Tenth Standing Committee on Delegated Legislation
Wednesday 19 May 1999
[Mr. Humfrey Malins in the Chair]
Value Added Tax (Amendment)
Regulations 1999
4.30 pm
Mr. Nick Gibb (Bognor Regis and Littlehampton): I beg to move,
That the Committee has considered the Value Added Tax (Amendment) Regulations 1999 (S.I. 1999, No. 438).
The Opposition have prayed against the statutory instrument for two reasons: first, because of the huge amount of concern among exporters and export houses; secondly, because of the considerable damage that will be caused to British exports, particularly from small and medium manufacturers. The Committee will know that goods that are exported from the United Kingdom may be zero rated for VAT purposes, notwithstanding that, if sold within the United Kingdom, they would be subject to VAT at 17.5 per cent. Many large manufacturing companies, when they send goods for direct export abroad, are able to zero rate these goods. Smaller manufacturers that are not of sufficient size to warrant an export department tend to use export houses to find and arrange overseas markets for their goods.
Since VAT was introduced, export houses have been able to procure goods from manufacturers without having to pay VAT on them, despite the export houses being based in the United Kingdom. They can do that if they can prove that the goods are destined for export. The consultation paper referred to that as zero rating of supplies one stage back from the actual export. The statutory instrument removes that exemption, so when an export house acquires goods from a United Kingdom manufacturer for export, it will have to pay VAT at 17.5 per cent. on them. The export invoice from the export house to the ultimate purchaser will be zero rated as before and the export house will be able to reclaim the VAT from Customs and Excise. Thus on a £100,000 order for tractor parts to Nigeria, an export house will now be required to pay £117,500 to the United Kingdom manufacturer of those parts, the Nigerian purchaser will pay £100,000 to the export house and the export house will reclaim £17,500 from Customs and Excise. If the export house moves from quarterly to monthly VAT accounting, it will take up to six weeks for the refund to be made.
Some may say, ``So what?'', but it is important to remember that exporting is very competitive, particularly given the current strength of the pound and difficulties in the export market generally. An average margin for export houses is 3 per cent., but many margins are significantly lower. Assuming a margin of 3 per cent., a £100,000 order would yield a gross margin of £3,000. That is gross profit because all expenses, overheads, costs of winning the order and so on must be deducted. To achieve that gross profit, £17,500 would be tied up for six weeks and with a borrowing rate of 10 per cent., £200 of interest would be charged, which is quite a chunk from a gross profit of £3,000.
Those figures are not based on the reality facing export houses; I plucked them out of the air. Small businesses with small profits and tight banking facilities face significantly higher banking costs. I have received a fax from an export house showing that borrowing £17,500 for six weeks would cost £743 in interest and bank charges, with a possible additional £50 in security and revisal fees. At a 5 per cent. mark-up, that would constitute 27 per cent. of the profit, which is a significant chunk. At a 3 per cent. mark-up, it would constitute 45 per cent. of the profit.
In a written question, my hon. Friend the Member for Maldon and East Chelmsford (Mr. Whittingdale) asked the Paymaster General about the cost to United Kingdom export houses of the imposition of VAT on goods purchased. She replied:
``It was not possible to arrive at any accurate figures for possible costs to export houses as insufficient evidence was provided in response to the consultation paper. However, by opting to change to monthly VAT periods, some export houses may gain a cash flow benefit.''—[Official Report, 11 May 1999; Vol. 331, c. 91.]
Representatives of export houses will laugh at the last part of that answer. Rather than a benefit, they face a significant cash flow disadvantage. How can the Government proceed with the measure when they have no accurate figures on the impact on such companies?
