Finance Bill

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Schedule 1

VAT: Face-value vouchers

Mr. O'Brien: I beg to move amendment No. 89, in

    schedule 1, page 142, line 7, at end insert—

    '(6) Where—

    (a) a person who is not its issuer makes a supply of a facevalue voucher,

    (b) that supply is chargeable by virtue of the previous provisions of this paragraph and is not an exempt supply by virtue of those provisions, and

    (c) the consideration given by him for the voucher is by virtue of paragraph 4(2) not chargeable or not on its full amount,

    that person shall be treated for the purposes of this Act as if the consideration given by him for the supply to him of the voucher, insofar as that consideration was not actually chargeable, included tax at the relevant rate.'.

The Chairman: With this it will be convenient to discuss the following:

Amendment No. 90, in

    schedule 1, page 143, line 1, leave out paragraph 4 and insert—

    '4(1) Subject to subparagraph (2), the amendments made by this Schedule apply to supplies of tokens, stamps or vouchers issued on or after 9th April 2003.

    (2) The amendments made by this Schedule shall not apply to the supply of any token, stamp or voucher issued pursuant to a contract made before 9th April 2003 between the issuer and the person to whom he issues it, unless those persons were on 8th April 2003 connected with each other within the meaning of section 839 of the Income and Corporation Taxes Act 1988.'.

It may well be that the Opposition spokesman wishes to speak to the amendment, but I shall permit very few remarks if he feels that that is necessary, because he has dealt with both the amendments at some length under clause 19. [Interruption.] I do not

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want applause from the Government; it creates grave embarrassment for the Chair.

Mr. O'Brien: I intended merely to move the amendment formally.

The Chairman: That is the first time that my advice has been taken.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 17.

Division No. 7]

Baron, Mr. John Djanogly, Mr. Jonathan Flight, Mr. Howard Jack, Mr. Michael Lamb, Norman
Laws, Mr. David O'Brien, Mr. Stephen Price, Adam Prisk, Mr. Mark Wilshire, Mr. David

Cunningham, Mr. Jim Cunningham, Tony Healey, John Hendrick, Mr. Mark Howarth, Mr. George Lucas, Ian McKechin, Ann Mallaber, Judy Marris, Rob
Mountford, Kali Munn, Ms Meg Pond, Mr. Chris Primarolo, Dawn Quinn, Lawrie Southworth, Helen Sutcliffe, Mr. Gerry Trickett, Jon

Question accordingly negatived.

The Chairman being of the opinion that the principle of the schedule and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Orders Nos. 68 and 89, That this schedule be the First schedule to the Bill:—

Question agreed to.

Schedule 1 agreed to.

Clause 20

Supplies arising from prior grant of fee simple

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

John Healey: Members of the Committee will recall that the last Budget contained an important package of measures to deal with VAT fraud and avoidance. They will also be aware of some of the strides that we have since made in reinforcing the VAT system against abuse and revenue leakage. In the 2002 pre-Budget report, we announced immediate action to tackle a highly threatening avoidance scheme involving the sale of new freehold commercial buildings. It may help if I outline the background of the scheme and, therefore, of clause 20.

Normally, the supply of commercial land and buildings is exempt from VAT. However, the European Union's sixth VAT directive specifically deems the supply of new commercial buildings to be taxable, and in the UK we have traditionally taken the definition of new building to be one that is sold within three years of its construction.

VAT is usually due on the sale of a commercial building at the time of legal completion. However, in some circumstances, the final selling price is not known at that point, which can cause complications

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in determining the VAT liability of the sale. Therefore, a trade facilitation measure was introduced in 1993 that allowed VAT to be declared at the time payment was received rather than at the legal date of the sale.

Regrettably, as unfortunately often happens, a measure introduced to help the majority of businesses has been undermined by a minority of businesses and their tax advisers, who saw it as an opportunity to exploit the rules and to avoid tax. They contrived to ensure that the final selling price on the new building remained uncertain. They then ensured that the bulk of the payment was made after three years, when the VAT liability of the building automatically changed from taxable to exempt.

Therefore, we took action to block such avoidance schemes in last November's pre-Budget report by amending the secondary legislation that governs the VAT treatment of commercial buildings with effect from 28 November 2002 in order to block future avoidance schemes and safeguard some £165 million that we estimated would be at risk each year if the scheme went unchallenged. In clause 20, we are taking the opportunity to strengthen and simplify anti-avoidance legislation. We are taking steps to ensure that it does not impose undue burdens on businesses that are not engaged in avoidance.

The clause provides that on sales of new commercial properties made on or after Budget day, the liability of payments made after three years will remain taxable and standard rated. In other words, all the uncertain payments for the freehold of a new building will be taxable if the freehold was granted on or after Budget day. Like the changes introduced in the pre-Budget report, the clause will also block avoidance involving the sale of vacant land and the subsequent construction of a commercial building. Deferred payments for the freehold of bare land will be exempt, subject, of course, to the option to tax, even if a new building is later constructed on the land.

