Treaty of Rome: Taxation Provisions (Hansard, 3 March 1997)

§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, legislation on VAT and excise is established under Article 99 of the treaty. Customs duties are set under Articles 28 and 113 of the treaty. Direct taxation is primarily a matter for the member states at national level and therefore the treaty's state aid rules and non-discrimination provisions are the only limitations on member states in this field. Unanimity is required for all VAT, excise and direct tax legislation and Parliament has the opportunity to scrutinise all proposals. The Government will continue to defend that position.

§ Lord Tebbit
My Lords, does my noble friend recollect that on 14th January in a Written Answer he told me that any amendment of the Sixth VAT Directive would require the unanimous agreement of all member states of the EEC, and that that directive forbids this Parliament from extending the zero-rate of VAT? First, does he agree that that indicates that Parliament has conceded sovereignty over taxation on a large scale to the EU; secondly, does he agree with me that in the unfortunate event of a Labour administration being formed there is a grave danger that that sovereignty would be further eroded by large-scale concessions to the EU over taxation, most notably VAT; and, finally, that that sovereignty could be re-established only by the denunciation of the Treaty of Rome?

§ Lord Mackay of Ardbrecknish
My Lords, it is true that under the VAT directive we have forgone the right to introduce or restore zero rates, as my noble friend rightly deduces from the Question I answered in January. However, it is also true that changes in any other direction require the unanimous agreement of all member states. That leads me on to the second part of my noble friend's question, which is correct: all these tax matters, as I said in my original Answer, are subject to the unanimity rule, and any party, as the party opposite, which wants to find itself never—I think I quote—"isolated in Europe", would obviously give up that veto and that unanimity rule. In that case I am afraid that some of the situations that my noble friend fears would come about.

§ Lord Barnett
My Lords, I wonder whether the Minister could give us a briefer answer. For example, is the position at the moment any different from what it was in the days when his noble friend was a member of the Cabinet supporting membership of the EU?

§ Lord Mackay of Ardbrecknish
My Lords, the position on VAT was clearly established in a judgment of the European Court given after the Commission took 1497 infraction proceedings against the UK in 1981. It was then made perfectly clear that the only thing that would be compatible with the Sixth VAT Directive was if zero rating was introduced for clearly defined social reasons and for the benefit of the final consumer. As all the things we currently have zero rated are for the benefit of the final consumer, we are confident, as indeed was my noble friend when he was in office, that our zero-rate position is safe from any attack by the Commission.

§ Lord Beloff
My Lords, did my noble friend have time to watch Commissioner Monti on television on Sunday when he made it absolutely clear that it is the Commission's purpose to make tax rates, as far as possible, identical across Europe; that there could be no question, for instance, of noble Lords opposite, should they by mischance come into power, reducing the VAT rate on fuel? In other words, the noble Lord's position and that of the Government is clear: it is in total opposition to the Commission's position as expressed by Commissioner Monti.

§ Lord Mackay of Ardbrecknish
My Lords, I did not see Commissioner Monti on television on Sunday. Regardless of what Commissioner Monti says on television or thinks in the privacy of his office, the situation is very clear. The tax position can be changed only on the basis of unanimity. As long as this Government are in power that position of unanimity will be maintained.

Lord Bruce of Donington
My Lords, is the noble Lord aware that since the case referred to by the noble Lord a further case (416/85) was brought on 13th December 1985 by the Commission against the UK in which the Commission reiterated the necessity for the harmonisation of VAT rates throughout Europe? Is the noble Lord aware that, although that case failed, it is by no means certain that under the Treaty of Maastricht, which has new preambles and recitals, the European court itself would give the same judgment if a similar case were brought today?

§ Lord Mackay of Ardbrecknish
My Lords, I am perfectly confident that the fears of the noble Lord, Lord Bruce of Donington, are unfounded. The judgment given in 1988 was clearly directed at situations that benefited commerce and industry, not the final consumer. Indeed, the Commission did not challenge zero-rating on food in shops, young children's clothing and shoes and so on; nor did it challenge VAT on fuel and power in the domestic market. It is up to us to decide what to do. We intend to retain the position of unanimity because we believe that that is in the interest of Britain and every other state. We believe that certain taxation rules do not require to be made uniform across the Community.

§ Lord Eatwell
My Lords, is the Minister aware that the opposition to harmonisation that he has expressed is contrary to the position adopted by the Chancellor of the Exchequer? I am well aware that the Chancellor of the Exchequer is now a semi-detached member of the 1498 Conservative Party, but does the Minister believe that he should agree with him? Will the noble Lord confirm that in his Budget speech last year the Chancellor argued in favour of the harmonisation of excise duties and said that he intended to adjust British duties to the continental level?

§ Lord Mackay of Ardbrecknish
My Lords, as the noble Lord is aware, we had a debate on this matter on Thursday last. I then explained in some detail the Government's position. I recommend that he re-reads it, if he has already forgotten what I said. The position is as I said then and as the Chancellor has said. There are problems about not having harmonised excise duties, for example cross-border smuggling and so on. But I have also made it perfectly clear that while we want to see some convergence of rates on products like tobacco we are determined that they have to move up to our levels as there are perfectly valid financial and health reasons for those excise duties being at the level they are in this country.

§ Lord Skelmersdale
My Lords, does my noble friend—

§ Earl Russell
My Lords—

The Minister of State, Department of the Environment (Earl Ferrers)
My Lords, I believe that there is time for both sides. However, I believe that the noble Earl, Lord Russell, has been trying to have a shot for some time. I suggest that he goes first, followed by my noble friend.

§ Earl Russell
My Lords, will the Minister remind his noble friend Lord Tebbit that the Treaty of Rome was not the first treaty to restrict Parliament's power in matters of taxation? It was restricted by the equal treatment taxation provisions of the Act of Union with Scotland. Does the Minister agree that the sovereignty of Parliament has not tottered as a result?

§ Lord Mackay of Ardbrecknish
My Lords, I am always grateful to the noble Earl. I must check this matter. If I heard what he said correctly, the tartan tax that the party opposite propose for the Scots may well be illegal.

§ Lord Skelmersdale
My Lords, further to the point raised in the supplementary of my noble friend Lord Tebbit, is it not a fact that as regards Europe there is a slight safeguard against the tax-raising proclivities of a future Labour government, in that they will be prevented from putting up any VAT rate by more than 2.5 per cent.?

§ Lord Mackay of Ardbrecknish
My Lords, as my noble friend rightly observes, in the Sixth VAT Directive there are certain limitations on the rates. The standard rate must not be less than 15 per cent. and only one or two reduced rates can be applied and neither must be less than 5 per cent. There are limitations which I believe are reasonable if we want a level playing field in the single market. However, on major taxes, especially income tax, we firmly believe that the setting of the rate is a matter for the governments of member states.