(2) After subsection (1) there shall be inserted the following subsection—
(1A) Paragraph (a) of subsection (1) above shall not apply in relation to any supply of goods or services by one member of a group to another unless both the body making the supply and the body supplied continue to be members of that group until—
and in subsection ( 1)(b), for "other supply" there shall be substituted "supply which is a supply to which paragraph (a) above does not apply and is a supply".
(3) In subsection (5) (applications to be treated or to cease to be treated as members of a group etc.), for the words after paragraph (d) there shall be substituted—
unless the Commissioners refuse the application under subsection (5A) below.
(4) After subsection (5) there shall be inserted the following subsection—
(5A) If it appears to the Commissioners necessary to do so for the protection of the revenue, they may—
§ (5) Subsection (2) above has effect in relation to—
- (a) any supply made on or after 1st March 1995, and
- (b) any supply made before that date in the case of which both the body making the supply and the body supplied continued to be members of the group in question until at least that date,
§ Brought up, and read the First time.
§ Motion made, and Question proposed, That the clause be read a Second time.—[Mr. Heathcoat-Amory.]
§ Ms Dawn Primarolo (Bristol, South)
The proposals in the new clause are designed to counter a significant tax 1412 avoidance scheme which has come to light. Indeed, in connection with the proposals, the Paymaster General wrote to my hon. Friend the Member for Oxford, East (Mr. Smith) on 28 February 1995 as follows:The changes are designed to counter a significant tax avoidance scheme. The scheme exploits … recovery of input tax which would not normally be recoverable".The Minister goes on to say that, because of a tribunal ruling,in principle, there is nothing to prevent … the hitherto irrecoverable input tax charged to groupsfrom being recovered and running into several billion pounds. The Minister adds that that, ifallowed to flourish unchecked, would constitute an attack on the very integrity of the tax".
We welcome the proposals that are set out in the new clause but we seek clarification from the Paymaster General. He has written about an attack on the "integrity of the tax" if the clause does not become part of the Bill. Yet the VAT tribunal's decision was made on 21 December 1994. The Government did nothing until the new clause appeared on 28 February 1995. Why was there such a long gap? Has there been a loss of VAT revenue in the interim? If so, how much?
I hope that the Paymaster General will respond to some brief questions about the operation of the clause. Will Customs and Excise be able to make the VAT due at the time of exit from the group? At present, it does not appear to have the power to make regulations to change the time of supply in the circumstances that I have outlined. If the regulations are ultra vires, the law requires the VAT to be due from the period in which the pre-payment was made. In such a case, the retrospective nature of the law is in principle objectionable. It means that the VAT liability of supply can be changed by an event occurring after the supply is made. There may be arguments that the principle is contrary both to United Kingdom principles and to EC law. I ask the Paymaster General to explain how the Government will counter such arguments.
In the Minister's letter to my hon. Friend the Member for Oxford, East, he made it clear that the Government had not expected the VAT legislation to he interpreted in the way that it has been. He explained that that was why it was necessary to act promptly. It is questionable, however, whether the new provisions comply with EC law. There is nothing in article 4(4) of the sixth VAT directive to allow member states to change the time of supply for supplies between group members, or to treat group members as one taxable person in respect of some transactions but not of others. How do the Government intend to deal with that possible challenge?
The law will catch, perhaps unintentionally, pre-payments between group members where a company is leaving a VAT group because, for example, it has been sold. It will be vital for the group representative member to ensure that all intra-group payments made to and by that company are in respect of supplies that have already been made. Due to joint and several liability, the company leaving the group has a similar interest. Perhaps the Paymaster General will explain how he sees that problem being overcome.
There is also a problem with continuous supplies. These are normally supplies of services, but also of some goods. For example, when is the service of renting out a property "performed"? The service is not completed until the expiry or termination of the lease. Certainly this is likely 1413 to be one sector in which pre-payments are common, rent usually being paid in advance. Customs and Excise may treat rent in particular as being pre-paid to the extent that it is in respect of periods after the degrouping. While not strictly supported by law, that would provide a reasonable solution for that type of pre-payment. However, it is more difficult to apply that principle to other continuous supplies that do not accrue evenly with time—for example, management and administration charges. How will interpretations be made in that respect and how shall we ensure that the new clause works effectively? I hope that the Paymaster General will respond.
