House of Commons Hansard Debates for 12 Jul 1989

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My hon. Friend the Member for Skipton and Ripon (Mr. Curry) asked about the wording of sub-paragraph (2)(b) in Government amendment No. 31, and in particular the reference to

"other than any that are zero-rated".

The objective here is to exclude from the tax base for the self-supply charge any services on which the developer has been charged no tax, either because he pre-paid his contractor before 1 April 1989 for services to be rendered after that date, or because he has been entitled to receive zero- rated services from his contractor if supplied before 21 June 1993 under relief for legally binding obligations. The developer who himself makes a zero-rated supply of his interest in the building because he is entitled to the transitional relief under paragraphs 12(1) or 12(2) of schedule 3 is not in any event caught by the self-supply charge by reason of paragraph 12(6). All supplies which are or have been properly zero-rated are excluded from the cost of construction for the purpose of the self-supply charge. My hon. Friend's concerns are fully met in that respect.

I have already effectively dealt with the issue raised by my hon. Friend the Member for High Peak (Mr. Hawkins). My hon. Friend the Member for Mid- Staffordshire (Mr. Heddle), who, in the course of consultations last summer and autumn, made some helpful and thoughtful contributions which were of great benefit to us in framing the legislation, also raised some other points today. We are not compulsorily taxing rent. The self-supply charge is on the finished building, but we are valuing the self supply at land cost plus construction costs. That is the basic framework and we have abandoned the proposal based on the open market value of finished buildings. The point about future rents payable by leasehold developers is significant. There would be a particular problem where the developer has acquired a leasehold interest in the site for his new building, but on terms that he will pay the freeholder a percentage of the rent that the developer actually receives over the period of the lease. That obligation to pay the freeholder is a cost to the developer, albeit an unquantifiable cost.

Our amendment includes proposals to exclude from the tax value of the self- supply charge rents that cannot be ascertained at the time of the self- supply. However, to leave the tax value on that basis permanently would simply invite developers to undertake all their developments for exempt or partly exempt tenants on a leasehold basis with cost expressed largely or wholly in terms of a percentage of future rents received. I have instructed Customs and Excise, therefore, to consult interested bodies to devise an appropriate solution to this problem. Subject to that qualification, I recommend the amendment to the House.

Amendment agreed to.

Amendments made : No. 22, in page 170, line 8, leave out from beginning to end of line 11 and insert--

(b) the building or work is not used by him at any time during the period in, or in connection with, making any exempt supplies of goods or services.'.

No. 23, in page 170, line 13, leave out paragraphs 6 and 7' and insert paragraph 6'.

No. 24, in page 170, line 15, leave out constructed' and insert constructs'.

No. 25, in page 170, line 16, leave out ordered' and insert orders'.

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No. 26, in page 170, line 17, leave out financed' and insert finances'.

No. 27, in page 170, line 27, leave out paragraphs 6 and 7' and insert paragraph 6'.

No. 28, in page 170, line 37, leave out land' and insert work'. No. 29, in page 170, line 42, leave out from applies' to shall' in line 43 and insert

the interest in, right over or licence to occupy the building or work (or any part of it) held by the developer'.

No. 30, in page 170, line 47, at end insert

or, if later, of the prescribed accounting period during which the building or work becomes substantially ready for occupation or use.' No. 31, in page 170, line 48, leave out from beginning to end of page 171, line 5 and insert--

(2) The supply treated as made by sub-paragraph (1) above shall be taken to be a taxable supply and the value of the supply shall be the aggregate of--

(a) the value of grants relating to the land on which the building or work is constructed made or to be made to the developer, other than any grants to be made for consideration in the form of rent the value of which cannot be ascertained by the developer when the supply is treated as made ; and

(b) the value of all the taxable supplies of goods and services, other than any that are zero-rated, made or to be made for or in connection with the construction of the building or work. (3) Where the value of a supply which, apart from this sub-paragraph, would be treated as made by sub- paragraph (1) above would be less than £100,000, no supply shall be treated as made by that sub-paragraph.'.

No. 32, in page 171, line 6, leave out from beginning to end of line 33.

