The
Chairman: Order. The hon. Gentleman’s remarks are
becoming more generalised. Will he come back specifically to new clause
7?
Mr.
Gauke: I am grateful, Mr. Benton. I will not proceed with
the quotation, but the direction in which it is going is clear. The
purpose behind new clause 7 is to state that the law made by this
legislature stands. An argument that may be used against it is that
European Union law stands above it. There is nothing that we can do. It
would be ineffective. There is an argument that new clause 7 would be
entirely ineffective and that the British courts would not recognise
it.
My view and
that of numerous judicial authorities is that, where Parliament
determines, as I propose it does in new clause 7, that an element of
European Community law will not stand, Parliament’s will
prevails. I should be grateful to know later in the debate whether the
Financial Secretary agrees with that interpretation and whether we have
that power. That still leaves the issue of our EU treaty obligations. I
fully accept that were new clause 7 to be accepted and to become law,
there are enormous issues with regard to our treaty obligations. I have
no doubt that enforcement action would be taken by the European
institutions against the UK. I should be grateful to know what
assessment, if any, the Government have made of the likelihood of such
action, and what the sanctions or fines are likely to be. I raise the
matter because the fiscal costs of the various changes to EU law are
considerable—I am talking about billions. We need, at least, to
be able to evaluate all the options that are available to us.
My purpose in raising the
issue, both on Second Reading and today by speaking to new clause 7,
has been to highlight the increasing interference in our tax law by the
EU. Secondly, I am trying to obtain a clear statement of Government
policy on the matter, both in respect of the M & S case and more
generally. Thirdly, I hope to clarify the constitutional position: has
Parliament the right to insert an explicit override of EU law within
legislation, and do the Government expect UK courts to recognise the
validity of such an override?
The ECJ has played a prominent
role in our deliberations during the last few sittings of this
Committee. We have seen how it has damaged our competitiveness in the
art market, and how the Government’s strategy to tackle missing
trader intra-Community fraud has been scuppered by an ECJ judgment. Now
we see that our corporation tax laws are being fundamentally amended
because of the ECJ. We have to ask who should decide our tax
laws—the democratically elected UK Parliament, accountable to
the British people, or the judges of the ECJ? Is our purpose merely to
implement our instructions from European institutions, and do we really
think that that would be to the long-term benefit of our tax system and
our economy? This might not be the time or place to determine such
matters, but we have a responsibility to ask those
questions.
Mr.
Hoban: I congratulate my hon. Friend on the way in which
he made his case for new clause 7. He was right to highlight the way in
which the ECJ is shaping the direct tax system in the UK. Of course, he
refers particularly to the Marks & Spencer case, which underpins
this clause and the schedule. When we discuss amendments to the
schedule, I shall come to some of the issues arising from that case and
the way in which the Government have responded to that
judgment.
We should
reflect on the fact that the case brought by Marks & Spencer used
two articles—articles 43 and 48, relating to the freedom of
establishment and the equality of treatment of member states—to
argue the point that group relief should be available in the UK for
losses incurred by overseas subsidiaries. Those articles have been used
by businesses in other countries to amend or to force through changes
to their own tax legislation.
My hon. Friend mentioned the changes in capitalisation rules—I
think that they were in the Finance Act 2005—that stemmed from a
case that sought to unpick the rules on capitalisation in Germany that
favour German businesses to the detriment of other businesses located
there. In a way, that action helped the UK heads of corporate
businesses to try to dismantle barriers in
Germany. Mr.
Gauke: It is also worth pointing out that, as a
consequence of that case, we have had to amend laws that imposed a
considerable bureaucratic burden on UK companies in order to show that
transactions within a group took place on an arm’s length
basis.
Mr.
Hoban: Indeed. As happens in such cases, if the
determination of a matter of European law affects one member state, it
might well have to be applied to other member states. A tax adviser has
told me that the ECJ is interested not in tax avoidance in a particular
member state but in tax avoidance that takes place across the European
Union as a whole. There will inevitably be situations in which changes
in one jurisdiction will lead to changes in other
jurisdictions.
My hon.
