Certain Fees to Be Treated as Premiums Under Higher Rate Contracts

Clause 25 – in the House of Commons am 8:45 pm ar 11 Mawrth 1997.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Mr David Shaw Mr David Shaw , Dover 8:45, 11 Mawrth 1997

I beg to move amendment No. 1, in page 20, line 16, leave out from 'or' to end of line 17.

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

With this, it will be convenient to discuss the following amendments: No. 2, in page 20, line 24, leave out from beginning to end of line 26.

No. 3, in schedule 4, page 120, line 1, leave out from beginning to end of line 50.

No. 4, in page 120, line 3, at end insert 'the contract is a designated contract and'.

No. 5, in page 120, line 7, at end insert— '(1A) For the purposes of this Act a taxable insurance contract is a designated contract if it is designated by the Commissioners as being of a class under which the premium received has been fixed at a higher level than is necessary to purchase the insurance to which it relates in order to reduce the price and charge to tax of another connected contract for goods or services.(1B) The Commissioners may make a designation under the above sub-paragraph at any time but such designation shall not take effect until the beginning of the financial year following the financial year in which the designation is made.'.

No. 6, in page 120, line 16, at end insert 'but for the purposes of this sub-paragraph a person shall not be regarded as connected with a tour operator or travel agent if he is a registered insurance broker within the meaning of the Insurance Brokers (Registration) Act 1977.'. No. 26, in page 120, line 16, at end insert— '() The premium under a taxable insurance contract relating to travel risks shall not fall within this paragraph if the contract provides cover for a risk which relates to services supplied by a tour operator or travel agent and these services are not subject to Value Added Tax other than at the zero rate.'.

Photo of Mr David Shaw Mr David Shaw , Dover

It is possible that one of the interests placed against my name in the Register of Members' Interests is involved here. I do not believe that it is, but I thought that I should mention it.

I raise the issue because I have been asked to take an interest in the subject by the travel industry and also by Saga Holidays—a company which, although not based in my constituency, employs a number of my constituents who work in neighbouring Folkestone at the headquarters of Saga Holdings. The change in insurance premium tax was discussed in Committee, but in the context of a number of other changes. My amendments deal solely with the possibility of exempting the travel industry from the change.

I entirely understand why the Treasury has raised the issue in the Bill—there is concern about tax avoidance through value shifting—but we are now becoming so refined in our attempts to introduce measures to counter tax avoidance that we are in danger of going too far. In many instances, we are hitting legitimate businesses that are implementing measures not designed for tax avoidance and we may end up raising taxes in certain sections of society and creating distortions. The travel industry has argued that the fears of Customs and Excise and Her Majesty's Treasury are exaggerated and may even be wrong. Travel agents are bound by the rules of the trade, which in their view make it impossible to have effective value shifting. That is because the way in which tax is paid is based on a fixed margin, which does not change if discounting takes effect.

9.45 pm

Tour operators believe that there cannot be value shifting, certainly not to any great extent, because the only circumstance in which it might happen would be in the small number of cases where the tour operator has its own travel agent and is involved in providing insurance. In those instances, where that does take place it is very unlikely that the tour operator could gain significant benefit, because competition in the marketplace is so tight and the public are well used to buying the holiday at the most competitive price. Therefore, if companies were value shifting, it might discourage the public from going to those companies.

People are beginning to ask whether this tax avoidance measure, as it is being sold to the House, is more of a revenue-raising measure. The problem is that we are likely to end up with differential taxation. Insurance sold through insurance brokers will be taxed at a different rate from travel insurance sold by the travel industry. Bridget Rosewell, an economist who runs a company called Business Strategies Ltd., has done a one-page economic analysis of this. It should be commended to the House, if only because it is on one page, which is rather unusual for economists. In the analysis, she competently points out that the differential effect will shift the selling of travel insurance towards direct insurance providers—that is, insurance brokers.

That seems illogical because it simply takes business away from those who are involved in the travel industry. I am concerned that this measure produces just a further distortion in the marketplace. It may cause many problems for travel companies and may mean that they will find some artificial way of restructuring their businesses to enable them to go on providing insurance. It seems illogical for business to have to go through such contortions to operate in a manner approved by the Treasury. I urge the Minister to think seriously about whether the travel industry is being unfairly treated and ask whether we will end up having to revisit the matter anyway because this is not sustainable on a fair basis.

As the Minister knows, I represent a constituency with a considerable interest in the travel and tourism industry, so I hope that this issue will be seriously addressed.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I rise briefly to support the basic thrust of the arguments of the hon. Member for Dover (Mr. Shaw) and to refer to amendment No. 26, which is in my name.

As the Exchequer Secretary will be aware, we had quite a fair debate about this in Committee and I do not intend to repeat those arguments. The only thing I would say is that I am increasingly of the view, as expressed by the hon. Member for Dover, that this is looking more and more like a revenue-raising measure rather than a loophole-closing measure. It is discriminatory not only against the travel trade, or against certain sectors of it because of the way they happen to operate, but against the consumer, whose interests could be damaged. That case was made particularly by Saga, which obviously still feels strongly that the measure discriminates against the special way in which it approaches its specialist market. That is to the disadvantage of the consumer as much as it is to the disadvantage of the company in question.

