House of Commons portcullis
House of Commons
Session 2007 - 08
Publications on the internet
Public Bill Committee Debates

Value Added Tax (Buildings and Land) Order 2008

The Committee consisted of the following Members:

Chairman: Mr. David Amess
Abbott, Ms Diane (Hackney, North and Stoke Newington) (Lab)
Arbuthnot, Mr. James (North-East Hampshire) (Con)
Austin, John (Erith and Thamesmead) (Lab)
Baldry, Tony (Banbury) (Con)
Blizzard, Mr. Bob (Waveney) (Lab)
Boswell, Mr. Tim (Daventry) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cawsey, Mr. Ian (Brigg and Goole) (Lab)
Clarke, Mr. Tom (Coatbridge, Chryston and Bellshill) (Lab)
Crausby, Mr. David (Bolton, North-East) (Lab)
Greening, Justine (Putney) (Con)
Jenkins, Mr. Brian (Tamworth) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Newmark, Mr. Brooks (Braintree) (Con)
Riordan, Mrs. Linda (Halifax) (Lab/Co-op)
Wright, David (Telford) (Lab)
Mark Oxborough, Committee Clerk
† attended the Committee

First Delegated Legislation Committee

Monday 12 May 2008

[Mr. David Amess in the Chair]

Value Added Tax (Buildings and Land) Order 2008

4.30 pm
The Financial Secretary to the Treasury (Jane Kennedy): I beg to move,
That the Committee has considered the Value Added Tax (Buildings and Land) Order 2008 (S.I. 2008, No. 1146)
May I welcome you to the Chair, Mr. Amess, on this glorious afternoon? I hope that you are as pleased and delighted as I am to be here debating this order. It introduces a new replacement schedule 10 to the Value Added Tax Act 1994 which, with the Committee’s consent, will take effect from 1 June 2008. Schedule 10 primarily deals with the rules providing land and property owners with the choice of whether to apply VAT to what would otherwise be VAT exempt supplies of land and buildings. This is known as the option to tax.
The option to tax was introduced on 1 August 1989 following a European Court ruling that led to the withdrawal of the UK’s zero rate on supplies of construction, sale and some leases of non-residential property. By making an option to tax, a taxpayer can recover the VAT incurred on the construction and purchase of new commercial buildings and on the purchase and letting of opted used commercial buildings—in other words, VAT that would otherwise be irrecoverable.
The option to tax has, over the years, been subject to many highly aggressive tax avoidance schemes and there were successive changes to schedule 10 during the 1990s that were designed to stop the abuses. As a result, many consider schedule 10 to be the most complex piece of VAT legislation. In addition, as part of a deregulation measure, changes made in 1995 allowed taxpayers to revoke an option to tax after 20 years, subject to the written permission of Her Majesty’s Revenue and Customs. As the first revocations will be possible from 1 August 2009, taxpayers need certainty over the conditions under which they will be able to revoke their option to tax.
The order delivers two key aims. First, it simplifies the legislation by redrafting it in the same style as the tax law rewrite work that is being undertaken for direct taxes. Secondly, it introduces the new rules on revoking an option to tax. At the same time, it includes several other changes that have been requested by business. The aim of this new schedule 10 is therefore to make the legislation easier to understand and more accessible to both taxpayers and tax professionals and to set out clear rules on the right to revoke an option to tax after 20 years. It also introduces several changes requested by business during the course of the consultation process.
The Chartered Institute of Taxation has stated that the overall package of proposed changes introduces welcome flexibility for businesses affected by options to tax. In October last year, The Tax Journal reported:
“There is no doubt that the proposed package of measures described in these articles should be welcomed. They provide much needed flexibility and certainty. It is especially good to see that HMRC has been listening to the representations made and has worked with representative bodies to come up with workable solutions”.
The option to tax was one of the areas of tax legislation identified by business as a high priority for simplification. I believe that it will be welcomed both inside the House and outside. I therefore commend it to the Committee. Could I just ask Mr. Amess, whether we may remove our jackets? I am rather old-fashioned.
The Chairman: Anyone who wishes to remove their jacket in the warm climate should feel free to do so.
4.34 pm
Justine Greening (Putney) (Con): I should also say, Mr. Amess, that it is a pleasure to be able to serve under what I am sure will be your fantastic chairmanship of this Committee.
We also welcome this order on VAT on buildings and land and the option to tax, introducing rules for 20-year revocation that will be possible from August 2009. I also recognise that it is something of a revamp of what is admittedly complex legislation and the reworking is absolutely necessary. Over the years, the various steps taken by Customs to combat anti-avoidance, such as regarding the use of sale and leaseback schemes, have led to amendments to the existing regulations but those amendments have gradually made the tax situation more complex.
Moreover the result of that complexity for the business world has been that the regulations that have been in place have been like a maze at times, with relevant tax rules in different parts of the regulations, making it much harder for businesses to ensure that they have followed the regulations as they planned to. We gradually reached a stage where the structure of the law relating to a necessarily complex tax area was exacerbating an already difficult situation. Consequently, we welcome the overall thrust of the order today.
Under the order, the tax rules around VAT on buildings and land and the option to tax rules are now organised in a much more logical order, making it easier for those needing to use the regulation to follow and navigate through it. I also recognise that in addition to that improvement there are a number of further changes to the tax laws in this area and I think it would be helpful if I perhaps touched upon some of those changes now, and in particular the areas where I want to question whether Ministers could have gone further. It would certainly be helpful to get a response from the Financial Secretary about the logic for developing the regulation to the state it is in now, welcome though that is, but not any further.
