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Session 2000-01
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee A

Tuesday 8 May 2001


[Mr. Edward O'Hara in the Chair]

Finance Bill

(Except clauses 1 to 3 and 16 to 53 and

schedules 4 to 11)

4.30 pm

The Chairman: In the present circumstances, it might be useful if, for the convenience of the Committee, I pointed out that a resolution has been passed by the Programming Sub-Committee. I call the Minister to move the same motion formally now.


    That the Order of the Committee of 26th April shall be varied as follows—

    (1) the remaining provisions of the Bill shall be taken at this afternoon's sitting;

    (2) the order of consideration at that sitting shall be as shown in the second column of the Table in the Order of 26th April; and

    (3) the proceedings at that sitting shall (so far as not previously concluded) be brought to a conclusion at 7 p.m.—[Dawn Primarolo.]

Clause 95

VAT: Residential Conversions and Renovations

Mr. Edward Davey (Kingston and Surbiton): Before raising a point that the Charities Tax Reform Group has brought to my attention, I shall welcome the clause in general. The Government are right to introduce an extra relief for such building work. [Interruption.]

The Chairman: Order. There is rather a lot of subterranean noise in the Room. As we are picking our way through drastically changed circumstances, the Committee's co-operation would be appreciated.

Mr. Davey: Thank you, Mr. O'Hara.

The Charities Tax Reform Group is concerned about quite a technical point, which relates to the definition of accommodation in the context of building work. The Value Added Tax Act 1994 distinguishes two types of residential accommodation: ``dwellings'' and buildings

    ``intended for use solely for a relevant residential purpose''—

or RRP. In the context of building work, a dwelling must be ``designed as a dwelling''. Most communal residential accommodation is not sufficiently self-contained to qualify, so it is treated as RRP accommodation instead.

That can cover a range of accommodation types that are significant for charities. I am sure that you are aware, Mr. O'Hara, that relevant residential accommodation may be for people with learning disabilities, or people whose carers are having a break. A range of charities run such accommodation, which could include accommodation for people who require personal care because of old age, past or present problems with alcohol dependency, drug abuse or mental disorder. It could also include hospices or even residential accommodation for educational purposes.

The current law, with VAT on building work at 17.5 per cent., does not discriminate between dwellings and buildings for a relevant residential purpose. The problem with clause 95 is that, in reducing the VAT rate from 17.5 to 5 per cent., it introduces discrimination against buildings with a relevant residential purpose. I can exemplify that rather technical point in several ways.

The clause proposes that the 5 per cent. VAT rate will apply to building works involving renovation of dwellings that have been empty for three years or more—that is excellent—conversions of non-dwellings, commercial or relevant residential purpose buildings into dwellings, conversions of dwellings into RRP buildings, and conversions of dwellings resulting in a different number of dwellings. All building works with accommodation in those categories will benefit from the VAT reduction, but most RRP buildings will not. As I said, some will benefit, if they are conversions in the direction of a relevant residential purpose, but others will not.

For example, the VAT rate will make it cheaper to convert commercial premises to dwellings than to RRP buildings, and cheaper to convert an empty RRP building to dwellings than to renovate it for RRP use. That is an oversight and a mistake, and I am flagging up a technical point to the Government, rather than criticising them. That failure could result in absurdities, as is demonstrated by the fact that conversions from offices to flats, and from flats to RRP use, will qualify for the 5 per cent. rate, but conversions directly from offices to RRP use will not; instead, they will be subject to VAT at 17.5 per cent.

The current law treats dwellings and RRP accommodation without discrimination. To maintain that state of affairs, we would need provision in tax law to ensure that the new 5 per cent. rate applied to renovations of RRP buildings that have been empty for three or more years, conversions of commercial and similar buildings for RRP use, and conversions of RRP buildings resulting in a different number of units.

The Minister will agree that it would be wrong to exclude such buildings from the preferential rate, because they are being used for charitable purposes and could be used for the social inclusion purposes that the Government have in their broader agenda. Therefore, the Government should re-examine the point again—or, ideally, clarify in Committee today that they are happy to take it as read that all RRP buildings will benefit from the reduced rate, and that they will tighten up the laws to clarify that in due course. The Minister may feel that she needs to write to me on the point, but if she assures me that she will be writing in a positive way, I will not press the Committee to divide on the clause.

The Paymaster General (Dawn Primarolo): I am grateful to the hon. Gentleman for speaking to me about this issue just before the sitting started.

