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Mr. Djanogly: For the first time today, my hon. Friend refers to the serious impact on charities. Will not charities, more than many other institutions, want to adapt their premises over a period to change the use of those premises? Could not the Bill have dramatic implications for charities in that regard, and does it not constitute an attack on charities for that reason alone?
Mr. O'Brien: My hon. Friend makes a very important point, and I hope that the Government will listen to it a little more keenly than they did in Committee last week. I know that they will feel that it is inappropriate to attack them for being hostile to charities, but we must measure them by their deeds, not their words. We have advanced our argument on why we consider this provision an attack on charities, educational establishments and grant-funded research establishments. It has been denied, yet the Government persist with the deed that gives rise to the initial complaint, so such an approach is appropriate.
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My hon. Friend the Member for Huntingdon, whose point is perfectly valid, is well regarded in his constituency for the work that he does on behalf of charities, not least the Thalidomide Trust. That puts me in mind of the fact that trustees may find themselves in the most desperate conflict in the light of this provision. Trustees have an obligation to deploy the assets entrusted to them for charitable purposes in the best possible service of those objectives, but potentially they will incur higher liabilities for doing so. If they are not allowed to do so because a serious tax consequence may result from the change envisaged under clause 22 in an effort to address the relief sought to overcome the Lennartz case, there is the potential for damage to charities.
If the Economic Secretary is going to persist in the arguments that he sought to deploy in Committee, let us park the issue of charities. But for the fact that the Government happen to have a majority at the moment, they would have experienced difficulties, given the comments made by certain of his colleagues in Committee. I am glad to say that they found the discussion interesting and persuasive, but I accept that a party system is in place and that their party currently enjoys just a few more votes than ours does; hopefully, that will not last for long.
Under the terms of the clause, private businesses will be obliged to use the second type of treatment, which I outlined, to deal with non-business use of land and buildings. So the problem is that, as I said, the principal taxpayers hit by this clause will be educational establishments and charities. They will suffer by taking all of the non-deduction for VAT upfront, significantly
adding to their costs. However, the Economic Secretary said in Committee that in general, we do not have to worry about them because they have the 90 per cent. rule. It was the hon. Member for Torridge and West Devon (Mr. Burnett) who mentioned the example of a charity that moves from 50:50 use to 75:25 use, for which the 90 per rule does not apply. Through clause 22, the Government are seeking to deploy a remedy to Lennartz, which is applicable and is currently being marketed relatively widely in the City. Indeed, the Economic Secretary has referred to the need to find a remedy, because he was concerned that a legitimate tax-avoidance scheme already existed under the Lennartz precedent.As we know, there are certain categories: tax planning, which is a wholly legitimate procedure that one would expect responsible people to adopt; tax avoidance, which is fine so long as it does not stray over the grey line into any form of illegality; and anti-avoidance. According to the Government, the difference between tax avoidance and anti-avoidance is that they are keen that there should be no avoidance of what they intended to raise under certain tax concepts. A further category is tax evasion, which we all revile and abhor. We certainly support the Government's efforts to deal with tax evasion issues, but this is not such an issue. They are seeking to remedy a scheme that is currently out there and being marketed. They want to make it part of their anti-avoidance package, but Lennartz currently already gives that authority. That will be important when we consider the powers that this Government believe they have to legislate to overcome Lennartz. There is severe doubt as to whether they have the authority to do that; they certainly cannot be sure that such authority will not be challenged in the courts. If such a challenge is made, we will be left with uncertainty. The one thing that we should not do is to produce law that we know is going to be challengeable, and which is subject to such uncertainty. The Economic Secretary has yet to answer those points, but because we discussed them in Committee I have the comfort, at least, of knowing that I could not have given him more notice of my argument. I shall therefore carry on with it.
From a practical perspective, the provisions in the clause will be difficult to implement. If we assume that buildings have a life of 40 years, how can we be sure about the relevant proportions of business use and non-business use throughout the 40 years? Should one use general projections or take the projections for the first five years and then have a review? Or will the provision for immediate use be set in stone? The main problem is how to predict the future. What will the trustees of a charity have to consider? What will be in their interest? In relation to the business element of the shared premises, it is impossible to predict the progress of a business over 40 years. In 1970, there were only six companies left of the 100 that formed the first FTSE list. Broadly speaking, businesses run on a 20-year cycle, so a 40-year provision is totally impractical.
Mr. Gummer: Does my hon. Friend agree that one of the problems with property in this country is a degree of inflexibility in its use? The Government should be congratulated on trying to achieve some change to that, but the provisions will make that change more difficult
to achieve, not easier. Of all countries in Europe, we need most to increase the flexible and imaginative use of the buildings that we have.
Mr. O'Brien: My right hon. Friend and I had contact when he was a Minister and I was in a business related to building materials, and I am grateful for his remarks. There have always been advantages and disadvantages in the fact that our built environment—albeit much of it is beautiful, with many historic and cultural connections—has the longest demolition rate in the world. On average, it takes 997.6 years to demolish a building in this country. That is an extraordinary statistic, but it is true, because most buildings are remodelled rather than demolished. In contrast, in southern Ireland, most people build a new house next door to the old, which becomes the outbuildings. We have a different approach, and that is why flexibility is the key. My right hon. Friend puts his finger, as ever, on the salient and practical point, from the experience that he has had in government and in business.
The Bill contains no provisions that allow adjustment to the apportionment originally made. If the percentage of non-business use to business use changes downwards over the useful life of the building, it is conceivable that no deduction would be made for significant taxable use, especially in the event of the sale of a building. As a procedural point, Customs and Excise believes—it would have been helpful to have some advice—that it does not have to apply the reasoning in the Lennartz case, as there is provision to derogate, in local law, from the application of the article in the EU directive under which Lennartz was decided.
As I said in Committee, many advisers doubt whether that view is correct. The reason is that the UK provision derogates not only from the article under which Lennartz was decided, but from a further article that does not provide for derogation. The derogation can result in consequences that are disproportionate—that is the key word, because that is how the derogation works—to the aims of the directive. It is understood that Customs and Excise has obtained counsel's advice on whether it can implement clause 22.
Mr. John Taylor (Solihull): On that important point, my hon. Friend gives me considerable cause for concern. If there is an absence of adequate clarity in the provisions that will guide the taxpayer and the duty payer in the next 12 months, will not the bravest and the richest face two or three years of litigation with the authorities? Does he agree that it is not as important that the law be fair as it is that it be certain?
Mr. O'Brien: I pay tribute to my hon. Friend, whose legal expertise is well known to his many friends and colleagues in the House, and to a vast range of people outside. I would certainly defer to his insightful expertise. I would not be prepared to hazard an answer from the Dispatch Box to the technical and legal question whether, in a case brought by an individual or enterprise against the tax authorities, a provision could be voided for uncertainty. That is a legal principle, obviously known to the law, but I do not know whether such a case could be brought. My hon. Friend is right, in terms of fairness. We legislate for the people of this country, whether they be rich or people with normal
income, taking the average of the population. The people involved may be charity trustees, doing good work, but the Bill would mean that they were suddenly caught up by the difficulty that has been described.As has been stated, clause 22 seeks to address an opportunity to delay or avoid VAT. The arguments in favour are similar to those raised by the German Government in a case against a taxpayer, Mr Seeling. The Advocate General of the European Court of Justice has opined that the German approach is invalid.
As it happens, the Fourth Standing Committee on Delegated Legislation discussed these very matters on 7 May. Judgment on the Seeling case was due on 8 May. I suggested that it would be useful to adjourn our meeting, in the hope of greater elucidation from the judgment to be given the following day. The Minister declined my request.
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