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House of Commons Hansard
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General Committees
12 September 2016

Delegated Legislation Committee

Draft International Development Association (Seventeenth Replenishment: Additional Payments) Order 2016

The Committee consisted of the following Members:

Chair: Mr Peter Bone

Davies, Byron (Gower) (Con)

† Day, Martyn (Linlithgow and East Falkirk) (SNP)

† Fernandes, Suella (Fareham) (Con)

† Foxcroft, Vicky (Lewisham, Deptford) (Lab)

† Griffiths, Andrew (Lord Commissioner of Her Majesty's Treasury)

† Hodgson, Mrs Sharon (Washington and Sunderland West) (Lab)

† Mackinlay, Craig (South Thanet) (Con)

† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)

† Mathias, Dr Tania (Twickenham) (Con)

† Osamor, Kate (Edmonton) (Lab/Co-op)

† Perkins, Toby (Chesterfield) (Lab)

† Sandbach, Antoinette (Eddisbury) (Con)

† Solloway, Amanda (Derby North) (Con)

† Stevenson, John (Carlisle) (Con)

† Stewart, Rory (Minister of State, Department for International Development)

† Tugendhat, Tom (Tonbridge and Malling) (Con)

† Turner, Karl (Kingston upon Hull East) (Lab)

† Zahawi, Nadhim (Stratford-on-Avon) (Con)

Leoni Kurt, Committee Clerk

† attended the Committee

Sixth Delegated Legislation Committee

Monday 12 September 2016

[Mr Peter Bone in the Chair]

Draft International Development Association (Seventeenth Replenishment: Additional Payments) Order 2016

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I beg to move,

That the Committee has considered the draft International Development Association (Seventeenth Replenishment: Additional Payments) Order 2016.

It is a great pleasure to serve under your chairmanship, Mr Bone. I am here to ask the Committee to support an additional £350 million loan to the International Development Association which, as colleagues know, is the part of the World Bank that was set up in 1960 particularly to target the world’s poorest nations. I imagine that Committee members will have three questions: first, why have we chosen IDA; secondly, why have we chosen £350 million; and, thirdly, why are we making the payment now as opposed to at any other point?

Why the IDA? As hon. Members will be aware, the World Bank has been a partner of the British Government since we helped to establish it in the 1940s. It is a very well established development organisation. It is not perfect, and the Committee may have an opportunity to discuss some of the bank’s challenges, but in practice, having had a long relationship with it and conducted some serious audits, we are convinced that its 12,000 people, working in 127 offices, have a critical mass of expertise and a proven record of delivery. We saw that in Vietnam in the 1970s and 1980s, in Yugoslavia in the 1990s, and most recently during the global financial crisis of 2008-09.

Why are we giving this money now? We have put a great deal of pressure on the World Bank—as, indeed, has the world—during recent humanitarian crises. We have seen the Ebola crisis and the earthquake in Nepal, and of course most recently we have been dealing with Syrian refugees and in particular education provision in Lebanon and Jordan. In every regard, we have put a lot of pressure on the World Bank to deliver.

Why this amount? The loan will support the World Bank’s projects in a range of countries. IDA works right across the 77 poorest countries in the world, and its programmes are tailored to individual countries. For example, it has done a great deal of work in Nepal on reconstruction since the earthquake. In Bangladesh, it focuses on extreme poverty, while in Burma it is doing good work on public financial management. It has been able to increase from 8% to 10% the tax revenue that the Government of Burma raise, which equates to around £2.5 billion a year of additional income for the Burmese Government, and that can be spent on development. We are focused in particular on concrete outcomes, however. The money that we will put in will allow us to provide life-saving vaccines for around 200 million more children, microfinance loans for around 1 million more women, and access to clean water for around 32 million people.

Although the World Bank is a capable institution, as I said at the start of my speech, it is not perfect, so along with this money, we will push ahead with reforms in three key areas. First, we will encourage the bank to work much more in fragile and conflict-afflicted states, which is Department for International Development jargon for countries teetering on the edge of war or those in which there is an active conflict. In the past, we have had to put pressure on the bank to work in Burundi and Mali. We believe that more could have been done in South Sudan and Yemen, and we are working closely with the bank to ensure that it keeps country offices on the ground and really delivers in those locations.

Secondly, we believe that more could be done on responsiveness and efficiency, and that loans could be more quickly disbursed. Getting below the two-year timeframe that the bank is currently pursuing would really help in addressing urgent issues in fragile states.

