§ 5.2 p.m.
§ Lord COBBOLD rose to move, That This House takes note of the Thirty-first Report of last session of the European Communities Committee on a common system of value added tax on works of art, used goods etc. (R/75/78) (H.L. 187, 1977–78). The noble Lord said: My Lords, I rise to move the Motion standing in my name on the Order Paper. The Select Committee's report on the draft Seventh Directive on value added tax was printed on 13th June, evidence having been taken during the preceding two months. I am informed by Her Majesty's Customs and Excise that no Governmental discussions on the document have yet taken place in Brussels, and that no discussions are expected before next year. The proposals have, however, been considered in Brussels by the EEC Economic and Social Committee, which issued an Opinion on 1st June in which they made a number of criticisms on the proposals.
§ The issues in this report are extremely complex and, in introducing it to your Lordships, I shall not go into too many details or into too much mathematics. There are, however, many points which directly concern British interests, more particularly the United Kingdom's auction rooms and dealers in works of art and antiques, with their worldwide pre-eminence, and also the highly developed United Kingdom markets in second-hand motor cars and similar trades. While the Committee welcome the objective of the Commission to extend to second-hand goods the harmonisation which has already been agreed in regard to value added tax on new goods, they feel that there are strong arguments for seeking modifications in the present Directive, which would bring the arrangements more into line with current United Kingdom practice and cause less disturbance to established markets.
§ As set out in paragraph 1, the committee took evidence from Her Majesty's Customs and Excise and from a wide circle of interests concerned, and also had the advantage of considering submissions to the House of Commons Select Committee. The committee are most grateful, for the careful and detailed evidence given 942 to them. The application of value added tax to second-hand goods raises special difficulties, which are described in paragraph 3 of the report. Paragraph 4 goes on to explain how, when VAT was introduced in the United Kingdom in 1972, special schemes were devised to prevent distortion of trade. It appears from evidence received, both from Her Majesty's Customs and Excise and from the traders concerned, that these special schemes have, on the whole, worked well, and have proved broadly acceptable.
§ The basic difference between present arrangements in the United Kingdom and the proposals in the Directive lies in the method of assessment. The special schemes in the United Kingdom are based on taxation of actual margins of profit, whereas the Directive proposes taxation on a fixed standard basis, irrespective of actual margins of profit. The Committee consider, on the basis of the evidence, that taxation based on arbitrary standards cannot be as equitable as the taxation of actual margins. In some cases, the former could lead to too low a level of taxation and in others to an excessive and unjustifiable burden, which would be likely to have disruptive effects on markets. Again, on the basis of evidence the Committee are not convinced by the arguments advanced by the Commission that taxation of actual margins requires that the dealer's margin should be divulged to the buyer, and that it also facilitates evasion. It has been made clear to us that, under the United Kingdom's special schemes, neither of these results has, in fact, been experienced. The very complicated mathematics of all this are spelled out in the course of the report, particularly in paragraphs 7, 8, 11, 17 and 19.
§ Apart from this fundamental question of the basis of assessment, the proposals raise several other points of concern to United Kingdom interests. It is proposed that, in line with practice in dealing with new goods, taxation on imports, less a deduction on re-export, should be applied also to second-hand goods which are at present exempted from taxation on imports under the United Kingdom's special schemes. As set out in paragraph 15, it is argued by the trade, with support from Her Majesty's Customs and Excise, that taxation on imports of works of art and antiques would be damaging to 943 the London auction markets and dealers, and would indeed lessen the attraction of EEC countries generally as a cultural centre. The trades also point out that, even if tax were deductible on re-exports, the lengthy delays between import and re-export would involve a heavy burden. Bearing in mind the international importance of the United Kingdom for entrepôt trade, some satisfactory solution should be found in the course of negotiations, though Her Majesty's Customs and Excise have stressed to us that it may prove a very difficult problem.
§ Paragraph 16 deals with a related question which does not arise directly from the Commission's proposals as such. It is, I understand, a general principle of VAT legislation in this country, and indeed throughout the EEC, that some relief and therefore some incentive is given to export as compared with domestic use. Any incentive to export works of art seems unfortunate at a time when efforts are being made to retain art treasures for the nation, but the Committee feel that this problem should be dealt with by wider measures than amendment of VAT legislation. In a recent comment on observations on this subject by the House of Commons Expenditure Committee, Her Majesty's Government have stated their agreement with the view expressed in this paragraph of the House of Lords report.
§ Still on the subject of fine arts and antiques, there is a strong divergence of view in the trade—the arguments on both sides being set out in paragraphs 13 and 14 of the report—as to whether under the Directive's proposals auctioneers should, or should not, be dealt with on the same basis as registered dealers. As I have already mentioned, the Committee accept the general view put forward by witnesses, that it would be preferable to maintain the existing United Kingdom practice of charging on actual margins. In that case, whatever the strength of the two conflicting arguments, it would not seem feasible to charge auctioneers on anything other than their commission.
§ Turning to the trade in second-hand motor cars and similar trades, witnesses made a strong case, as set out in paragraphs 18 and 19, that the Directive's proposals would give rise to taxation 944 considerably higher than is justified by the normal level of real profit margins. They also stressed that dealers rely on low profit margins, and consequent large turnover, and that unrealistic taxation of used car sales would also affect sales of new cars. Their arguments appear to the Committee to be well founded and to deserve careful consideration.
§ In addition to the specific subjects which I have mentioned, witnesses drew the Committee's attention to various other matters, including some important points of definition and of drafting in the proposals, which clearly needed review and clarification. Some of these points are dealt with in paragraphs 20 and 21; others are set out in the minutes of evidence printed with the report.
§ In conclusion, the Committee welcome the close contact which evidently exists between Her Majesty's Customs and Excise and the principal trade associations. They were also glad to hear from the principal trade associations that many of them are in contact and often in agreement with their counterparts in other EEC countries. I repeat the Committee's general view that extension of harmoni-sation to cover second-hand as well as new goods is desirable in principle. They hope, however, that in further negotiation it will prove possible to arrive at solutions which take account of the criticisms which have been voiced and which are more closely in line with the special schemes, based, as I have said, on the taxation of actual profit margins, which have proved their worth in the United Kingdom. My Lords, I beg to move.