No. 33, in page 171, line 34, at end insert--

7A. Where the benefit of the consideration for the grant of an interest in, right over or licence to occupy land accrues to a person but that person is not the person making the grant

(a) the person to whom the benefit accrues shall for the purposes of this Act be treated as the person making the grant ; and (

(b) to the extent that any input tax of the person actually making the grant is attributable to the grant it shall be treated as input tax of the person to whom the benefit accrues.'.

No. 34, in page 171, line 39, leave out from beginning to end of line 41.

No. 35, in page 171, line 46, after contract', insert

except that a term of a tenancy or lease shall not be taken to provide that the rule contained in that subsection is not to apply in the case of the tenancy or lease if the term does not refer specifically to value added tax or this section.'.

No. 36, in page 171, line 49, at end insert--

7A. In section 45(4) (orders etc.) of the Value Added Tax 1983, there shall be added after paragraph (c)--

"(d

(an order under section 35A above, except one making only such amendments as are necessary or expedient in consequence of provisions of an order under this Act which--

vary Schedule 5 or Schedule 6 to this Act ; but

(ii

are not within paragraph (c) above.".'.

( No. 37, in page 172, line 41, after to', insert

sub-paragraphs (1A) and (1B) and'.

No. 38, in page 172, line 43, at end insert--

(1A) Note 4(b) to Group 8 of Schedule 5 to the Value Added Tax Act 1983 shall have effect in relation to grants, assignments and other supplies made on or after 1st August 1989.'.

No. 39, in page 172, line 43, at end insert--

(1B) In relation to grants and assignments made on or after 1st April 1989 but before 1st August 1989--

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(a) that Group shall have effect as if the Notes to it included a Note in the same terms as Note (1) to that Group as it had effect before the substitution made by paragraph 1 above ; and

(b) Group 8A of that Schedule shall have effect as if the Notes to it included a Note in the same terms as Note (5) to that Group as it had effect before the amendments made by paragraph 2 above.' No. 40, in page 172, line 44, leave out and 10' and insert 7A, 10 and 12(6) and (7)'.

No. 41, in page 172, line 45, leave out

paragraphs 2 to 7 and 9'

and insert

section 35A(2) of, and paragraphs 2 to 7A'.

No. 42, in page 172, line 47, leave out

sub-paragraphs (1) and (2) above'

and insert

the preceding provisions of this paragraph'.

No. 43, in page 174, line 1, leave out to 7' and insert and 6'. No. 44, in page 174, line 2, leave out

(or substantially reconstructed a protected building)'. No. 45, in page 174, line 9, leave out or 8A'.

No. 46, in page 174, line 11, leave out

(or substantially reconstructed a protected building)'. No. 47, in page 174, line 14, leave out

(or reconstruct) the building or to construct'

and insert the building or'.

No. 48, in page 174, line 16, leave out (or reconstruction)'-- [Mr. Lilley.]

Mr. Heddle : I beg to move amendment No. 105, in page 174, leave out lines 21 to 23 and insert--

(7) The supplies made pursuant to sub-paragraph (1) above shall be taken to be zero rated supplies for the purpose of sub-paragraph 2(b) above if :

((a) the building was constructed (or reconstructed) pursuant to a legally binding obligation incurred before 21st June 1988 ; or (

(b) the grant referred to in paragraph 5(1)(a) of Schedule 6A is made pursuant to a legally binding obligation incurred before 21st June 1988 ; or

(a) a grant shall be treated as made in pursuance of a legally binding obligation incurred before 21 June 1988 if sub-paragraph (c) below applies.

(b) a person shall be treated as having been under a legally binding obligation incurred before 21st June 1988 to construct (or reconstruct) a building or any development of which it forms part if sub-paragraph (c) below applies.

(i) the person making the grant or assignment or constructing (or reconstructing) the building or any development of which it forms part had before that date arranged (without being legally bound) to make such grant or other supply or carry out such construction or reconstructions ; and

(ii) the arrangement was made in writing, or were evidenced by a note or memorandum thereof made in writing before that date ; and (

(iii) a legally binding obligation to make the grant or other supply or to construct the building (or reconstruct) is on or after 21st June 1988 but before 21st December 1989 entered into by that person.

and any such obligation shall be treated as having been made on the date when the arrangement first came into existence.

