Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 21 JANUARY 2004
JOHN HEALEY
MP, MR PAUL
O'SULLIVAN AND
MS MRIDUL
BRIVATI
Q40 Joan Walley: What would enable
you to make a certain judgment?
John Healey: The work that we
are currently undertaking in detail at the moment with a view
to being able to make an announcement on this potentially as part
of a wider package of measures to try and boost energy efficiency
in the home around the time of the Budget. The Carbon Trust's
programme is valuable. It is a pilot, trying to get 200 micro-CHP
units into different households and then seeing what the effect
is.
Q41 Joan Walley: We are not going
to have to wait for two years for that research.
John Healey: In my judgment, we
do not need to wait until we see the results of that. Having got
the results of that, it would actually be rather useful in helping
to give us greater clarity and certainty on these questions and
it is important that the Carbon Trust pursue their programme.
In my judgment, the bigger questions relate around being confident
and clear that we have the legal vires to do this and confident
and clear that we have a principled case on which to base this
policy where we choose to adopt it. We are not yet in a position
to do that but we are doing some intensive work on it.
Q42 Joan Walley: So, you expect to
have a decision fairly soon on it?
John Healey: And I am aiming to
be in a position to make a judgment on this. The Chancellor in
the end will make the decisions around the time of the Budget
because what is quite clear and what we are looking to try and
do on a sort of Budget and Spending Review timescale—and
we were clear in the commitment that we gave in the Pre-Budget
Report and indeed all the groups that are interested and indeed
this Committee would recognise that there is no one thing that
is going to help us solve the problem with domestic energy efficiency,
it is a combination of various spending programmes, programmes
for utilities including potentially the role of economic and fiscal
instruments—is put together the sort of package that will
mean that this part of the policy territory, if you like, makes
the contribution that we need it to make towards achieving the
climate change goals, the contribution that we identified last
February in the Energy White Paper.
Q43 Chairman: It sounds to me as
though the timetable is being driven by a desire to announce at
the time of the Budget rather than by lawyers who are having difficulty
reaching a decision. It is perfectly respectable if that is the
case. We all know that lawyers are capable of stringing anything
out but this is not exactly rocket science, is it? It must be
possible to reach a decision.
John Healey: I do not know how
the lawyers would describe the situation but I think it is fair
to say that, as policy makers and ministers, we are driving the
lawyers in order that we can make the decisions on the timetable
that we see as appropriate.
Q44 Sue Doughty: Very briefly because
we touched on this on the floor of the House on 18 December and
this is around the same area about energy saving materials. In
your response to me when I was asking about a reduced VAT rate
of 5% for supply and installation of energy efficient products
and materials, you suggested to me that this could not be done.
It is still my belief that the sixth VAT directive prevents a
reduced rate of VAT on energy saving materials used for Do-it-Yourself,
but there is no reason for not extending it to all products for
energy savings that are installed by contractor under the current
directive because this would be such a big incentive to contractors
who do not have to wait for something to be announced because
it would appear that it is already there in law to allow you to
do it for materials installed by contractors. Can we revisit this
one once again, please.
John Healey: It can for contractors,
it cannot for DIY installation. The rules prevent us doing that
which is why we have been arguing hard for two or three years
now and in particular in this current round of reduced rates discussions.
We cannot introduce a reduced rate of VAT on energy efficient
products as things stand without changing those rules as well.
Q45 Sue Doughty: So, just to confirm
the previous discussion you had with Joan Walley, if we know that
it is energy saving installed by contractors, that is fine. If
it is an energy efficient product, this is the area of greyness
which we are trying to get to a resolution.
John Healey: The area of greyness
is in particular connected with the proposition that micro-CHP
boilers might attract a reduced rate of VAT of 5%.
Q46 Sue Doughty: So, other energy
efficient products such as central heating, hot water systems,
controls and insulations would already be included as being eligible
for 5% VAT if installed by contractors?
John Healey: The legal advice
is that we have the legal vires to do that under the current
regime and indeed in some areas we have already done that.
Q47 Sue Doughty: So, will you be
bringing that in?
John Healey: If we are going to
take that any further, then that will be something we will consider
and make an announcement about at the time, round about the Budget,
when I hope we are going to be able to confirm a package of new
measures and policies that will contribute to the aspirations
that we have to see greater energy saving in the home.
Mr O'Sullivan: I think it might
be worth explaining is that the way in which it works at the moment
is if you are talking about something like installed central heating
systems, you would not be able to specify the reduced VAT rate
for particularly energy efficient boiler systems and the way in
which it works at the moment is because the VAT reductions are
available for schemes where there is grant support, we can specify
within the grant that they will be appliances that need to serve
an energy efficient standard. So, the way in which it has been
set up has been to try and ensure that where installations or
where a heating system is installed, we get the very best in terms
of the energy efficiency rating being installed in those, and
that has been done by making this link to the grant scheme. There
is scope in terms of EU legislation for evolving some of that,
but part of the way in which it was designed was to ensure that
we get the most energy efficient appliances being fitted by installers
where we can give them a 5% VAT cut.