As a consequence of the clause, the changes to the VAT regulations made at the time of the pre-Budget report will be considerably simplified and made less burdensome for non-avoiders. A separate statutory instrument was laid on Budget day to amend the regulations to do just that.

Mr. Laws: Can the Economic Secretary give us some indication or confirmation of the economic effects of clause 20 on Exchequer revenues in each of the next few years?

John Healey: I have explained to the Committee that we took steps to block the avoidance scheme in the pre-Budget report. At that stage, we had recourse only to secondary legislation, which we laid. We estimate that the revenue at risk from future avoidance schemes is £165 million a year. Clause 20 puts the powers in primary legislation. That allows us to simplify them and to take away some of the burdens for non-avoidance, which we implemented because we had to use the second-best, but nevertheless immediate, instrument of secondary legislation. The

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clause is a further demonstration of our commitment to tackling VAT avoidance in a well-targeted way.

Mr. O'Brien: Clause 20 relates to the time of supply of land transactions. The Economic Secretary has explained the clause thoroughly. Basic VAT law—for the record, paragraph 1(a) of schedule 9 to the Value Added Tax Act 1994—states that the sale of a freehold new building or new civil engineering work must be standard rated, regardless of whether the seller has elected it. However, by entering into sale contracts where payment of the price was delayed, sellers of new buildings or works could take advantage of section 96(10A) of the 1994 Act and VAT regulation 84(2) in its original form, which delayed the time of supply until payment of the price and made the sale exempt. That provision has been used in VAT avoidance and was partially dealt with by a statutory instrument in November 2002, which amended VAT regulation 84(2).

By inserting new section 96(10B), clause 20 lays down a general rule that if at the date of the grant—in other words, completion—the building or the work is new, the price will always be standard rated, even if payment is delayed. Having considered the Minister's explanation carefully, I regard the clause as reasonably sensible.

Question put and agreed to.

Clause 20 ordered to stand part of the Bill.

Clause 21

Business gifts

John Healey: This is a small and simple measure, but it will be none the less welcome to many businesses and to members of the Committee. The Committee will know that firms from across the country routinely offer gifts to visitors, clients, partners and, on some occasions, visiting MPs in furtherance of their business. Such business gifts have traditionally qualified for VAT relief provided that their value does not exceed a prescribed limited and that they are given to an individual only once in a 12-month period. In Budget 2001, we increased the limit on the value of gifts qualifying for relief from £15 to £50.

There is, however, an anomaly in the rules. If a business gives a succession of gifts to the same person, the gifts are subject to VAT even if their total value over a 12-month period does not exceed the £50 limit. The clause replaces the current qualifying criteria with a provision that any number of business gifts made to the same person in a 12-month period will qualify for relief where the total cost does not exceed £50. The clause is small, simple and sensible, and I commend it to the Committee.

Mr. O'Brien: The Economic Secretary has said that the clause is small and simple. On delving a little further, however, we find that it raises some issues, which I hope that he will consider carefully and respond to. He will note that no amendments have been tabled because we are raising these points to catch his eye, and the eyes of his advisers. He may want to tackle the difficulties that we have identified on Report. If he chooses not to do so, we reserve the right further to consider the clause.

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I will not rehearse what clause 21 is intended to achieve, and none of us would dispute its intent or principle, which the Economic Secretary has outlined. The problem is that Customs and Excise might be too rigid in examining what constitutes ''the same year''. Two annual gifts such as those given at Christmas might be given in consecutive years but within a little less than 12 months of each other. The sums may be small, but, for a small business giving a lot of Christmas gifts to clients and sales staff, the cost might be an unwelcome added burden.

I have identified a hassle factor. When one examines a provision that has been described as relatively easy and simple, it is important to consider whether true simplification has been achieved. I recognise that there is no compulsion to conduct a regulatory impact assessment, which I dare say the Economic Secretary did not consider in relation to this relatively small matter. However, the clause may well add an unnecessary and disproportionate burden to small businesses, which need to ensure that their commercial relationships and staff relationships are well cemented.

10 am

I hope that the Economic Secretary will carefully examine the idea of allowing businesses to choose a 12-month period, or to use a 12-month period determined in law, such as the VAT year, the accounting year or the period to 31 December. I also hope that he will consider bringing the matter back on Report. The problem was identified by the Institute of Chartered Accountants, which states:

    ''We welcome the intention to simply these rules. However, by introducing any period of one year in which a succession of business gifts can be aggregated means that businesses will have to keep rolling 12-month records, thus reducing much of the effect of the simplification. We would suggest that either businesses be permitted to choose a 12-month period, or that one should be determined by law'',

which reinforces my point.

The key is to recognise that rolling periods are worse because all companies must have them. If such records were kept, they would impact on those businesses that have already identified the ''same year''. It would be better to have a single date rather than bringing businesses into line by using a rolling period, because businesses dealing with the regulatory burden can anchor to a single date.

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