Ninth Standing Committee on Delegated Legislation
Thursday 1 July 1999
[Sir David Mader in the Chair]
Value Added Tax (Abolition of Zero-Rating for Tax-Free Shops) Order 1999 (S.I., 1999, No. 1642)
10 am
The Chairman: As it is warm in the Committee, hon. Members may remove their jackets, if they wish.
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the Value Added Tax (Abolition of Zero-Rating for Tax-Free Shops) Order 1999 (S.I., 1999, No. 1642).
Hon. Members will know that, until yesterday, passengers on sea crossings or flights between European Union member states were able to buy duty-free goods at duty-free shops or on board ships and aircraft, and bring them into the United Kingdom without paying value added tax or excise duty. There were limits on the quantities passengers could bring in. The availability of duty-free goods on journeys within the European Union ended at midnight on 30 June. That decision was taken not by this Government, although we were required to implement it, but by the previous Government. In 1991, the previous Government agreed in a unanimous vote with other European Union member states that duty-free sales should end on 30 June 1999. It must then have seemed a long way in the future, but there is no evidence that the previous Government gave any further thought to the consequences of that decision, between 1991 and the change of Government in May 1997.
The Government never changed their mind on the principle of abolition--duty-free sales have no place in an open single market--but they supported the view expressed by a number of member states, including Germany and France, that there was a case for a limited extension of duty-free sales so that more consideration could be given to the arrangements for a successor regime. That view did not receive unanimous support from member states and the abolition of duty-free sales went ahead. The Government always knew that it would be difficult to overturn that decision because unanimity was required. Many member states took the view that, having taken the decision in 1991 and provided for six and a half or perhaps seven years in which to make preparations for abolition--some member states had undertaken the changes--they were not prepared to re-open the debate.
During the past six months, the United Kingdom has successfully pressed the Commission for sensible interpretation of the law and has secured important administrative simplification which will help to make trade in duty-paid goods as straightforward as possible. In seeking a better deal, it was important that simplification aimed at keeping the burdens on business to a minimum. Although it is not the subject of our debate, it may be helpful if I give some examples of the simplifications.
When an aircraft flies over several countries, it was feared that the duty rate would keep changing, but it does not. Similarly, when ferries merely pass through the territorial waters of a member state without docking, there will be no duty-rate change. Ferries and aircraft do not need to account for duty or claim reimbursement when goods are not available for sale--for example, when entering the territory of a higher-taxing member state. Ferries and aircraft can offset claims for reimbursement of UK duty against separate payments without completing separate forms.
We shall debate related issues in the House. A picture was painted of chaos, administrative burdens, impossible journeys for travellers and impossible circumstances in which businesses would have to account for their trade. However, the simplifications played an important role in ensuring that such developments did not occur.
Committee members will be aware of press reports about the abolition of duty-free sales. Horrific stories were conjured up: we heard that tens of thousands of jobs would be lost, that shops would be closed and that half the routes between Dover and Calais would be closed because they were no longer viable. Such developments have not occurred for various reasons. For example, Customs and Excise carried out excellent work and had discussions with companies to ensure that the abolition was achieved in the simplest, smoothest way. It did so in an extremely short period. If we had had longer, I am sure that we could have done better. Customs and Excise has said that it will continue to consult with the trade and to monitor the operation of the arrangements.
Should enormous difficulties arise, we shall deal with them and, if necessary, attempt to persuade the Commission to change the relevant legislation. I pay tribute to Customs and Excise and to the trade--at least for its role behind the scenes, if not for its public stance--for securing sensible discussions.
Committee members may be concerned about the order's effect on the travelling public. What difference will passengers see? In every port and airport and at every departure point Customs and Excise has distributed leaflets that clearly explain what will happen, and staff are constantly on hand to assist traders. The sophisticated computerised tills that sales outlets use are perfectly capable of dealing with the new arrangements--indeed, they are doing so.
Sir Sydney Chapman (Chipping Barnet): I have a technical but important question for the Paymaster General. She explained that the abolition of the duty-free concession ended at midnight last night. The order is due to come into force today. Has the order already come into force or will it come into force if we pass it? What position are the duty-free shops in at this moment? For example, can they not be charged VAT until the order is passed?
