Hewitt offers Rover VAT lifeline

Ministers are considering allowing MG Rover to defer paying millions of pounds in VAT, in an attempt to rescue the £1bn takeover by the Chinese.

Ministers are considering allowing MG Rover to defer paying millions of pounds in VAT, in an attempt to rescue the £1bn takeover by the Chinese.

The proposal has been sanctioned by Trade and Industry Secretary Patricia Hewitt, and discussions have been "ongoing" between Rover executives and officials at the DTI and Customs & Excise over the past three weeks, according to senior Government sources.

Since MG Rover's chairman, John Towers, announced the rescue deal by Shanghai Automotive Industry Corporation (SAIC) in November, there have been worries that the Chinese are getting nervous.

The Government is desperate to see the deal complete as it would safeguard 6,500 MG Rover jobs in the West Midlands and avoid the possible collapse of the company ahead of a general election.

Under the DTI proposals, MG Rover would be allowed to defer VAT payments for at least a year. Companies are not required to disclose in their accounts how much VAT they pay, but it is thought that MG Rover's bill is up to £50m a year.

The Government only allows VAT deferral in exceptional circumstances. At the height of the foot and mouth crisis, ministers allowed some farmers affected by the disease to pay their tax late, but further examples are rare.

A former senior Customs & Excise officer said: "These circumstances are exceptional because it is the Government's cash flow that you are playing with."

Deferring VAT payments could land the Government in hot water with the European Commission. A leading competition lawyer, who asked not to be named, said: "A tax deferral gives a company a clear advantage over its rivals. This could constitute illegal state aid."

Stephen O'Brien, Conservative trade spokesman, said: "If the Government is offering MG Rover deferred taxation, this raises questions as to whether it sets a precedent and whether other companies will be entitled to do the same.

"Any offer by the Government that involves the cash flow of tax receipts is something that Patricia Hewitt and Gordon Brown should announce to Parliament and not try to hide behind the lame excuse of commercial confidentiality."

Last week the Government and MG Rover rubbished reports that SAIC could be handed £100m of taxpayers' money for buying MG Rover.

However, both parties refused to comment on the VAT deferral plans citing "commercial confidentiality".

A DTI spokeswoman said: "Patricia Hewitt made it clear in the House that the Government ... is doing all it can to ensure that negotiations on the joint venture between MG Rover and SAIC are successfully concluded."

A spokesman for MG Rover said: "The Government is very supportive and keen to see the partnership succeed."