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Question accordingly agreed to .

Resolved ,

That the draft Cleveland (Structural Change) Order 1994, which was laid before this House on 8th December, be approved.

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Value Added Tax

8.15 pm

The Paymaster General (Mr. David Heathcoat- Amory): I beg to move,

That the Value Added Tax (Buildings and Land) Order 1994 (S.I., 1994, No. 3013), dated 29th November 1994, a copy of which was laid before this House on 29th November, be approved.

I understand that with this it will be convenient to discuss at the same time the following motion:

That the Value Added Tax (Transport) Order 1994 (S.I., 1994, No. 3014), dated 29th November 1994, a copy of which was laid before this House on 29th November, be approved.

We have two orders to consider, the first being the Value Added Tax (Buildings and Land) Order 1994. I will briefly set out the reasoning behind the order and the need for it.

The order closes a widely used VAT avoidance scheme, which is most often implemented by the use of commercial lease and leaseback arrangements, although it is not limited solely to those schemes. Hon. Members will know that businesses supplying goods and services that are exempt from VAT, such as finance, gaming, health and educational services are not able to recover all the VAT that they pay on their own expenditure. Sometimes they cannot recover any of it. In contrast, businesses supplying goods and services that bear VAT can recover the VAT they pay on their expenditure. When an exempt business purchases a new building or has one constructed it will pay a large amount of VAT which would normally be wholly or mainly irrecoverable. In order to avoid that, some businesses have been leasing the building to an associated company, often formed specifically for the purpose, and then leasing it back again and occupying it.

Both companies then make use of a provision called the option to tax, which allows them to tax the rents charged under the leases, which would ordinarily be exempt from VAT. That allows the exempt company to recover from the outset the VAT paid on the building. It cannot recover VAT on rents paid to the associated company under that lease, but as the lease is often extremely long, that has the effect of artificially spreading VAT paid on the building over many years. In one extreme case, a lease of 2,000 years was used. The Exchequer cannot wait that long to collect VAT on buildings constructed today. The avoidance device is increasingly used in the financial sector but also by some universities, some fee-paying schools, hospitals and charities. In some grant-funded building projects the VAT will already have been catered for in the grant, so it cannot be right that such projects also enjoy an additional VAT relief through an avoidance scheme.

Those schemes are costing the Exchequer £200 million a year. We therefore decided that the option to tax should not be made available to those using such a scheme. VAT paid on buildings will properly accrue to the Exchequer from the outset. The necessary order effecting that was laid before the House on 29 November and took effect on 30 November.

The provision is not retrospective. Existing leases will not be affected. Under article 2 of the order, an option to tax will be ineffective on leases executed or land transferred on or after 30 November 1994 if at the time,

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first, the grantor and the grantee are connected and, secondly, either the grantor or grantee is not entitled to recover all the VAT paid on its business expenditure. Thus the rental income will be exempt from VAT, and tax on the building cost will not be recoverable.

The measure, therefore, is not intended to affect businesses engaged in normal commercial property transactions, nor does it prevent the use of lease and leaseback arrangements. It merely ensures that the Exchequer receives revenue at the correct time in accordance with the original intention behind the VAT legislation. I commend the order to the House.

The second order before us is the Value Added Tax (Transport) Order 1994. That order was also made on 29 November 1994, but comes into effect on 1 April 1995. Public passenger transport in this country, unlike most other European countries, is zero-rated. It has been so since VAT was introduced in 1973, and was justified on social grounds.

The order aims to bring the scope of the relief more into line with what Parliament originally intended. It is highly selective, removing zero- rating only in circumstances where relief cannot be justified on social grounds, and is clearly distinguishable from the normal concept of public passenger transport.

Mr. David Marshall (Glasgow, Shettleston): Can the Minister explain to the House why flights that are intended to cure people's phobia of flying will be subject to VAT, yet booze cruises out to sea and back will not? How can he justify a decision such as that? Where is the logic? Are not the aviation and coach industries being singled out for punitive treatment in that respect?

Mr. Heathcoat-Amory: I think that the hon. Gentleman would agree that a flight leaving one place and returning to the same place, and of the type described, to cure a fear of flying, is not public transport-- certainly not in the way that was understood by the House in 1973. Public transport must involve at least a transport of the public from one place to another. That is why we are restricting the zero-rating to what Parliament intended at the time.

Mr. Paul Tyler (North Cornwall) rose --

Mr. Heathcoat-Amory: If the hon. Gentleman hopes to speak later on behalf of the Liberal Democrat party--

Mr. Tyler indicated dissent .

