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21 Jun 2006 : Column 497WH—continued

21 Jun 2006 : Column 498WH

VAT (Isle of Mull Swimming Pool)

4.43 pm

Mr. Alan Reid (Argyll and Bute) (LD): It is a pleasure to serve under your chairmanship today, Mr. Bercow. I start by thanking the Speaker on behalf of my constituents on Mull and Iona for granting me this Adjournment debate.

I want to set out the background to the swimming pool before turning my attention to the complex VAT issue. Mull is the largest island in the country that does not have a swimming pool. I do not want anyone to think that because Mull is an island, people have the alternative option of swimming in the sea. The seas round the island are very treacherous and are certainly no place for anybody to learn to swim.

Tragically, every year about 50 children in the country die from drowning. That shows the importance of learning to swim, and Government policy rightly attaches a high importance to teaching children to swim. The Schools Minister recently announced a £5.5 million scheme to give daily catch-up lessons to children who cannot swim by the end of their primary schooling. Such a policy could not be implemented on Mull simply because there is no swimming pool.

For a quarter of a century, the islanders have been trying to raise enough money to build a pool. The Mull and Iona Swimming Pool Association was formed and it set up a company with charitable status to manage the fundraising, oversee the design and construction and to own the pool when it was completed. That company is called the Mull and Iona Community Enterprise—MICE, for short.

After a quarter of a century of effort, the islanders are now tantalisingly close to getting a swimming pool, having raised £1.8 million required to build it. They have overcome many hurdles along the way, one of which was the fact that on an island of only 3,000 people, no swimming pool could be run without making an operating loss. That hurdle was overcome by reaching agreement with the North British Hotels Trust—NBHT—a registered charity that owns and operates the Isle of Mull hotel at Craignure on the island. It was agreed with the trust that the pool would be built next to the hotel and that it would be leased to North British Hotels Trust, which would then operate the pool and absorb any losses on the running costs.

The pool would, of course, be open to the public and made freely available to schools and swimming clubs. It has received financial support from the Argyll and Bute council, Argyll and the Islands Enterprise and SportScotland, as well as many contributions from trusts and individuals. A great deal of money has been raised through voluntary fundraising activities by the islanders.

A few months ago, it seemed that the difficulties were over. MICE had raised £1.8 million that was required to build the pool and the North British Hotels Trust had agreed to manage and operate it and absorb any operating losses. It all seemed fine, but then came the bombshell in the form of the dreaded VAT man, which is why I applied to Mr. Speaker for this debate. It is frustrating that the islanders are so close to realising the dream of a swimming pool, yet they are being foiled by the prospect of being taxed to the tune of
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£300,000 for a project that I am sure the whole House would agree is a worthwhile voluntary sector project. It would be simply impossible to raise that extra £300,000.

It has always been assumed that, because MICE and the North British Hotels Trust are both charities and the pool was for school and community use, as well as being non-profit making, it would be zero-rated for VAT. However, it has turned out that the law is not quite as straightforward as that. Much correspondence has taken place between Revenue and Customs and MICE and, so far, Revenue and Customs has not been able to give a ruling on the matter. I stress that the HMRC officers with whom MICE has been dealing have always answered its questions speedily and are doing their best to do their job and co-operate. MICE has no criticism whatever of the people in the VAT office, but simply of the complicated rules under which they have to operate. Parliament designed those rules to catch large banks and insurance companies that wanted to avoid VAT, but it seems to have caught a small voluntary group in that net.

The list of items that are zero-rated for VAT are specified under schedule 8 of the Value Added Tax Act 1994. Under the heading “Group 5—Construction of buildings, etc.”, item 4 states:

However, the interpretation of the law is that a swimming pool does not fall into the zero-rated category, despite its being used for social and recreational activities and—in this case—being operated by a charity. It was therefore accepted by MICE and North British Hotels Trust that some VAT had to be paid, but it was assumed that the hotels trust would be able to pay VAT on the lease and charge VAT on admissions to the pool and that MICE would be able to recover the VAT on the construction.

An independent commercial valuation of the lease was obtained, and it was estimated that the commercial value of the lease was about £5,000 a year. That is the cost of the lease that the hotels trust would pay to MICE. The assumption was that the hotels trust would be able to pay VAT on the lease, which would work out at slightly under £1,000 a year, and that would allow MICE to recover the £300,000 VAT on the construction costs.

However, an unexpected problem arose, and this is where the whole affair becomes difficult to understand. Certain categories of admission to the pool are zero-rated for VAT. Those include schools, clubs and what is known as a series of lets. The series-of-lets rule is specified in the Value Added Tax Act 1994, schedule 9, group 1, note (16). In conjunction with that, we have to look at another part of the 1994 Act: schedule 10, paragraph 2. That is a long complicated paragraph, and it would probably take me the whole time allocated for the debate to read it out, so I shall refrain from doing so, but the crux of the issue is a phrase in that paragraph: “wholly or mainly”.

