Third Standing Committee on Delegated Legislation
Monday 8 November 1999
[Mr. Edward O'Hara in the Chair]
Value Added Tax (Input Tax) (Amendment) Order 1999
4.34 pm
The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,
That the Committee has considered the Value Added Tax (Input Tax) (Amendment) Order 1999 (S.I. 1999 No. 2930).
This order is part of a total package of six orders. One of the other orders is an appointed day order for section 20 of the Finance Act 1999, and the remaining four are subject to negative procedure. They have not been prayed against, but I need to refer to them for completeness to explain the effect of the order before us.
The package of changes is needed because of a judgment of the European Court of Justice against Italy. The changes arising from it are varied and technical, but will benefit a number of taxpayers. The judgment stated that member states should not implement a value added tax exemption in the European Community sixth VAT directive by any other means if that gives a different result for the taxpayer. In the United Kingdom, some supplies of goods have been treated as outside the scope of VAT or subject to VAT on the profit margin, when the sixth directive provides for exemption. The exemption in the directive is designed to prevent double taxation, where the seller paid VAT on purchasing the goods and was not able subsequently to reclaim any of it.
We have looked carefully at how we treat such goods and have decided that our treatment produces a different result from exemption. The changes therefore introduce exemption for such goods and make some necessary consequential changes. I should add that, while we consider what changes should be made to UK law, following the judgment in 1997, we took action straight away to ensure that those who could benefit from the exemption were able to do so.
For the sake of completeness, I shall tell the Committee about the other five orders, referring first to the Value Added Tax (Supplies of Goods Where Input Tax Cannot be Recovered) Order 1999, No. 2833, which will take effect on 1 March 2000. ``That introduces a new exemption for the sale of goods on which the seller has borne VAT on the full purchase price and none of it has been recovered. As envisaged in the sixth directive, it will ensure that such goods are not taxed twice.
Secondly, I draw attention to the Value Added Tax (Subscriptions to Trade Unions, Professional and Other Public Interest Bodies) Order 1999, which takes effect on 1 December 1999. It introduces exemption for membership subscriptions to political, religious, patriotic, philosophical and philanthropic bodies, which are currently treated as non-business activities or are standard rated, depending on the nature of the benefits. Linked to that order is the Finance Act 1999, Section 20 (Appointed Day) Order 1999. It repeals the current non-business treatment of membership subscriptions, which become exempt on 1 December 1999.
The Value Added Tax (Cars) Amendment Order 1999 and the Value Added Tax (Special Provisions) Amendment Order 1999 make various consequential provisions for the treatment of cars, some of which will take effect on 1 December 1999, and some on 1 March 2000.
The sixth order, which is before the Committee, makes consequential changes to the Value Added Tax (Input Tax) Order. The input tax order prevents businesses from reclaiming input VAT on certain goods and services that they buy. That includes business cars—for example, cars that businesses buy for their employees to use—and goods used for business entertainment. Currently, businesses that then sell such goods treat the supply as outside the scope of VAT. However, if they make a profit, they must account for VAT on the profit margin under the input tax margin scheme.
I turn to the changes. The order abolishes the input tax margin schemes with effect from 1 March 2000. From that date, sales of all the goods will be exempt from VAT. The exemption applies only to the first sale of goods by the person who was unable to recover input tax on their purchase. Dealers who buy and sell used cars and other goods will still account for tax on the profit margin that they earn on sale.
To prevent the new exemption from putting unwelcome burdens on motor manufacturers and motor dealers, the order removes their stock-in-trade cars, including demonstrator cars, from the input tax restriction, with effect from 1 December 1999. That change, which is welcomed by dealers and manufacturers, means that they can reclaim VAT on those cars, and charge tax on them when they are sold.
I should clarify that private use of such cars by employees of motor dealers and manufacturers will still be taxed. Any private use will be taxed by the normal rules for the private use of goods—an output tax charge. We are also taking the opportunity to update the law in this area and introduce further minor changes, which will be welcomed by the trade. The definition of a motor car, which is used to determine which vehicles are subject to input tax restriction, will be changed, coming into effect from 1 December 1999.
I shall outline the changes. London-type taxis will be reclassified as motor cars. They were originally classified as commercial vehicles, so that taxi operators could claim back input VAT. That is no longer necessary because, since 1 August 1992, it has been possible to claim VAT on any cars that are used as taxis. Twelve-seater vehicles will be classified as commercial vehicles only if they meet the road safety regulations for 12-seaters. That will prevent conversions of dubious safety just to enable VAT recovery. Some dual-purpose vehicles—mainly double-cab pick-ups—will be reclassified as not being cars, by adopting a one tonne payload test. That change reflects developments in the market and the inherent nature of these vehicles.
The revenue effects of the changes in this order must be seen in terms of the whole package. The stock-in-trade and definitional changes on 1 December 1999 will be broadly revenue neutral. The change to exempting disposals of input tax blocked goods on 1 March 2000 is expected to raise VAT revenue of £10 million to £20 million a year. That will arise from non-recoverable VAT incurred on expenses that is directly attributable to exempt supplies of cars.
