VAT: representatives and security

Finance Bill – in a Public Bill Committee am 11:30 am ar 7 Gorffennaf 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss clause 113 stand part.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee

These clauses are part of a package of anti-fraud measures announced at Budget 2016 to address online VAT fraud, of which I have direct experience. A business in my constituency has suffered from overseas sellers on platforms such as Amazon and eBay undercutting its prices by avoiding payment of VAT. Indeed, I have corresponded directly with the Minister on that issue, so I am pleased that the Government have decided to take note of my concerns.

Clause 112 will allow Her Majesty’s Revenue and Customs to require a person established in a country outside the EU to appoint a representative to account for VAT on sales to consumers and non-taxable persons in the UK. It will also permit HMRC to require security from the seller for payment of the tax. The appointment of a representative to account for VAT is used in other circumstances, so the change simply extends the circumstances in which HMRC can exercise that power.

The Opposition have long called on the Government to go faster and further in cracking down on tax evasion, so we welcome the intention. However, we are concerned that the measure might not be fully effective because HMRC first has to identify that a person is not accounting for VAT on sales into the UK and then it has to direct them to appoint a representative who is prepared to act. That may be difficult because the representative will then be responsible for accounting for VAT if the supplier does not do so and may be liable for the tax. It would be helpful if the Minister could specifically address that point. Furthermore, it seems possible for a determined fraudster to use different companies or aliases to avoid the impact of an HMRC direction. Will the Minister tell us today how the Government intend HMRC to take effective enforcement action on that?

Clause 113 will impose joint and several liability on the operators of online marketplaces to account for VAT on sales by overseas sellers to UK consumers and non-taxable persons. As with clause 112, the clause suffers from the defect that HMRC’s powers take effect only if the overseas seller has failed to comply with VAT rules and if HMRC issues a direction, which essentially means that VAT is likely to be lost, and may continue to be lost for some time, before HMRC acts. Will the Minister tell us today how he intends to address that problem?

Also of note is that clause 113 applies to any overseas business—in other words, other EU and non-EU businesses—but the measures are meant to be targeted at non-EU businesses only. HMRC states that, in practice, it will use the power only

“where overseas businesses do not have a genuine business establishment in the EU.”

However, there is a view that the legislation should reflect what is intended in practice and that the current drafting raises the question of whether the measure is actually compatible with EU law. EU-established businesses could be caught by the legislation despite there already being local rules for them to comply with and mutual assistance procedures for the UK to use. Can the Minister assure us that such businesses will not be affected? One way to address the situation would be to amend clause 113 to mirror clause 112 to cover only non-EU established businesses. What is the Minister’s view on that suggestion? Are the Government considering any further amendments?

A consultation was launched alongside these two clauses at Budget 2016 as part of a package of measures to address the issue. It was a live consultation on what due diligence should be undertaken by online marketplaces to ensure that overseas sellers are registered for VAT and account for it on their sales. We support HMRC taking action to target abuse and non-compliance in this area, but business groups have expressed concern that the primary target should be those who seek to evade the tax, rather than legitimate businesses that unwittingly deal with them. Can the Minister reassure those businesses on that point?

Her Majesty’s Treasury estimates the VAT loss attributable to sales by overseas businesses via online marketplaces to have been as much as £1 billion to £1.5 billion in 2015-16. Acknowledging that the amounts involved are only estimated, but still significant, it would be helpful if the Government could expand on how that estimate has been reached.

The Labour party is prepared to offer support for a crackdown on VAT fraud but, given the understandable concerns of business about the administrative burdens, the Government need to be very clear about the amounts involved and the benefits to the taxpayer. Similarly, we hope that Ministers will report back to Parliament on the success of the scheme as well as on wider action to narrow the tax gap so that we can measure such success. Although the Government have estimated that they will receive an additional £365 million in revenue as a result of the measures by the end of the Parliament, that figure is obviously some way short of £1 billion. Will the Minister tell us why such a gap will remain and what further action the Government are considering?