Finally, we believe that private sector investment could be better mobilised. We have been proud to work with the private sector on, for example, port developments in east Africa—in places such as Dar es Salaam—and power generation projects in Nigeria, but we think that more could be done in that regard.

However, in sum, with those provisos, having looked closely with our team at this particular loan, we believe that it is a good, sensible use of UK taxpayers’ money that will contribute to the global goals we all hold dear. I commend the order to the Committee.

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It is a pleasure to serve under your chairmanship for the first time, Mr Bone. I thank the Minister for outlining the statutory instrument before us today. It is right that Parliament has the opportunity through this Committee to scrutinise the order in detail as it pertains to a substantial level of investment.

I would like further information on the UK’s pledge of a concessional loan, which the Government are making for the first time ever as part of the donation to IDA. Will the Minister provide further detail, either today or subsequently, about his assessment of other nations’ progress on and timescales for fulfilling their commitments under the agreement? I am happy to confirm that the Labour party does not intend to divide the Committee on the order.

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It is a pleasure to serve under your chairmanship, Mr Bone. The Minister refreshingly outlined what the Committee is considering in plain English and I thank him for that. He spoke of the three questions that we would ask, but there is a fourth. Given the mounting pressure that we are putting on the World Bank and the IDA, what proportion of the five or 10-year budget does this £350 million represent, and which other countries are contributing the balance?

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I thank the Minister and shadow Minister for their speeches. The Minister highlighted IDA’s important work. When I visited Nepal earlier this year, I certainly saw the importance of that work and of infrastructure financing and investment. He said that there had been a shift to channelling more funds towards fragile and conflict-affected states, but will he confirm whether that involves moving funds away from health and education infrastructure in other countries? What is being done to ensure that we balance our responsibilities to other nations? I understand the multilateral nature of this matter but, bearing in mind that negotiations will be continuing about the next phase of post-2017 funding, may we have a debate in the House before December on the Government’s priorities going forward and the impact that our support will have?

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It is a pleasure to serve on the Committee. My hon. Friend the Minister will have seen from his work before joining the House that one of the problems in conflict zones and in fact in pre-conflict zones, which he mentioned, is the possibility of fraud and the abuse of large sums of taxpayers’ money. We are talking about an enormous gift from the British people, so I would be grateful if he would outline some of the areas in which the British people can have confidence that the money is being properly spent in areas that they would see as justified.

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It is a pleasure to serve under your chairmanship, Mr Bone. I thank the Minister for his clear explanation of the order. I just state for the record that I will be happy to support it.

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It is a pleasure to serve under your chairmanship, Mr Bone. What has been the experience of the previous, quite substantial transfers over many years through these revolving and soft loans? Have they been repaid, or have substantial amounts been written off as irrecoverable?

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How foolish of me to think that there were only three questions, given that I have just been hit by five very good additional questions. I thank the Scottish National party and the whole Committee for their support for this order and for moving ahead with this important work in international development.

With your permission, Mr Bone, I will take each of the five questions in turn. The shadow Minister asked the very important question of why we are making a loan, because this actually is not a grant, but a loan. IDA itself is a loan-making body that makes a range of concessional loans and grants. We feel it is right, given that the association will in turn be lending this money and receiving the principal back, that the British taxpayer should also be able to lend this money and receive the principal back in 20 years’ time. That will not affect the results. Results will still be achieved by the loan, but the principal will come back to us.

My hon. Friend the Member for South Thanet asked how many of the loans are written off. We often make concessional loans to very fragile countries, and some of them do not come right. That is why we have a combination of loans and grants. We would expect our loans to be repaid, but this £350 million that we are putting in is within the context of a total package of about £2 billion of UK support, of which the overwhelming majority is in the form of grants.

One reason why this happens is that we encourage IDA to go into areas where the private sector will not wish to invest, so we expect that a certain number of the loans will not come good, but that relates to the question asked by my hon. Friend the Member for Tonbridge and Malling. We have to be hugely careful about fraud because the sums that we are talking about are enormous. The state capacity in some of the countries in which we operate is limited, and there are also other problems, such as security problems, which can make it quite difficult for our staff to get out on the ground and directly see projects.

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The Minister is responding to an important point. May I add to the list of concerns those states where there might be corruption, human rights abuses or dictatorships that could be supported by our funding? We need to be mindful of how we handle such difficult situations.