Friend made an eloquent case for effectively carving out direct taxes
from the implications of the Single European Act, as that Act has been
used to bring the case before us. However, we need to think carefully
about the implications of doing so. He made a powerful argument in the
context of tax, but I am sure that other legislatures could make
equally powerful arguments about other matters covered by the Single
European Act. Those seeking to withstand market liberalisation measures
introduced by the Act might see a UK carve-out as an argument for a
carve-out to protect their own services. Those Governments that seem
inclined to protect their own businesses and withstand cross-border
flows of transactions might see the carve-out as a reason to seek their
own carve-outs from the Single European
Act. If we carve out
direct taxes, what will other member states seek to carve out? We must
be careful how we tackle the issue, because of what the consequences
might be. Although we all subscribe to what the Chancellor
said— “we must
explicitly reject old flawed assumptions that a single market should
lead inexorably to tax
harmonisation”— the
legislative bite required to put it into effect might have a knock-on
effect on aspects of our relationships with other member
states. I come to
another issue concerning the judgment and its application through the
clause and schedule—the Government’s consideration of the
ECJ judgment and its elaboration by Mr. Justice Park in the High Court.
I shall deal in more detail later with the point that the
Government’s interpretation of the ECJ’s judgment is far
narrower than Mr. Justice Park’s. He said in his judgment that
he did not feel he needed to return to the ECJ to clarify certain
points left ambiguous as a consequence of its judgment; he felt that he
could do that himself.
The
Government’s interpretation and implementation of changes to
group relief that are narrower thanMr. Justice Park’s
judgment creates a risk that businesses will challenge schedule
1’s interpretation of the ECJ’s judgment, that they will
push the Government on issues
of timing, arrangements and other aspects and that the Government will
incur great costs defending its narrow interpretation of the ECJ, to
taxpayers’
detriment. I shall
make one specific point on the Government’s consideration of the
application of ECJ judgments to tax policy. Some would argue that
although the judgment in the Marks & Spencer case dealt
specifically with group relief, which is available only when a parent
owns 75 per cent. or more of the subsidiary, it should also apply to
consortium relief and the rules for claiming group relief should be
reflected in the rules for claiming consortium relief. It is argued in
the light of the ECJ judgment that businesses will seek to take the
Government to court in the ECJ, saying that if the Government are going
to apply the ECJ’s judgment on group relief in a particular way,
they should also make the same applications and changes to rules for
consortium
relief.
John
Healey: The hon. Gentleman gives a reasoned exposition of
his views, but he has not been clear about where he stands on new
clause 7. Does he support it or
not?
Mr.
Hoban: I think that I have given that explanation clearly
already by highlighting some of the issues and the thought required
before such a clause is put to a vote. I hope that, in the light of my
remarks and given the thought that needs to go into how such a change
might be implemented, my hon. Friend the Member for South-West
Hertfordshire will seek the Committee’s leave to withdraw the
new
clause. 11.30
am
The
Chairman: Order. New clause 7 has not been moved, so there
will be no necessity to withdraw
it.
Mr.
Hoban: I am grateful. That will give my hon. Friend even
more time to think about the matter before it is dealt with towards the
end of our
proceedings. I
conclude by saying that this stand part debate has raised important
issues about the application of European law to tax. We cannot see it
in isolation from the wider issues of reducing barriers to business
across Europe, which we must examine carefully. We must remember that
much of our economic success at home and abroad is due to the free
movement of capital, both human and financial. We should be wary of
making changes that, while satisfying us on one issue, damage us on a
broader range of
issues.
Rob
Marris: I am grateful to the hon. Member for Fareham for
rebuking the hon. Member for South-West Hertfordshire on new clause 7,
perhaps better than I could have done. The new clause would be a first
step towards taking us back to 1971, before the Heath Government
rightly negotiated our accession to the European Union—the
Common Market, as it was then called. It is a wrecking amendment and
would wreck the UK’s position within the European Union. The
hon. Member for South-West Hertfordshire was quite clear about that. He
cited various cases, but as his colleague the hon. Member for Fareham
pointed out, European Union law is a two-way process.