I recognise that the order brings in a number of changes regarding new rules for associates and I also very much welcome the change to the cooling-off period in extending the ability to revoke from three to six months. It will mean that businesses are better able to take the best tax option for themselves; the previous three-month cooling-off period for revocation was so short that it was effectively the equivalent of just one quarterly VAT return.
The introduction of the new way to option to tax, in other words the real estate election, is also welcome. Previously the global option to tax route meant that it was difficult for some organisations wanting to revoke the option to tax on a specific property within a portfolio, because they were not clear on when the option to tax started in relation to the particular property within that overall portfolio. Unless all properties in the global option to tax portfolio had met the 20-year condition, apparently none would have been able to be revoked. So the new suggested real estate election means that companies will only have to write and notify Her Majesty’s Revenue and Customs and the option to tax will be deemed to have come into effect and to have been established on the date of acquisition of the property, which is sensible and obviously a welcome simplification of the rules.
One aspect of the real estate election that I want to raise with the Minister, which has been raised with me by the industry is the rules around bringing in the real estate election and the process of transitioning existing properties affected by the previous global option to tax into it. My discussions with tax advisers involved in advising their clients is that they feel that the rule changes, although welcome, are perhaps unnecessarily complicated. That may discourage some companies from making an election. Can the Financial Secretary provide us with reassurance regarding the extent of guidelines that HMRC can issue to ensure that companies wanting to transition properties into the real estate election will have the clarity of advice and be able to do so in an uncomplicated way? Also, can she tell us the Customs process for reviewing the application of the real election once it has been used by companies? Will she be prepared to review this area with a view to simplification of that process if it becomes clear that there is unnecessary complexity?
Additionally, there seem to be somewhat onerous information requirements relating to a real estate election. When a property within the portfolio is either acquired, or sold, or the company gains an interest in the property, the person or company has only 30 days to provide HMRC with information. Given that, will the Financial Secretary clarify whether the requirement to provide relevant information to HMRC within 30 days is an absolute time limit, or will HMRC allow discretion regarding the process?
On a further point, regarding the introduction of certificates to disapply an option to tax for buildings to be converted into dwellings and land supplied to housing associations, will the Financial Secretary consider adding more flexibility to the rules regarding the conversion of buildings into dwellings and the process by which those certificates are then issued by the buyer to the seller? Under the current proposals, if a building is bought with the intention of it being converted into a dwelling, the buyer must give the vendor a certificate stating his interest in converting the property.
There is a very helpful diagram outlining this in annexe 1 to the HMRC information sheet 03/08 on page 7. It shows a certificate being issued at each stage of the buying and selling process. However, it is unlike planning permission, where the permission remains with the property, because each time the building is sold on with intent to convert to a dwelling, it needs a new certificate. Certificates need to be available for the entire chain of sales prior to the conversion of the property into a dwelling for the disapplication of the option to tax to hold.
Is that necessary? Is it not excessive? Is seems somewhat bureaucratic. It might have been wiser to take a more flexible approach, perhaps more akin to the planning application process. Is the Financial Secretary prepared to consider that aspect of the certification process, to see whether it can be streamlined? If not, will she at least undertake to listen to the industry if its fears are justified that the certification process will be overly bureaucratic—and, more to the point, unnecessarily so?
Following an application regarding permission for an option to tax, it can often take a significant time before HMRC approval is granted; I understand from the profession and tax advisers that the process can take up to six months. Before today, the commencement of the option to tax was the date on which permission was given by HMRC. For the option to tax to commence on the date that the application was first made is definitely a welcome change. I also welcome the fact that applicants can now appeal against decisions about which they are unhappy.
The revised definition of occupation includes a new exclusion for automatic teller machines, which is welcome. Again, however, I question whether the order goes far enough. For example, if a shopping centre was owned by one party that was funded by a bank that had a cash machine on the site, it was likely previously to have been classed as occupying that site, leading to problems with the disapplication of the option to tax. Such cases have been addressed by the order. However, there is a broader issue. For instance, if the shopping centre was transferred to a join venture that received funding from the bank, I understand that the company could not charge VAT for exempt sales and that the option to tax would therefore be disapplied for entire shopping centre. However, that is not dissimilar to the circumstances addressed by the order regarding automatic teller machines.
When considering changes to the definition of occupation, would it not be possible to take a broader approach that tackled such issues more generally, and took account of the reasons why certain factors arise? For example, would it be possible to consider taking a de minimis approach to stop people unwittingly falling foul of the law? For instance, it might be possible for the rules to allow a de minimis result if less than 20 per cent. of a property’s floor space was used. Will the Financial Secretary consider such a streamlining of the order, which could take the provisions on automatic teller machines to a more logical and pragmatic conclusion, so that it works as intended?