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The questions asked by the hon. Lady and my hon. Friend the Member for Tonbridge and Malling are central to this subject. This is, in the end, UK taxpayers’ money that comes from hard-working people. Those people believe in trying to deal with humanitarian crises and in helping the world’s poorest people, but they have an absolute right to expect that their hard-won money is being used in the right way.

We have a series of different mechanisms in place to try to deal with that. A multilateral aid review happens every three years and the independent commission reports directly to Parliament. We have our own internal audit team, and we also do annual reviews. It is possible to look at the development tracker on our website and to see our annual review, published in April, specifically of the IDA programme. We gave the programme an alpha-plus in the previous review, but note three particular areas of gender, climate change and the issue of fragile and conflict states regarding which we think it could be better. One reason why we work so closely with and are one of the larger contributors to the World Bank is that it has a very good track record—better than that of almost anyone else—in trying to address issues of corruption, transparency and predictability in the management of its financial processes.

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I support entirely the contributions that we are making to support some of the world’s poorest. Given that this is a loan, will the Minister clarify whether the amount that we are lending comes out of the spending of 0.7% of gross domestic product to which the Government and we are committed? If so, when that money comes back in, does it effectively increase the amount that has been spent, because we are counting money as a loan, rather than grant spending?

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The hon. Gentleman asks a very important question. The answer is that the sum absolutely does count against the 0.7%. This is agreed with OECD Development Assistance Committee rules, which allow for this because the impact of our loan is immediate in terms of our development effect. However, two complicated accounting techniques are used—one by the World Bank and one by us—to allow for the difference between our concessional loan and the amount that we would be able to get on the open market. The Treasury will then lay off against our own budgets the gap between what we anticipate that we will receive back in 20 years’ time and the costs at the moment. To be clear, the amount does come directly out against the 0.7%.

We are not the only country doing this. In fact, the practice is increasingly the norm, particularly with loan-making bodies such as IDA. The French, Japanese and Chinese do the same thing. When we loan to an organisation that is going to make a loan on, it makes sense in development terms, and also for the UK taxpayer, to make sure that something comes back to us in 20 years’ time.

I will finish on the question posed by my hon. Friend the Member for Stratford-on-Avon. He asked what percentage of the overall budget this contribution represents, and the answer is that it is a relatively modest amount. It will be about 1.3% of IDA’s total spend over what is called the IDA 17 period. The UK contributes about 13% to the IDA budget, which is roughly in line with the overall scale of our contributions to development activities worldwide. The contribution is larger than that to something such as the Asian Development Bank, where we put in about 5%, and that reflects our respect for and our greater confidence in the World Bank, and also the fact that in return for the money, we intend to get the reforms and the leverage that the taxpayer requires. I commend the statutory instrument to the House.

Question put and agreed to.

Committee rose.

Draft Neighbourhood Planning (Referendums) (Amendment) Regulations 2016

The Committee consisted of the following Members:

Chair: Philip Davies

† Allan, Lucy (Telford) (Con)

† Barwell, Gavin (Minister for Housing and Planning)

† Cartlidge, James (South Suffolk) (Con)

† Davies, Chris (Brecon and Radnorshire) (Con)

† Doyle-Price, Jackie (Thurrock) (Con)

† Greenwood, Lilian (Nottingham South) (Lab)

Griffith, Nia (Llanelli) (Lab)

† Haselhurst, Sir Alan (Saffron Walden) (Con)

† Hayman, Sue (Workington) (Lab)

Healey, John (Wentworth and Dearne) (Lab)

† Metcalfe, Stephen (South Basildon and East Thurrock) (Con)

† Nandy, Lisa (Wigan) (Lab)

† Pearce, Teresa (Erith and Thamesmead) (Lab)

† Philp, Chris (Croydon South) (Con)

† Pow, Rebecca (Taunton Deane) (Con)

† White, Chris (Warwick and Leamington) (Con)

Jonathan Whiffing, Committee Clerk

† attended the Committee

First Delegated Legislation Committee

Monday 12 September 2016

[Philip Davies in the Chair]

Draft Neighbourhood Planning (Referendums) (Amendment) Regulations 2016

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I beg to move,

That the Committee has considered the draft Neighbourhood Planning (Referendums) (Amendment) Regulations 2016.

It is a pleasure to serve under your chairmanship, Mr Davies. I am confident that for the next 90 minutes you will not hold against me anything we might have said when I was your Whip.