Q48 Sue Doughty: So, that will fit
within the grant scheme but, in terms of the generality . . .
Although I appreciate that, within the grant scheme, we are looking
particularly at the fuel poor and that is right, it is not the
only area where you can make those energy savings. I have always
taken the view that the fuel rich are the ones who waste the most
energy and anything that encourages them to reduce the energy
they use has to be beneficial.
Mr O'Sullivan: Yes.
Q49 Mr Thomas: On housing, I want
to ask you about the consultation announced in the Pre-Budget
Report on SIPPs, the self-invested personal pensions, and a proposal
that, for the first time, these would include residential properties.
What assessments are the Treasury making of the effect of that
on the number of second or holiday homes?
Mr O'Sullivan: I do not know about
this issue.
Chairman: Perhaps you could drop us a
line.[2]
Q50 Mr Thomas: Perhaps I could make
a point on this issue to make clear the environmental impact and
the sustainable impact of this. The proposal is of significant
tax benefit for people who set up their own self-administered
pension schemes to invest in residential properties: you get 40%
released if you are 40% taxpayers; you get a 40% rebate in terms
of your investment; you will be able to rent the property and
therefore will get a rent from it; and, when you sell it in order
to put it into your pension plan, you will be able to get capital
gains disallowance on that as well. To my mind, that is a huge
benefit from the Treasury to the richest people in society whilst
we are still trying to get first homes and sustainable first homes
for many people in all parts of the United Kingdom and that the
effect on an area like mine where we have 1,000 second homes that
are not used for local people is plain to see and I would like
to think that the Treasury is going to model the impact of this
on particular aspects of the residential home market before it
goes ahead with any such massive boost to the very richest in
society who are not the people who are actually looking for sustainable
residential homes at the moment.
John Healey: I quite understand
Mr Thomas's concern about second homes in what is a very beautiful
part of Wales. I have to admit that the potential environmental
impact of the self-invested pension scheme had escaped me but,
if the Committee will permit me—
Q51 Mr Thomas: It is sustainable
housing.
John Healey: I shall go back and
examine that and perhaps I could write and set out our view for
you.[3]
Chairman: I would be grateful if you
did write. I think we all understand that this is a slightly tangential
issue.
Q52 Mr Challen: My question is on
homes and it is also on VAT and I think I dread the answer. A
year ago, we asked the Treasury to look at ending the perverse
VAT incentive of building on greenfield sites and not brownfield
sites due to greenfield sites being VAT free. The response from
the Government was more or less in a footnote saying that this
subject would be looked at under a continual review. That was
12 months ago, so I am just wondering what has the review helped
us along with? Will there be an announcement shortly or are we
going to have another 12 months of continual review?
John Healey: I hope my answer
will not meet Mr Challen's expectations of dread! In fact, the
Committee may be aware of the Kate Barker review which is looking
at the question of supply and demand for housing and its implications
right across the economy and for the policy on fiscal regime and
the Committee may be aware that this is an element that she has
looked at. She has produced an interim report in the run-up to
the Pre-Budget Report and aims to submit a final report to the
Chancellor with further work during the course of this early part
of the year. So, this is an element of the comprehensive and quite
detailed look that she is taking at this whole question of supply
of housing. Therefore, I think one might expect that issue not
just to be, if you like, on the track of continual review, which
of course we do with every element of the tax regime, but a part
of a particular study that is being independently undertaken by
Ms Barker.
Q53 Mr Challen: I do not quite understand
why this review of VAT—and that was the answer we got, that
it was a review of this very specific issue—should hang
on another review which looks at all the spatial aspects, regional
housing policy and all the rest of it. Why can this not be dealt
with now in order that there is a level playing field at least?
John Healey: I think the reason
for that is that those who would argue for perhaps a standard
rate of VAT on housing going on greenfields would do so because
they are interested in the impact that it is going to have on
the distribution, location and potential cost of home building.
In that respect, it seems sensible to make sure that is part of
what is the wholesale look at the challenges we face in providing
enough homes in the right places within the UK rather than trying
to treat as something in isolation. So, that is why I suggest
that it is the appropriate way of dealing with it and that is
in fact where it sits at present.
Mr Challen: Except that we have other
policies—PPG3 is obviously the most prominent of those—which
have reversed decisions about greenfield sites and, coming back
to this phrase, joined-up Government. We have had PPG on the books
now for a couple of years and yet the incentives to build on greenfield
sites are still there. So, this should have been tackled some
time ago and I think that the Government should be able to report
back to the Committee that they are going to do something pretty
quickly on this matter because, whilst we are not doing anything,
houses are being built and many of them are in the wrong place.
