Jeremy
Wright: I should start by declaring my interest as a
non-practising barrister, and a more specific interest in that a few
years ago I spent three happy months acting for somebody accused of
precisely this type of fraud. I have some very personal knowledge of
the difficulties involved in prosecuting this type of
offence.
Mr.
Mark Hoban (Fareham) (Con): Who
won?
Jeremy
Wright: I am glad that my hon. Friend asks me that. It
goes back to a point made by the hon. Member for Falmouth and Camborne.
I am afraid that she is wrong that in such cases everybody gets
convicted or everybody gets acquitted. In the case that I was involved
with, a few people were convicted, but my client was not. As a point of
information, I should make that clear. However, I should also say that,
primarily because of that experience, I welcome the clause. It is a
positive move on the Government’s part to deal with a difficult
issue. As I said in my earlier intervention on my hon. Friend the
Member for Rayleigh, there is no doubt that the Government could and
should have been aware of the problem for a long time, but better late
than never. I am glad to see that the clause has found its way into the
Bill. The provision is
important because by reversing the obligation to pay VAT, we are likely
to deter a large proportion of those frauds. That is important, because
when such frauds come to court, they are extremely difficult to deal
with. They are difficult to deal with, incidentally, not because juries
do not understand them—I do not think that that is it at
all—but because they deal necessarily with a complex paper
trail. The structure
of carousel frauds is complex because their intention is to throw HMRC
off the scent. A number of companies are involved, often in various
countries, and—the Paymaster General is right about
this—although every company in the chain is certainly involved
in the fraud, not every person in every company has the necessary
degree of criminal knowledge to be guilty of the offences concerned.
That creates difficulties for juries, as it would for judges or other
tribunals, in dealing with such cases. They are complex and inevitably
long running. They involve mountains of exhibits and take a long time
and a great
deal of money to try. Anything that we can do to lessen the impact on
the Exchequer through the legal aid budget and to improve the revenue
that should be drawn in from such transactions seems worth while. In
general, I welcome the
clause. I have two
reservations, however, to which I draw the Paymaster General’s
attention. I hope that she can assist me with some reassurance. Because
the value of the clause, in my view, is to act as an effective
deterrent on those who might be tempted to perpetrate such fraud, I
should hope that it would have absolute clarity on where obligations
for the payment of VAT lie. As my hon. Friend the Member for South-West
Hertfordshire (Mr. Gauke) said, there is the potential for confusion
not only in subsection (6), which indicates that the recipient must
account for and pay tax on the supplier’s behalf, but in
subsection (3)(a), which indicates that supplies are to be
treated “as taxable
supplies of the recipient (as well as taxable supplies of the person
making
them)”. I have
no doubt that the clause’s overall purpose and effect are
exactly what we all wish them to be. However, I ask the Paymaster
General to put some reassurance on the record to make it perfectly
clear where the obligations lie, so that no one tempted to perpetrate
such a fraud could believe that the clause gives them any opportunity
to continue. I should
also like to raise another matter touched on by others. A danger has
arisen because of the prevalence of MTIC fraud that those legitimately
involved in trading the types of product commonly used in such
fraud—whether it be computer chips, mobile phones or other
easily transferable components—can not only find it difficult to
obtain banking facilities but can often find it difficult to obtain a
VAT registration.
HMRC is understandably
sceptical about companies wishing to trade in such products because of
their prevalent use in illegitimate trading. I hope that the Paymaster
General will indicate clearly that the methods used under the clause
will make it easier for legitimate traders in such products to go about
their business and obtain banking facilities and VAT registration, so
that those important economic sectors can be sustained and
improved. I welcome
the clause broadly, and I hope that with the Paymaster General’s
reassurance, it can be strengthened yet
further. Mr.
