Fifth Standing Committee on Statutory Instruments, &c.


Thursday 21 July 1988



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The Committee consisted of the following Members:

Chairman: Mr. Geoffrey Lofthouse

Aitken, Mr. Jonathan (Thanet, South)

Ashby, Mr. David (Leicestershire, North-West)

Bruce, Mr. Malcolm (Gordon)

Campbell-Savours, Mr. D. N. (Workington)

Coombs, Mr. Simon (Swindon)

Davis, Mr. Terry (Birmingham, Hodge Hill)

Lennox-Boyd, Mr. Mark (Morecambe and Lunesdale)

Lilley, Mr. Peter (The Economic Secretary to the Treasury)

McLeish, Mr. Henry (Fife, Central)

Marek, Dr. John (Wrexham)

Marshall, Mr. Michael (Arundel)

Morgan, Mr. Rhodri (Cardiff, West)

Powell, Mr. William (Corby)

Shaw, Mr. David (Dover)

Tapsell, Sir Peter (East Lindsey)

Tredinnick, Mr. David (Bosworth)

Vaughan, Sir Gerald (Reading, East)

Wise, Audrey (Preston)

Rose, Mr. J. R. Committee Clerk

3 Fifth Standing Committee on Statutory Instruments, &c. Thursday 21 July 1988


Value Added Tax (Special Provisions) (Amendment) Order 1988

10.30 am

The Economic Secretary to the Treasury (Mr. Peter Lilley): I beg to move, That the Committee has considered the Value Added Tax (Special Provisions) (Amendment) Order 1988. Since value added tax was introduced, there has been relief for business entertainment of overseas customers which has mirrored the relief that exists in direct taxation. As we have removed the relief in direct taxation in the Finance Bill, it is natural to do likewise for VAT relief on entertainment. The order is a small simplification which removes a potential area of abuse. It cannot be said that the success of British exporters depends upon such a measure. The scale of what we are considering is shown by the fact that the potential revenue gain of removing the relief is deemed negligible. I hope that the order will have the Committee's support.

10.31 am

Mr. D. N. Campbell-Savours (Workington): I have just had to run across London. I am not familiar with the matter being discussed but, if I am not mistaken, it is the issue that I raised during discussion on the Finance Bill. If I remember rightly, during that discussion I asked the Minister for an assurance that export agents who act for British manufacturers, most of whom have offices in London, would not be so affected that their ability to entertain overseas customers would be jeopardised. The Minister told me that, although he had recieved representations from the British Export Houses Association, the Government felt that the association's concern was not sufficient to warrant action or reconsideration by them prior to this year's Finance Bill. Subsequently, I received a letter from the association, which had written to the Chancellor of the Exchequer complaining about remarks made during that debate. No doubt, the Minister's officials have copies of the correspndence. I believe that the association complained that its position has been misrepresented and that I had identified a group of people who would be greatly affected by this change. I shall explain about whom we are talking. I know them because many years ago, in a former incarnation, I dealt with these people through their London offices. They have offices here and they identify buyers—in retail stores and other overseas buying agencies—and bring them to London. Often, to put it crudely, they wine and dine them and introduce them to United Kingdom manufacturers and distributors who are seeking export markets. The turnover of those people on behalf of their clients in 4 the United Kingdom or of organisations which they represent in selling to overseas customers, probably amounts to hundreds of millions of pounds because of the trade that they do. It is achieved with a small organisation—often with only one or two offices. I used to visit one such organisation near the John Lewis Partnership. It was a very small place which had an ante-room. Some have sample areas. Perhaps my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis) will confirm that I am correct.

Mr. Terry Davis (Birmingham, Hodge Hill) indicated assent.