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The Act says that the hotels trust cannot recover VAT on the construction costs unless the pool is used “wholly or mainly” for purposes for which VAT would be charged on the costs of admission. I find that slightly illogical. Parliament has decided that certain activities are zero-rated for VAT. I will refer to those activities as good causes. If the pool operators admit too many of those good causes, the builders, MICE, have to pay £300,000 VAT, yet if those good causes were not admitted, VAT would be required to be paid only on the lease and would be less than £1,000 a year. That seems rather illogical.

Let me summarise the position. Revenue and Customs says that the law is that more than 20 per cent. of admissions being good causes attracts £300,000 VAT, but with less than 20 per cent. good causes, VAT is less than £1,000 a year. Surely there is something far wrong there. I cannot believe that Parliament intended that when it passed the legislation.

Because of the agreement with the council and with SportScotland, schools and clubs must be admitted to the pool, and of course MICE wanted schools and clubs to be admitted. That was one of the main reasons for wanting a pool on the island in the first place. There is surely something far wrong with the law if it says that a charity cannot recover VAT on the construction costs if too many zero-rated categories of swimmer are admitted. That is surely the wrong way round.

The law that Parliament passed uses the phrase “wholly or mainly”, but does not put a figure on it. Revenue and Customs has adopted a policy that, in the case of indirect taxation, “wholly or mainly” means 80 per cent. That, I understand, has never been tested in court, and it must be stressed that the 80 per cent. figure was not passed by Parliament, but adopted by Revenue and Customs.

It has been estimated that less than one third of the usage of the pool would be by groups that were zero-rated for VAT, so if “wholly or mainly” could be reinterpreted as more than two thirds, the problem would be solved. I would have thought that “mainly” could reasonably be interpreted as meaning more than two thirds; 80 per cent. seems a very high interpretation of the word “mainly”.

The accountants hired by Argyll and the Islands Enterprise to advise MICE have told me that they are confident that if the case goes to a VAT appeals tribunal, MICE will win the case, but of course none of us wants the case to go to an appeals tribunal, so I ask the Paymaster General to take a look at the Revenue and Customs interpretation of the Act of Parliament.

MICE’s accountancy advisers have told me that the “wholly or mainly” rule was originally introduced in an attempt to eliminate anti-avoidance measures by some large financial institutions. There appears to have been a scam involving deals between financial institutions and universities or private hospitals. Apparently, universities or private hospitals were taking advantage, through a convoluted series of agreements, of the zero-rated status of health and education to enable the financial institutions to recover VAT on non-exempt activities. However, I understand that that loophole has been plugged by other means: the Government recently introduced other legislation that plugged that loophole,
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and a recent European Court ruling, which rejected an appeal by HBOS plc, BUPA and Huddersfield university, confirmed that.

My understanding is that that ruling shows that the 80 per cent. policy is no longer required to stop such tax avoidance by big banks, big universities and private hospitals. If the policy were to be reinterpreted to, say, two thirds for the deserving case of the Mull pool, I do not believe that that would open the floodgates.

The Paymaster General (Dawn Primarolo): Will the hon. Gentleman disclose which company is giving that financial advice to MICE? That may become pertinent to what I have to say.

Mr. Reid: I am perfectly happy to do so. Ernst and Young has been hired by Argyll and the Islands Enterprise and has given that financial advice. I have certainly used financial advice from that company in preparing my speech. I am working on the assumption that it is correct professional advice.

If the policy were reinterpreted to two thirds, that would not open up the floodgates to undeserving cases, because the European Court case was decided on a different piece of legislation.

It must be stressed that the recent agreement between MICE and the hotels trust was put in place because MICE could not afford to fund the inevitable operating deficit on the pool. The structure was not chosen as a VAT avoidance measure.

A Customs and Excise officer who had been dealing with the case had originally been suspicious that the purpose of the lease may have been to avoid VAT. However, in his latest letter to Ernst and Young, dated 16 June, he seemed satisfied that it was not. He wrote:

The crux of the problem appears to be the 80 per cent. policy, which, given how it has operated in this case, means that if the pool operators admit too many good causes, MICE has to pay a VAT bill of £300,000. Customs and Excise will never collect that money. If the ruling is implemented, no pool will be built, so at the end of the day no money will be collected.

To show how unfair the VAT bill for MICE would be, I shall refer to another swimming pool. Last Friday, I was delighted when the Scottish First Minister opened a new swimming pool in Campbeltown, also in my constituency. That pool is owned and operated by the council, so under the legislation it is free from VAT. However, because Campbeltown is big enough to enable the pool to run without an operating loss, the council was able to afford it. The paradox is that a reasonably large town on the mainland gets a VAT-free pool run by the council, but when a voluntary organisation on a smaller island tries to build a pool that would run at a loss, it receives a VAT bill. I do not understand how that can be fair.