The regulations will come into force on 1 October 2016. Neighbourhood planning gives communities direct power to develop a shared vision for their neighbourhood and to shape the development and growth of their local area. For the first time, community groups can produce plans that have real statutory weight in the planning system. So far, more than 1,900 communities throughout England, representing nearly 10 million people, have started the process of neighbourhood planning. More than 200 plans have passed a public referendum and are now in force, including six that passed last Thursday: two in Babergh, Suffolk; two in Herefordshire; one in Wellingborough, Northamptonshire; and one in Ashford, Kent. Those plans are now the starting point for planning decisions.

We need to ensure that the neighbourhood planning process is as simple and fast as possible, so that communities can see the benefits of their plan without unnecessary delays. Neighbourhood planning can take two to three years on average; slow decision making by local planning authorities can be particularly frustrating for communities and can discourage them from taking up neighbourhood planning. We therefore introduced a number of measures in the Housing and Planning Act 2016 that will speed up neighbourhood planning by an average of about 17 weeks. The new powers in that Act are complemented by a power in schedule 4B to the Town and Country Planning Act 1990 for the Secretary of State to make regulations prescribing a date by which the referendum must be held or before which it cannot be held.

Holding a referendum is a key step required to bring a neighbourhood plan or order into force, once it has been through public consultation and an independent examination. Where the neighbourhood area has been designated as a business area, there is an additional referendum for the businesses in the area.

On average, referendums have been held within eight weeks of a local planning authority’s decision to submit a neighbourhood plan or order to a referendum. However, while in some cases authorities have called a referendum within six weeks, in others the referendums have taken place more than 17 weeks after the authority’s decision; we therefore consider that it would be beneficial for new regulations to set out a clear expectation of the period for holding a referendum.

In February, we consulted on proposals for these regulations, as part of a wider package of measures. A summary of the responses to the consultation has been prepared and is available on the Department for Communities and Local Government’s website, along with the Government’s response. The proposal that underpins the regulations received considerable support. A small number of technical amendments were made as a result of the responses we received, to ensure that the regulations could be implemented effectively. The details of the regulations have been agreed with the Electoral Commission and with the Association of Electoral Administrators.

If approved, the regulations will be an important safeguard to ensure that a minority of local authorities do not cause delays to the neighbourhood planning process. They will require local planning authorities to hold a referendum on a neighbourhood plan within 56 working days of their decision that a referendum should be held, or 84 working days in certain more complex cases. The 84-working-day limit will apply when there is a business referendum as well as a referendum among the local electorate; when the neighbourhood planning area falls within more than one local planning authority; or when the local planning authority is not the principal authority responsible for arranging the referendum, as with a mayoral development corporation or a national park authority.

There are three exceptions to the 56 or 84-working-day time limits: where a neighbourhood planning referendum can take place on the same day as, or be taken together with, another poll that is due to be held within three months of the end of the 56 or 84-working-day period, to avoid spending unnecessary public money on a separate ballot; where there are unresolved legal challenges to the decision to hold a referendum; or where a local planning authority and the neighbourhood group agree that the referendum need not be held by that date. Those exceptions provide the necessary flexibility to allow local circumstances to be taken into account.

These regulations are part of a wider package of measures that the Government are introducing to speed up the neighbourhood planning process. A number of other regulations are subject to the negative procedure and have not, as yet, been prayed against by the Opposition. Presumably, the Opposition support those regulations. There are other measures in the Neighbourhood Planning Bill, which we introduced last week and which will shortly have its Second Reading.

Neighbourhood planning has been successful in making planning more accessible to local people. It empowers significant numbers of communities to take an active role in determining the future of their area, and it is a principle on which I hope we can all agree. The Government are committed to speeding up and simplifying the process, so that even more communities can benefit. It is important that we set time periods for key local planning authority decisions in the neighbourhood planning process, and these regulations are an important step in that process. I commend them to the Committee.

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This is a straightforward proposal. We support empowering local communities to influence proactively developments that affect their community. We have no objections to the Government’s referendum proposals, which we support. We recognise the importance of giving residents the right to develop a shared vision for their neighbourhood and to give them a stake in the development and growth of their local area. That will be important in helping to address issues, such as the housing crisis, that afflict urban and rural communities alike. People should get a say in choosing where they want new homes to be built, where shops should be provided, where offices and other workplaces should be located and, crucially, what those new buildings will look like and what infrastructure should be provided to service them. Those factors often lead to resistance to new development in some communities.

