§ Motion made, and Question proposed, That this House do now adjourn—[Mr. Boswell.]9.27 pm
§ Mr. Peter Archer (Warley, West)
I am grateful for the opportunity to draw the attention of such an attentive House to the self-evident injustice which has happened to a company in my constituency, and we have it on the authority of Customs and Excise that it has happened to others.
Usually, when something of this kind occurs—no doubt through a mechanical and unintelligent application of the rules—it is rectified when drawn to the attention of a more senior official. If even that fails, a Minister considers the issue with the eyes of someone outside the bureaucracy. If necessary, the rule book itself is amended.
In my experience, virtually the only Government service where a manifest distortion of fairness and common sense is not rectified is in Her Majesty's Customs and Excise, which exercises its breathtakingly draconian powers as though it had never heard the word "accountable". I must say at once that I am not making a judgment about every official in the service. Some officials in Customs and Excise are manifestly fair and reasonable, but if one meets an official who is not, the officials will never admit that a fellow official may have been wrong. They even treat their Ministers, if I may say so, as word processors for those who wrote the departmental letters. I do not pretend that on this occasion anyone was crushed, just that people were treated with gross unfairness and insensitivity.
Let me recount the facts so that the House may judge for itself. Johnson Freight Services Ltd. is a company of freight agents in my constituency. In April 1987, it acted as freight forwarders for a cargo of fabrics consigned by a company in Germany to a company in London known as Fashion First Ltd. In order that the goods could be cleared by customs, Johnson Freight Services paid the value added tax of £3,167 19. Before the goods were delivered, it transpired that Fashion First could not pay for them and shortly afterwards it went into liquidation. In order to avoid having to carry the goods back to Germany, the German company sold the goods to a company in Leicester—J and S Garments Ltd.
1039 In the normal course of events, when goods are imported VAT is paid on their value when they are purchased by the importer, who then marks them up and sells them at a profit. VAT is then paid on the retail value and the importer deducts as input the sum that was paid when they were imported. If J and S Garments had been the importer, it would have reimbursed Johnson Freight Services for the VAT paid on importation and it would have deducted that sum as inputs from the VAT which it paid on the sale. So Customs and Excise would have received from Johnson's the VAT due on the import price and would subsequently receive from J and S Garments the VAT due on the retail mark-up. J and S Garments would have paid the precise amount of VAT due and Johnson's would have received the money which it had advanced. That is exactly how the VAT system was always intended to work.
All that was required was that Customs and Excise should have agreed to treat J and S Garments as the importer instead of Fashion First, but that was too simple for the bureaucratic mind. No, it said that J and S Garments was not the importer; the goods had already been imported when it received them. In effect, Customs and Excise was saying that if J and S Garments reimbursed Johnson's it would not allow that company to deduct the sum as input from the money that it sent to Customs and Excise. So Customs and Excise has twice received the money and Johnson's is out of pocket for that amount. Customs and Excise is untroubled by that and, in short, its attitude to Johnson's is "Hard luck, mate. We have your money and we are keeping it."
The first argument of customs was that if agents pay money on behalf of importers it is a matter for Customs and Excise and the importers. That would be an understandable argument if the money had not been paid twice. If there is to be a loss. it should not fall on Customs and Excise—I accept that. The other parties should be left to sort out between themselves who is to bear the loss. However, in this case, there has been no loss—Customs and Excise has received its money. There has been a loss only because Customs and Excise received the money twice and it wants to keep both sums.
Customs and Excise then said that the money would have been returnable if, instead of the goods being sold to J and S Garments, they had been re-exported. They could have been returned to Germany and, presumably, sent back to this country as a fresh importation. Johnson's might then have reclaimed the money, but someone would have had to pay the freight charges both ways.
You and I, Mr. Deputy Speaker, are perhaps simple about these matters, but would we not have thought it more sensible to sell the goods in this country rather than re-exporting them? In any event, even if Johnson's had known about that provision and re-exported the goods, it would not have availed the company because it would apply only if the transaction took place after 31 June 1988. Do not ask me why. Even if the provision had been introduced in 1988, there could have been no conceivable objection to a retrospective provision if it recognised rather than took away someone's right.
Finally, when the only alternative would have been to change the mind of Customs and Excise, which clearly it was not possible to contemplate, Customs and Excise said that Fashion First Ltd.—the original importer—might reclaim the money which it had never layed out. As that potential liability existed, Customs and Excise could not 1040 repay it to anyone else. Johnson's solved that problem by procuring a letter from Fashion First, undertaking that it would not ask for the money. It was all to no avail—Customs and Excise was, and remains, immovable.