In addition to extra costs, export houses will have to complete monthly, rather than quarterly, VAT returns. That will be 12 a year instead of just four, which constitutes a considerable increase in administrative work. The Government will argue that some manufacturers prefer to charge VAT because, in dealing with export houses and zero-rating their supplies, they are required to obtain proof from the export houses that the goods have been exported. Where such documentation is not forthcoming, Customs and Excise imposes penalties. That argument is probably valid in respect of large manufacturers who can export directly. However, as John Dale, of John Dale and Associates, an export house in Kendal in Cumbria, said:
``If such manufacturers are . . . unable to cope with the current provisions''
then they are
``free to . . . insist on transacting such business only on condition that they charge VAT. I deal with one or two manufacturers who prefer to deal this way without any difficulties so why the need to change''?
In other words, it is possible for such manufacturers to charge VAT. Some manufacturers do not want to charge VAT because, in doing so, they would lose business. They do not see why it should be compulsory and the export houses agree with them. The problem is that most commercial arrangements undertaken by export houses will be unable to withstand that extra cash flow cost.
The second argument that the Government will advance is that they had to change the law because the European Union said so. The consultation document states that UK domestic law on VAT and export houses must comply with article 16(2) of the EC sixth VAT directive. However, in a letter to an export house, Mr. Mault, from Customs and Excise, said that that article is not mandatory. As many export houses have confirmed, other European Union countries are not taking the step that the Government are taking. David Kelly, of Edghurst Ltd., in Hawkhurst in Kent, said:
``Part B4 of the VAT information sheet indicates that it has become clear that the so-called UK export house VAT provisions did not comply with EU legislation. From talking to German and Italian contacts, no VAT is charged now on goods which are invoiced to a fellow national company but are exported to another country, and there is no indication whatsoever that rulings in Germany or Italy are to change.''
As the Paymaster General said in a written answer to my hon. Friend the Member for Maldon and East Chelmsford,
``The exemption from VAT on supplies to export houses is an optional measure in EC VAT law . . . we have very scant information about other countries' use of the measure. Customs and Excise is taking up with the European Commission claims made by a number of British businesses that some other countries operate export house provisions which do not fully comply with EC law.''—[Official Report, 11 May 1999; Vol. 331, c. 90.]
The Government are introducing a statutory instrument that will extend the VAT base on the pretext that the European Union insisted on that. However, it is clear that the European Union is not insisting on that, before they proposed the regulations, the Government did not research the situation in other European countries. It is scandalous that so little research has been carried out on the costs on export houses in the United Kingdom and on the effect that that will have on competition.
We may be told that the Government have scant information about other countries' use of the measure, but does not the Paymaster General have an obligation to obtain that information before introducing the regulations? In effect, she has proposed regulations that will put British companies at a huge competitive disadvantage, although the Government have not bothered to research the situation in other EU countries.
The third argument that the Government may use is that they have consulted widely and that only two dozen people responded to the 150 consultation documents that were sent out. Of those responses, half were in favour of the current VAT situation and half wanted it scrapped along the lines suggested in the regulations. The Government might use the defence, ``Oh, we've consulted, and everyone we consulted said that the proposal was okay.'' However, that is the last refuge of a Minister who knows that her justification for the change does not stack up.
How real was the consultation process? Robert Kemshell of the export house Network International Group Ltd., which is based in west Yorkshire, said that Customs and Excise had sent the consultation paper to 167 locations. He continued:
``As we are led to believe, most of these locations were not directly involved with exports.''
In a written answer to my hon. Friend the Member for Maldon and East Chelmsford, the Paymaster General said:
``The organisations to which the consultation paper on the withdrawal of export house VAT provisions were initially issued were the Joint VAT Consultative Committee, the British Exporters Association, the Simpler Trade Procedures Board . . . and the United Kingdom Oil Industry Taxation Committee. Subsequently copies were issued to more than 150 enquirers, including Tax in Industry and the Institute of Export.'' —[Official Report, 11 May 1999; Vol. 331, c. 91.]
The export association was mentioned, but what is its view? It lobbied strongly for the retention of the current zero-rating arrangements. Despite that, the Government decided to ignore its views and to abolish those arrangements. Despite the view of the trade association and the fact that other respondents were equally split, the Government plumped for abolition. The views of 12 respondents clinched the matter for the Government.