(9) If the Commissioners so require, proof of any of the matters specified in subparagraphs (6)(a), (b), (c)(i) or 8(c)(ii) above shall be given to their satisfaction by the production of documents before 21st June 1988.'.

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My hon. Friend the Member for Corby (Mr. Powell) paid tribute to my hon. Friend the Economic Secretary for the way in which he wanted to ensure the minimum impact in practical terms at all times. I associate myself with those remarks and thank my hon. Friend the Economic Secretary for his kind remarks a moment ago. It is a pleasure to be able to endeavour to make some practical contribution to legislation before that legislation is cast into stone. In that spirit, I ask my hon. Friend to consider the amendment and to see whether he can find some way to meet the practical concerns of many contractor-developers, who will be hit by the transitional arrangement if the time limit is not extended.

The amendment's purpose is to extend the proposed VAT transitional relief to the position where, before 1 April 1989, a person has constructed a building, or paid for a new building, and so VAT on the construction costs is recoverable or to the position where, before 21 June last year--the date of the judgment--a person constructing a building or granting or assigning the relevant interest in land had entered into arrangements for carrying out the construction, or for granting or assigning the interest, and where those arrangements subsequently mature into legally binding contracts before 21 December next. The amendment is designed to ensure that the benefit of zero-rating for grants or major interests in new buildings is not clawed back by the self-supply charge and to deal with circumstances that commonly arise.

It is common practice in the development and construction industry that a development project will commence on the basis of letters of intent, heads of agreement or other similar arrangements which, while falling short of creating legally binding obligations, nevertheless form the basis of agreement between the parties which is eventually embodied into formal legal documentation. The amendment adopts a principle and a format used in previous Finance Acts to extend transitional relief on the introduction of tax changes to the situation where the parties are essentially committed to a course of action which, at a later stage, becomes legally binding and legally documented. The amendment in no way alters any previous form, but takes account of the practical effect of agreements entered into in principle which ultimately become enshrined legally, in this case before 21 December next.

The transitional reliefs recognise that where a person had become legally committed to carrying out building work or to constructing a building before the judgment of the European Court on 21 June last, he should not be prejudiced by the changes to VAT on non-domestic construction. Many developer-contractors will rightly take advantage of the transitional reliefs. However, many projects are of such size and complexity that a developer who was, before 21 June last, committed to carrying out a project may not have the benefit of the transitional reliefs. That is because-- especially in the case of large-scale developments--formal contract documents are often entered into after a considerable time. The preparation and planning stages may take months--or even years in the case of, for example, the Liverpool Street station complex. Construction frequently commences before legal documentation is finalised. The parties are prepared to proceed on the basis of detailed heads of agreement because of the delays caused by the complexity of the legal

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documentation, which deals with many matters that are not relevant to the principle--the construction of the building--such as subsequent letting and so on.

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As a result, a number of contractor-developers who became committed to projects before 21 June last and who have incurred substantial expenditure on the projects will not have entered into formal construction contracts by that date or into a legally binding obligation to construct the building. Much of the work will be carried out before the grant of the final detailed planning consent under which the building is constructed. Such contractor- developers will not be able to take advantage of the transitional reliefs enshrined in the Bill. They will have made an appraisal of the viability of their projects on the basis of existing VAT rules and will have entered into commitments on that basis, but will now have to bear an unforeseen additional cost if they are to complete the project. I hope that my hon. Friend the Economic Secretary will have some sympathy with my view that that unforeseen additional burden may call into question the economic viability of projects committed before the date of the judgment.

Although the introduction of the option to tax will, in many cases, enable the developer to recover the VAT, many major inner-city regeneration schemes will be affected. That is why I feel so strongly about the matter. The Government are wholly commited to the regeneration of our inner cities and it would be a shame if they could not find a way to grant additional transitional relief to ensure that the projects can go ahead, in accordance with our manifesto commitment.