It might be said that Customs and Excise was bound by the regulations. Perhaps beneath that bureaucratic jargon there beats something approximating to human hearts, but however unhappy Customs and Excise was at being unable to help, it was ruled by the statute. Alas, that is not the explanation. Customs and Excise has the power to make extra-statutory concessions where fairness requires them. Indeed, the possibility of reclaiming VAT paid on importations after June 1988, if the goods were re-exported, is itself an extra-statutory concession. But Customs and Excise is not prepared to change the wording of its own extra-statutory concessions. It says, "What we have written, we have written."
The problem may be that such a situation has never arisen before, so there has been no time properly to consider it—except since 1987. But that was not the case. On 5 September 1988, a surveyor in customs at Dover wrote to Johnson:Cases identical to this one where goods have been rejected by the importer and re-sold to another trader have been submitted to Headquarters in the past but no amendments have been allowed".That, it seems, concludes the argument. The Court of Appeal and even the other place in its judicial capacity may reconsider their former decisions, but not headquarters. We wither and perish, but naught changeth headquarters—it has spoken. The Minister will forgive me for saying that, when I wrote to her, she simply repeated the language of the oracle.
Some hon. Members may wonder why this case has taken so long to reach the stage of an Adjournment debate. Johnson's has been trying since 1987 to get someone in Customs and Excise to listen. It wrote to Customs and Excise at Dover on 11 January 1988 enclosing all the required documents. On 27 January, Customs and Excise replied, "Your request is refused". The reasons given were, first, that the entry could not be changed to show a new importer after the goods had been cleared by customs—I follow the logic but not the common sense—and, secondly, that the original importer still retains the right to reclaim the VAT.
After some oral consultations, Johnson's wrote again, saying that the matters were dealt with in the original documents. A letter came back asking Johnson's to resubmit the original documents, together with the letter of refusal from Customs and Excise. I can only assume that Customs and Excise failed to keep copies. Johnson's did that and then received the letter, dated 5 September 1988, to which I referred. It pointed out that, if the agency pays the VAT on behalf of the importer, that is a matter to be resolved between them. It said that headquarters had rejected similar applications in the past. I have already dealt with those two arguments.
Johnson's then tried writing to headquarters—why should the company not go to the authority that had been cited against it? Headquarters answered that the original importer had the right to reclaim the money. So Johnson's obtained from Fashion First the letter renouncing its claim to the money. The reply was that no new information had been provided which altered the decision.
Johnson's then approached me and I wrote to the Minister, who replied that the claim did not meet the 1041 current criteria, as though Customs and Excise did not have the power to change the current criteria. I knew that, and I am asking that the current criteria should be amended if they give rise to such manifest injustice. I have been given no reason why that cannot be done. This is the kind of crass, uncomprehending bureaucracy that gives, crass uncomprehending bureaucracy a bad name.
I hope that it is still not too late for the Minister to stand back and consider what she is being asked to endorse. If such an incident can occur in respect of a modest sum, and the Department and the Minister cannot see what is unfair about it, perhaps it is time to circumscribe the powers of Customs and Excise before it does something much worse.
§ The Minister of State, Treasury (Mrs. Gillian Shephard)
I congratulate the right hon. and learned Member for Warley, West (Mr. Archer) on the lucid and eloquent way in which he presented the Adjournment debate. I am grateful for the opportunity to explain the Government's position on this matter, despite the fact that I am not only a word processor, but an oracle.
The right hon. and learned Gentleman has set out the chronological facts of this case, on those there is no dispute. As he said, in April 1987, Johnson Freight Services acted as forwarding agents for a consignment of fabric from Germany being imported by Fashion First Ltd. Johnson's completed the customs entry documents in the name of Fashion First Ltd. and paid to customs £3,167 VAT on its principal's behalf. It is common commercial practice for importers to appoint agents to deal with customs formalities and pay import charges in that way. In this case, however, the importer refused the goods and is believed to have gone into liquidation. The goods were not re-exported because the German suppliers resold the goods to another United Kingdom trader, J and S Garments Ltd.
As the right hon. and learned Gentleman said, Johnson's applied to customs first to change the importer's name on the import documentation, but that was refused because such changes cannot be made after goods have been cleared by customs and released. The reason for that is to avoid, as far as possible, the obvious possibilities that there might be for fraud.
Johnson's subsequently applied to customs for reimbursement of the money which the company had paid on behalf of the original importer, but which it had apparently been unable to obtain from that importer. Customs refused that application, too, because the law did not provide for such repayment. The law is clear and tightly drawn, and only the importer can reclaim VAT as input tax. It is the legal responsibility of customs to collect all charges due—duty and import VAT—on importation. That is achieved by means of an import entry submitted to customs at the time of importation declaring details of the goods being imported.
