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3.8 am

The Economic Secretary to the Treasury (Mrs. Helen Liddell): I thank my hon. Friend the Member for Chatham and Aylesford (Mr. Shaw) for his speech, which was all the more impressive given that he is a new Member and this was his first Adjournment debate. He must be very pleased with the amount of work that he has put in and in the ultimate product. I regret to say that my hon. Friend the Financial Secretary to the Treasury is indisposed, but she joins me in congratulating him on securing this debate. She and I agree that we should make the best possible use of our empty stock of homes. However, as I shall explain, using the value added tax system to achieve that objective is by no means as simple as it may first appear.

Before I clarify some of the important and very perceptive points made by my hon. Friend, it may be helpful if I explain the background to our zero and reduced rates. After infraction proceedings by the Commission against the United Kingdom, the European Court of Justice ruled, in 1988, that the scope of our zero rates was too wide. The court said that zero rates should apply only when there was a benefit to the final consumer, and that, in construction, they should apply only for clearly defined social reasons. The ECJ ruling resulted in changes for commercial property, but that is not the issue in this debate.

The United Kingdom took the view on domestic construction, which the Commission accepted, that to implement the United Kingdom's social policy, we were right to zero-rate the new construction of dwellings, residential accommodation and certain charity buildings.

Another important point is that construction of buildings for residential use has always been VAT-free, since the inception of VAT in 1973, whether built by local authorities, by housing associations or by private enterprise. The ECJ decision confirmed that practice. The United Kingdom was able to show that zero rating was for the benefit of the final consumer, and that it fell within the social reasons requirement of the second directive because it implemented social policy in housing matters.

Those buildings continue to be zero-rated under the arrangements provided by the sixth VAT directive. The arrangements permit member states to retain rates that were in existence in January 1991 and that fall below the minimum otherwise permitted by the directive. The directive also permits us to move away from the zero rate to a reduced rate of 5 per cent. or more. Theoretically, the United Kingdom could apply a reduced rate to the construction of all buildings that are currently zero-rated.

Hon. Members should be aware that we have agreed with our European partners that, once we have given up a zero rate, we will never reintroduce it. Similarly, we cannot introduce any new zero rates.

It may be useful to correct another misconception. The zero rating of barn conversions, which was introduced in 1994 by the previous Government, was not negotiated in Europe, as it was a relatively minor and legal change to an existing zero rate to include dwellings created for the first time from buildings used previously

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for commercial or non-residential purposes. It is important to make the distinction that it applied not only to barn conversions but to conversions using redundant factories, warehouses and hospitals.

More important in the context of my hon. Friend's comments, help was also targeted specifically at housing associations. A special rule allows them to convert old non-residential buildings into housing VAT-free, without having to comply with the condition applying to all other conversions that the property is sold.

My hon. Friend suggests harmonisation of VAT rates for new construction and renovation. I should mention the limitations on that matter. Repairs and renovations to all buildings are, and always have been, taxed at the standard rate. Goods and services that are currently standard-rated are not covered by the arrangements provided by the sixth directive. The relevant law is contained in annexe H of the sixth VAT directive, which lists goods and services to which reduced rates may be applied. Category 9 on the list is the

The last few words are especially important. A general reduced rate for all housing is not permitted. It is permitted only for

    "housing provided as part of a social policy".

We understand that phrase to mean housing provided for the less well-off, as part of a Government's social policy, such as local authority housing and housing provided by housing associations. Housing in general cannot be said to be provided as part of a Government's social policy. It is important to recognise the difference between the ECJ judgment in 1988, which accepted that zero rating of housing was for social reasons because it implemented social policy, and the requirement that annexe H is restricted to what we call social housing.

I should add that there have been several views over the years about the meaning of the words in category 9 of the annexe. We did think that, in theory, we could have a general reduced rate. In the context of introducing a reduced rate for the installation of energy-saving materials, we sought the view of the Commission. Its view is that a reduced rate provided under this category could be applied only narrowly, and should be specifically targeted to benefit the less well-off. After taking legal advice, we are now clear that it applies to social housing only.

My hon. Friend the Member for Chatham and Aylesford forcefully argued that there was a strong case for a reduced rate for renovation because it would encourage the regeneration of Britain's many empty homes. However, many empty homes are in private ownership and therefore would not qualify for a reduced rate. Any change in law would have to be negotiated in Europe. It would take a long time, and the chances of success would be low.

The House will realise from what I have said that a reduced rate is not the universal panacea that some people claim it to be. Furthermore, the European Commission recently examined the operation of the reduced rates and reported that reduced rates were a very imprecise tool for policy making, and should not be used as a substitute for direct subsidies.

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That is very much in line with the Government's thinking on the application of reduced rates. In general, we believe that widespread use of reduced VAT rates is likely to result in unnecessary complication of the tax, to the detriment of business and the integrity of the tax. We do, however, believe that in some circumstances a reduced rate, such as the reduced rate for domestic fuel and power, may be a useful tool to tackle specific problems. The reduced rate for certain installations of energy-saving materials is another case in point.

My hon. Friend asks: what will it cost? Obviously there is a revenue issue. A recent estimate of the cost of reducing VAT to 5 per cent. for all house renovations was £1.1 billion. Even combined with a reduced rate on new construction, there would still be a very substantial loss to the Exchequer, which would have to be made up by increased taxation elsewhere.

It would be very easy to rush headlong into introducing measures that sound like good ideas. Let us be clear in our mind about the consequences of introducing a harmonised reduced VAT rate for housing. VAT might then become chargeable on new social housing. Only renovations permitted under annexe H would enjoy a reduced rate from the current full VAT rate of 17.5 per cent. It is important to reiterate that work on all other existing housing will continue to be rated at 17.5 per cent. That

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will create new borderline difficulties between different types of housing, which will become subject to different VAT rates.

I fully understand, and am sympathetic to, the views of my hon. Friend, but I am not yet convinced that using the VAT system to address the issue of regeneration of empty properties is the right course of action. Furthermore, there is little hard evidence at the moment to support claims that a reduced rate would generate more jobs, lower consumer prices or counteract environmental effects to any real extent. VAT, even at a reduced rate, on new housing would be very unpopular with house buyers.

We should explore other options for achieving the objective of reducing the cost of renovating properties. The possible results of hasty changes are too uncertain. We do not want to risk leaving a legacy of VAT on new houses without fully considering all the options and all the likely pitfalls.

I assure hon. Members that the Government will continue to explore all possible means of addressing the issue. It will not be filed away where my hon. Friend suggested, although I am sure that he agrees that it is a difficult issue. I thank him for giving us an opportunity to explore the issues and congratulate him again on securing this important Adjournment debate.

Question put and agreed to.

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