§ Moved, That this House takes note of the Thirty-first Report of last Session of the European Communities Committee on a common system of value added tax on works of art, used goods etc. (R/75/78) (H.L. 187, 1977–78).— (Lord Cobbold.)
§ 5.12 p.m.
§ Lord GRANTCHESTER
My Lords, today we have a welcome opportunity to consider proposed changes in the tax. Changes of such a nature rarely come before your Lordships' House, and we have the benefit in this discussion of the most excellent and concise report submitted by the Select Committee. I should, I think, in so far as it is necessary 945 for me to do so, declare my interest in this subject as President of the tribunals established to determine disputes between the Commissioners of Customs and Excise and taxpayers concerning value added tax. In any discussion of a proposed change in the tax it is useful to start with the basic principle of the tax, then to examine the proposed change to see whether and to what extent it involves a departure from the basic principle and then to examine the results which can be foreseen if the change is put into effect both in relation to the enforcement and collection of the revenue and in relation to the affected sector of the economy. I intend to follow that pattern in raising a few points for further thought in relation to this matter.
Value added tax was introduced as a simple tax calculated as a percentage of the value which a trader adds to supplies of goods and services made by him in the course of his business. It is a tax ultimately borne by the consumer and it is widely based. In relation to goods, the consumer ultimately bears tax on the aggregate of all the values added by traders in the chain which ends with him. It differs from purchase tax where the amount of the tax was charged at the beginning of the chain and the Revenue was not concerned thereafter. The difference is important when one comes to consider enforcement and collection over not just one but perhaps many stages.
As your Lordships will be aware, the way in which the tax operates for supplies made by a dealer is that he accounts for tax on his selling prices but deducts the tax charged to him on purchases and supplies made to him. In that way, the net amount paid is the tax on the value which he has added. But this simple concept cannot be applied to all dealers in second-hand goods. In these cases, more often than not the dealer initially acquires the goods from a private individual who is not accountable for tax on his sale to the dealer and cannot charge any tax. Therefore, to arrive at the tax on the value which the dealer adds, there is no tax paid by the dealer to set against tax on the sale by him. This difficulty has been partly overcome in our legislation by the introduction of what are called margin schemes for some but by no means all second-hand goods. In these cases, provided the dealer keeps the appropriate records of his 946 transactions, the tax is limited to the appropriate rate on the differences between his selling and his purchasing prices.
Apart from conforming to the principle of the tax, the margin schemes are designed to minimise distortions in trade as between transactions in new goods and transactions in these specified second-hand goods. We have, however, here one anomaly in our legislation in that the margin schemes apply only to certain second-hand goods. These goods roughly fall into two categories. First, there is the class which includes cars, motor-cycles, caravans, boats and aircraft. Secondly, there is the class which includes paintings, sculptures and antiques. In relation to these goods, the margin schemes work tolerably well. The main source of complaints arises in relation to the books and records which a a margin trader is required to keep under penalty of paying tax not just on his margin but on the full selling price.
The requirements as to accounting are strict, and in the initial stages of the tax dealers have been faced with the prospect of bankruptcy for failure to keep their books and records as required by officers of the Commissioners of Customs and Excise. Consideration should be given to reducing these requirements to a minimum and removing the discretion of officers to accept less than such stated minimum, a discretion which has sometimes, so the tribunals have considered, been overlooked by the assessing officers and has sometimes been exercised inconsistently in various parts of the United Kingdom.
A liability to pay tax should not depend on the decision of an officer at a local office whether or not to exercise a discretion in relation to books and records. But, as I have mentioned, most secondhand goods are not covered by our margin schemes. The latter are confined to those goods in relation to which strict enforcement and collection of tax on the basis of such a scheme is a reasonable practicability. Thus, there are no margin schemes for jewellery less than 100 years old, television sets, wirelesses, household goods such as washing machines and, going right down the line, scrap metal. It has been hard enough for the Commissioners to persuade antique dealers to keep detailed records and accounts of a margin scheme. Can we expect a scrap dealer to keep detailed records of such a scheme? Difficult 947 problems arise in determining when goods are second-hand or used. Is a diamond engagement ring, obtained on approval and worn for a week by a girl and then returned to the jeweller, second-hand when she returns it?
The change now proposed by the Commission involves the adoption of a set formula based on selling prices for determining the tax on all second-hand goods, so first it involves the difficulty of determining in each particular case whether or not the goods sold were second-hand. Secondly, it involves the adoption of a principle under which tax is not charged purely on the value added element in the supply of second-hand goods; the charge will usually be on a greater or a lesser amount. It is easy to tell a dealer that he must either pay tax on his margins, if a margin scheme is applicable or, if it is not, on his selling prices. It will be difficult to educate second-hand car dealers in the application of the proposed formula for them, set out by the Commission. The result will be to make enforcement and collection of the tax far more difficult and the Revenue will suffer. The tribunals will receive many more appeals. In my experience there has been no complaint in this country that not all second-hand goods are treated in the same way. In my view, an answer to this problem which might be more satisfactory would be for us to be allowed to keep the margin schemes in relation to the existing goods to which they apply and which accords with the principle of the tax, but to adopt some simpler formula on the lines suggested by the Commission for other second-hand goods. That compromise might be an acceptable solution.
A second departure from the basic principle of the tax arises on the proposal to treat auctioneers and other persons— and I quote, "exercising an intermediate function of whatever kind"—as if they were selling the second-hand goods concerned. At present an auctioneer or buying or selling agent pays tax on his commission because he supplies his services for that consideration. That accords with the basic principle. The proposal that he should pay tax on the sale price of the goods which he auctions or buys or sells for his principal is a radical departure therefrom. It will prejudice the Revenue by benefiting auctioneers and 948 dealers in New York and Geneva at the expense of auctioneers and dealers in London and, I would assume, in Paris. Works of art are difficult to contain within national boundaries. We should be slow to agree to a matter which would prejudice the London art market by a departure from the principle of the tax, and a departure which would act to the detriment of the Revenue.
