First Standing Committee on Delegated Legislation
Tuesday 26 October 1999
[Mrs. Ray Michie in the Chair]
Value Added Tax (Sports, Sports Competitions and Physical Education) Order 1999
10.30 am
The Paymaster General (Dawn Primarolo): This is the first time that I have had the pleasure of being a member of a Standing Committee under your chairmanship, Mrs. Michie, and I hope that there will be many more such occasions. It is a pleasure to see you here.
I beg to move,
That the Committee has considered the Value Added Tax (Sport, Sports Competitions and Physical Education) Order 1999 (S.I. 1999, No. 1994).
The order puts a stop to tax avoidance by commercially driven sports clubs, while fully safeguarding the position of genuine non-profit-making clubs. The avoidance exploits a difference in the VAT treatment of the two sorts of sports clubs, which derives from European law and to which hon. Members may wish to return when discussing the order.
Until 1994, the United Kingdom treated all subscriptions to sports clubs as taxable at the standard rate but, in response to a legal challenge by the Central Council of Physical Recreation, the previous Government agreed that EC law was being wrongly applied and introduced an exemption for subscriptions to not-for-profit members' clubs. Since then, some profit-making clubs--notably golf clubs--have contrived schemes to avoid having to charge VAT by setting up non-profit-making clubs within the club, which they control and from which they extract profits.
It may have come to the notice of members of the Committee that we attempted to tackle that avoidance in an earlier order laid at Budget time last year that followed the Government's anti-avoidance procedure. I must be honest with the Committee and say that we did not apply the order because we realised that it would have had an accidentally adverse effect on genuinely not-for-profit clubs, which would not have been acceptable. Since then, we have spent a long time talking to affected parties to ensure that the wording of the provision is precise and correct. The resulting order has taken some time to draw up because, following correspondence from hon. Members about their golf clubs or golf clubs in their constituencies, I thought it right to make every effort to ensure that the order is correct, so extensive consultation was undertaken.
The order sets new conditions for exemption, which will take effect from 1 January 2000. To be exempt, a club must not distribute its profits except to another non-profit-making body or to its members on winding-up and it must not be subject to commercial influence in a way that permits the extraction of profits. When drafting the order, Customs and Excise took full account of the concerns of sports governing bodies and of the need to protect the competitive position of commercial clubs that account properly for VAT. The order is complex, mainly because of the complexity of the avoidance schemes and our desire to ensure that we close current and future loopholes to prevent abuse of the measure that safeguards the exemption of non-profit-making clubs. As I have said, that has taken some time.
Mr. A. J. Beith (Berwick-upon-Tweed): Does commercial influence extend to the reasonable rent of land and facilities for the purpose of playing golf?
Dawn Primarolo: In the order, commercial influence refers to an officer of the club, or someone associated with him or her, who is paid a profit-related salary or leases sports land to the club at a greater than nominal rent, or supplies managerial and administrative services to the club, or makes other supplies to the club at above the open market value.
Under pressure from me, Customs and Excise has taken great pains to ensure that guidance given to clubs on interpreting the exemptions is correct. Customs and Excise has stated that, in normal circumstances, it will treat any payment of less than £1,000 as nominal. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) will agree that we have made considerable efforts to assist in this matter.
I should remind the Committee that the order seeks to return the law to its 1994 form, as the previous Government intended and legislated to do. The law existed in that form until the appearance of avoidance schemes, of which Customs and Excise became aware in 1996.
I am satisfied that the order will prevent tax avoidance and that non-profit-making clubs will be protected, but there is no disguising the fact that there will be losers. The losers will be those clubs that have used tax avoidance schemes, and they will be prevented from doing so. I readily acknowledge that many commercial golf clubs feel that they suffer unfair competition from local private members' clubs, many of which are large-scale organisations. We treat those concerns seriously, but the provisions in European law that allow us to counteract distortions are not straightforward. Customs and Excise is currently discussing those distortions with the European Commission. It is also working closely with the commercial golf club sector to define the problem in relation to the Commission and the sixth VAT directive, and explore possible solutions.