Too often, we have seen developers foisting ugly and inappropriate developments on communities, with no consideration given to the impact on local people or the local area. Established residents frequently complain that new developments have created pressure on infrastructure and services. At a time of pressure on such services, it is important that we avoid exacerbating the problem. The more we involve local people, the less likely that is to happen. We must take steps to avoid making matters worse through the impact of the new developments that we so drastically need.

The impact on the environment is another factor that can be addressed by being sensitive to the visual amenity where any new development is to be located. Time and again, developers pay little attention to the surrounding environment. Being responsive to that factor can be achieved by choosing a palette of materials that is sensitive and that blends in with the local area. Involving local residents is therefore a positive step in ensuring that developments reflect local need and complement the environment in which they are located.

As the Minister will know, Cabe—the Commission for Architecture and the Built Environment team at the Design Council—offers free tailored support to community groups involved in neighbourhood planning. How often has the Cabe team offered that tailored support to community groups? Does his Department intend to promote this service proactively, so that it runs alongside the referendums? If local communities are to make informed decisions about developments affecting their community, involving Cabe will clearly be crucial.

Who will pay the costs of administering the referendums? If local planning authorities are expected to pay, will they be able to recover the costs from the developers? If not, will the Government provide any additional grants to reimburse local authorities, which have already seen their budgets severely stretched?

We have no objections to the proposed referendums, but I would be grateful to the Minister if he clarified the issues that I have raised this afternoon.

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It is a delight to respond to this brief debate. It is good to hear the Opposition’s support for the principle of neighbourhood planning, and it is great to hear them expressing a cross-party view on this important change to our planning system. The change was originally introduced in some of the coalition Government’s early legislation. At the time, the Opposition expressed real concern that it would be a charter for nimbyism and would restrict the development that we all agree we need throughout the country. However, the initial evidence from places that have adopted neighbourhood plans actually suggests the opposite, as the hon. Lady alluded to. Although we have only a small sample so far, there appears to be about a 10% uplift, on average, in the amount of housing planned for when we involve people in the planning system, empower them and allow them to take decisions. It is very good to see support from the Opposition Benches for these reforms.

The hon. Lady made a particularly powerful point, which I want to underline, about the importance of local authorities engaging with local communities about these decisions. All MPs are aware, from our surgeries and our casework, of the huge need in this country for additional housing to be built, but we are also all conscious that proposals made without proper engagement with the local community can meet significant resistance. The hon. Member for Croydon South represents a constituency in the same borough as mine, and that is the experience we have had with our council’s local plan: it has come out with proposals without having properly engaged with residents associations beforehand. That has led it into very adversarial disputes about housing. The hon. Lady’s point was a powerful one.

The hon. Lady asked two specific questions. One was about funding, and I can answer it in two ways. Since the neighbourhood planning grant was introduced in 2012-13, approximately £13.8 million has been paid to local planning authorities and to national parks. Planning authorities can claim £5,000 for area designations at the start of the process and £20,000 once a referendum date has been set, to cover the cost of the independent examination of the plan and of holding the referendum. So far, about £6 million has been paid to planning authorities and national parks for area designations, and more than £3 million has been paid for plans that have passed the examination stage and proceeded to referendums. There is a budget of £5 million for the current financial year, and we expect that to be more than sufficient.

The regulations do not introduce the possibility of a referendum, because that principle is already established in law; they just constrain when the referendum must be held. We do not consider that they place any additional cost on local planning authorities; they just constrain when the authorities must do what they already have to do. There is therefore no additional funding as a result of the regulations, but I reassure the hon. Lady that there is a package of funding to support local authorities with the cost of holding referendums.

The hon. Lady mentioned Cabe support for communities. That is not currently part of the support package we provide for local communities, but I am very happy to look into her suggestions and speak to our officials about taking them up.

This has been a short but important debate. As I said, it is very good to see support from the official Opposition for these fundamental reforms, which the Government have introduced to our planning system to give communities more of a say in their development. I look forward to similar support when we discuss the Neighbourhood Planning Bill.

Question put and agreed to.

Committee rose.