Finally, I would mention that the report deals with a proposal to tax all second-hand goods on importation. At present a few goods, such as works of art executed before 1st April 1973, when the tax was introduced, can be imported without payment of tax. There is really an anomaly here and one which I should have thought we could agree to on the basis of the imposition of a general tax on all importations. It need not necessarily prejudice the London art market, as a dealer who exports goods on which tax has been paid on importation or a private individual who buys the goods from an importer or exporter, could be allowed to reclaim the tax paid. The fact that the Revenue would be obtaining an interest-free loan of the tax is not a reason for not accepting this proposal, as a great deal of the tax paid to the Revenue is in reality an interest-free loan pending the claim of input tax by the purchaser. I suggest that further representations should be made to the Commission to allow, where-ever practicable, supplies to be taxed in accordance with the basic principle and to seek to exclude special treatment of supplies which entail practical difficulties of enforcement and collection.
§ 5.26 p.m.
§ Lord COTTESLOE
My Lords, unlike the noble Lord, Lord Grantchester, who has just given us a most interesting and informative exposition, I am no sort of an expert in the highly complex field of VAT and I doubt whether many of your Lordships are. But I regard the arts as a universal language transcending national boundaries, and in my view it is right that exports of works of art and museum objects—to use the phrase which is now fashionable—are zero rated for VAT, as in this country they now are. It is right that they are, but this has the distorting effect that it costs more to buy such things for the home market than for export, and while the encouragement of 949 exports in general is clearly in the national interest, in this particular field the effect of the zero rating is thus contrary to the interests of our museums and galleries and favours the dispersal of elements of our national heritage.
It must also be said that VAT as at present administered, bears hardly, and in my view unjustifiably, on living creative artists. These are matters of substantial importance and logically the way to avoid these undesirable effects would be to zero rate sales of works of art and museum objects altogether, whether sold for export or for the home market. That is what I should like to see. I recognise that I am not at all likely to see it, that it is too much to hope for, but any step in that direction is to be welcomed.
Turning now to the report of the Select Committee, it is clear that harmonisation on the standard margin basis of the Seventh Directive on VAT would have an adverse effect as compared with the basis of actual margins as at present operated in this country. As the Select Committee point out, it would be less equitable, it would be more arbitrary and it would penalise particularly the sales at auction which are so important a feature of the fine art trade here and in which we lead the world, and I hope will continue to do so. Therefore, if the EEC harmonisation is really necessary—which I find difficult to believe—I warmly support the recommendation of the Select Committee at the end of paragraph 22 of their report, that the Commission should be asked— to quote the words of the report—to seek ways of harmonising in this instance community practice on the lines of the prevailing system in the United Kingdom.If I may carry the argument a little further, if the Commission are not prepared to do so, then I hope that we shall go on with our own system rather than adopting theirs. From the EEC point of view, that may sound rather anti-social, so to speak. Harmonisation is, no doubt, in general desirable, but, after all, this is a matter of internal taxation. I suggest to your Lordships that in matters of internal taxation we are entitled to decide the detail of our own practice rather than being obliged to conform to that of other nations. I am a wholehearted European, but, after all, we should not dream of allowing the EEC to dictate our system of taxation in other respects, rates of income 950 tax, capital gains tax and whatever. So I hope that, while conforming with the European Commission so far as we reasonably can, we shall not attempt to do so in this matter of VAT unless we are satisfied that it is desirable in the interests of equity and in the interests of this country; and I personally am satisfied, as it appears that the Select Committee are satisfied, that it is not.
§ 5.32 p.m.
The Earl of GOSFORD
My Lords, I am most grateful to my noble friend Lord Cobbold for giving the House the opportunity to discuss the report at this stage. I am also grateful to the noble Lord, Lord Cottesloe, for mentioning VAT in relation to the living artist. He has thus made my task this afternoon that much easier.
My Lords, I want to speak on the one paragraph in the draft Seventh Directive which I believe has been overlooked by the Select Committee. Paragraph 2, item 2, says:Member States shall exempt supplies and imports of works of art effected by the artist himself.The 31st Report includes evidence from Her Majesty's Customs and Excise which states, in their paragraph 8, "Sales by artists":In the United Kingdom there is no exemption from VAT for the disposal or importation of works of art by the artist himself, whereas the Commission's proposals (draft Article 2, paragraph 2) include a mandatory exemption for these.Here I should be obliged if, when he makes his intervention, the Minister will comment on the Labour Party's policy towards the arts which suggests that works of art should be zero rated, and could he say how he reconciles this with the evidence of Her Majesty's Customs and Excise. To return to the 31st Report, in the Summary of LAPADA's reactions—LAPADA being the London and Provincial Antique Dealers' Association Limited—paragraph 13 states:Exemption of supplies and imports effected by the artist himself is welcomed.Apart from these two mentions there is virtually no evidence in this otherwise excellent report either from or about the living working artist himself. I underline "living" and "working" as the report 951 deals with second-hand goods, and this emphasis on second-hand goods means that the report is dealing in the main with those who buy and sell artists' work and not with those who produce it; also in the art market this very often means the work of dead artists. Therefore, I should like to point out some of the effect VAT has on artists. In a recent Arts Council Annual Report it states:VAT has made art more expensive to buy and dealers were reporting a falling off in sales of contemporary painting and sculpture. Few of them were inclined to invest space and money in the promotion of any but artists of already proven market value.My Lords, you can imagine that this must make it very hard indeed for the young artist to get a start in life. Further to this, to the artist who has had to register it is a direct drain on his resources. To the artist who is not registered it still tends to be an indirect drain, as his outlets have normally had to register. The seller, either the artist himself or the gallery, has then to decide whether to charge VAT to the customer over and above the price of the work, thus jeopardising the sale, or whether to include VAT in the price and pay the tax.