Dawn Primarolo: VAT and the excise duty are being charged, because the traders have agreed to use the successor regime now in place, which we will debate on the Floor of the House next week. Those provisions enact the abolitions from one minute past midnight. The timing of our deliberations on the order today does not affect in law the point at which VAT becomes liable.
However, Customs has agreed with traders--for example, the shops at Heathrow, Gatwick and other airports--that already have stock in their shops that they will be treated as warehouses for tax purposes. As they sell those goods, the duty and the VAT will be applied; they will not have to account for the duty now on stock for which such accounting would not have been necessary before 30 June.
We shall monitor that position carefully. We have proposed a three-month period for this, because that is the wind-down period in the legislation for warehouses of that type. However, the turnover of the traders is such that it will probably not take three months to exhaust that existing stock. I have read in the newspapers that, such is the desire of people to shop while waiting for planes, that the shopping facilities at Gatwick airport are to he expanded considerably.
That leads me to the welcome, if surprising, announcement from the British Airports Authority that, following the abolition of duty-free sales and the zero rate of VAT, it plans to sell more than 90 per cent. of its products at the pre-abolition price. Customers will, therefore, see little difference in the shops. On aircraft in flight, we have made simplifications to enable goods to be sold from 20 minutes after take-off. Seasoned travellers will know that it takes about 20 minutes for passengers to be allowed to start moving round the aircraft anyway, even though they are dissuaded from so doing.
We must make it clear that duty-free sales will continue to exist for passengers travelling to countries outside the European Union. However, as a result of the abolition last night of duty-free sales to passengers travelling within the EU, we are required to make a number of legal changes. We are concerned with one such change today. This statutory instrument simply and specifically implements the VAT aspect of the end of duty frees within the European Union. It removes the zero rate for mobile operators and land-based duty-free shops. It is a simple piece of legislation, and no further VAT changes are needed to implement the replacement regime of Vat.
The withdrawal of the zero rate of VAT means that the basic rules for VAT now apply. Land-based shops, such as those at airports, will now have to account for VAT on sales to intra-Community travellers in exactly the same way as high street shops. High street shops cope with that, and I do not believe that it will prove an insurmountable problem for sophisticated outlets such as land-based shops.
The specific legislative changes are contained in the reference to zero-rate group 14 in part I of schedule 8 of the Value Added Tax Act 1994; the zero-rate group 14 itself, in part II of schedule 8 of the 1994 Act; and the Value Added Tax (Tax Free Shops) Order 1995, which amended group 14.
VAT-free sales will still be made available to passengers travelling to third countries. Such sales are covered by other legislation, so there is no need for this statutory instrument to make further qualification.
Together with the Excise Goods (Personal Reliefs) (Amendment) Order 1999, which was discussed earlier in the week, the two statutory instruments give effect in UK law to changes in European legislation that were agreed in 1991 by all member states. However, as I said, Customs will continue to work closely with the trade to ensure that the successor regime works well. We will be able further to tweak or amend the provision, should that prove necessary. Should that require a return to the Commission to make such changes, we will consider doing so.
10.17 am
Mr. Oliver Letwin (West Dorset): It is a horrifying experience to be under your chairmanship, Sir David, as a former Conservative party Whip, but I nevertheless welcome you to the Chair. It is equally horrifying to be surrounded by hon. Friends of infinitely greater distinction than me, whom I hope will contribute to today's debate if they feel so moved.
I think that four hon. Members who are present today, including the Paymaster General and me, were also present at the previous debate on the Excise duty order, so I shall not rehearse the issues that were raised then. On inspection, the simplified regime that the Paymaster General eloquently described a moment ago proved likely to degenerate into a complicated farce involving the relationship between intra- and extra-Community duty-free or non-duty-free trade and sales.
I shall let that subject be, and we shall see the outcome in due course. During the previous debate, I made some acerbic comments about the drafting of the Excise duty order and its explanatory note. I have no similar comments to make about this order, which is admirably pellucid and needed no explanatory note, although one was provided. Indeed, I could understand the explanatory note as well, I hope that the draftsman of the Excise duty order will derive much instruction from this admirable example.