Mr. Heathcoat-Amory: The hon. Gentleman does not, so I give way to him.

Mr. Tyler: It is precisely because I do not want to take the time of the House later that I want to make a specific argument about the tourist industry. I understand clearly what the Minister has just said about the logic, but I think that he is well aware that the tourist industry is alarmed about the proposal, because it will affect a number of steam railways, it will affect operators of boat trips and it appears to be being introduced without any consultation with the tourist industry.

I should be grateful if the Minister would tell us what consultation has taken place with the statutory tourist organisations or tourist operators before or since the order

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was laid. The statutory organisations have expressed anxiety to me. The proposal appears to have come literally out of the blue, without any proper consultation.

Mr. Heathcoat-Amory: It certainly has not come out of the blue because it was announced on 29 November, and therefore there has been time to discuss the matter and to put at rest several unnecessary fears. The hon. Gentleman may be alluding to a number of supposed proposals to apply VAT at a positive rate to boat trips and other tourist attractions, when that is not the intention.

Mr. Patrick McLoughlin (West Derbyshire): Will my hon. Friend give way?

Mr. Heathcoat-Amory: Before I give way again, I shall proceed with my introductory remarks, because I want to emphasise that public transport in its usual and accepted sense, whether it is by bus or by coach, by train, ship or air, is not affected by the order, and will continue to be zero-rated.

I also want to lay at rest any idea or suspicion that the order has anything to do with any requirement from the European Community, because our zero rates are fully safeguarded by the sixth VAT directive, which can be amended only with the unanimous agreement of all member states, and we have no intention of removing zero-rating from public transport.

Sir David Mitchell (Hampshire, North-West): I am grateful to my hon. Friend for giving way. I declare an interest as a member of the North Yorkshire Moors Railway and the Watercress line. Will my hon. Friend give me a clear assurance that there will be no VAT on train journeys on those preserved railways?

Mr. Heathcoat-Amory: Yes; I can give that assurance to my hon. Friend. These railways are zero-rated at the moment and will not be affected by the order, so I am happy to give that assurance. I think that that partly answers the argument made by the hon. Member for North Cornwall (Mr. Tyler), because many groundless anxieties have been caused, and I hope to set them at rest during the debate.

Mr. Richard Page (Hertfordshire, South-West): When the matter was introduced in the Budget, it was clearly stated, under item 10, that the compliance cost assessment would be referred to relevant trade associations. As someone who is interested in and connected with the major trade association in this country, the Association of British Travel Agents Ltd, I know that the association was not contacted regarding the effect of the proposal. I feel strongly that it is premature to introduce it at this stage, without proper consultation throughout the industry.

Mr. Heathcoat-Amory: I give my hon. Friend the assurance that there will be no significant compliance cost because the legislation is a simplifying measure; therefore the anxieties expressed that it will be a bureaucratic imposition on the tourist trade are unfounded, as has been displayed by the compliance cost paper that is available.

Several hon. Members rose --

Mr. Heathcoat-Amory: There will be opportunities for my hon. Friends to catch your eye, Mr. Deputy

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Speaker, and I do not want to trespass too far into the debate itself. Before I give way again, I shall outline the three main areas of transport covered by the order.

The first main area concerns charges for admission to, or for the use of facilities at, places of amusement, entertainment, historical or cultural interest; those will become wholly liable to the standard rate. Currently, some such places that provide their customers with some forms of transport have been able to treat their supplies as wholly or partly zero-rated, while the rest of the admission charge is liable to VAT at the standard rate.

The second main area concerns charges for car parking facilities provided at airports together with a transport service between the car park and the airport terminal; those will become wholly standard-rated. Such charges may currently be apportioned between standard-rated car parking and zero-rated transport, with some operators being able to apply the zero rate to a high proportion of the total charge, even though the customer is primarily receiving a car parking facility.

The third main area covers pleasure flights, which include hot air balloon rides and other trips by air for pleasure or amusement or for the experience of flying; they will be standard-rated. In some cases that means no change, as rides with fewer than 12 seats are already standard-rated.

Mr. Robert Banks (Harrogate): I ask my hon. Friend to pursue the matter a little further and elaborate. Are we talking about roller-coaster rides in amusement fairs? Are we talking about ski lifts at Aviemore? Are we talking about overhead cable railways, such as those that run in an amusement park in Yorkshire?

Mr. Heathcoat-Amory: The roller-coaster rides that are seen at funfairs and at some theme parks and so on are already standard-rated, so will not be affected, but train rides within such amusements, or cable rides or monorails, will become standard-rated because such rides are not public transport. A number of known safari or theme parks will not only apply standard rating to existing attractions, but will extend it to the transport elements included in the admission price.