Another danger for the artist is that if his gross income from sales exceeds a certain figure in any given quarter he can be liable to register. A quite modestly successful exhibition could do this. Cases have been reported where an artist has been visited by Customs and Excise, told that he has committed a serious offence, and in addition to compulsory registration may have to find several thousand pounds in back tax. Thus we should take note of Lord Redcliffe-Maud's words in his 1976 report, Support for the Arts in England and Wales, that the battle for VAT zero rating on all works of art, whether on pictures, sculpture, concert or theatre tickets, must be fought.
This is where I believe we in this country can learn from our neighbours in Europe and Scandinavia. I should like to quote from the Commission's proposals for Community action in the field of culture of 1977, where it states:The effect of VAT on culture is not a neutral one. The situation is particularly worrying in the case of contemporary works. Their very creation may be threatened by marketing difficulties.952 And further:It would be useful for all Member States to adopt the system of permitting artists and writers to spread their tax declarations over a period of several years in order to compensate them for the fluctuations in income.It is perhaps ironic that this levy of VAT on the sale of work by artists should be found in this Seventh Directive, because I believe a survey would show that the turnover in second-hand art works, including those of dead artists, which may have given them very little reward in their own lifetimes, would outstrip that in direct sales from living artists. The answer to many of these questions will, hopefully, be given by the forthcoming report of the Calouste Gulbenkian Foundation inquiry into the economic situation of the visual artist. For all the reasons I have mentioned, I hope that the Government can support the adoption of the draft Directive's Article 2(2).
§ 5.39 p.m.
§ Lord LUCAS of CHILWORTH
My Lords, if I may return your Lordships from the fine art world to the rather more commonplace world of the motor industry, it will perhaps not be necessary for me to remind you of my interest in this market. The noble Lord, Lord Cobbold, and the noble Lord, Lord Grantchester, have outlined quite perfectly the basis of VAT and the special schemes. However, because of the importance of the used car market in the United Kingdom I should like to devote my speech to that aspect.
Currently, the United Kingdom used car market is worth about £2,400 million and involves some 2.5 million used units each year. That is neither an inconsiderable amount of money nor an inconsiderable volume when one considers that the new car market involves about 1.5 million units per year. In our country the two markets—the used and the new—are related one to the other. In fact, it would not be an exaggeration to say that they are both related and interdependent, because we employ an extremely sophisticated system in this country and nearly all the used motor cars are handled, in the first instance, by virtue of part exchanges.
The market is broadly divided into three groups. The first is the person to 953 person group, involving the private sale. It is not a very large group and it has not attracted the interest or the envy of any other group of people. The second group is that of the unregistered trader about which we unhappily hear too much and most of what we hear is derogatory. Again, the percentage of business which such traders handle is quite small and certainly the Customs and Excise have not, in their evidence, suggested that if there is an evasion of tax through that market it is of a large order. The last group in the market is that of the registered trader. Such traders probably handle 90–93 per cent. of all the business and they are, of course, subject to the ordinary corporation and income taxes. It is here that the interdependent relationship with the new car business is evident. They are so linked that were there to be any change in the current system of taxation—in other words, the used car business moving into either of the other two areas—the damage to the new car industry would be considerable. It is particularly for that reason that the United Kingdom motor manufacturers and the retail industry are united in their belief that the special scheme as now enforced should be retained broadly as it is. As I have said, discontinuance would have an adverse effect on the new car market and that in turn would have a tragic effect on employment in the industry.
The motor industry has suffered very badly from industrial unrest in recent weeks. Your Lordships will know of the threat to employment in the motor manufacturing industry. However, any change in the balance between the two markets—new and used—would inevitably bring certain changes in the employment on the retail side as well. A change as suggested in the Seventh Directive would remove from the purchaser many of the benefits of consumer protection legislation that we in this House and those in another place have introduced in recent years and, of course, there would be the inevitable loss of revenue to the Treasury.
Those are the benefits of our sophisticated and related industry. It is not a relationship which is enjoyed in the European Common Market countries, where used car trading has little relationship with the new market. Indeed, this relationship is not evident in that mecca 954 of car selling, the United States of America, where my understanding is that they admit to great envy of our more orderly marketing arrangements.
The Directive recognises the argument and the need for the special scheme, but unhappily it does not appear to appreciate the detail of the operation. With one exception, to which I shall refer in a moment, the proposals of the Directive are intended to achieve precisely the same ends as the United Kingdom special scheme but in practice they would cause the purchaser to believe, quite wrongly, that by going to a registered trader he would be required to pay VAT on the full selling price and that were he to avoid the registered market by buying privately he would save that money.
The essential difference between the EEC proposal and our own scheme in this respect is quite minimal, but the changes could well be, as I have indicated—and I do not think this is an exaggeration— quite catastophic as regards the industry as a whole. The exception to which I referred relates to the unnecessary and arbitrary restriction that the Directive imposes. It is imposed largely because there is a fear of fraud. The Directive seeks to restrict the notional VAT input which a trader is allowed to recover, to a maximum of 80 per cent. of that which he will pay out—the notional output. The purpose of the Directive is to cause VAT to be charged only on the trader's used car mark-up, but the 80 per cent. rule would, in fact, cause the VAT actually charged to be more than twice that intended. That is borne out by the evidence given on page 32 of the report and it was, in fact, accepted as a proper argument by the Committee.
The United Kingdom special scheme, so far as the motor industry was concerned, was designed by Customs and Excise with an eye to minimising the opportunities for fraud. The noble Lord, Lord Grantchester, referred to the amount of paperwork and the complication of paperwork. I have no doubt that the industry would be extremely gratified were the situation to be simplified. Nevertheless, it has, during these five or six years, grown accustomed to the scheme and, while burdensome, it has proved itself relatively simple and easy to understand 955 and certainly the Customs and Excise have expressed themselves as being quite satisfied as regards fraud or tax evasion, as with other aspects of the scheme.