How many export houses were sent copies of the consultation document? I have done my own consultation, and I can come up with considerably more than 12 companies that are against the proposal. I shall list them.
Company number one is the Network International Group Ltd., which I mentioned earlier. Mr. Kemshell said:
``We rely on our Government to support British Exports. By imposing VAT on one section of British Exports, you are doing substantial damage . . . We estimate that you are putting at risk well in excess of £50 million per annum . . . We and other Export Procurement . . . Houses, are currently being forced to cancel orders to British Companies, in favour of those on Mainland Europe and elsewhere, VAT not being a problem from those areas . . . We can simply not stand the financial burden you have imposed and survive. Naturally we are having to explain to British Manufacturers, why the business is going to others.''
Mr. Kemshell went on to discuss the consultation process. He said:
``the very limited response you received to your consultative document . . . is not actually surprising, when you consider who the document was actually sent to. It should have been sent to the companies involved in Exporting and Procurement for Export, rather than unconcerned or biased organizations.''
Company number two is Goddard Export Services, which is based in Harrogate. Its managing director states:
``For the past eighteen months British Companies exporting goods have had a very difficult trading period due to various economical reasons, which has seen many companies going out of business. Those of us who have survived now find ourselves being held back by our own Government . . . This decision will affect employment and as a member of the SME Panel on the New Deal Scheme, I am concerned that companies selling goods overseas will not have the funds to take part in this scheme, we will certainly not be able to take a New Deal client on board''.
Company number three is John Dale and Associates, which I mentioned earlier. Its representative states:
``part of my business required me to supply such VAT free invoices as part of my own export documentation . . . If suppliers do show VAT on their invoice then we have to reinvoice on our own forms.''
That involves the company in enormous amounts of administration.
Company number four is Edghurst Ltd. Its representative states:
``As most export houses such as mine work inevitably on very small margins, we will be hit tremendously. . . . The biggest fallacy of the whole situation, however, is that if we source goods, for example, for a client in Nigeria from a UK manufacturer, we are penalized by having to pay 17.5 per cent. VAT thereon . . . yet, if we buy what could be the same goods from elsewhere within the European Union, or indeed any other country at all, we pay no VAT. In either scenario, we would not physically handle or be in control of the goods.''
Another company—number five—MSW Machinery (International) Ltd., has written:
``My company was set up in 1970 mainly to export to Third World Countries. We began by making small tractors designed for Africa and the Indian sub-continent. . . . Since then we have been shipping refurbished, new or `off-farm' tractors and agricultural equipment and have many satisfied customers in Kenya, Nigeria, Somalia, Trinidad, Bangladesh and elsewhere. We also supply hospital equipment. . . . Hitherto VAT has been waived on the purchase of most of the goods we export against proof of shipment. . . . Removal of these arrangements will inevitably affect cash flow and profitability and hit UK exports.''
Company number six—Compass Oilfield Supply Co. Ltd., based in Great Yarmouth in Norfolk, states:
``Our company is involved in the supply of equipment and spares to the petrochemical industries and 98 per cent. of our turnover (£3.9 million) is export business. The revised process of having to pay VAT is causing us to lose business as we have to carry this additional amount on our cash flow.''
Company number seven, Eltham Export Ltd., based in Woolwich, London, states:
``The negative impact on our cash flow is substantial and has necessitated our moving to monthly accounting for VAT . . . greatly increasing the administrative workload . . . We perceive this as another nail in the coffin for struggling exporters . . . It is time someone stood up for British exporters, whose job is difficult enough without the negative contribution from HM Customs and Excise.''
Opposition Members are standing up for British exporters and I hope that the Government will try to do so this afternoon.
Company number eight, Hi-Pro Ltd., based in Twickenham, states:
``What this means is that in many cases we are having to pay out to the local suppliers more than we will receive on the exports''—[Interruption.]
I am sorry if this is distracting for the Paymaster General, but if the consultation process had been as full as it ought to have been—
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