Newmark: My understanding is that tax advisers are also
involved in intra-community fraud. In February it was reported that the
Government were trying to tackle the problem through tighter regulation
of tax advisers. However, John Whiting from Pricewaterhouse Coopers
responded: “we would be a
little wary of suddenly appearing as agents of the Revenue. I can
understand why the government might be looking at it, but is this
trying to control a real problem? If the problem is bad tax advice,
then there is a case for regulation. If the problem is that the
government is losing money because people are finding a way around the
tax system, we need clearer
rules”. In that
context it would be useful if the Government explained how such
proposals have progressed.
Dawn
Primarolo: This is an extremely important debate and,
within the confines of what I can say in public, I want to be as
helpful as I can. I congratulate the hon. Member for Rayleigh on his
introduction. The issue that we are discussing is complex and a
challenge, not just for the UK Government, but other member states. I
will try to cover all the points that he made.
I shall deal with the points
that have just been made by the hon. Member for Braintree (Mr.
Newmark). First, the Government are not asking tax advisers and
solicitors not to provide advice. We are asking them not to provide
advice and support for fraudulent activity. Clearly, that is what we
are talking about. Secondly, I accept his second point about clarity,
but that is true of all legislation and so it is necessary that it be
as clear as
possible. I agree
particularly with the points raised by the hon. Member for Rugby and
Kenilworth (Jeremy Wright). Ideally, the provisions in the clause will
deter fraudulent activities and address the difficulties that he so
eloquently described. He made another important point: in a fraudulent
chain of activity there might be individuals who find themselves
subject to prosecution, but who had no knowledge, or did not have
access to knowledge, of fraudulent activity. That is an important
division—I will answer the hon. Member for Falmouth and Camborne
in a moment—and comes back to the important distinction about
with what we are trying to deal.
I shall address the points that
have been made in the following order: the scale of the problem and the
Government’s attempts to tackle it; issues involving other
member states; and the safeguards that we are negotiating. I think that
that will cover all the points that have been made, but if any Member
disagrees, please
intervene. In 2001-02,
HMRC identified the growing problem of MTIC fraud. The Finance Bill
2003 gave to Customs and Excise—now Her Majesty’s Revenue
and Customs—not only powers to deal with the growing MTIC fraud,
but a specific plan for its reduction. By 2004-05, losses from that
fraud had been reduced from £2.5 billion in 2001-02 to the
figures in the pre-Budget report of between £1.1 billion to
£1.9 billion. A particular strategy was being deployed by the
Department, which was successful.
3.15
pm We were
reducing MTIC fraud by interventions on repayments. As a caveat, I
should say that the tax administration is so fantastically efficient at
repaying VAT promptly that that efficiency becomes part of the track.
That is an interesting dilemma for us all as policy makers, as we
strive to support business and make our tax administration sufficient,
and is to do with the speed with which VAT is returned, particularly on
export where the export company delays and the company that is claiming
the VAT does so immediately. Without going too far down that route,
hon. Members can see the dilemma. The first dilemma is to balance
efficiency without creating a
problem.
Mr.
Gauke: If the problem is the over-efficient and rapid
repayment of VAT, has the Paymaster General considered giving it to the
tax credits team?
Dawn
Primarolo: Oh dear. I thought we were having a grown-up
discussion. I am not going to answer the hon. Gentleman’s
questions if he is going to be so
unpleasant.
Mr.
Hoban: Will the Paymaster General give
way?
Dawn
Primarolo: Of course, as long as it is not about tax
credits.
Mr.
Hoban: I refer back to the Paymaster General’s
comments about the HMRC’s efficiency at repaying refunds. I
understand that in one European country, the delay in paying refunds
back to traders is such that it precludes MTIC from taking place. I am
sure that that is a route that neither she nor the Government would
want to go down, because I know a great many businesses benefit from
the rapid repayments.
Dawn
Primarolo: Indeed. The hon. Member for Rayleigh also asked
me about the experience of other member states. That has certainly been
a suggestion. I do not think that I am particularly attracted to that
line of
argument. Figures have
emerged, particularly of late, and it is right that I should refer to
them. The hon. Member for Rayleigh asked what they were now. As the
result of a decision in a case, which was touched on by the hon. Member
for South-West Hertfordshire, part of the strategy that was being
deployed for the MTIC challenges to the Department was no longer
available to us. I have to put that delicately. As a result, the
Department and I had to reconsider whether there were additional things
we needed to do and what they were—I will come to them in a
minute—and the reverse charge is part of that.