Value Added Tax (Place of Supply of Services: exceptions relating to supplies made to relevant business person) Order 2016 (S.I. 2016, No. 726)

The Committee consisted of the following Members:

Chair: Mike Gapes

† Allen, Heidi (South Cambridgeshire) (Con)

† Barclay, Stephen (Lord Commissioner of Her Majesty's Treasury)

† Benn, Hilary (Leeds Central) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Costa, Alberto (South Leicestershire) (Con)

† Ellison, Jane (Financial Secretary to the Treasury)

† Fysh, Marcus (Yeovil) (Con)

† Glen, John (Salisbury) (Con)

† Green, Kate (Stretford and Urmston) (Lab)

† Long Bailey, Rebecca (Salford and Eccles) (Lab)

McCarthy, Kerry (Bristol East) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mann, Scott (North Cornwall) (Con)

† Offord, Dr Matthew (Hendon) (Con)

† Paterson, Steven (Stirling) (SNP)

Powell, Lucy (Manchester Central) (Lab/Co-op)

† Scully, Paul (Sutton and Cheam) (Con)

Fergus Reid, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee

Monday 12 September 2016

[Mike Gapes in the Chair]

Value Added Tax (Place of Supply of Services: Exceptions Relating to Supplies Made to Relevant Business Person) Order 2016 (S.I. 2016, No. 726)

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I beg to move,

That the Committee has considered the Value Added Tax (Place of Supply of Services: Exceptions Relating to Supplies Made to Relevant Business Person) Order 2016 (S.I. 2016, No. 726).

It is a pleasure, Mr Gapes, to serve under your chairmanship. The order introduces a change to the VAT place of supply rules for insurance repair services. Insurers who have structured their arrangements to receive such services free of UK VAT will be charged the tax from 1 October 2016. As is often the case with tax, this measure is somewhat technical. Supplies of insurance are exempt from VAT, which means that insurers do not charge VAT, but cannot reclaim the VAT that they pay on their costs. This measure is about the VAT that they are charged on repair services and aims to counter attempts by insurers to avoid incurring that VAT.

The VAT system includes place of supply rules that determine which country can collect the tax on any given supply. Under the normal VAT place of supply rules, repair services supplied from a repairer to an insurer are treated as supplied where that insurer is established. However, a small number of insurers have structured their arrangements to exploit the rule and avoid incurring VAT on costs that they are unable to reclaim. They do so by routing repair services to an associate offshore insurance firm located in a jurisdiction where no VAT applies, resulting, for example, in no VAT being charged on insured vehicle repairs carried out here in the UK. Such practices deplete public revenues and give avoiders a competitive advantage over those supplying similar insurance products.

We received complaints from UK insurers that such practices challenge fair competition and could force them to set up similar avoidance arrangements. In the summer Budget 2015, we promised to introduce a use and enjoyment provision in UK VAT law to address the issue. Following informal discussions with industry representatives, the Government consulted on a draft order in February 2016.

The order amends the place of supply to where the repair service is used and enjoyed, meaning that repairs carried out on goods used in the UK for UK policyholders will be subject to UK VAT, irrespective of where the insurance provider is based. The changes made by this order will end the tax avoidance by the few. It will yield approximately £5 million per annum from 2016-17 and deter others from implementing similar arrangements, protecting significant revenue. The administrative cost of the change to UK repairers will be minimal, as they already charge VAT in the normal course of events to their UK customers.

In conclusion, the measure demonstrates that the Government will not tolerate tax avoidance. We will take strong action to make sure that we have a level playing field where everyone pays their fair share. This statutory instrument will, in particular, help to ensure that UK insurance businesses can operate on an equal footing with their overseas counterparts, that services are subject to VAT where they are consumed and that we remove an incentive to locate offshore to avoid tax. I therefore commend the order to the Committee.

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It is a pleasure to serve under your chairmanship, Mr Gapes. You will be pleased to hear that I will not detain the Committee for long.

The order seeks to prevent avoidance of VAT by some insurance companies, as the Minister outlined. Such avoidance is broadly achieved by the insurance company locating outside EU VAT jurisdictions, so that any repair services can be provided to them VAT-free, as the present legislation provides that the place of supply is where the recipient is based. The provisions of the order seek to close that loophole and, as such, the Opposition support the Government in this legislation.

As the explanatory memorandum sets out, the order

“will require the service provider to charge VAT at the standard rate on the repairs they perform where the provider of the insurance cover for the goods is located outside the VAT territory of the EU”,

but where the supply of services would otherwise be treated as made in the United Kingdom and the services are effectively used and enjoyed outside the territories of the member states. The practical effect is that all UK repairs made under UK insurance contracts will be subject to VAT in the UK.

