, but of course I cannot say that any arrangement has been agreed about what would happen in the band between the EEC figure and the national figure if it happened to be higher.

It might be convenient if at this point I were to refer to what the noble Baroness said in relation to the effects of inflation. One fixes a limit of £5,000, and because of inflation that limit catches more people as inflation goes on. Consideration of course has been given—not so much in a European context, but certainly in the context of the tax in this country—to the notion of indexing the limit, but there are powerful arguments against it. There are arguments for it, as the Joint Committee heard, but there are arguments against it as well. If the limit were raised, particularly if it were automatically raised, by reference to some index, many traders above the new limit might wish to remain registered voluntarily, especially if they made a substantial proportion of zero rated supplies, and especially of course if they were supplying mainly to registered persons.

If the effect of an automatic rise in the limit were to give people the opportunity to deregister, they would, as noble Lords will appreciate, have to face the obligation of paying tax on their stocks at the deregistration date, so the temptation would be not to deregister, even though the opportunity came along. It is thought that, generally, a policy of index linking would create a very undesirable see-saw effect; the same trader could move repeatedly into or out of the field for registration depending on the way his taxable turnover and the registration limit changed in relation one to another. I would reiterate the point I made in a slightly different context; that our national registration limit is already the highest in the Community, with the exception in part of the Irish rate, and one would see index linking as tending to push it up and up in relation to the other Community rates.

Baroness ELLES

My Lords, I am obliged to the noble and learned Lord for that explanation of the reason why he does not think the figure should be changed, certainly not over a long period, but may I ask him whether he would nevertheless accept that the inflationary costs of administering VAT for small traders are going up the whole time and that this must be taken account of in the overall consideration of what figure is reached for annual turnover for the small trader?

Lord McCLUSKEY

Yes, my Lords. I am sure the noble Baroness is right that it is proper to take that matter into account in considering the figure. While I am on that point, I wish to deal with the point the noble Baroness raised in relation to deregistration. To put the matter precisely, the condition for deregistration is that the turnover should have fallen below £4,000 in each of the two years preceding deregistration or that in each of the quarters comprised in those years it should have been £1,250 or less; a quarterly rate of £1,250 is of course equal to £5,000 annually. The view of the Government on that is that it would be undesirable for a trader to be deregistered on grounds of low turnover unless it were reasonably certain that his turnover would remain below the registration level. That is to avoid the see-saw effect I spoke of, moving into and out of the field for registration, and that is why the conditions for registration and deregistration are not identical.

Lord ROBBINS

My Lords, may I ask the noble and learned Lord to elaborate his argument a little? I confess that I find it somewhat difficult to follow. Suppose the value of money accidentally continued stable; there would be no see-saw effect and everything in the garden would be lovely. If there were correct indexing, that would mean essentially that the real value of the limit would remain constant. The purpose of indexing would be just that. Thus, I do not in the end see the noble Lord's argument against indexing on that ground.

Lord McCLUSKEY

My Lords, if I properly understand the point which the noble Lord, Lord Robbins, has made, if one has stability in the currency then one has no risk of any see-saw effect; there is no problem with indexing if the currency is stable. I was really talking about the more likely situation—one is always hopeful—that at the present time inflation is likely to continue, and if one indexes and if the figure (that is, the European units of account figure) is reviewed, as it would be, annually, one would tend to find that a trader who did not himself change his prices and his turnover would find that the figure had passed above his annual turnover.

The noble Viscount expressed apprehension that one effect of the Draft Sixth Directive, when it was completed, might be to compel traders in the United Kingdom to go on to a monthly return basis. I understand that that is not likely, and I think I can reasonably assure him that that will not be compelled by the Draft Sixth Directive. Indeed, one of the important considerations in the mind not only of the United Kingdom Government but of other Governments as well has been to introduce the changes which have to be introduced in such a way as to avoid disturbance of the national systems in a way that would upset traders and others who have an interest in some form of stability in the mechanics of the tax.

Mention was also made by the noble Viscount of the evidence that was given about partial exemption, and he specifically referred to the question of legal services. We appreciate the problems of partial exemption, and indeed the quotations from Mrs. Dorothy Johnstone's book which appear in two places in the report of the Joint Committee express a truth which we would acknowledge. The Bar Council and the English Law Society, in their evidence to the Committee, were concerned about the administrative problems of a partial exemption.