It is the importer's responsibility to have his goods entered to customs and pay any VAT or other import charges due. Only the importer can reclaim the VAT as input tax, subject to the normal VAT laws. The law on that is tightly drawn to ensure that two or more different 1042 entities should not be able to deduct, as input tax, VAT on the same transaction. I know that the right hon. and learned Gentleman will understand that.
For most importations, import agents or freight forwarders are used. They will submit an entry for goods at the place of importation on behalf of the importer, but importers can submit an entry and pay the VAT if they wish. If an agent or freight forwarder takes it on himself to pay the VAT due on behalf of the importer, that is a commercial arrangement between him and his principal—the importer. Customs regard the payment as having been made by the importer, and have made that clear in its publication, "Notice 702: VAT—imports and warehoused goods".
§ Mr. Archer
Before the Minister passes on to the next stage in her argument, will she take account of the fact that Fashion First has renounced any right to claim, so there will be no question of two people claiming the same amount of money. The company has said, "We are perfectly happy that you should pay the money to the people who originally paid it to you."
§ Mrs. Shephard
I have taken account of that matter, but the point is that the contract was between Johnson's and Fashion First and that is where the complaint and the problem for Johnson's lies.
What should have happened? Fashion First should have reimbursed Johnson's for the import VAT that the agent had paid to customs. There is no dispute about that.
Fashion First should then have deducted as input tax on its next VAT return the import VAT paid but obviously it went into liquidation.
Fashion First would properly have obtained the imported goods effectively tax free and would have accounted to customs for VAT on any onward supplies that it made. In respect of those goods, Johnson's could not have been entitled to deduct as input tax on its VAT return the import VAT paid on behalf of Fashion First, because Fashion First was the importer.
As regards deduction of input tax, VAT registered traders can, subject to the normal VAT rules, treat as input tax the VAT that they have paid on goods supplied to them, or imported by them, where the goods are used or to be used for the purpose of their business. In the case of imported goods only, the trader who imports the goods for the purpose of his business has the right to treat the import VAT as his input tax. A freight agent who pays import charges on behalf of an importer cannot acquire the importer's right.
What seems to have happened is this. Fashion First went into liquidation and failed to reimburse Johnson's for the import VAT that the agent had paid to customs. That is where the dispute lies—the failure of the contract between Johnson's and Fashion First.
Fashion First may or may not have deducted as input tax on its next VAT return the import VAT paid, although, as the right hon. and learned Gentleman says, a copy letter dated 28 September 1989 from Fashion First to Johnson's states that such a deduction had not and would not be made.
§ Mr. Archer
At the risk of being tiresome, I understand that in the first instance one would have expected Fashion First to reimburse Johnson's and then to deduct it from its VAT on onward sale. However, in this case that did not happen. J and S Garments simply stands in the same 1043 position as Fashion First for that purpose. Fashion First has renounced any interest in the matter. Customs have had the amount twice. Apart from a rather curious logic, why should one not treat J and S Garments as if it was in the shoes of Fashion First?
§ Mrs. Shephard
If the right hon. and learned Gentleman could allow me pursue my argument, I shall come to a clear exposition of the commercial arrangements that shippers and forwarders need to take into account when they enter into such contracts with importers. That is set out in VAT public notice 702.
Fashion First refused the goods and the German supplier resold them to another United Kingdom trader, J and S Garments, so they kept on circulating within the United Kingdom and they were not re-exported.
No VAT was charged on that transaction. J and S Garments neither paid import VAT on the goods, nor made a corresponding deduction of that VAT in input tax on its next VAT return. J and S obtained the imported goods as if it had both paid the import VAT and subsequently deducted it. In no circumstances would either Johnson's or J and S have been entitled to deduct as input tax on their respective VAT returns the import VAT paid on behalf of Fashion First.