Finally, I think that it is no exaggeration to say that the British motor manufacturing industry, the retail motor industry and Her Majesty's Customs and Excise are of a single opinion on this subject. As that opinion is largely in accordance with the principles of the Seventh Directive I believe that we should urge Her Majesty's Government to press for the retention of the United Kingdom scheme as it is, and, in the interests of consumers throughout the Community and the industry within the Community, and, indeed, in order to achieve this desirable harmonisation, Her Majesty's Government should press for the Community to adopt our scheme as the basis upon which the harmonisation of VAT might be achieved throughout the Community.
§ 5.50 p.m.
§ Lord TRANMIRE
My Lords, after the very clear explanation of this report by my noble friend Lord Cobbold, who is the chairman of the Sub-Committee that deals with this matter, I would not have risen to talk about the report but for the fact that there is one aspect of the matter which has rather been omitted; it is the effect of the Draft Directive on rural Britain. In his evidence the very distinguished witness from the Customs and Excise said that he had received representations from 24 organisations and had tried to cover all those who would be affected.
However, if one goes round the rural market towns of Britain and asks the people whether or not they have read the Draft Seventh Directive, one would find a surprising ignorance which is followed by a sense of real shock when they realise what is involved. I do not think it would be a bad thing if I try briefly to explain what is happening in this trade in rural England. Ever since purchase tax died and VAT was introduced there has been a great change in the aspect of the market towns of this country. Shops are suddenly being closed because the trader, a small businessman, does not have the staff, the time, or the expertise to deal with his VAT 956 returns. So he goes out of business and is duly taken over by businesses like insurance companies, which have the staff behind them.
Therefore, the face of the market town is changing all the time—with one exception. With the rise of the tourist trade —and certainly in my county of Yorkshire with the attractions of the scenery— one finds that little antique shops are springing up everywhere. At present this is the one booming trade. Those who run the shops tell me that they will be blasted by this Draft Seventh Directive. Its effect will be very much harsher in rural areas than in London. I served on the Sub-Committee and we heard evidence from distinguished witnesses from all the large London auction rooms and the London dealers, but we heard very little about the small men who are struggling either with this special scheme or in the auction rooms of rural Britain. In their case the margins must be very much smaller than the margins in London and their turnover must be very much quicker. This is partly due to the fact that a great many of the competing antique shops are so small as not to be registered. Therefore, unless he has a quick turnover and a very small margin, a dealer in rural England does not have much opportunity of survival.
As my noble friend explained, this report, which is based on a split of 70: 30, has the effect of making the dealer or the shop pay on the basis of a 43 per cent. margin. I have spent the last week or so asking some of the antique dealers in my area of Yorkshire for their margins, and in very many cases they are down to 5 per cent. That is because it is a keen trade which has a very quick turnover. Therefore, this Draft Directive will have a very disastrous effect on the antique trade in rural England.
Perhaps I might illustrate what I mean. Let us take a man who makes a 5 per cent. profit; he is buying at £100 and selling at £105. At the moment he will pay VAT at 8 per cent. or 40p VAT, or, if he is dealing in silver, VAT at 12½ per cent. which is 62p. Under this Draft Seventh Directive on his profit of £5 at 8 per cent. he will pay £2.52, so whack goes more than half his profit; if he is 957 in silver, he will pay £3.93. I hope that the Minister will go into this problem of the effect on those with this small margin who run small business in rural England.
Another aspect, which has been touched on before, but not in what I call the rural atmosphere, should be mentioned. If one reads one's weekly paper, every week one sees that unfortunately people have died and that their goods are being sold by the local auctioneer. What is forgotten is that this Draft Directive extends the VAT principle not only to the position of the auctioneer but also to the class of goods. Therefore, all those sales will come under this 30 per cent. provision; in other words, all will be on a basis of a 43 per cent. profit. This will be very awkward not only for the sales of the deceaseds' goods but also for antique fairs, which are now a common occurrence throughout rural England where people sell antiques by auction at a profit. They will be included although the owners of the goods—whether they are the personal representatives of the deceased or those who are putting their antiques into the antique fairs—are not registered persons. They will be caught under the auction sale rule, which would alter the whole of English law because it says that the auctioneer has a property in the goods he sells, whereas at the moment one merely pays VAT on the commission. Therefore, I hope that the Government will pay attention to this aspect. A country auctioneer would have to pay his 8 per cent. or 12½ per cent. although the goods were not his property; the man who then buys the goods, whatever his margin, will have to pay on the basis of the 43 per cent. profit. All in all I would suggest that this is a most unsatisfactory Directive.
However, I agree with the noble Earl, Lord Gosford, and I think that probably we should have patted the Commission on the back for dealing with the artist himself, but we thought it was such a good thing in rather a bad Directive that we kept quiet about it. However, I agree with the noble Lord that it is an advantage. Apart from that, it is an unsatisfactory Directive. It is inflationary in character and it will also require a huge bureaucracy to administer. It will be very damaging to the prosperity of rural England. Therefore, I hope that when Her Majesty's Government come to discuss this in the Council of Ministers— 958 I hope later rather than sooner—they will express the point of view of rural Britain.
§ 5.59 p.m.
The Earl of GOWRIE
My Lords, I should like to start by congratulating the noble Lord, Lord Cobbold, not only on the way in which he introduced this debate, and for giving us a chance to air these matters, but on his report itself. It seems to me to be a model of lucidity and brevity and, above all, to list in more length and detail than many such reports normally do, the exact representations that have been brought to bear upon the Committee considering it. My brief words this evening are simply designed to throw his work into relief. That said, I have a difficulty in speaking from these Benches. I tried to persuade my noble friends to let me off and let me take two small steps back, or vault over the Front Benches landing in the laps of my noble friends behind me and talk from there, because while your Lordships are traditionally tolerant to people who declare their interest my own interest in this matter is very direct and substantial.