The community on Mull has done what it thought the Government, the Scottish Executive and the council wanted it to do. It formed a community group, raised the money itself and went into partnership with the private sector. Like all islands, Mull has a tremendous community spirit. People there did not rely
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on the state, but got up, worked their socks off and raised the money themselves. Now it appears that they have to pay VAT on the pool that would not have had to be paid if the council had built it.

Time is running out because many of the bodies that awarded grants imposed time limits, for obvious reasons. For example, the European objective 1 money must be spent by the end of November or it will be lost forever. In a 16 June e-mail to Ernst and Young, the Customs and Excise Officer who is dealing with the case wrote:

I do not expect the Paymaster General to give an answer today, but I am sure that she will be sympathetic to the islanders’ plight. I would hope that she would study the problem in detail and attempt to find a way round the VAT problem.

I must stress that when I am speaking in the debate, I have no criticism of Customs and Excise officers or the way that they are carrying out their job. They are responding quickly and giving advice. I have no criticism there.

I am sure that all those laws were passed by Parliament for perfectly sensible reasons to stop VAT avoidance by big companies and banks. However, two charities are involved, MICE, a community group and the North British Hotels Trust, a voluntary group trying to provide a swimming pool for the island. Therefore, I hope that we can find a way round the problem without opening up floodgates that would allow big banks and insurance companies to benefit from it.

The islanders of Mull have tried very hard for 25 years. Therefore, I hope that we can find a solution to the problem that would allow them to build a pool without the extra £300,000 bill from Customs and Excise.

5.1 pm

Mr. Michael Wills (North Swindon) (Lab): I am grateful to the hon. Member for Argyll and Bute (Mr. Reid) for allowing me to take a couple of minutes to support the powerful argument that he made. I agree with everything he said about the need to crack down on evasion; I think that everyone in the House agrees on that. However, he put forward a powerful case for how that can have perverse consequences for small community groups. I understand that absolutely from my own experience.

For example, as the hon. Gentleman noted, if a building is built in one way it can attract VAT, yet if it is built in another it does not. In a recreation facility in which the entrance to the swimming pool is through a central area, if the pool is completely replaced but the entrance remains the same, that new facility attracts VAT. However, if it were wholly new—with an entrance in a separate place—it would not attract VAT. As the hon. Gentleman said, that can be enormously damaging for small voluntary groups that are trying to build a community facility, not trying to evade VAT,
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and which are not big corporations. Therefore, I support everything he said in that respect.

The hon. Gentleman also referred to the fact that time is running out on the Isle of Mull. Time, as he powerfully demonstrated, is often of the essence in these judgments. It is important for small community groups, such as those on the Isle of Mull and in Highworth in my constituency, that do not have access to much professional advice—they cannot afford it—to get a clear and rapid indication of their tax liability. In my experience in Highworth, that can take a year, which I am sure he agrees is too long.

I hope that my right hon. Friend the Paymaster General, whom I know will be sympathetic to the efforts of voluntary groups in the Isle of Mull and elsewhere, can find a way to reassure everyone about those concerns.

5.3 pm

The Paymaster General (Dawn Primarolo): It is delightful to see you in the Chair, Mr. Bercow. You have chaired quite a few debates in which I have participated. I congratulate the hon. Member for Argyll and Bute (Mr. Reid) on securing today’s debate, and I shall return to the comments made by my hon. Friend the Member for North Swindon (Mr. Wills).

First, let me say to the hon. Member for Argyll and Bute that things are not always as they seem. For instance, when the officer wrote the e-mail to him about ministerial direction, he was referring to whether the officer had authority to meet him as a Member of Parliament. Ministers have absolutely no power of direction over the tax system; it is divided by care and management. However, I want to return to the points that the hon. Gentleman made.

First, I appreciate why the people of Mull and Iona—an island community with an extensive coastline—attach such great importance to the issue of the pool. Their feelings reflect and are reflected in their impressive and sustained fundraising efforts over many years. As the hon. Gentleman was good enough to acknowledge, the project fits closely with the Government’s objectives for access to swimming pools for members of the public.

I pay tribute to the efforts of the community on Mull and Iona, particularly the swimming pool association, which has been involved for some 25 years in campaigning, fundraising and trying to establish the pool. All of us would probably acknowledge that it is probably one of the longest-running fundraising campaigns in Scotland. Pools are expensive to build and maintain, and the association has experienced several difficulties over the years in respect of those costs. We all congratulate members of the association on the endurance, determination and imagination that they have demonstrated in overcoming those many difficulties.

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