Generally speaking, the EU VAT system is designed to ensure that the tax is collected in the country where final consumption takes place. That is to ensure that UK VAT arises on consumption in the UK of goods and services. It also ensures that UK VAT is not charged in addition to other foreign VAT and taxes on consumption outside the UK. As the Minister highlighted, it appears that some insurance companies have been exploiting the system to avoid VAT on the provision of repair services specifically. Insurance companies have been setting up offshore so that such services can be supplied to them VAT-free.

The order creates an exception to the current VAT rules based on a provision in the EU principal VAT directive that permits member states to regard the place of supply as being where the services are “effectively used and enjoyed”, thereby ensuring that when the repair is undertaken in the UK, the tax is due in the UK, as the service is effectively used and enjoyed there, regardless of the involvement of offshore entities.

The Chartered Institute of Taxation broadly agrees with the principle that the Government have put forward, but it has some technical concerns about the definitions used in the order. It is specifically concerned about the lack of a clear definition or guidance on the interpretation of “use” and “enjoyment”, which could leave the legislation open to dispute, creating uncertainty for taxpayers and the authorities. As far as I am aware, the terms “use” and “enjoyment” are not defined in the EU principal VAT directive or in UK legislation. The Chartered Institute of Taxation informs me that it has raised the issue directly with HMRC and has suggested that ideally there should be a definition in the legislation and, at the very least, clear guidance on how the terms are to be interpreted.

The final HMRC guidance has not been published yet, but the Chartered Institute of Taxation has been privy to a draft, and it told me that the guidance still does not explain how the terms “use” and “enjoyment” are to be interpreted. Perhaps the Minister could use this opportunity to provide clarification as to whether the Government will define the terms “use” and “enjoyment” in legislation. We certainly would not want any lack of clarification to provide a further loophole for insurers to avoid VAT.

The order was announced in the summer 2015 Budget. According to the corresponding policy costings, I understand that it is expected to save the Exchequer £5 million a year, which is fantastic. However, although we support the order, the money is minor when compared with the Treasury’s estimates of a tax gap of around £35 billion. The latest available figures for the VAT gap was £13.5 billion for 2014-15. That is 10.8% of the estimated net VAT total theoretical liability.

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Order. I would be grateful if the hon. Lady did not deal with the wider question of VAT and the tax gap, and confined her remarks to the order that we are debating.

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Thank you, Mr Gapes. I was just trying to extract a little bit more information from the Minister. You will appreciate that we rarely have opportunities to do that.

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Order. Please confine your remarks to the terms of the order.

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I apologise. To conclude my remarks on the order, the Opposition support the provisions introduced by the order to address VAT avoidance by insurance companies located offshore. However, I hope the Minister can address some of the points I have raised and, in particular, the concerns of the Chartered Institute of Taxation.

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I am sure, Mr Gapes, that there will be opportunities in future to debate the wider issues. I will confine my remarks to the statutory instrument.

On the point about the relatively modest amount of money that will be saved by closing the loophole, as I said, we estimate that it will be £5 million. However, in closing the loophole we expect that we will prevent a far wider problem, which would amount to a considerable sum. To clarify, this is essentially pre-emptive action.

Reaction to the measure has generally been positive. The industry appreciates that we are trying to level the playing field. We involved industry representatives in discussions before the exposure of the draft legislation and they had the opportunity to comment. I note what the hon. Lady says about the definitions of “use” and “enjoyment”. The Government consider that that refers to where a service is consumed, so for insurance repairs, if the goods are to be used in the UK under insurance for a UK risk, the service is consumed in the UK and should be subject to UK VAT.

The measure comes into force on 1 October, and the Government will issue guidance. I make an undertaking, in particular, that officials will check with the chartered institute. If it has any further concerns we are interested in knowing them and in seeing whether we are able to reach a position with which it is entirely satisfied. However, those who have been consulted in the industry certainly feel that the terms are helpfully defined and that the measure will level the playing field.

As I said, the order is about ensuring that we do not have a significant loss of revenue in future and, at the same time, do not put those parts of the industry that are not trying to exploit the loophole behind those that are, acting early to ensure that the industry remains competitive and that everyone is playing by the same rules.

Question put and agreed to.

Committee rose.