Select Committee on Economic Affairs Third Report


10 June 2003

By the Select Committee appointed to consider the Finance Bill


The Finance Bill 2003


  1.1  The House of Lords is taking a new step forward with this Report. It is the first time that a Lords Committee has reported on a Finance Bill. We see this as a constructive and helpful contribution to the evolving process of Parliamentary consideration of Finance Bills. Our aim throughout has been to complement and assist the work of our Commons colleagues, making the best use of the expertise and objectivity which this House can offer.

  1.2  Our terms of reference enabled us to consider technical issues of tax administration, clarification or simplification, but not the rates or incidence of taxes. We were also constrained by the exceptionally tight Parliamentary timetable for this year's Bill. From the start we decided to focus within our remit on a few key topics which had aroused widespread concern and where we could make the best use of our collective expertise in the very limited time available.

  1.3  Those key topics were the new Stamp Duty Land Tax, the new provisions against VAT evasion and the mandatory electronic payment of PAYE by large employers. We also decided to concentrate particularly on the consultation process leading to the introduction of those measures, as well as on the extensive use of regulation-making powers related to them.

  1.4  Stamp Duty Land Tax is an important new measure which attempts to modernise centuries-old legislation. It has potentially far-reaching consequences for the commercial property business. The early stages of pre-legislative consultation were widely welcomed by the professional and trade sectors involved. But the process was abruptly halted, leaving some of the main provisions and a great deal of important detail to be worked out and implemented through secondary legislation by 1 December of this year

  1.5  Most of our private sector witnesses believe this timescale is far too short. They would much prefer the introduction of the tax to be delayed until next year while the legislation is redrafted to take more account of market factors. They also argued that far too much was being left to regulation-making powers without proper Parliamentary scrutiny.

  1.6  Our attention was drawn to a wide range of outstanding specific problems thrown up by this tax: the lack of certainty over potential tax liability for commercial property transactions, lease duty provisions that are still to be decided, the difficulties of fair assessment where lease revenues depend on turnover or factors like the outcome of planning applications, potential inflexibility over reclaiming tax where leases are terminated, how to deal with complex commercial transactions and apparent inconsistencies over the qualification for disadvantaged areas relief. We were also alerted to potential bureaucratic difficulties created by the self-assessment provisions and by the transitional rules for the commencement of the new tax.

  1.7  Inland Revenue witnesses assured us that these problems could still be ironed out satisfactorily by the time that tax is due to take effect on 1 December 2003 and that the vast majority of ordinary property transactions would not be adversely affected by these changes. But, given the huge task outstanding, we think it is more important to get the tax right, and as fair and simple as possible, than to meet an arbitrary target date. We therefore recommend that early in the Autumn of 2003 the Government should review the progress made to see whether the tax can be got right in time.

  1.8  We share the concerns raised over the extensive use of regulation-making powers related to this tax. We recommend that clearance procedures should be devised to reduce uncertainties over liability. We hope the Inland Revenue can find ways of countering or deterring tax avoidance that will not penalise legitimate commercial transactions. We welcome the assurances they have given us over improvements in customer service and reducing bureaucratic burdens.

  1.9  We were told that the VAT anti-abuse provisions are designed to combat serious professional frauds operating across the EU. The Government estimate that these cause revenue losses of between £1.7 and £2.5 billion in the UK alone. Sophisticated "missing trader" and "carousel" rackets exploit the supply chain of high volume trade in volatile markets like computer chips or mobile telephones. We fully support the Government's efforts to crack down on these abuses. But, as always, a proper balance has to be struck between those efforts and the need to safeguard the rights of legitimate traders.

  1.10  Consistent and understandable misgivings have been raised with us over the prospective reach of the enforcement powers contained in the VAT anti-abuse measures: traders can be required to provide security against potential loss of VAT caused by insolvency as well as fraud in the supply chain, and joint and several liability can be imposed upon them. We recommend that enhanced safeguards should be considered to protect the interests of legitimate traders unwittingly caught up in an artificial supply chain, without weakening the attack on fraud. These would incorporate extended judicial oversight by the VAT and Duties Tribunal.

  1.11  Mandatory electronic payment of tax by large companies is the right way to go and should not create serious difficulties for business. We looked at the arguments for using carrots rather than sticks to encourage wider and more rapid adoption of electronic payment, but concluded that would not have been appropriate in this case.

  1.12  All in all, we believe this has been a worthwhile exercise which should make a valuable contribution to Parliamentary consideration of the Bill. We are encouraged by the wide and warm welcome given to it, especially in professional circles, and by the ready and invaluable assistance given to the inquiry by all our witnesses, both from the private sector and from the Government Departments involved.

  1.13  We recommend that a similar exercise should be carried out next year, starting earlier and with wider terms of reference.

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