Mr. Gary Waller (Keighley): May I press my hon. Friend a little more on preserved railways? He will know of the great importance that they have in many areas including my own, where we have the Keighley and Worth Valley railway. Will my hon. Friend assure the House that journeys on preserved railways, whether by steam or diesel, will not be subject to VAT, notwithstanding the fact that one of the stations on the Keighley and Worth Valley railway serves Haworth, the home of the Brontes, and is visited by many tourists every year?

Mr. Heathcoat-Amory: I appreciate the fact that my hon. Friend may not be giving full descriptions of all the facilities in his constituency, but his description of the railway leads me to assert with confidence that it will not be standard-rated.

Mr. Bill Walker (Tayside, North): Will sporting activities such as club members flying gliders throughout Europe that are currently, because of the sporting aspect, zero-rated in the United Kingdom, continue to be so?

Mr. Heathcoat-Amory: As I understand it, gliding clubs--I know of my hon. Friend's interest in them--are exempted from VAT and will remain unaffected by the order. I am happy to give that assurance.

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I emphasise that the order is confined to transport in a narrow range of circumstances, so zero-rating will continue to apply to the vast majority of cases. Steam train rides and boat trips, including ferries and canal boats, which are currently zero-rated, will continue to be relieved. The exception, mentioned earlier, involves trips at places such as theme and safari parks and other places of entertainment or interest. In those circumstances, admission charges, fares or other charges, which are currently either zero-rated or apportioned, will become wholly liable at the standard rate. Subject to the agreement of the House the order will come into effect on 1 April 1995 and is expected to generate additional revenue of about £45 million in a full year.

8.32 pm

Ms Dawn Primarolo (Bristol, South): In dealing with the two orders on VAT I shall first discuss the Value Added Tax (Buildings and Land) Order 1994 and make it clear that we will not press the order to a vote. However, I seek from the Minister some replies and clarification on a number of points. As the Minister has explained, the order involves the VAT exempt sector, which is different from the zero-rated sector. It deals specifically with the subject of lease and leaseback. A number of points have been raised on that issue and on the drafting of the order.

The Law Society has sought clarification from Customs and Excise on the specific nature of the loopholes that are being closed to prevent VAT avoidance. The transactions allowing such avoidance will not be permitted. But the Law Society has told us that Customs and Excise has acknowledged that the order goes too far and goes beyond the steps necessary to prevent VAT avoidance. It has apparently said that some form of extra-statutory concessions may be needed to tidy up the order. I should be grateful if the Minister could this evening tell the House whether that it is so.

The next two issues involve the definition of a third party and the possibility of the order applying retrospectively. It has been made clear that the effective date is 30 November 1994. If that is correct, the order is, arguably, retrospective and could have serious implications for many exempted bodies. Can the Minister give an assurance to the House that the legislation will not be retrospective and that the loophole being closed will take effect as indicated in the order?

My next point relates to the way in which the order blocks the loophole allowing tax avoidance, which it claims to seek to do. The order will be effective in blocking all lease and leaseback schemes. It applies only to the granting of leases between connected parties where either party is exempt. It appears that the exempt person developing the new building for his or her own use could circumvent the order by entering into a third- party agreement on lease or leaseback. The explanations to the provisions are not exactly clear. I should be grateful if we could have confirmation that such circumvention is not possible and that there can be no way in which, by using a third party, exemptions can still be obtained and avoidance achieved.

The Value Added Tax (Transport) Order 1994 contains an entirely different set of propositions. As some of the interventions this evening have already shown, the order is controversial. It has been extremely tortuous and difficult to identify and pin down the exact sectors to which it will be applied.

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The order was hidden among the huge amount of papers that came with the Budget statement on 29 November 1994. During a debate on the Budget resolutions on 5 December 1994, my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) raised the issue of the order's impact on the tourist industry as there was already some concern about that. During that debate he explained, in column 38, the problems being experienced by the British Tourist Authority, the cuts in its funding and the implications for tourism of the order. In reply to that debate the Financial Secretary to the Treasury said that the order stopped

"favourable tax treatment for trips in hot air balloons, round trips in Concorde over the bay of Biscay, and so on."--[ Official Report , 5 December 1994; Vol. 251, c. 108.]

The order was presented to the House then as a means of preventing further abuses and dealing with a category that had sneaked in, so there was nothing more to concern the House.

However, the matter was raised again in the Ways and Means debate on 13 December 1994--the mini-Budget or Budget part II as it has become known. The Government still did not seem to know exactly what the order would do. When challenged, the Chancellor said:

"The Government have no intention and would never extend VAT to zero-rated goods"--

which the order covers--

"without primary legislation."