I also suspect that, given the way in which the tax has been structured, if value shifting or tax avoidance has been a feature of the tax, which the Minister did not entirely prove, there is a danger that he is creating a framework that will encourage more of the same. Clearly, people will find one way or another to avoid falling into the 17.5 per cent. tax bracket. I wonder, for example, whether people will start to include free insurance in the price of the holiday, and in so doing argue that there should not be any tax levied at all. If free insurance is provided, 17.5 per cent. of nothing is nothing. That could lead to a fair amount of exchange between Customs and Excise and individual businesses.

Amendment No. 26 highlights a basic discrimination which, it has been suggested to me, is likely to lead to judicial review. It is absurd to suggest that there should be 17.5 per cent. VAT on the insurance premium for a product that does not attract VAT at all and therefore where the possibility of value shifting does not occur.

I know that the Minister has given a written explanation of why he is resistant to the argument. However, it is fair to say that the Federation of Tour Operators feels very strongly that there cannot be value shifting—which is an argument that the Minister used for the justification of the difference—where a product is not liable to VAT or is zero-rated. It is technically impossible, yet people will have to pay a 17.5 per cent. tax. The fact that the Minister will find that the ruling is discriminatory and will be challenged in the courts is not a threat, but it is the judgment of one person in the trade.

I do not believe that the Minister and his Department have dealt with all the anomalies satisfactorily and I am sadly confident that we shall have to re-visit the matter. Although—I think—neither the hon. Member for Dover nor I are at this point going to press the matter any further, we want to put on record that we believe that the anomalies will have to be addressed.

Photo of Mr Peter Fry Mr Peter Fry , Wellingborough

I support my hon. Friend the Member for Dover (Mr. Shaw). I do so particularly because I am concerned about the effect of the measure on smaller travel agents rather than larger companies.

It is undoubtedly clear that very many smaller agents depend on commission from selling travel insurance to sustain themselves in competition against larger companies. My hon. Friend is chairman of the Back-Bench smaller businesses committee, and I have the honour of being its vice-chairman. The case for the small business should be put forward.

The principle that is being established is exceedingly odd and could cause endless trouble in the future. We are deciding that different rates of VAT will apply to the same product, merely according to where one buys the product. I have spent many years in the insurance industry and I deeply object to the establishment of such a principle. If the present Government or any future Government proceed on such a principle, I forecast all kinds of trouble. Like my hon. Friend the Member for Dover, I believe that this debate is not the last word on the subject. I believe that there will be such abuse or evasion of the measure that in the end the Treasury will have to look at it again. I shall give one clear example of such possible abuse.

If a customer goes to a small travel agent, who sells him a holiday, and the travel agent says, "You will of course need insurance, but if I sell it to you it will include 17.5 per cent. VAT," the customer will blink and think again. All that the travel agent has to say is, "Down the road is my friend the friendly insurance broker, who will be very happy to sell you travel insurance at a lesser rate of VAT." There would be nothing to stop the insurance broker giving his friend down the road some commission for passing on all his customers. If VAT at 17.5 per cent can be that easily evaded, one must question the very logic of introducing it in the first place.

I do not follow the logic of the hon. Member for Gordon (Mr. Bruce). Holidays may be advertised as having free insurance, but free insurance costs something, even without commission. A company that is offering free insurance will have to pay for it one way or another, and I suspect that it will do so by increasing the cost of its holidays. In that case, 17.5 per cent. VAT would be applied across the board.

This would be a retrograde measure for small businesses. I hope that it will not cause small travel agents to close. I should hope that the Government would deplore that result. I ask my hon. Friend the Minister to re-examine the matter at the earliest opportunity.

Photo of Mr Philip Oppenheim Mr Philip Oppenheim , Amber Valley

I thank my hon. Friends the Members for Dover (Mr. Shaw) and for Wellingborough (Sir P. Fry) and the hon. Member for Gordon (Mr. Bruce). They made some reasonable points, and I appreciate the way in which they did so. In Committee, we probably had a fuller debate on this issue than on any other and I accepted that clause 25 would not be an easy measure to pass. I explained that there was a problem, and that we are absolutely convinced that value shifting is occurring in the travel sector among tour operators and travel agents. The measure is not the ideal way to deal with the problem, but it is the least bad option. It is not perfect, and I have always made that absolutely clear.

I accept the argument that, whereas value shifting is clearly occurring in some sectors—particularly in the car hire sector, where it has almost amounted to an abuse—the situation has been less clear in the travel sector, although we are convinced that it is occurring. I also accept the point made by my hon. Friend the Member for Dover and the hon. Member for Gordon that we shall have to keep the matter under review. There is no question about that. It is a new type of VAT loophole, and it is being closed in a new way.

I accepted in Committee that there are complications and that the current solution is not ideal. The matter should be kept under review, and I will certainly give a commitment that the Government will do so. On that basis, I hope that my hon. Friend the Member for Dover will seek leave to withdraw the amendment.

Photo of Mr David Shaw Mr David Shaw , Dover

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.