Those mostly affected by the change will be businesses with fleets of business cars. Some of them may become partly exempt for VAT, but by excluding a whole raft of cars from the definition for exemption, we intend that as few businesses as possible will face the additional complexities. I should add that Customs has regularly updated businesses and its advisers about the planned changes. Indeed, the phasing of the changes—some on 1 December and some on 1 March 2000—is based on what businesses told us they wanted.
The order, and the package as a whole, make VAT fairer. With the other changes, the order provides a mechanism against the problem of double taxation, while updating the law in line with what business needs. I commend it to the Committee.
Mr. Graham Allen (Vice-Chamberlain of Her Majesty's Household): Aye.
4.41 pm
Mr. Oliver Letwin (West Dorset): Notwithstanding the sedentary intervention of the Government Whip, we cannot simply say ``aye'' to the order. However, I do not intend to labour the point unduly. It is not the most controversial order that has ever been produced, but some questions arise, so it would be nice to have some answers on the record.
This is the stealthiest of all stealth taxes, in that the Chancellor of the Exchequer told my right hon. Friend the shadow Chancellor in a written answer on 24 May that Customs and Excise expected a revenue gain of about £15 million from the associated items that would be subject to tax under the measure. I think that that is what the Economic Secretary was just saying. I understand that that arises from the fact that businesses previously did not have to pay VAT on associated costs. Items such as valeting, for example, will now be subject to VAT. I understand that, in the first year, the revenue gain of £15 million a year will be offset by a loss to the Exchequer of £10 million, but that thereafter, it will remain an on-going gain.
It is not the biggest extra tax in the world—it is belittled by many of the other tax increases introduced by the Government. Nevertheless, £15 million is £15 million. One hoped and expected that the Minister would explain how the money will be given back to the corporate sector. I did not detect an explanation in her statement, and I look forward with eager anticipation to finding out whether the Chancellor will explain it in his pre-Budget address tomorrow. If he does not, we shall have another stealth tax—admittedly, in this case, entirely enforced on the Government by the European Court's judgment, although it could have been counteracted.
Will the Minister say on which sector of British business she expects that extra tax cost to fall? Which companies will be paying it? Will it include companies in the manufacturing industry, which is currently hardest hit? Will there be special arrangements for such companies? Will the tax fall on small businesses that provide a company car for one employee? What will be done for such businesses to counteract the effect of the tax?
The second issue, which relates to process, is very different and has a wider significance. The European Court of Justice judgment was delivered on 25 June 1997. In her opening remarks, the Economic Secretary implied that it had taken some time for Her Majesty's Customs and Excise and the Treasury to come to a conclusion about whether our law contained provisions that had an effect different from that of pure exemption, and that the Treasury had eventually concluded, on the advice of Customs and Excise, that our law did have a different effect. However, it is evident from paragraphs 18 to 20 of the judgment that it would have an effect on our law. Indeed, Customs and Excise must have recognised that because, on 10 October 1997, it issued business brief 23/97, in which it made clear that it had interpreted the judgment in a way that would require a change. I understand that such things cannot be done overnight, but it has taken a very long time to effect a change that is complicated in neither its purpose nor its implementation. Why has it has taken so long?
What will happen to those companies that took advantage of the option given in the guidance of 10 October 1997:
``In the interim, businesses may choose either to continue to use the input tax margin schemes''—
that is the scheme for taxing the profit on sales—
``or rely upon the ECJ judgment and treat the sale of input tax blocked cars as being exempt''?
I would be interested to know how many businesses have chosen each option, although I assume that there will be some in each camp. It now turns out that, under the law, it will—retrospectively, so to speak—have been wrong for those who chose to continue to use the input tax margin schemes to have done so. Can we take it that the order will involve no retrospective effect on those businesses, given that they were merely following one of the options in the business brief guidance? What will happen to businesses that are already engaged in such a practice, but who will now be affected by the order? What transition arrangements exist?
That raises a wider point that emerges from this whole saga. The order presents us with a beautiful problem about the sixth VAT directive and its articulation in the UK. It is immensely complicated and, on the admission of the Paymaster General, defective—it contains articles, including article 13b, that members on both sides of the Committee believe are clearly defective. The order is too complicated to understand, which is why even the Italian Government, who employ many highly expert lawyers and are trying to do a good job with the order—there is no question of that Government trying to evade anything—were unable to understand the purport of the directive and, hence, did something that the European Court, in a judgment of the most astonishing opacity, later found to be improper.
We then had a two-year delay, during which Customs and Excise told British business that it did not know what business ought to do, and therefore gave two options. That was followed by the implementation of the new regime, which gains the Government £15 million a year on the sly, unknown to most of the British populace.
I freely admit that the Government have done the right thing—we do not have any objection to that—but does not the Minister agree that there is something very odd about the process? Is not action urgently needed, so that we avoid a continuous series, not just of five orders, but of an unknown number, as what is an extremely defective order is repeatedly reinterpreted by a court, whose judgments are themselves extremely difficult to predict, because no one knows on what basis they are made, and which are so opaque that it takes the Government two years to implement them?
4.50 pm
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