The order is not primary legislation. When my hon. Friend the Member for Dunfermline, East (Mr. Brown) challenged him during the debate that the order should be withdrawn and placed before the House as primary legislation, the Chancellor replied:

"The extension of the VAT transport order was done partly under these resolutions and partly under the Finance Bill as well." The Finance Bill was published on 4 January 1995 and these matters are not covered in that primary legislation. The House has been misled throughout the debates. We were told that VAT would be extended to zero-rated goods only through primary legislation, but there is no primary legislation before the House. The Chancellor went on to say:

"The VAT zero rating on transport is designed to protect passenger transport. It has now been extended to air balloon rides, funfair rides, to things inside theme parks. This legislation covers anomalies of that kind " --[ Official Report , 13 December 1994; Vol. 251, c. 802-805.]

I think that the Chancellor misled the House again because the order covers far more than that. The Chancellor promised that zero-rating would not be removed without primary legislation. That promise has been broken. It is not in the Finance Bill; it is in the orders which are before us today. The Chancellor and the Financial Secretary to the Treasury either did not know the exact extent of the order, or did not give the House all the available information when they were asked to clarify the situation. The effects of the orders are gradually becoming clearer.

Let us turn to the tourist industry.

Mr. Heathcoat-Amory: I am grateful to the hon. Lady for giving way. I wish to clear up one matter. My right hon. and learned Friend the Chancellor was quite clearly referring to major changes to VAT legislation. If the hon. Lady is complaining about marginal changes being made by way of orders, can she explain why the last Labour

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Government did it three times? I have before me an order which removed certain food items from zero-rating because they fell into the category of biscuits. The last Labour Government did that by way of secondary legislation. Why is the hon. Lady complaining when Labour Governments have done the same thing?

Ms Primarolo: I am happy to debate what the last Labour Government did or did not do. If the Minister cares to put it before the House, we will engage in that debate. We are discussing undertakings that were given to the House a matter of weeks ago in parliamentary time about an issue that will have a considerable effect on the tourist industry. The Government are seeking to avoid the consequences of the decisions that they are making. Such is their desperation in moving constantly to indirect taxes to scrape in the money that they are not looking carefully at the implications of their actions for industries in this country.

Mr. Tyler: I am grateful to the hon. Lady for giving way. Does she accept that not only has the House been misled, but the tourist industry has not had a proper opportunity to take account of the Government's proposals and their implications, both in terms of the statutory bodies-- the English tourist board and the regional bodies--and the operators? The Chancellor has misled not only the House but interested parties outside this place.

Ms Primarolo: I agree absolutely. I wish to turn to that point in my remaining remarks on the order.

The House has been misled. It is misleading to label the tax as one which affects only entertainment and recreation, as clearly business travel will also be affected to a large extent--particularly by the increased cost of transport in and around airports. Business tourism is currently experiencing very high levels of growth throughout Europe, and we need to be competitive in that sector.

That point is backed up in correspondence from Sir John Egan, chairman of the CBI's tourism working party and chairman of the BAA, to my hon. Friend the Member for Stalybridge and Hyde (Mr. Pendry). Sir John made clear the damage that he believes that the decision will do to the tourist industry.

Since 1979, our trade surplus in tourism has turned into a £3.1 billion deficit. Meanwhile, our share of the growing world market has declined. If we had maintained the share of the market that we enjoyed in 1979--under a Labour Government--a further 150,000 jobs would have been created in tourism. Successive Tory Governments have become complacent about tourism. They have cut the budgets to the tourist boards in successive years, with this year being no exception, and they are now trying to apply an added tax burden to tourists in order to raise another £45 million. That is not a significant sum for the Treasury.

The Financial Secretary to the Treasury has dismissed our claims as scaremongering, saying that the decision will not affect other areas. This evening the Minister tried to skate over its implications for heritage and for museums. Since more than 60 per cent. of overseas tourists claim that they visit Britain for cultural reasons, it is ridiculous for the Government to apply a tax to the very items which attract tourists to this country.

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The tourist industry has long been seen as a soft target, and Sir John and Richard Tobias, the chief executive of the British Incoming Tour Operators Association, make that point in their letters. It is interesting to read what the tourist industry representatives are saying. Richard Tobias said:

"Clearly this is yet another example of one of Britain's most successful export industries being taxed to the point where we are becoming uncompetitive against our European neighbours".

Adele Biss from the British Tourist Authority said:

"We are also stressing that the effect on our international competitiveness appears not to have been taken into account by this decision".