I am a fine art consultant by trade; I am an agent for a number of museums; I am the co-manager of a substantial art buying fund; I advise people how to buy or sell works of art on a commission—and I hasten to say that I pay my VAT on the commissions I earn. I am also a colleague—and I would say a friend—of many of the people who made representations to the noble Lord, Lord Cobbold, and his Committee (Mr. Floyd of Christies, Mr. Julian Agnew, and Mr. Godfrey Pilkington, in particular); and I act as a consultant for a firm which is a member of the Society of London Art Dealers, who made substantial representations to the Committee.
I, like the Society of London Art Dealers, am concerned with questions dealing with the export of the national heritage which my noble friend Lord Cottesloe raised and with which his name is intimately connected, though as an art dealer I would say that we sometimes go in for imports as well as exports. That is to say, we buy things, say, in America, and bring them back here.
I think that the matters raised by my noble friend are of great importance, and 959 perhaps we should give a full day's debate to them. We have debated them before from time to time. We should debate them again. But I agree too with the noble Lord, Lord Cobbold, and the Committee that a discussion of VAT and taxation questions on second-hand goods is not perhaps the best place to raise such questions, so I shall pass over them. While I am, therefore, speaking very much for myself, I am glad to say that I shall be able to say something on behalf of the Conservative Party programme at the end and I shall make it clear when I am, so to speak, putting back on my Shadow hat.
At least such personal interest gives one a little direct experience of the really frightening consequences for the London art market if the European draft Directive on a common system of VAT on secondhand goods were to be adapted and put into practice. It is not only a scarey prospect for the London art market. It would be very damaging to the art market in the European Economic Community as a whole because, as the report argues, the market would simply transfer elsewhere, outside the Community. I am glad that less interested parties than myself —in fact every single speaker so far in this debate—have agreed with the Committee to this effect.
It is of course clear that the application of VAT to second-hand goods creates special difficulties. If I may say so, I thought that the noble Lord, Lord Grantchester, gave us an extremely erudite and lucid explanation of what exactly the difficulties were. Where the art trade is concerned, there are, I think, four salient objectives to the Directive. There is the suggestion that VAT should be payable on all sales at auction even where the auctioneer is only acting as agent for private sellers. This is manifestly unfair, it seems to me, and would of course apply to dealers acting on commission as well as to auctioneers. There is the suggestion that VAT should be payable by a dealer on a notional margin of 30 per cent. of the selling price rather than on the actual margin between buying and selling prices—on the profit, in short. This is of course a highly arbitrary basis for taxation and against, I would argue, the precedence of this country in fiscal affairs.
960 Then there is the suggestion that dealers should not be allowed to take as inputs the VAT on their ordinary expenses such as telephone, professional bills, framing, restoration, and the like. Now I think that that is obvious nonsense for the trade and I also think, reading between the lines, that the Commission has already more or less acknowledged this. Lastly, and I think most relevantly, there is the vital question of free imports. This is particularly important for London where so much of the world trade in art and antiques is based, and where so much exporting and importing takes place. I am, therefore, very pleased that the Committee was in sympathy with such interested parties as the trade associations who made representations to the Committee. The Committee showed its sympathy when it expressed concern thattaxation of imports of works of art could damage the United Kingdom markets which are of international renown".I quote from paragraph 15 of the Introduction. That surely is the crux of the argument.
As I said earlier, by implication the threat to London is also a threat to the whole position of the EEC within the world art market. If this draft Directive were to be adopted—and I cannot think that it will be; I certainly hope not—the net result would be that the art market would move, as the report suggests, to Geneva and New York. This would not necessarily be particularly damaging to successful dealers in this country as individuals or to the success of the auction houses (although they would very much regret it) because they have taken positions internationally already. All they need in order to carry on their transactions are their expertise, their diplomatic and brokerage skills and access to a telephone. It is not very difficult to conduct such transactions once you are used to them. The people whom such a transfer would damage—and many noble Lords have pointed this out—would be the Inland Revenue and the Customs and Excise in this country and by proxy therefore the citizens and Government of this country. I insist, therefore, that even allowing for the trade's interest the net loser would be the Revenue. The noble Lord, Lord Cobbold, has pointed this out at page 4 of his report.
961 Words were said, I think by the noble Lord, Lord Raglan, who is not here this evening but who sat on Lord Cobbold's Committee, to the effect that, "Well, this is all very fine but the international art market is a multimillion pound affair and it is reasonable that various Governments, whether national or community based, should take their cut". This of course is a point to be acknowledged, but if your Lordships will consider the paragraph at page 7 of the report, Sir AnthonyLusada, leading for the Fine Art Trade Working Party on VAT, answers it very well. The point has also been made earlier in the debate that of course where corporation or capital gains or personal income taxation is concerned the net British tax share deriving from the art world is considerable already, and it is that share that would move away if the Directive went through.
As I have often argued in a different contest from this debate's, Britain's manufacturing industries are the industries that are in trouble. Her invisible sector— the export of financial services and such overseas currency earners as the art market—are in fact very buoyant and successful and a lot of our continued economic wellbeing, relative as that is, depends on their continued success.
May I turn briefly to the effect of the Directive on the antique trade with which I am less personally involved. The report has made clear that if the Directive went through there would be an increase in private transactions, in black markets, in tax evasion and the like. I thought my noble friend Lord Tranmire brought out most clearly the damaging effects on tourism, though I would not go the whole way with him. I would think that the effects would be damaging in London as well as outside it. His point was interesting about the importance to market towns in this country of the smaller antique dealer.
Turning to the motor trade, the speech of my noble friend Lord Lucas of Chilworth should be read with great care; we are aware of how much he knows about the subject. I was interested in the point he made about the relative envy which other countries have towards the way we conduct our second-hand motor trade. When I first went to America I wanted to buy a second-hand 962 car for not very much money and I went around the mid-western town where I was teaching, asking, "Will someone lead me to an honest car dealer?" A voice piped up—I will not attempt the accent—and said, "You don't want that. You want a dishonest car dealer who likes you", and I found out later that I had bought a car off the Mafia. More seriously, the point of the relative stability of the English second-hand motor trade, including its own contributions through VAT and otherwise to our Revenue, is spelt out very well at page 20 of the report, in answer to a point raised in Committee by the noble Lord, Lord Roberthall.