I welcome the changes to the rule on the option to tax regarding land that has been bought with a building on it if the building is then demolished. I understand that previously the owner would have had to re-notify HMRC, and that there would be a new option to tax on the new building. I believe that it will now be easier for the person to demonstrate that an option to tax was already in place, and that the substance of the transaction will mean that the new building can be taken under the same option to tax as the land upon which it is built. Again, that seems to be a welcome change.
We broadly welcome the order. I have raised a few issues, and I look forward to the Financial Secretary’s response. We believe that the order is a step forward and, as she said, so does the industry.
4.44 pm
Mr. Colin Breed (South-East Cornwall) (LD): I, too, welcome you to the Chair, Mr. Amess.
We welcome the proposals. Anything that simplifies a total minefield is to be welcomed. I read through the explanatory memorandum, which clearly states that the measure is
“for the purpose of rewriting the Schedule...into language that is clearer and easier to use”
However, I read the rest of the document and thought, “Goodness gracious! What was it like when it wasn’t clearer or easier to use”. I am happy about that.
I have only two specific questions—I am sure that they will be far easier to answer than those asked by the hon. Member for Putney. First, the legislation mentions residential caravans and residential houseboats, which I understand. However, in my constituency and many other places in the country, there is a category of residential accommodation that always seems to produce difficulties—I am a little surprised that it did not get a category of its own—known as park homes. They are not really caravan homes and are not the same as residential occupation; they seem to fall between a number of stools on all sorts of things. Will the Financial Secretary say whether the proposals have any relevance to people who live in, buy and sell park homes?
Secondly, have the proposals made any specific changes to the way in which appeals are undertaken, or is the appeal procedure more or less exactly the same as now?
4.46 pm
Jane Kennedy: Those are thoughtful questions and I shall answer them as best I can—I will be happy to look at the detailed questions that I cannot answer today when I study Hansard and I will write to the Committee.
Assuming that the statutory instrument proceeds with a fair wind, it will allow additional flexibility. The Government will continue to discuss the matter as part of the VAT simplification work that is being done on a broader footing. I reassure the hon. Member for Putney that, although we have come a long way, we are still in listening mode. Our work intends to deliver simplification and certainty for business, but I should like to test her points against the advice that I have been given on one or two issues.
On real estate election, the VAT information sheet from which I believe she quoted covers the new guidance and was made available on publication of the statutory instrument. It will be replaced by an updated edition of VAT notice 742A, “Opting to tax land and buildings” within two months. The Treasury intends to publish a new notice in early 2009. The guidance will be continually updated as a result of discussions between HMRC and the industry. I hope that that is welcome and that it answers a number of the hon. Lady’s questions on the detail of how HMRC will apply the measure and what requirements it will make of, and work it will give to, business and tax advisers that are preparing for questions on the option to tax. As I have said, Customs has issued guidance and will consider it further.
The hon. Lady questioned the need for so many certificates. HMRC suggested the structure and the way in which the measure is described in response to representations made to it by business. She put a slightly different slant on those representations and expressed concerns about those acting as intermediaries and how much of the final transaction should be in the public domain. Again, we want to keep those things under review. The rules that we are considering are drawn to protect the confidentiality of those making the claim. The businesses that responded welcomed the measure, but I shall have a look at the concerns that she expressed.
As a result of the number of standardised forms and certificates that have been designed, copies of which will be available by 1 June—I do not wish to labour the point—we want to go forward. Based on where we are and the simplification work that has been done as a result of the tax law rewrite—similar principles have been applied—we believe that we have struck the right balance, but we will obviously want to test that going forward. The reason we are discussing the order now is that there is often a long lead-in time for transactions and businesses need to know as early as possible what the new working regime will be when they actually make their decisions. As I said, I want to keep that under close scrutiny.
The hon. Lady asked about the broader approach to the definition of occupation for the purposes of anti-avoidance. HMRC believes that the current relaxation of the rule for the automatic teller machine strikes the right balance between helping taxpayers and protecting revenue. Again, we will look at the anti-avoidance provisions as part of wider simplification work on the option to tax.
The hon. Member for South-East Cornwall drew to my attention a number of points about specific dwellings and the current appeals process. The appeals process will be extended by the measure. I will have to look at the detail of the examples of dwellings that he gave to the Committee before I respond in detail. I want to get the answer right because there will be interest in those points. If he will allow me, I shall respond in greater detail in writing—I have had to say that about a number of things, but the broad brush of the measure is welcomed by those who are affected by the option to tax and I hope that the Committee will give it a fair wind. I undertake to respond in writing when I have read some of the remarks on some of the detail and have given them further thought.
The Chairman: Did the hon. Member for Putney want to pursue it further?
Justine Greening: I just wanted to say that I look forward to any further written representations, but I appreciate the fact that the Financial Secretary has tried to respond to some of my questions.
Question put and agreed to.
That the Committee has considered the Value Added Tax (Buildings and Land) Order 2008 (S.I., 2008, No. 1146).
Committee rose at seven minutes to Five o’clock.

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2008
Prepared 13 May 2008