Sir John also said:

"each new tax burden therefore is not a burden in isolation,"-- I am sure that every taxpayer in this country knows that-- "but rather becomes an additional part of a cumulative burden that gnaws at the industry's competitiveness".

That is what British tourism is saying about this order's impact on the industry.

It was asked whether consultation had taken place on the issue, and the Minister replied that that had taken place. That is very interesting, because in a written answer on 12 December the Secretary of State for National Heritage said:

"The application of VAT is a matter for my right hon. and learned Friend, the Chancellor of the Exchequer, who announced on 29 November that services relating to entertainment or recreational activities and car parking at airports, which include passenger transport, will become wholly standard- rated. The measure, which will affect a limited range of businesses, will not involve significant compliance costs . . . "--

I will return to that point later--

"and it is not expected to affect international

competitiveness."--[ Official Report , 12 December 1994; Vol. 251, c. 498 .]

Clearly, at that time he had not spoken to the tourist industry. Of course, consultation was not considered necessary. We must compare his comments to those emanating from the tourist industry. Customs and Excise says that no compliance costs are necessary and that none is expected.

Those in the tourist industry have produced their brochures for the year and committed themselves to costs they cannot now avoid. They must either recall all their brochures, which would involve costs, or sustain the loss that the tax difference will make and endeavour to recoup it next year. No consultation was carried out with the National Heritage Department or with the industry before the order was introduced. The Government continue to claim their commitment to tourism, yet here they are undermining that very process. I am sure that hon. Members will give many examples this evening, but I want to mention a couple of tourist attractions that will be damaged. I have received correspondence from the director of the slate caverns in Blaenau Ffestiniog. Those who work there are angry and upset. They won an appeal in a VAT tribunal to keep zero-rating on their facilities in the slate caverns, but that tribunal is now overridden by the imposition of the order.

Mr. Jones, the director of the slate caverns, writes:

"The Chancellor's actions could have come from the darkest depths of Stalinist Russia".

It is decorative wording from very angry people. He states that the caverns

"have attracted 5 million tourists in the past 21 years, winning all Britain's top tourism awards and many international accolades."

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He continues by explaining how he heard about the order:

"We know of it only because a gleeful VAT officer telephoned before Christmas, saying Budget legislation was on its way to cancel a 1984 court ruling"

and that the two rides provided in the caverns no longer constituted public transport.

Those working at the caverns expected to find the proposals in the Finance Bill because they had been told that the measures would be contained in primary legislation, but, after two days of looking at the Finance Bill, they discovered that that was not so and that the proposals were in a statutory instrument. They were then told by Customs and Excise that the document could not be faxed to them--time was running out and it had been pointed out that we would be debating it today--because that would be breaking Crown copyright. They had to order it from Norwich. They placed their order and they are still waiting for copies of the order that we are discussing tonight. Mr. Jones continued:

"the vindictive intention is clear enough, i.e. to overturn the 1984 court ruling which we won on appeal. It is an act of revenge against a small company which makes a major contribution to the rural economy of North Wales".

The tax will add 87p to the entrance price of £4.95. They have already printed the price list so they are already committed for 1995 and they will have to sustain that loss. There was no consultation and they will have to face plenty of costs--all for £45 million to the Exchequer.

The historic national tramway museum is in a similar position. Somebody once said as a joke that this Government would tax air if they could find a way of doing it. They are certainly trying to tax at every opportunity our heritage and the time that people give freely to such institutions to maintain that part of our heritage. That time is now to be taxed. It is absolutely obscene.

Mr. David Winnick (Walsall, North): Has my hon. Friend received correspondence about the Birmingham tramway museum? Is she aware that it will be a devastating blow to people in the west midlands, not just in Birmingham but in the surrounding areas, including my constituency, if the museum is to be penalised along the lines that she has described? It is a serious matter. I have received correspondence about it and have recently written to the Minister.

Ms Primarolo: I am grateful to my hon. Friend. A number of representations have been made. I was trying to spare the House the agony of going through every single one, because we would exceed the one and a half hours allowed for the debate. I have picked out two examples, but the clear intention of the order is to rake in money not on the basis of Concorde flights over the Bay of Biscay or hot air balloon rides, although it is questionable whether VAT needs to be placed on that.

I am interested to find out why VAT will not apply to glider flights, given that for the gliders to get up in the first place they have to be towed by an aircraft, to which VAT will be applied.

Mr. Bill Walker: Perhaps I can help the hon. Lady. The answer is that gliding clubs are non-profit-making organisations, which throughout Europe are exempt from VAT.

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