Mr. Campbell-Savours: Yes, I am right. Unfortunately I did not do my homework. I did not realise what was involved until I came into Committee. These organisations make a major contribution to Britian's export effort. If the correspondence which I recieved from that Association is correct, it has been grossly misrepresented and an error is being made today through the Government's decision to proceed with the order. By now, the Minister should have been given copies of the correspondence. Surely, Treasury officials will know exactly what I am talking about. Copies were sent to me within four days of our proceedings on the Finance Bill. I saw a letter to a Treasury Minister from the national association, complaining about comments that were made and how it had been misrepresented. Those people deserve a better hearing. I do not want to make a great political speech, but the matter should have been considered in the light of the representations. Perhaps there has been abuse. But what disturbs me is that when I originally raised the issue in Committee it was clear that there had been no real consideration of that group's difficulty. That group is crucial because if often represents the smaller manufacturers and distributors—those who cannot afford a large sales force and sales distribution arrangements overseas. They are reliant on those selling houses in London—or, for overseas customers, the buying houses in London because they buy from British manufacturers—to secure the markets overseas. Indeed, that was so in my case. These people found me some of my original clients about 20 years ago. I suppose that it is too late and that the order will go through on the nod. These people should still be brought into the Department and the Government should consider their circumstances in detail. It should be noted whether hardship befalls them over the next few months. We are not discussing a little VAT; it is a large amount of these people's annual expenditure. In effect, all they do is entertain to obtain the orders. They do not have stocks or warehouses; they have nothing but their ability to smooth-talk and entertain the customer. I do not ask for a concession now but if these people have difficulties during the next 12 months, the Minister should consider the matter and come back with a concession next year, if he feels that anything can be done to ameliorate any problem arising with that group.


10.37 am

Mr. Lilley: I am glad that my opening remarks, although brief, were not so brief that we completed our proceedings before the hon. Member for Workington (Mr. Campbell-Savours) had the opportunity to raise that issue. It is important that we consider it. I assure the hon. Gentleman that I asked about any correspondence on the VAT relief. We had precisely one letter, which was on a constituency matter raised by an hon. Member; it did not relate to the matter raised by the hon. Member for Workington. Perhaps the correspondence which he mentioned was with my right honourable Friend the Financial Secretary and was about the parallel relief of direct taxation, which was ended by clause 68 of the Finance Bill. I shall re-read that correspondence to ascertain whether it has any bearing on this matter. My immediate response is that, although the group of people to whom the hon. Gentleman referred undoubtedly do valuable business—a high proportion of which is entertainment—that should be seen in the context of the business of their customers, who are the exporters and potential exporters. For no business is entertainment a major component of the value of the goods and services which it is hoped to export. We are not introducing a distortion between entertainment carried out by the company itself and entertainment carried out on its behalf by the agents mentioned by the hon. Gentleman. Their valuable function can continue without distortion being introduced by removal of the relief. If we gave agents a special relief, but did not retain it for those manufacturers and other businesses who carried out their own entertaining, that would create a distortion. The relief is not necessary to enable them to continue their business. Their business is generated by their ability to find customers for British suppliers, and long may they continue to do so. It is not induced by a tax relief. Therefore, although I shall look at the correspondence on the subject, I cannot easily see that there is a case for a relief within a relief.

Mr. Terry Davis: I am sure that my hon. Friend the Member for Workington (Mr. Campbell-Savours) knows a great deal more about that aspect of business than I do. The Minister has suggested that the effect of the loss of tax relief will be small in relation to the size of manufacturers, even small manufacturers, and that the amount of the relief will have little impact compared with the volume of exports from those businesses. What are the financial arrangements bwtween the export houses and the principals? Do the export houses receive a commission for introducing a buyer when that leads to an order, so that the VAT is an expense to them and is not just passed on to the exporter?

Mr. Lilley: It is an expense to them and is one of the costs of running business, and they will have to pass it on to the customer. If the customer—the British exporter—were to do his own entertaining, he, likewise, would be unable to reclaim the VAT on the entertainment following the introduction of the order, so the costs would be identical either way.