Finally, confirmation is needed from Customs and Excise that a change of representative member does not mean that the group has changed. We presume that it will regard a group as the same group if the VAT registration number is unchanged.
The purpose behind the clause is to prevent tax avoidance. The Paymaster General has made it clear that if the loophole is not closed, the integrity of the tax and the tax base will be threatened. I hope that he will respond to the points and questions that I have raised.
§ Mr. Heathcoat-Amory
I shall gladly outline the reasons for the proposed change. It is undeniably rather complex but I shall describe it as simply as I can. I shall be pleased to go into further detail if any hon. Members of a technical disposition wish me to do so.
The essence of the new clause is the grouping provisions and their abuse. The House may know that the provisions were introduced when VAT was first introduced to simplify accounting by associated companies. Supplies between members of a VAT group are disregarded for VAT purposes. Only one VAT return has to be submitted by the representative member of the group instead of separate returns for each company. That is a long-standing, deregulatory measure that we would not normally wish to change.
Unfortunately, some groups—more exactly their professional advisers—believe that they have found a lawful way of manipulating the relevant provisions to avoid VAT, which individual members, if they were not grouped, would otherwise have to incur. That is the subject of litigation. The potential loss to the Exchequer is so serious that the Government have decided to bring forward the proposals that are set out in the clause to ensure that the clear intention of Parliament is respected for the future.
In the example of the scheme that has reached the VAT tribunal so far, the group concerned, knowing that VAT that is paid on cars is not normally deductible, used two subsidiaries to purchase cars and other goods. It seems that 90 per cent. of the price was paid VAT free in advance to the two companies. They promptly left the VAT group, purchased the cars and other goods and delivered them to a company that remained in the group. Apart from the VAT on the remaining 10 per cent. of the price, which was paid later, the group had obtained the cars tax free. The group freely admitted to the tribunal that the only reason for arranging the purchase in that way was to avoid tax.
1414 Other groups have already put similar schemes on the starting blocks. About £50 million-worth of revenue is at stake awaiting the outcome of the current case, which is being appealed by Customs and Excise.
The new clause will amend the group legislation provision by preventing the type of supply that I have described—this answers the question of the hon. Member for Bristol, South (Ms Primarolo)—between members of a group being disregarded for VAT purposes. Therefore, VAT will have to be accounted for on its full value and the group will be able to recover only such part of the VAT as is properly deductible. That, again, was the clear intention of Parliament.
We are also taking this opportunity to extend the powers of Customs and Excise so that not only schemes of this kind, but any similar schemes which may seek to exploit the ability to move companies in and out of groups, can be rendered ineffective. Only the first change, which is aimed at the specific avoidance measure we found, is retrospective to the day after we announced the changes–1 March this year. The second change is not retrospective, but will give Customs and Excise the additional powers from Royal Assent.
The hon. Member for Bristol, South asked me why we were introducing the new clause so late. It was only when the VAT tribunal decision was released, just before Christmas, that it was realised that action was necessary. We then had to evaluate precisely what that action should be. We had to take legal advice about whether our action would conflict with EC law; I can confirm to the hon. Lady that it does not. When all those things were done, we introduced the measure. We announced it to the House on 28 February, the draft new clause was made available and a press release was issued. As the hon. Lady has said, I wrote to the hon. Member for Oxford, East (Mr. Smith). Now, at the first opportunity, the measure is being brought before the House as a whole for confirmation as part of the Finance Bill.
When an avoidance scheme is admitted as such by the company concerned, the House does not need to ask itself whether it is really dealing with a legitimate business activity in accordance with parliamentary intention, as it is clear that this is not just an avoidance scheme, hut an extremely expensive one which could undermine revenue to a wholly unacceptable extent. Given those remarks, I hope that the House will endorse the Government's decision.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.