To sum up, what I can say for the Opposition, getting away from the personal interest declared earlier, is that we are impressed by the argument made by Lord Cobbold in the report, and underlined in the debate, that there is considerable sympathy on the part of Her Majesty's Customs and Excise themselves for the representations made by interested trade parties on this matter. Normally one has a conflict, as it were, as between the taxpayers and the taxpayees, but in this case there seems to be considerable agreement that the Directive would damage not only the interests of those who might pay VAT at the new rates but also the Customs themselves. That view is underlined by page 27 of the report. The Opposition is also concerned for the effects this draft Directive could have on London. We are all involved with the politics and economics of the capital city and the disappearance of this trade overseas or outside the Community would be particularly disastrous for the capital city.
A wider and possibly more philosophic point to which we on these Benches also subscribe, and my noble friend Lord Cottesloe raised it, is that we consider ourselves good Europeans, but as good Europeans our duty in this, as with, say, the European monetary system, which we discussed last week, is to get in there, to get into Europe, and fight in European councils and pressure groups for our own interests. On this occasion that should be an easy enough thing for us to do because most of the European interested parties themselves agree, as many speakers have said, with the way we dispose VAT 963 on second-hand goods in this country rather than with the suggestions put forward by the Commissioners.
For all those reasons, as well as for the almost unanimous feeling in the House that adopting the Directive could be very damaging and dangerous in a number of ways, I am glad on behalf of the Opposition to endorse Lord Cobbold's report, and thank him for introducing it to us so lucidly this evening.
§ 6.15 p.m.
§ The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)
My Lords, I hope that when the noble Lord, Lord Cobbold, replies he will not find it necessary to repeat the complaint that Sir Anthony Lousada made to the Select Committee on 9th May when, speaking of the Germans, he said, "They only sent a lawyer to represent them at our last meeting". Though only a lawyer, I will do my best to reply to the debate, and your Lordships have made it easy for me to do so in the sense that the noble Lords, Lord Cobbold and Lord Granchester, and the report itself, explained the problem so lucidly that it would be taking your Lordships' time unnecessarily were I to attempt anything more by way of explanation. Accordingly, I shall confine myself to replying, so far as I can, to points raised in the debate.
I welcome the emphasis by Lord Grantchester on the principle of the tax as it would apply to used goods, and that is the principle or concept of value added. The Government's general approach is that this is the principle which should be applied rather than the adoption of an arbitrary basis, as it was described by the noble Earl, Lord Gowrie, for tax in this area. I can accept in full the description given by Lord Grantchester of the present United Kingdom system and I need not seek to clarify that. Perhaps, however, I might make a little point. In relation to what he said about the discretion vested in local officers, the Commissioners are prepared to consider reconstructed records in certain cases, and the local officers are aware of that, so the matter can go beyond the local officers.
Lord Grantchester was quite right in saying that, as regards rings, the United 964 Kingdom scheme covers only antique rings. In relation to the example he gave—of the returned, slightly used engagement ring—I do not think I could offer a considered answer to that, but the test is whether or not the ring has gone into personal consumption. I am not prepared or able to go any further in relation to that example. The noble Lord, Lord Grantchester, was perhaps wrong in suggesting that much of the tax at the present time is in the form of an interest-free loan to the Customs and Excise. In fact, input tax may be deducted immediately; it is only if a trader is, on balance overall, due for a repayment that he may have to wait perhaps 14 days to have his money back.
I should indicate generally that we accept the test which the noble Lord, Lord Cottesloe, mentioned. He said, if I summarise him correctly, that one must look at the proposals and ask, "Are they in the interests of equity and the interests of this country?". We accept that, and indeed we go a little further and ask," Are they acceptable to those who are concerned?"—and that concern was raised by a number of speakers in this debate—and we also ask, "Will they facilitate evasion? Will they in fact encourage evasion? Will they distort trade? Will they damage the industry?". The noble Lord, Lord Lucas of Chilworth, was afraid of that, and of couse we accept fully the point made by several speakers that we must consider very carefully the dangers to the London art market and to the United Kingdom art market, indeed for that matter to the European Community centres other than London that have art markets.
The noble Earl, Lord Gosford, drew attention to a document which figured at the Labour Party Conference. I have to concede that not every such document necessarily enshrines the policy of Her Majesty's Government, and I would simply say that under the Sixth Directive, additional zero rating is, in effect, prohibited by Article 28(2). The general matter about VAT on culture, which was raised by Lord Gosford, raises wider questions, and I think that is why the report did not deal with it. The position is that the Government consider that here we are looking only at a particular aspect of VAT. The general directive is the Sixth Directive and we consider that 965 questions of general importance, such as this one mentioned by the noble Earl, are questions that should be dealt with under the Sixth Directive, in which there is no provision for exemption, and the general matter he raised has no place in proposals for the treatment of used goods. The Government are opposed to the proposal, which is inconsistent with the broad-based nature of the tax, and which discriminates unfairly against authors, musicians, actors and others. That is all that I can say about that, and I think that that would also be the view of the Committee, at least to the extent that one should not look at these wider matters in the context of this relatively limited draft Directive.
I shall not deal with the other very general points that were raised by the noble Lords, Lord Grantchester, and Lord Tranmire, and the noble Earl, Lord Gosford, which again are more appropriate to a debate on the Sixth Directive, rather than to this debate on the report in relation to the Draft Seventh Directive. However, I shall certainly draw the attention of my right honourable friend in another place to the matters about which the noble Lord, Lord Tranmire, has spoken this evening, and in particular to the points that he raised about the small rural dealers, although I am sure that there must be some in other parts of the United Kingdom than England—but I put that in simply because I am a Scotsman.