The hon. Member for South-West
Hertfordshire mentioned the Factortame case; I assume that he meant
Factortame No. 1 rather than No. 2 or No. 3. He did not talk about the
debate within the EU, which is perhaps too wide for us to discuss
today, on the horizontal applicability of directives in
contra-distinction to their political applicability, or about cases
such as Foster v. British Gas and the Francovich case in Italy
on the applicability of EU directives. The EU is now a club of 25
members, all of which, including the United Kingdom, are at least in
theory bound by the same laws. If new clause 7 were accepted, we would
be seeking to opt out of that arrangement and see ourselves as distinct
from the EU. The huge risk is that other member states would do the
same, and we would end up with a fragmented EU. That would not be in
the interests of the UK. In particular, it could adversely affect the
position of the UK in financial markets, as the hon. Member for Fareham
said. London is the
financial centre of the EU; most people would accept that, although
perhaps the hon. Member for South-West Hertfordshire would not. One of
the ways in which we have built on that position is by taking advantage
of the financial rules of the European Union, which are binding on all
25 member states at least in theory and often in practice. If we were
to start to resile from those rules, it would weaken the position of
London and the UK within the EU, to our detriment. It might satisfy the
hon. Gentleman’s view of where the UK should be going as a
sovereign state, but it would be something of a little Englander
approach and an own goal in financial matters. We have the leading
centre within the European Union, a position that has been built upon
in large part, though not solely, due to our membership of the EU. New
clause 7 would seek to wreck that, and I urge my hon. Friends to vote
against it if it is pressed to a
Division.
John
Healey: I appreciate the reasonable way in which the hon.
Member for South-West Hertfordshire put forward his entirely
unreasonable proposal. He has many colleagues who take an equally
hostile view of the European Union but have generally framed their
arguments in a less temperate
tone. The hon. Member
for Fareham was interesting. He encouraged the hon. Member for
South-West Hertfordshire to a point and then urged him to be cautious,
particularly on the concept of carve-outs, for which he was arguing. My
hon. Friend the Member for Wolverhampton, South-West was much clearer
and more direct about the risks that such an approach might pose to our
national economic
interest. On
a number of points, the hon. Member for South-West Hertfordshire
touches on the high principles of domestic and European Union
jurisprudence. The simple legal fact at the heart of the matter is that
the relevant Community laws are those concerning fundamental freedoms
prescribed by European Community treaties and relating to cross-border
movement between member states.
The hon.
Gentleman also asked about costs. It is true that following judgment in
the Marks & Spencer plc case, several reports suggested that the
cost to the Exchequer would be high. However, they reported the
outcome of the case in a way that was misleading;the judgment
of the European Court of Justice was much narrower than was implied in
those reports. The Government estimate that the cost to the Exchequer
of the small extension of group relief proposed in this clause and
schedule 1 as a result of the Marks and Spencer judgment, will be about
£50 million a year. That estimate was set out and reflected in
the Budget documentation. The Government are prepared to accept that
cost in order to maintain the existing group relief that we believe is
important and beneficial to UK
business. The hon.
Member for Fareham made a number of points which, as he said, we will
come on to in more detail later, but it is appropriate that I return to
two of his points now. He took the Government to task by saying that
the provisions in the clause and schedule are in fact narrower than Mr.
Justice Park’s judgment. We have studied the ECJ’s
judgment carefully and consider that the proposed extension to the
group relief legislation is in line with the requirements in the EC
treaty. The ECJ’s decision was very narrow—a view that
has been reinforced by Advocate General Geelhoed. [Interruption.]
I should spell that out for the Committee. The Advocate said that
the judgment should be applied
restrictively. The
hon. Member for South-West Hertfordshire asked about consortium relief.
I am not sure if he is aware, but consortium relief is minute in
comparison with group relief and typically accounts for less than a
quarter of 1 per cent. of the volume and value of group relief. So we
have concentrated our efforts on the effects of group relief because
that has the greatest impact and effect on business. To be direct, the
implications for consortium relief of the Marks & Spencer judgment
are unclear, and we are still considering what—if
any—consequences there might be. If we judge that it is
appropriate to take action, we will do so, but only if we feel that it
is necessary. I commend the clause to the Committee and if the hon.
Gentleman wishes to press his new clause, I shall ask my hon. Friends
to oppose
it.
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