I also know that there has been communication with the Dean of the Faculty of Advocates about the Scottish position. The practical problems in Scotland might be less at the Bar, where the legal accounting systems are possibly somewhat more adaptable to VAT requirements than they appear to he South of the Border, but this is not just a matter of practical problems. We have taxed legal services in the United Kingdom ever since VAT was introduced, and we are not in a strong position to argue differently in the Community. In other words, it would be very difficult to argue for a zero rate in respect of legal services and the Community would probably regard it as very odd if we were to come along now arguing for zero rating in preference to exemption in view of our current practice. It appears that exemption will be the preferred choice of the majority in the Community and I think that that is something which will simply have to be accepted.

There have been some observations—though happily they have been restrained—about the efficiency of the collection of the tax in other countries, and it is perhaps right that I should make a brief reference to the Audit Court referred to in the Joint Committee's report. The audit of Community revenue and expenditure is provided for under Article 206 of the Treaty of Rome, which established an Audit Board for the purpose. Under an amending Treaty dated 22nd July 1975, the Audit Board is to be replaced by a Court of Auditors having higher status and greater independence of action vis-à- vis the other Community institutions than the Audit Board. This is the body which the Joint Committee mentioned in paragraph 29. The target date for setting up the court is 1st January 1977, but that date is not likely to be achieved and the matter will be considered by the Foreign Ministers' Council on 15th December this year. Under the present system, Community auditors already visit Member States for the purpose of satisfying themselves that the own resources contribution is being correctly accounted for. They have power to inspect books and records in the official possession of the Member State and also to visit the premises of traders, though only when accompanied by officials of the Member State.

When the VAT own resources system is established, as it should be following the coming into force of the Sixth Directive in its final form, the Community auditors will no doubt be concerned to see that the system is working as intended in the Member States. The relative inefficiency of the administration of national VAT and, therefore, the efficiency of the collection of the VAT own resources element will probably be for later consideration.

However, the efficiency of tax collection is in any case difficult to measure in the sense of finding out the extent to which there are under-declarations by taxpayers which do not come to light. Any suggestion that this can be done by comparing the VAT yield with the country's national incomes statistics of consumers' expenditure and adjusting for the rates and incidence of the tax is thought to be an over-simplification, since the national statistics themselves are estimates and may have an appreciable margin of error.

Baroness ELLES

My Lords, I wonder whether the noble and learned Lord can inform the House whether any other country in the Community gives powers to inspectors such as are given in this country to investigate the position of VAT upon private premises.

Lord McCLUSKEY

My Lords, perhaps I may come back to that point. I do not know the answer, but I am sure that those in the Box will provide me with the answer before I sit down.

Lord HAWKE

My Lords, can the noble and learned Lord reiterate his statement that the estimates of the national income and so on are subject to a wide margin of error? Successive Chancellors of the Exchequer have only too often come to the Dispatch Box in another place and dealt in questions of £100 million here and £100 million there as likely to make an appreciable difference to national statistics. If they start from a basis where there is a wide margin of error, these exercises seem rather fruitless.

Lord McCLUSKEY

My Lords, I do not wish to make a general comment on that, particularly in the presence of a former Chancellor of the Exchequer, but I believe that he and other noble Lords will agree with me that the history of forecasting is the history of error. To turn to other points dealt with by the noble Baroness, Lady Elles, she rightly said that this Directive first made its appearance in 1973 and was amended in 1974; but it was in April of this year that the Council of Ministers decided that the interim arrangement that we have spoken of could not continue indefinitely and set a target date of January 1978 for the operation of the VAT own resources system. This decision has given a new impetus to the discussions in Brussels about the Draft Directive and we hope to make progress on December 16th. Indeed, I hope to be a witness to that progress in Brussels. The noble Baroness also referred to a single standard rate. I made some reference to this earlier. There are a vast number of different rates in the Community and, looking at the tables of those rates, I found that we had relatively fewer than the other countries in the Communities.

To deal now with the point raised by the noble Baroness in relation to powers of entry, my information is that most of the Member States have powers of entry to premises on which business is conducted. In many small businesses this includes private premises, as in this country. The noble Baroness also suggested and gave a graphic example of profit that might be derived from the study of other countries' systems. I think that I can commend to her the book which I chanced across and which is called A Tax Shall be Charged, by Mrs. Dorothy Johnstone. I read it not so much because it instructed me very much about the subject of this debate but for its elegance and lucid style. If the noble Baroness would care to look at that pamphlet she would find from it that a vast amount of study has already been done by the Department because the Department was able, as it were, to "go to school" on the experience of other countries.