Many of the projects depend for their viability on occupation, at least in part by tenants in the financial or insurance sectors. It is tenants in those sectors who are most likely to acquire space in the larger city developments--precisely the type of developments to which developers who are unable to take advantage of the proposed transitional relief may have become committed before 21 June last. I realise that, in the longer term, developers who undertake developments aimed at the financial sector will have to face this question, which arises as an inevitable consequence of the European Court's decision. But any developer-contractor who becomes committed to such a development after 21 June will do so having had the opportunity to take the new VAT regime into account. It is only developers who were already committed to a project before 21 June last who will be unfairly prejudiced and to whom I believe additional transitional relief up to 21 December next should be made available. I accept that the Government must comply with their obligations under Community law. The question whether fresh infraction proceedings would be brought in respect of additional transitional provision is both practical and political. However, assuming that existing transitional provisions are not unacceptable to Mrs. Scrivener and the Commission, it is unlikely that a loosening of the term "legal obligation" without substantially extending the scope of the transitional relief in time or nature would necessarily prove unacceptable.

My hon. Friend the Economic Secretary has heard the broad thrust of my argument before. I hope that, in this

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context, as a contribution to inner-city regeneration and because so many schemes are entered into under heads of agreement before the confirmaton of legally binding documentation my hon. Friend will find it in his heart to extend the period of transitional relief.

Dr. Marek : I listened with interest to the argument of the hon. Member for Mid-Staffordshire (Mr. Heddle). There can be no doubt that there has been some rough justice for some companies which had decided on projects that were absolutely certain to go ahead, but for which contracts had not yet been signed by 21 June. The hon. Member for Mid-Staffordshire said that the Economic Secretary had heard his arguments before. If the Economic Secretary had heard his arguments before and done nothing about them, they must have fallen on stony ground. In my view, it would not be in the interests of good government to listen to them at this stage and amend the Bill accordingly. I suspect that many developers have now realised that the arrangements were not perfect. But the Bill has had its Second Reading and its Committee stage and we are now on Report, quite late in the parliamentary year. I cannot recommend that the Economic Secretary accept the amendment. However, I recommend that the hon. Member for Mid- Staffordshire put his name down to join the Standing Committee and consider the Finance Bill next year. We would be very pleased to see him. He could advance his arguments in Committee and we could talk about them.

However, the Committee's wish prevailed and many hon. Members regretted that a perfect solution could not be found. The Opposition would support the Economic Secretary if he refused to listen to the arguments put forward by the hon. Member for Mid-Staffordshire.

Mr. Beith : To proffer support for the official Opposition will immediately flash a red light to the Treasury Bench, and the Government will realise that this must be an important point. I must not criticise the hon. Member for Wrexham (Dr. Marek), for he did me a favour. The Minister will recall that, in Committee, I tabled an amendment on this subject, but, because of the death of a close relative that day, I was unable to be present when the Committee reached it. The hon. Member for Wrexham was kind enough to move the amendment for me. Any lack of conviction on his part was not to his discredit, because he was performing a kind service. I hoped that the act of moving the amendment might persuade him of the merits of the argument, but it obviously has not yet done that.

One of the reasons I wanted the amendment to be accepted and not be withdrawn in Committee and moved for the first time on Report was that I wished Ministers to consider the matter in sufficient time to bring changes on Report. I am disappointed that they have not seen fit to do so. It is not a matter that we can leave aside until next year. It affects decisions that have already been taken and projects that are already in hand. It has about it a rather worrying retrospective character, not because of the Government's original intention but simply because the drafting was not sufficiently wide. The hon. Member for Mid-Staffordshire set out some of the problems that arise. I will not go over the ground that he carefully covered, but there are other problems. A case in Newcastle was brought to my notice. A developer had made his original commitments with the city council,

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but, because of the changed policy on how things are to be handled on Tyneside, the responsible body became the development corporation. The legally binding contract was subsequently made with the development corporation, which apparently wanted an unencumbered company to make the commitment, and therefore a new company was created by the same people to carry out the same projects. The effect was that the legally binding commitment was too late to benefit from the transitional relief, even though all the other circumstances suggested that the transitional relief was intended for precisely such a case.