On the detail of the proposed due diligence scheme, the primary concern that businesses expressed to us is that the scheme targets intermediaries in the supply chain, not those failing to comply. That places an additional burden on legitimate business and, although that may be justifiable to collect tax owed, there is a danger that it gives a message to potential tax evaders that they will not be pursued by HMRC. We support HMRC’s aim of minimising the burdens on legitimate business arising from the scheme and limiting them to only those that are necessary and proportionate, but HMRC should also take account of the resources available to different businesses to meet the compliance burden. For example, small and medium-sized enterprises might struggle with compliance and need special protection to avoid an adverse impact on cross-border trade.

It is clear that enforcement is a fundamental issue for HMRC. Although there is a risk of missing trader fraud and misdeclarations in any VAT system, there can be no substitute for HMRC providing effective monitoring and enforcement. For the measures to be effective, HMRC must retain the role of primary enforcer, and it needs to be sufficiently resourced to monitor, investigate and administer trade in the area. With that in mind, does the Minister believe that HMRC currently has adequate resources to do that, given the cuts it has borne?

The Minister will be aware that in some EU member states the problem is avoided by making the online marketplace responsible for accounting for VAT. That is likely to be effective where the marketplace actually collects the selling price for the seller. Of course, it may not be effective if all the marketplace does is act as an intermediary.

Finally, there may be anomalies, for example when an overseas individual sells personal goods, which are not subject to VAT, to UK purchasers, as VAT should not be charged in such circumstances. Any thoughts that the Minister has on lessons from elsewhere and the Government’s evaluation of other systems for collecting VAT would be helpful for us to consider.

Opposition Members are pleased that the Government are taking action to tackle online VAT fraud, and we are fully supportive of the clauses in principle. However, I would be grateful if the Minister addressed some of the many issues I have raised with the legislation and the wider strategy for tackling online fraud generally.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

As we have heard from the hon. Member for Salford and Eccles, the clauses make changes to ensure that the high street and online businesses that pay UK VAT can compete on a level playing field with overseas sellers that, on occasion, do not. The clauses will ensure that more VAT is paid by overseas sellers who store their goods in UK fulfilment houses and sell those goods via online marketplaces, will give HMRC stronger powers to make overseas business appoint a UK tax representative, and will ensure that online marketplaces are part of the solution to the problem. The measures are forecast to reduce VAT evasion and raise £875 million in extra tax over the next five years, as certified by the independent Office for Budget Responsibility.

A recent survey by the British Retail Consortium shows that more than 20% of non-food retail spending now occurs online, which means that the UK public can now buy goods faster and cheaper than ever before. British businesses also have an online platform to enter markets they could normally never have imagined. A small village business can now supply high-quality local goods across the United Kingdom and even the world. However, that small business is competing with thousands of online sellers overseas, some of which are evading VAT. That abuse has grown significantly and now costs the UK taxpayer between £1 billion and £1.5 billion per year. Those overseas sellers are competing with all businesses trading in the UK, abusing the trust of UK consumers and depriving the Exchequer of significant revenue.

The Government are responding to that problem. An HMRC national taskforce is carrying out operational activity jointly with law enforcement agencies, which is actively disrupting the supply chains used by overseas businesses to evade VAT and has resulted in the seizure of more than £750,000-worth of illegal goods over the past year. However, HMRC’s traditional powers are difficult to apply against those businesses, which is why the Government are acting to strengthen HMRC’s powers in that area. Our first legislative step in the Bill focuses on those non-compliant overseas businesses themselves and the online marketplaces they trade through. We are strengthening HMRC’s ability to require non-compliant overseas sellers to appoint a UK VAT representative to provide support. We are also introducing a new joint and several liability provision that will allow HMRC to make those online marketplaces ultimately responsible for any unpaid VAT.