Mr. Terry Davis: I think that the Minister may have missed my point. I was asking whether the middle man, while performing a powerful function in business, simply charges a percentage commission, so that any expenses are his expenses, or whether he bills his expenses to the exporter, so that in effect they become the exporter's expenses. It makes a big difference to the man in the middle, depending on the way in which the commission works. Is it cost plus or straight percentage?

Mr. Lilley: I have no idea how the middle men bill their customers, but presumably they will find a way of billing which ensures that the customers pay all the costs that they incur, otherwise there would be no point in being in business.

Mr. Campbell-Savours: Perhaps I can help the Minister—we cannot expect him to have all the answers. It is a commission payment, and I am told that it is sometimes paid on a management fee basis. If it is paid on a management fee basis, there may be some flexibility but, in the main, the business is commission business. It would be very difficult for the companies to go back to their British suppliers on whose behalf they operate and ask them to change the percentage to a round figure, by what I am sure would be a very small amount. The amount may be significant to them, but it may not be easily comprehensible to a manufacturer.

Mr. Lilley: I cannot imagine that the difficulty would be insuperable. The costs of doing business change all the time, and I cannot believe that such agents are so inflexible as to be unable to ensure that they always charge fully for the costs that they incur in the course of business. The order will increase the cost of entertainment to them by up to 15 per cent. That rise could occur for a variety of other reasons, and they would undoubtedly find ways of ensuring that their customers paid for it.

Mr. Campbell-Savours: I do not want to split hairs, but many people invoice their services to their buying customers overseas, not just to their manufacturing suppliers and distributors in the United Kingdom. I do not have the file with me, otherwise I would have had all the facts to hand, but, if that is the case, those people may find it difficult to justify an additional charge to their foreign supplier. Their foreign supplier may wish to work through a European buying house, because there are European buying houses which operate throughout the Community. If the business is very competitive, someone in London may say that it is better to buy through the French office of an association. I do not know whether it is universal throughout the Community, but the office may have a concession that is more favourable and makes it easier for the business to arrange for supply from say a French manufacturer, because the pressure in that area is exerted by the British agent. Such matters often have wider implications. If an action in this country moved the business away from a British buying house to a foreign buying house where there might not be same loyalty to British 7 manufacturers, the net effect might be much greater than is assumed in the order. I am not asking for the statutory instrument to be rescinded. I am simply asking the Minister to check out my allegations and, if they are valid, to write to us all. His hon. Friends, I am sure, would eagerly await such correspondence. The hon. Member for Corby (Mr. Powell), who is a great European, would want to know about all these matters, especially if there is a possibility that other countries in western Europe might snatch from Britain business which we regard as ours by good fortune. Will the Minister investigate the matter over the next 12 months and—perhaps in the course of the Finance Bill next year—comment on it and say, "We took representations and we were satisfied" or "We have had to make changes"?

Mr. Lilley: I am happy to give the hon. Gentleman an assurance that I shall consider the matter and 8 write to him. I can give him a degree of reassurance, as most of partners in the Common Market have similar arrangements to those that we are introducing. Although it is not the purpose of the order, we are coming into line with the sixth directive, which makes the input tax on entertainment non-reclaimable. It is therefore unlikely that British agents will be better off operating from one of our partner states in western Europe. I shall follow up the hon. Gentleman's points and write to him, and I shall send copies to other hon. Members who, as he said, are keen on correspondence.

Question put and agreed to.

Resolved. That the Committee has considered the Value Added Tax (Special Provisions) (Amendment) Order 1988.

Committee rose at thirteen minutes to Eleven o'clock.


Lofthouse, Mr. Geoffrey (Chairman)

Aitken, Mr.

Campbell-Savours Mr.

Coombs, Mr. Simon

Davis, Mr. Terry

Lennox-Boyd, Mr.

Lilley, Mr.

Marek, Dr.

Marshall, Mr. Michael

Powell, Mr. William

Tapsell, Sir Peter

Tredinnick, Mr.