There is no reason to hold back on tackling avoidance, which currently undermines the position of legitimate commercial clubs. The measures in the order are a sensible and well-targeted response, and have been discussed fully with trade interests. I commend the order to the Committee.
10.39 am
Mr. Oliver Letwin (West Dorset): I should begin with a word of sympathy for the Paymaster General who, when this ghastly saga began, was Financial Secretary. One might have thought that, on being promoted to her present, elevated position, she would have shed this horrible portfolio, but for some reason it has stuck to her. Most unfortunately for her, she now has to deal with it.
Dawn Primarolo: I am sure that the hon. Gentleman has heard of the term "sticking VAT". He has given a new application to the meaning of that.
Mr. Letwin: I prophesy that unless the Paymaster General is promoted, as we hope, to an even grander position in the near future, she will still be dealing with this issue in two, three or more years' time--if the present Government by some mischance remain in power.
The problem is not of the Government's making. It is due to the sixth VAT directive, which I hold in the greatest possible disesteem. Article 13 of the directive states:
"Without prejudice to other Community provisions, Member States shall exempt the following".
If the article stated that member states "may exempt the following", the problems that have been faced by the Paymaster General and her predecessors would not have arisen. I cannot understand the ludicrous conception that the European Union must determine which countries shall be exempt from VAT. I was delighted to hear that the Paymaster General's officials are talking to the Commission about it. I hope that in due course they will succeed in eliciting some movement on the matter or, if not, that Her Majesty's Government will start fighting the cause.
Article 13 provides that something shall be exempted. Unfortunately, that something is subsequently hopelessly misdefined as
"certain services closely linked to sport or physical education supplied by non-profit-making organizations to persons taking part in sport or physical education".
The problem with the article is not only that it inserts "shall" where there should be "may", but that the thing that is to be exempted is not merely a function, but a function that is carried out by a particular type of body. That mistake can have arisen only from a failure by those who drafted the article to engage in the slightest amount of economic literacy training. it clearly creates the basis for a distortion of competition, which is what has happened.
I assume that the structure of the sixth VAT directive and its treaty base in relation to the single market are intended to permit open competition, not to distort competition. A provision that forces an exemption in respect of a part of the industry that is structured in a certain way--in this case, non-profit-making--and by implication prevents the exemption of another part of the same industry, which is directly competing and profit-making, will intensify the distortion of competition.
The order will do nothing to cure the root of the problem, and we have to yet to discover whether the Government will succeed in persuading the Commission to assist in curing it. If nothing is done, the Paymaster General will be back among us with further orders in the not-too-distant future.
The Paymaster General confidently announced that the order, which could be described as third time lucky, will prevent the tax avoidance mechanisms that it is designed to prevent--as were its late and unlamented predecessors. I doubt that it will do so. The distinguished presence on the Liberal Benches, the right hon. Member for Berwick-upon-Tweed, drew attention to one of the areas that will cause trouble, and there will be others. Expert tax lawyers--I shall not name them--have told us that once the order is passed they will find a means of recreating avoidance mechanisms that will keep the Paymaster General happily occupied for some years to come. I suspect that, however ingenious she and her officials or their successors are, there will never be a solution to this problem so long as the badly structured European Union arrangements remain in place. That is because where there is a distortion of competition, there is a great incentive to try to devise mechanisms to overcome it. The private sector has far greater resources at its disposal to circumvent the ingenuities of the Inland Revenue and Customs and Excise than either of those bodies can ever muster to prevent that.
Dawn Primarolo: I am following the hon. Gentleman's points carefully. I want to make sure that, following his consultations with those who have already declared that they want to avoid the intent of Parliament in this order, he does not condone the actions of those who seek to avoid the legitimate tax that Parliament, through VAT legislation, has decided should be levied.
That is a separate point from the one about the possible shortcomings of article 13A, which I would be happy to discuss with the hon. Gentleman. However, I would not want him to give the impression that he is condoning tax avoidance, and I sincerely hope that he is not doing so.
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