The object must surely be not to impose on people tax burdens that they would not have had to accept if they had been aware of what was coming, and, in particular, not to do so in a way that might threaten the viability of a project.

As the hon. Member for Mid-Staffordshire pointed out, we are dealing with inner-city schemes on which the Government have set considerable importance in their policy for the regeneration of inner cities and, in some cases, schemes which, by their very nature, have a narrow margin of viability. Therefore, it does not make much sense for a substantial tax burden suddenly to be added when a project is well advanced. The principle is clearly recognised by the Government in the presence of transitional relief provisions, but those provisions do not extend to the reality of commitments actually made by developers to local authorities and development corporations for aspects of the work or phases of the scheme that may have already begun.

I am disappointed that Ministers have not followed precedents in statute for commitments other than legally binding commitments. They should have done something about the weakness in provisions that are well intentioned but would have been very much better if they had been drafted to include the sort of cases that the hon. Member for Mid-Staffordshire and I have tried to bring to their notice.

Mr. Lilley : My hon. Friend the Member for Mid-Staffordshire (Mr. Heddle) has moved a complex amendment. Not surprisingly, there are technical difficulties which mean that I cannot accept it. I will not pursue that point, because there are more substantial reasons why I cannot recommend that hon. Members accept amendments along those lines even if we could overcome the technical problems, and likewise the proposal by the hon. Member for Berwick-upon-Tweed (Mr. Beith). In providing transitional relief, our primary concern was to deal with the problem of construction companies with a legal commitment to build a building, which they had entered into before the court ruling, at a price based on the contract being zero-rated, and which would subsequently find that contract bearing 15 per cent. VAT. Such companies would be legally required to go ahead and complete the building and might be faced with potential bankruptcy. We had to bring in transitional arrangements to deal with that position. Partly as a result of the persuasive representations of my hon. Friend the Member for Mid-Staffordshire, we went further and extended our provisions more widely than had been proposed originally. I hope that we thereby met most of the legal obligations that people had entered into ahead of the court judgment.

However, we did not think it right to provide a relief where no legal obligation had been entered into, but

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simply an arrangement that might subsequently mature into a legal obligation. Although some such agreements may be precise, others may be vague and it would be difficult to extend the transitional relief without such arrangements becoming open-ended. Indeed, that would be all the more difficult to justify since from mid-December 1988 onwards--once the Advocate General's opinion had been

published--developers who had been properly advised were pretty aware that zero-rating was likely to be declared unlawful under the sixth directive. Indeed, over the preceding three years many people had acted on the presumption that that would be the outcome of the case. Therefore, that change was not as difficult to foresee as some tax changes.

There is no precedent in VAT provisions for the sort of proposal that my hon. Friend the Member for Mid-Staffordshire has suggested. Although the development land tax has some similarities with the transitional relief once granted, DLT and VAT are different animals. Development land tax operated at rates of up to 80 per cent. which naturally affected the transitional relief appropriate in those circumstances.

The main relief that we have built into the operation of this tax is the option to tax. That means that any fully taxable tenant will be able to pass on--or rather, reclaim--any VAT that is imposed on his rents, so that it will not stick on him. In turn, the landlord will be able to reclaim the VAT on construction if he opts to tax his rents. The whole thing washes out of the system. It sticks only in the case of exempt and partially exempt tenants, of which there are about 45,000 out of a total of 1.6 million firms registered for VAT. We should not exaggerate the extent to which they dominate new developments and can render them profitable or unprofitable. We have no evidence of any schemes being aborted as a result of any lack of transitional relief in this respect.

Dr. Marek : It would be useful if the Minister could state how much money would be forgone by the Treasury if the amendment were accepted.

Mr. Lilley : Unfortunately, the cost is unquantifiable, but substantial. Because the amount is vague, the arrangement will inevitably be open-ended. There is no evidence that any harm is being done by the absence of such relief, given the extensive reliefs that we already have.

Therefore, although I understand the spirit in which the amendment has been moved by my hon. Friend the Member for Mid-Staffordshire and supported by the hon. Member for Berwick-upon-Tweed, I must recommend the House to reject the amendment.

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