Our second legislative step is a new due diligence scheme for fulfilment houses. Those are often large warehouses in which overseas businesses store goods in the UK before sale. The Government will ensure fulfilment houses perform proper due diligence on the overseas businesses using them and on the goods handled on their behalf. HMRC is currently consulting on the detail in preparation for legislation in next year’s Finance Bill.

Turning back to the measures we are legislating for in the Bill, I will explain the changes made by these clauses. Clause 112 makes changes to the existing rules that allow HMRC to direct an overseas business to appoint a VAT representative with joint and several liability. The changes will ensure that the VAT representative is actually in the UK and is accessible to HMRC for operational activity. That will make it much easier for HMRC to pursue the debts of non-compliant overseas businesses. The clause also gives HMRC greater flexibility to seek a security.

The changes introduced by clause 113 will ensure that if overseas businesses fail to appoint a UK VAT representative or continue to evade VAT, the online marketplace that they trade in can be made liable for that VAT. In such circumstances, HMRC will put an online marketplace on notice that it will be held jointly and severally liable for an overseas business’s VAT. That notice will set a period of time during which the online marketplace can avoid being liable for the VAT, either by securing compliance from the overseas business or by preventing that business from trading through its platform. If the online marketplace does neither, it will become liable for that VAT and will become accountable for the overseas businesses it hosts on its site. The new measures are aimed at the overseas businesses themselves but will also bring the online marketplaces into play. Those sites have an important role in that market and will bolster HMRC’s ability to tackle that evasion.

In closing—I will come to the hon. Lady’s questions in a moment—I thank my hon. Friend Chris Heaton-Harris, whose campaigning on this issue rightly held the Government to account; the small businessmen and women of the UK have a worthy champion in this place. The hon. Member for Salford and Eccles reasonably requested that we do not target legitimate companies. I assure her that HMRC will take a risk-based approach to implementing the measures on a case-by-case basis. She also raised the concern that VAT may be lost before HMRC is able to take action. Let me reassure her that HMRC will act swiftly, taking a risk-based, case-by-case approach. From Royal Assent, action will be taken. For the purposes of yield, these measures score from 2017-18, but HMRC is keen to take action.

The hon. Lady asked how HMRC will enforce the VAT due from online marketplaces. HMRC is working with relevant interested parties to ensure that these clauses are effective. If online marketplaces do not pay up, they will be subject to HMRC’s debt collection and enforcement processes.

On timing, it is important to remember that the suppliers, not the online marketplaces, have the primary responsibility to account for VAT. This package of measures will make it much more difficult for overseas businesses to avoid paying the tax they are liable for in the UK. If sellers continue to evade their liability and the online marketplaces do not act to prevent that, they will be held jointly and severally liable.

On the yield from these measures and how it was calculated, the costings were certified by the independent Office for Budget Responsibility. As I said earlier, £875 million has been scored over the next five years. On the issue of HMRC’s resources and its ability to deal with tax avoidance and evasion more widely, we have already announced that in this Parliament we will legislate for more than 25 measures on avoidance, evasion and aggressive tax planning, and they are forecast to raise £16 billion by 2021. We have also given HMRC an extra £800 million to fund additional work to tackle tax evasion and non-compliance by 2020-21.

We have to remember that the UK’s percentage tax gap is one of the lowest in the world; in 2009-10 it was 7.3%, and in the first four years of the previous Parliament it fell to 6.4%. That is not to say that there is not more to do. This measure is evidence of the need for further action. We have provided HMRC with the support it needs—powers and resources—and that will continue to be the case.

This type of tax evasion by overseas businesses is a major risk to the Exchequer, so it is right that we take action. This action will protect millions of UK businesses from unfair competition and protect the Exchequer. I welcome the cross-party support for clauses 112 and 113.

Question put and agreed to.

Clause 112 accordingly ordered to stand part of the Bill.

Clause 113 ordered to stand part of the Bill.

Clause 114