However, that is the end of the good news. I profited by the Paymaster General's statements during the previous debate. Roughly speaking, her logic remains identical: she made a good speech then and a good one today. Her logic is that the miserable previous Government--[Hon. Members: "Hear, hear."] Yes, hon. Members should encourage themselves, because they are about to receive some pleasant surprises. Quite unnecessarily, the miserable previous Government acceded to a vote--which required unanimity and could easily have been vetoed--that gave rise to the end of duty free, including VAT, to which I shall come in a moment. The present Government leapt into action on the first day of their accession to power and sought to remedy the [Mr. Oliver Letwin]
ghastly deficiency that they had inherited. However, they were unfortunately defeated by the overwhelming weight of the other members of the European Community, but they have, nevertheless, vouchsafed to us the brilliant successor regime that the Paymaster General has described.
That was the logic exposed by the Paymaster General at the time--very beautifully, as always--and re-exposed today in slightly less detail, for which I am grateful. So shocked was I by those revelations that I decided to investigate the whole matter. Various things have become clear to me which, I suppose, as a citizen of the United Kingdom, should have been clear to me at the time, although I was not then a Member of Parliament.
So far as I can discern, the European legislation that gave rise to this order is entirely otiose, in that failure to pass it would have had no effect, because lifting the exemption for excise duty would have sufficed to require VAT on those items to be reimposed. That is because, if one refers to the 1977 text of the sixth VAT directive, one can see that the original exemption does not contain any special exemption for duty-free shops. Indeed, the sixth VAT directive would have imposed VAT on duty-free shops which, strictly speaking, came within a category that would have been captured by the directive, except that article 14(d) of the sixth VAT directive provided a loophole--the loophole on which the European Community, including ourselves, rested for some years until 1991. Article 14 (d) of the sixth directive states that one category of exempt goods is,
"final importation of goods qualifying for exemption from customs duties".
In other words, up to the time when the new directive was introduced, items in duty-free shops were not subject to VAT, but only because they were exempt from duties under separate European legislation and, therefore, under separate UK legislation. Therefore, when the situation was regularised by the introduction of article 28k into the new version of the sixth VAT directive, all that happened was that article 14 was rewritten in a clearer form and a specific exemption was included for duty-free shops. Interestingly, the old article 14(d) substantially remains, so, until yesterday, there were two routes by which goods in duty-free shops were exempt from VAT.
One of the reasons why this is interesting, at least to some of us, and may even be interesting shortly to Labour Members, is that, for reasons best known to itself--so far as the House of Commons Library and I have been able to determine--this House has never directly debated, in European Standing Committee B or any other European Standing Committee, the removal of the VAT exemption for duty-free shops. When the directive that ostensibly gave rise to this order was brought before the House, the House sublimely ignored it, so no evidence about the attitudes of the parties can be derived from that. However, luckily, that is not the material point.
The material point was whether excise duty would be imposed after 1999, which would immediately have triggered an imposition of VAT under the original directive. As luck would have it, that was investigated by the House of Commons in European Standing Committee B when the Labour party was in opposition. The Minister's logic that the rotten old previous Administration leapt unnecessarily into accepting the change in law, contrary to the wisdom and foresight of the then Opposition, does not stand up to examination of the record of that Committee's proceedings.
The hon. Member for Wrexham (Dr. Marek) was, I think, the shadow Economic Secretary at the time. He said:
"I think that the motion, which 'congratulates the Government on negotiating an agreement' is a little OTT. However, I shall not recommend that my hon. Friends vote against the motion."
In welcoming the Government's decision to go along with other members of the Community in removing the duty-free exemption on excise duty, he said:
"If the Government have indeed moved from the stance adopted under the previous Prime Minister"--
who was, of course, Lady Thatcher--
"that is to be welcomed . . . Harmonisation is also necessary regarding excise duties."--[Official Report, European Standing Committee B, 2 December 1991, c.15.]
He then discussed technical aspects of duty-free goods and excise duty, from which I learned much.
My point is self-evident. The Minister alleges that the nasty old Government did these dreadful things, but in fact they were spurred on by the Opposition to accede to the changes which created this saga.
|