Chairman: Before you answer that, Joan
Walley would like to say something on this issue.
Q54 Joan Walley: Before we leave
this point—and it may be me who has overlooked it in which
case I apologise—it would be enormously helpful if you could
let us have a copy of the remit which was given to Kate in terms
of the economic instruments aspect of the joint report which I
believe was commissioned jointly by ODPM and the Treasury.
John Healey: Certainly. I will
report back to this Committee on this issue as soon as I am able
and, in the meantime, I will certainly make sure that the Committee
has details of the remit Ms Barker is working to.[4]
Q55 Mr Challen: I will now move on
to the question of alternative fuels. In 2002, LPG counted for
a mere 66,000 tonnes out of a total of 37 million tonnes of fuels
accounted for, that is despite after having eight years of preferential
duty applied to it. How could you explain what appears on the
surface to be a complete failure and miserable failure of the
policy?
John Healey: I would not first
of all accept that it is a miserable failure of policy.
Q56 Chairman: We would not expect
you to!
John Healey: Mr Challen, you will
remember when we gave a commitment in Budget 2001, which was at
that time pretty unprecedented in terms of the duty regime, that
we would maintain the differential discount for LPG and CNG over
other fuels, having done better than that and frozen them every
year since. You might be aware that, since that time, the sales
from road fuel gasses have grown from four million litres to 179
million litres. There are now 1,400 outlets through which it is
possible to use and get LPG to fill up your car including my local
filling station in Rawmarsh on top of Rawmarsh Hill. Alongside
the significant commitment and cost that the Exchequer has been
prepared to put in to encourage the development of this industry,
the industry itself has invested, according to the LPG Association,
more than £200 million over that period. So, this is an industry
which is now much more widespread, it is a form of road fuel that
is much more widely used by the motorist and part of the purpose
of such a significant discount for LPG was precisely to try and
help with establishing this industry and to recognise what inevitably
were additional infrastructure costs, both in production and distribution,
as well in costs in converting vehicles, if this was going to
be a road fuel that would play its part in contributing to a greener
environment.
In the absence of the Chairman, Joan
Walley was called to the Chair
Q57 Mr Challen: I guess that part
of the reason why so little of this LPG was sold is because, in
your own area when you were the Green Minister with responsibility
for Customs & Excise and Inland Revenue, a total of 58 LPG
vehicles existed out of a fleet of 4,300. Is there any specific
reason why the department has chosen not to go down that road?
John Healey: If the Committee
would wish, I am happy to give the Committee the updated picture
in terms of the Government car fleet.[5]
I suspect that, like any fleet manager, the replacement of vehicles
generally is done on a three-year basis, so it is a process of
replacement.
Q58 Mr Challen: But 58 vehicles out
of 4,300 does not sound like a three-year rolling programme to
me. Perhaps they cannot get to your local LPG station.
John Healey: As it happens, my
own vehicle is due to be replaced within the next few months and
what I find quite interesting is that the decision about which
vehicle we go for in part is mine. So, I feel a particular responsibility
to try, if indeed the figure stands at 58, to increase that over
the next few months.
Q59 Mr Challen: Except that you would
not really because the Government are going to start withdrawing
this preferential rate and that particular fuel does not look
quite so attractive any more.
John Healey: The reason in the
Pre-Budget Report that we signalled that we would, over the next
three years, increase the level of duty for LPG towards the point
at which it was more appropriately pitched was that as part of
what we also published in the Pre-Budget Report was this framework
for all alternative fuels. Our principal purpose in making tax
decisions about duty rates is based on the degree of environmental
gain that we can get from a particular green fuel. LPG clearly
can deliver some environmental benefits and particularly where
the conversions are properly done, those can be significant. However,
the majority of vehicle conversions are not done through the PowerShift
programme, four out of five are not done through the PowerShift
programme. Some of those 80% are certainly done by reputable converters
and are done to a high standard, but there is a significant proportion
of those which are done in a substandard way which can mean that
in fact the environmental performance of LPG converted vehicles
when they are not done properly is actually worse than the comparative
fuels that we take as our benchmark. Crudely, we need to move
to a point, after a period, in which the duty discount that we
have offered, which is certainly the most generous in Europe,
almost double that in Germany and France, five times that in Italy,
all three countries which have a fairly well developed LPG market,
was in place to help this industry establish itself to a point
where we need to have duty rates and the cost to the Exchequer
and the public purse, the taxpayer, set at an appropriate level
that meets or, if you like, matches the sort of environmental
gains we get from the use of LPG.
2 Please see supplementary memorandum on Ev
17-18 Back
3
Please see supplementary memorandum on Ev 17-18 Back
4
Please see supplementary memorandum on Ev 18 Back
5
Please see supplementary memorandum on Ev 18 Back
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