In law, only the importer who has imported the goods for the purpose of his business can reclaim the import VAT and he does so by means of normal VAT returns. An agent who enters into a commercial arrangement to pay import charges on behalf of an importer does not acquire his principal's right to reclaim the import VAT as input tax. That is stated unequivocally in the June 1986 edition of public notice 702. I shall read that in full, because it will help clarify the argument. The leaflet says:If you act as a shipping or forwarding agent for importers and pay or defer VAT on their behalf, you cannot reclaim the VAT as input tax because the goods are not imported for the purpose of your business. Although Customs usually deal with agents in relation to the importation and clearance of goods, it is the importer's responsibility to ensure that the goods are properly entered and to pay VAT and other charges due. Only the importer can, subject to the normal 'rules, reclaim any VAT paid as input tax.If for any reason you decide to pay the VAT or defer it to your own account on behalf of the importer, you should remember that this is a commercial arrangement between you and your principal. Payment of VAT in these circumstances does not entitle you to make any reclaim to Customs in the event of difficulty. Customs regard the payment as having been made by the importer. Whether or not the importer has received the goods the importer has a legal right to reclaim the tax subject to normal roles.If the importer fails to pay you the VAT or goes into liquidation without reimbursing you, you cannot recover the money from Customs and Excise. Your only recourse is to the importer".I know that that is not the burden of the right hon. and learned Gentleman's argument. He is saying that that is the law, but we should see common sense and try to change it. My point is that nothing could possibly be clearer than the position laid out in those paragraphs. It is absolutely clear that if a shipper is not paid by an importer with whom he has entered into a contract, he cannot recover the money from Customs and Excise; his only recourse is to the importer. Johnson Freight Services, as an experienced forwarding agent, which undoubtedly provides services for merchants in the import-export business, would be aware of that.
§ Mr. Archer
The hon. Lady has been extremely courteous and helpful in giving way. Does she accept that that provision is to protect customs against a loss? I accept that if there is a loss, it should not fall on customs. However, in this case there has been no loss; customs has received the money twice.
§ Mrs. Shephard
I do not accept that. If two parties enter into a commercial arrangement, it is no part of customs to bail out either party in the event of the arrangement's failing. That is the point.
The right hon. and learned Gentleman mentioned extra-statutory concessions. Customs staff are not quite the hard-hearted and faceless persons whom he is trying to depict. I feel it incumbent upon me to defend them in their absence. An extra-statutory concession was introduced in 1988.
VAT is a tax on the consumption of goods and services in the United Kingdom. If goods on which tax has been paid to customs at import are re-exported and have not entered the UK economy, it is clearly unfair to the agent who paid the tax on behalf of an importer that he should have to bear the cost should the importer not reimburse him. During 1988, agents and freight forwarders made representations to customs about that problem. In July 1988 the Minister then responsible for customs—my right hon. Friend the hon. Member for St. Albans (Mr. Lilley), now Secretary of State for Trade and Industry—announced in the House an extra-statutory trial scheme for repayment to agents where certain conditions were met, and 30 June 1988 was adopted as the start time.
It is deeply irritating to be caught on the wrong side of such a line. However, in this case, because one of the criteria is that the goods should have been re-exported in the same state, the extra-statutory concession would not have helped Johnson. It is specifically to deal with the case where goods have not entered into and are not being circulated in the United Kingdom economy. That is why that concession cannot apply to Johnson Freight Services. Sadly, it entered into a commercial arrangement with Fashion First that went wrong. If Fashion First has gone into liquidation, perhaps Johnson's first recourse should be to the liquidators.
Normally, Adjournment debates offer a window of opportunity, but I have been limited to giving the clearest possible explanation of the Government's policy. VAT public notice 702 is clear. The fact that there might be a commercial risk involving VAT and customs is laid out clearly in the leaflet. It is clear that only importers can reclaim VAT on goods that are imported for the purpose of business and, if a problem occurs, the shipping agent, the freight forwarder, cannot have recourse to customs.
§ Mr. Archer
I am criticising not the clarity of the notice but the injustice of it. Is the Minister saying that, under no circumstances, would customs or the Treasury consider amending the notice to take account of circumstances where customs has had the money twice?
§ Mrs. Shephard
One can never say never. In the past, Treasury Ministers have considered aspects of VAT schemes and the way in which VAT works to see what injustices might be righted.
The commercial position of freight forwarders is so clearly laid out in VAT public notice 702 that they are 1045 aware of the risk. Should a company with which they have a contract go into liquidation, they cannot have recourse to customs.
I sympathise with the predicament of Johnson Freight Services and with the arguments that were advanced by the right hon. and learned Gentleman, with all the skill for which he is well known. In drawing up rules and legal arrangements for contingencies, it is important to ensure that the rules and regulations and risks are laid out clearly so that those who are entering into arrangements are aware of the risks that they may be running.
1046 It is important to protect the revenue. We are all rather grateful for the proceeds of VAT as national revenue. A tax-collecting system must be so arranged that the possibilities of fraud and mistake are minimised. I have much sympathy for the right hon. and learned Gentleman and much admiration for the way in which he presented his case. I said that one never says never, but, as things stand, we must stick to the position laid out in VAT public notice 702.
§ Question put and agreed to.
§ Adjourned accordingly at two minutes to Ten o'clock.