Fraud, by its nature, is
difficult to measure. Because this is intra-community fraud, it relies
on data from other member states to make estimates. The figures that we
have seen cited recently, such as the ONS statistics, are for attempted
fraud not stealing. I wish to draw a line—the figures that we
have seen of late are truly staggering, and there is nothing to suggest
that they are correct. I have given the figures already, but of course
I acknowledge that the issue is growing and we need to move rather
quickly. With regard
to what the Department is doing, first there are the arrangements in
the Bill, including stamping and, in later clauses, the reverse charge.
A reverse charge is difficult to put into VAT legislation. We are
considering that and have applied for it on the basis of the challenge
that faces us. Other member states—the hon. Member for Rayleigh
asked me to touch on this—who also suffer considerably from MTIC
fraud take a slightly different approach. We are going for a specific,
limited reverse charge. Germany, for instance, wants a reverse charge
in VAT legislation. However, our view, and I think that of Committee
members, is that that would require much of small and medium-sized
businesses and we are not attracted to
it. There is a great
deal of discussion about the nature of a reverse charge. I have made
the point clearly that the issue was not dealt with at the margins of
the last ECOFIN meeting—I was there—but the Commission
has been written to and I have raised the matter with
other Ministers. We continue to press hard, because we believe that our
solution of a limited reverse charge is the way forward. However, that
requires the Commission to agree on how the charge would operate, and
it has to be balanced within Community law. Naturally, the Commission
is concerned with the same things as hon. Members: the impact on small
business and not having excessive burdens. When the Commission has made
a decision, it has to go to the Council and be passed with
unanimity. I want this
process to take place as fast as possible. I included the proposed
legislation in this Bill so that the Government would be able to bring
it forward. However, the negotiations with the Commission on the detail
are such that, although I can give the hon. Member for Rugby and
Kenilworth (Jeremy Wright) the assurances he is looking for—we
are striving for clarity, specificity, the target and not a general
approach—the Commission is not attracted to that view. Those
negotiations are still going on. I need to reflect on how I am able to
keep him informed of
developments. Following
the Bond case, we have deployed more than 1,000 staff to tackle the
issue. The hon. Member for South-West Hertfordshire said that there was
a staff shortage, but that is not the case. I also hark back to what
the hon. Member for Rugby and Kenilworth said: the nature of this work
is such that we need specialist skills, because it is detailed and
about looking at material. In the meantime, extra staff have been
deployed.
Mr.
Gauke: I am grateful to the Paymaster General. I shall not
mention tax credits again. Does she accept, none the less, that there
is at least a perception that there is a shortage of staff? There is a
genuine concern going around a number of law firms, as I said
earlier, about the time it takes to obtain VAT registration.
Someone from the HMRC made the point to the correspondent that that
seemed to be caused by a lack of staff. If that is incorrect, I should
grateful for the Paymaster General’s
comments.
Dawn
Primarolo: I was coming to my next point. The question is
about what the staff are doing. That touches on another principle that
we need to consider. One of the requirements on the Department is to
consider registration closely—who is seeking to register and
whether registrations can be refused—I make it clear that I have
asked it to do that. That task requires highly skilled staff and takes
time, and there is the tension that the hon. Gentleman and the hon.
Member for Rugby and Kenilworth rightly
identified. This is
not the most desirable situation to be in, but, given the
circumstances, we are using extra staff to question the huge amount of
registrations, including new registrations. At the moment, that is one
of the tools being used. However, the fraudsters then mutate their
approach. They may find companies that are dormant or do all sorts of
other things, so we also have to look carefully at where activity
suddenly starts. I
want to be helpful, but I also want to be careful, because those who
commit such fraud are advised and
are very able people. There is therefore a limit to how much I can tell
the Committee about the compliance strategy, although I am doing what I
can. | 