The changes do nothing for residential properties in the way that the hon. Gentleman suggested. A conversion of a non-residential building into an RRP unit already benefits from having no VAT burden, so there is no need for change there. There is no relief for renovations of RRP buildings just as there is no relief for general renovations, apart from for the special category of properties that have been empty for three years. The Government did not believe that we should introduce a general relief on all renovations, and we do not plan to make such a radical change. However, I listened carefully to the hon. Gentleman's comments and I know that he has had particular representations. I would like more time to consider his points, and I will ensure that my officials have discussions with the relevant organisation to determine whether a perverse incentive has inadvertently been put into the system. Naturally, we want to follow that up. I would be pleased to write to the hon. Gentleman when I have had time to examine it in a little more detail. I know that other members of the Committee, too, are interested in the issue.

Mr. Alun Michael (Cardiff, South and Penarth) rose—

Dawn Primarolo: I shall give way to my right hon. Friend, who has a long history of interest in charities.

Mr. Michael: I am grateful to my hon. Friend for giving way to me. Sometimes, those who are involved with charities view such issues differently from those who are dealing with them in terms of taxation or legislation. The concerns set out by the Charities Tax Reform Group were intended to be helpful rather than critical, as the hon. Member for Kingston and Surbiton (Mr. Davey) made clear. Will the Paymaster General respond to the points that have been raised in the terms in which they were raised by the group concerned, to try to provide clarification? It would be helpful if all members of the Committee were to receive that information; we would then be able to engage in helpful discussion with those who contact us.

Dawn Primarolo: I entirely accept the points that have been made by the Charities Tax Reform Group. It has been genuinely helpful in exploring the issues that are of concern to it, particularly when the Government undertook the review of charities taxation. Given our timetable, I will endeavour to reply as quickly as I possibly can to the hon. Member for Kingston and Surbiton and my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Michael), and also inform other members of the Committee.

My officials will discuss the issue again with the Charities Tax Reform Group. Obviously, in those discussions, we must clarify whether there is a problem. If there is not, further explanation and reassurance are necessary, but if there is, we must consider how to deal with it. As members of the Committee know, various vehicles are available to deal with inadvertent errors in the interval between Finance Bills.

I want to be helpful to the Committee, but I am sure that it appreciates that, rather than attempt a full explanation this afternoon, I would like to examine the point in detail to determine whether there is a real issue, or whether it would be wiser to ensure that full clarification is given to the Charities Tax Reform Group about how the measure will operate.

Question put and agreed to.

Clause 95 ordered to stand part of the Bill.

Clause 96

VAT: museums and galleries

Question proposed, That the clause stand part of the Bill.

Mr. Howard Flight (Arundel and South Downs): My question to the Paymaster General is, if section 33 of the Value Added Tax Act 1994 can be extended to museums, why can it not be extended to other charities, or even all charities? When that suggestion has been made in the past, the Government's position has been that article 6 precludes it. Another issue that arises from the legislation is whether the specified museums and galleries will be leaned upon to give up charging, and whether their grant in aid will increase sufficiently to cover the loss from ceasing to charge. Those are not legislative matters but background to the proposed change. Finally, will the Department for Culture, Media and Sport have a role in identifying the museums? It should know more about museums than the Treasury.

Mr. Edward Davey: I thank the Paymaster General for replying in such a positive way to our debate on clause 95, particularly given the time constraints. I wrote to her with a point about this clause from the Charities Tax Reform Group, to get clarification in the context of official advice. We, and the charities group, were concerned that if a person, in this case a charity, took up the special offer within the VAT refund scheme of being effectively zero-rated for VAT, but had previously sold assets when it transferred from being a business to a non-business, tax could be due and could be collected by Customs and Excise. That person would have had an incentive not to follow the Government's lead but to counter the Government's intention.

4.45 pm

On 3 May the Paymaster General wrote to me saying:

    ``we accept that this should not happen of the bodies that will be the subject of the special VAT scheme. Customs and Excise are developing a workable solution to this so that when the museums and galleries in question do move to universal free access, there will be no clawback of the VAT correctly recovered while they have been charging for admission.''

The Paymaster General set out the reasons why that had not been covered in the legislation; they are incredibly complex, and involve three separate areas of VAT law. She went on to say:

    ``We have therefore decided to resolve this issue outside the current Finance Bill. Before the scheme is introduced on 1 September 2001, we will ensure that there are special arrangements in place for each museum and gallery affected in this way designed to suit their individual circumstances.''

It is important that we have that on the record, so that the staff of museums and galleries who read our proceedings do not have to worry about that point. In some cases it could involve hundreds of thousands, if not millions, of pounds. The Paymaster General's reply was extremely helpful and I thank her for her assistance.


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