That process is continuing and the Department is always open to ideas from other countries, bearing in mind that the mere fact that a particular method seems to work in another country is not of itself a good reason for immediately introducing it into this country because one likes to see stability in taxes. The noble Viscount mentioned that the general thrust of the evidence before the Committee acknowledged that VAT in practice was not as bad as it was once thought to be. That is a tribute to the stability of the system at the present time.

To come to the noble Lord, Lord Grantchester, he made, in the course of his lucid speech, valuable comments on the importance of regulating the tax so as to avoid unfair competition. I have already remarked on the harmonisation of rates. That seems to be a long way off, though one acknowledges that, once the Draft Sixth Directive has been put into its final form, the next stage will tend to produce pressure upon this and other countries to harmonise their rates. The noble Lord also, with the value of his experience behind him, made a number of comments about the characteristics of a tax—it should be efficient, effective and fair—and criticised value added tax in this country in a way which will certainly be looked at. I do not believe that I can comment in any great detail on what he said because his remarks did not arise directly out of the report, but the recommendation that the noble Lord has made will certainly be given careful consideration and that will be something that will be taken into account not only by the Department in this country but no doubt by the other countries when they meet, in order to try to ensure that the tax, when it is harmonised throughout the Community, will be as near as possible efficient, effective and fair.

It remains for me to reiterate my thanks to those who have assisted in the preparation of this valuable and cogent report and who have taken part in this debate. If there is any point that I have left unanswered, I should be happy to attempt to answer it before I finally sit down.

5.39 p.m.

Viscount AMORY

My Lords, I should like to associate myself with the congratulations that the noble and learned Lord, Lord McCluskey, offered to the noble Lord, Lord Grantchester, on his most interesting maiden speech. The noble Lord has a high reputation as a lawyer and really exceptional knowledge of the subject that we are discussing. I was intensely relieved that the noble Lord did not bombard me with any very intensive questions in depth about the working of VAT in the United Kingdom. I was afraid that he was going to probe me from his extensive knowledge of the sublime mysteries of that tax, but the noble Lord was kind. It is quite clear that the noble Lord is not only a distinguished lawyer but also a complete gentleman.

The noble Lord, Lord Grantchester, asked two questions to which the noble and learned Lord, Lord McCluskey, has referred. First, he gave us a warning about the pressure that he thought we might be under in this country in the direction of harmonising rates structure, apart from the basic arrangements for assessment. Perhaps that will happen, but assurances have been given on behalf of the EEC authorities that there are no proposals under discussion at present for harmonising rates, at any rate until that mystic date when fiscal frontiers will be eliminated. But I expect that in the very long term his warning may be relevant indeed.

Secondly, the noble Lord expressed some fears about the relative unfairness of some of the present rules and regulations, and he mentioned the evidence given by Professor Prest. Apart from Professor Prest, I cannot remember that we got very much evidence about alleged unfairnesses or inequity in the administration of VAT on the current basis. It may be because we did not ask enough questions on that aspect. My noble friend behind me, Lord Hawke, asked what wide margins of errors were, and the noble and learned Lord, Lord McCluskey, referred to the presence of a very out-of-date Chancellor of the Exchequer opposite him and avoided answering that point. My Lords, I will answer as to what it was in my day. In my day £50 million was a substantial figure and even on occasions a crucially important figure, and if it had not been I should never have been offered an appointment at the Treasury. I do not think that I need follow that up any further.

I think I have got off much more lightly than 1 feared. I said that I hoped that noble Lords would tell me that I need not answer more than three questions, though I would have to give my reasons and draw a map.

Lord McCLUSKEY

My Lords, the noble Viscount has referred to what was known at the time as a little local difficulty. If I can have the noble Viscount's indulgence, I should like to refer to a little local difficulty of mine. When I was speaking about lawyers, 1 said that they were likely to be exempt. Of course that was a slip of the tongue; they are likely in the Community to be taxed.

Viscount AMORY

My Lords, that seems to me, as a non-lawyer, to be wholly equitable. But I am in a difficult, even alarming, position this evening, because every single other noble Lord who has spoken has been a distinguished lawyer, and I was afraid for a moment that the kind of observation that would be put to me by one or other of them would be, "I put it to you that everything you have said has been a tissue of inaccuracies". But I have nothing to complain about. I think that we have heard an adequate review of this subject, and it has certainly been a less aggressive discussion than appears to have occurred in another place on the same subject. I very much thank noble Lords who have spoken, and I feel very fortunate in the treatment that I have received, and I now propose to take a hurried departure. Before doing so, I should like to move formally the adoption of this report.

On Question, Motion agreed to.