The noble Earl, Lord Gowrie, declared his interest and that was indeed very fair, but his expertise merely serves to add value to his words, though we shall not seek to impose a tax upon that particular added value. I do not believe that there is any substantial disagreement between the Government and those who have spoken, and certainly there is no substantial disagreement between the Government, on the one hand, and the Committee, and I could summarise the matter in the following way. The existing United Kingdom special schemes have worked smoothly. They are not thought to have given rise to serious problems, or to evasion. They appear to be acceptable, by and large, to the traders concerned, and accordingly we shall certainly continue the pattern of consultation with the trades which has obtained in the past. We shall take them with us through 966 consultation in all the consideration that will be given to the draft Seventh Directive in the forthcoming period of time.
I have to put it as generally as that because, although the Commission's proposals were supposed to be passed to the Council at the end of 1977, they did not in fact appear until January 1978, and indeed discussions have not yet started between the member countries. It is apparent that there is no great enthusiasm to begin the negotiations between the member countries. As the noble Lord, Lord Cobbold, said, certainly negotiations are unlikely to start before the end of this year, and as he also pointed out, the Economic and Social Committee of the EEC, in an opinion dated 1st June, has in fact said, reject the draft Seventh Directive. The position is that each member country has an approach to this problem which is different from that obtaining in any other member country. The Commission's proposals differ from any of the schemes obtaining in any of the member countries, and the only EEC body which has commented upon them has said, "Reject them". So the future can stretch for quite some distance ahead.
I do not think that I need go further, but I want to make a specific comment upon the point which was raised by the noble Lord, Lord Cobbold, in relation to paragraph 16 of the report. That was the matter of the incentive said to be given to the export of works of art from the United Kingdom, and this relates to the fact that Article 2, paragraph 7 allows deduction of VAT due or paid on the goods at the time of acquisition or importation when a work of art is exported, but no deduction is allowed in respect of a supply to a customer within the country concerned. Exports are also zero-rated for VAT purposes. The Committee commented:This is undoubtedly regrettable at a time when efforts are being made both in official and private circles to retain art treasures for the nation".Certainly one does not want to do anything, or to adopt any scheme, which would encourage this regrettable tendency, but I think it is possible to exaggerate it.
Value added tax is a tax on domestic consumption, and it is a normal feature of this type of tax that it does not fall on goods sent out of the country. It is, therefore, logical to relieve such a supply 967 from tax and to allow recovery of tax paid at the time of purchase or importation. This relief provides no incentive to a dealer to sell a work of art to an overseas buyer, since the dealer's receipts from such a sale are the same as if he had sold to a United Kingdom customer. Of course, he has to charge tax to the United Kingdom purchaser, and therefore at first sight the purchaser in the United Kingdom seems to have to pay more, but it is usual to find that the purchaser abroad has to pay value added tax on importation of the goods, and in any event he usually has to pay higher transport and higher insurance costs. So, while not suggesting that the point has no validity, I think that there is a danger that it may be exaggerated.
Quite apart from the general matters of principle, about which we are all agreed, there are matters of drafting—though I shall not detain the House with these— which suggest to us that the Draft Seventh Directive was put together fairly hurriedly in order to be put before the Council, when it was not ready and had not been thoroughly thought out. In particular, the Committee drew attention to a mistake made by the draftsman of that document in relation to the fact that the tax need not be shown on the invoice when a secondhand car is sold. So in general we shall maintain our consultations with the trades likely to be affected. We shall also maintain our links and consultations with those in other countries who, as the noble Earl, Lord Gowrie, pointed out, find our system of trading and our methods of dealing with the taxation on this type of trading attractive, and we will hope to carry the day in relation to as many of these points as possible.
This has been a valuable report and a useful debate. I am sure that your Lordships will have found that the proposals in the somewhat badly drafted Seventh Directive have been greatly illuminated by both the report and the debate. The report serves to demonstrate very clearly the very real advantages which the United Kingdom systems have and which have been found to be acceptable to the trades. I think that your Lordships will accept that the Government's position is right; that we need further consultation and argument in order to challenge the weaknesses and the 968 disadvantages of the proposals enshrined in the Directive. I think that your Lord-ships will accept the general proposition that was put to the Committee by Her Majesty's Customs and Excise witnesses —that there is good sense in not changing a proven, workable system, except for reasons that are acceptable to the trades concerned, and which are sensible, and which seem to be in the interests both of equity and of this country.
§ 6.28 p.m.
§ Lord COBBOLD
My Lords, I shall not detain your Lordships many minutes. I wish to thank noble Lords who have spoken this evening, as well as those who have listened to this somewhat intricate subject. It is very often a matter of lament in the Scrutiny Committee, as the noble Lord, Lord Greenwood of Rossendale, would agree, that in these debates there are frequently very few speakers other than Members of the Committee. With no disrespect to the very valuable contribution from the noble Lord, Lord Tranmire, about the smaller and rural dealers—which he was quite right to emphasise—it has been very interesting to me, and I am sure to the House, to hear other speakers who are not Members of the Committee but who really know their subjects. Today we have heard from the noble Lord, Lord Grantchester, who really knows about the working of VAT, and from the noble Lord, Lord Cottesloe, about the arts, and from the noble Lord, Lord Lucas of Chilworth, on the motor car trade. The noble Earl, Lord Gosford, was quite right in saying that the report had omitted to deal with the question of taxation of sales by artists, but as the noble and learned Lord, Lord McCluskey, has indicated, I think our feeling probably was that that was a question of general VAT legislation, and did not come into the second-hand goods category.
Finally, my Lords, I think it only remains for me to thank the noble and learned Lord who has replied to the debate: a lawyer was so very acceptable on this occasion. Perhaps he would be good enough to convey to the Customs and Excise Department the great appreciation which the Committee felt for their very co-operative and helpful attitude.
§ On Question, Motion agreed to.