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Session 2008 - 09
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Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. David Amess
Allen, Mr. Graham (Nottingham, North) (Lab)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Clwyd, Ann (Cynon Valley) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hogg, Mr. Douglas (Sleaford and North Hykeham) (Con)
Horam, Mr. John (Orpington) (Con)
Ladyman, Dr. Stephen (South Thanet) (Lab)
Michael, Alun (Cardiff, South and Penarth) (Lab/Co-op)
Mudie, Mr. George (Leeds, East) (Lab)
Roy, Lindsay (Glenrothes) (Lab)
Timms, Mr. Stephen (Financial Secretary to the Treasury)
Twigg, Derek (Halton) (Lab)
Whittingdale, Mr. John (Maldon and East Chelmsford) (Con)
Mr. Mark Etherton, Committee Clerk
† attended the Committee

First Delegated Legislation Committee

Monday 2 November 2009

[Mr. David Amess in the Chair]

Value Added Tax (Buildings and Land) Order 2009
4.30 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That the Committee has considered the Value Added Tax (Buildings and Land) Order 2009 (S.I. 2009, No. 1966).
I bid you a very warm welcome, Mr. Amess, to chairing our Committee. It is the first time that I have served under your chairmanship. I welcome all Committee members as well.
This Treasury order addresses some issues that have arisen since the current schedule 10 of the Value Added Tax Act 1994 was introduced in 1 June 2008. Schedule 10 sets out the rules governing the operation of the option to tax, whereby land and property owners can choose whether to apply VAT to what would otherwise be VAT-exempt supplies of land and buildings. A business that exercises that option is required to charge VAT on all future lettings or sales of the property concerned but is able to recover the VAT on associated costs, such as repairs and refurbishments. The option to tax therefore provides flexibility for developers and landlords whose customers are businesses. I should add that supplies of domestic and charitable buildings are exempt from VAT and therefore not affected by the option to tax.
After extensive consultation with businesses on simplifying schedule 10, a revised version came into effect on 1 June 2008 that introduced new rules for revoking an option to tax and made other changes requested by businesses to make the operation of the legislation less burdensome. The package was widely welcomed. A small number of amendments have been identified since, which are necessary to protect against tax avoidance risks and to ensure that business can benefit as intended. We have identified opportunities to simplify the rules further and to ensure that the anti-avoidance legislation does not bite unfairly in cases of lending to property developers by banks that have received financial support from the Government.
The changes to schedule 10 take those identified opportunities, first, by ensuring that when a property subject to an option to tax is sold, the payments received will be subject to VAT, even if they are made some time after the sale takes place. That will close an avoidance loophole and create certainty. Secondly, the changes will ensure that the benefits of the real estate election rules, which allow businesses to take a single option to tax all future acquisitions of land and buildings rather than notify each individually, also apply to those buying property at auction. Thirdly, the changes make it simpler for taxpayers to obtain permission from Her Majesty’s Revenue and Customs to revoke an option to tax—after the requisite 20 years have passed—and to exclude new buildings from an existing option to tax. Fourthly, the changes amend the disapplication of the option to tax anti-avoidance test to ensure that the test does not catch banks simply because they have Government shareholding.
The amendments to schedule 10 in the Treasury order ensure that businesses can benefit from the option to tax rules as intended when schedule 10 was introduced, and protect against avoidance risk.
I commend the order to the Committee.
4.33 pm
Mr. Greg Hands (Hammersmith and Fulham) (Con): It is a pleasure to serve under your chairmanship, Mr. Amess, for, I believe, the second time. I thank the Financial Secretary for introducing the order. As he said, it follows on from the identically titled order of last year, which made extensive changes to schedule 10 of the 1994 Act, and the changes before us adjust the regime brought in last year. I understand that most were prompted by suggestions from businesses, which I think the Financial Secretary also said. We have some questions about the order.
We welcomed last year’s order, which introduced the so-called “options tax” that allows VAT to be charged and, therefore, other VAT to be offset at the same time, hence irrevocable VAT becomes recoverable. We are minded to support the present changes but I would be grateful if the Financial Secretary could first answer some questions about the proposals.
The explanatory notes identify two key motives for the changes. First, they state that the changes will facilitate the scheme’s use. How much take-up has there been of the options made available by last year’s order, both in terms of the number of instances—companies involved—and the financial value of the transactions?
Secondly, the changes “reduce further” the risk of schedule 10 being used for “abusive tax avoidance” purposes. Is that remark a response to a theoretical risk, or an actual risk of tax avoidance? Is there any evidence that the scheme is being abused and, if so, what is—or is projected to be—the scale of abuse over a whole financial year? The technical changes seem acceptable, but I would like the Financial Secretary’s reassurance that the parties affected have been properly consulted.
A further question relates to the 20-year revocations that became permissible from 1 August 2009. That was one of the changes approved last year and it would be helpful to have the Financial Secretary’s reflections on what has happened since they took effect. Finally, given that the rules on those options are already being amended, does the right hon. Gentleman anticipate any problems with any of the existing cases as a result of changes that we are discussing today?
4.36 pm
Mr. Jeremy Browne (Taunton) (LD): I wish to contribute briefly to the debate, because I, too, see merit in the proposals. However, I have a few additional questions that I wish to put to the Financial Secretary. The first question—and this has been touched on by the hon. Member for Hammersmith and Fulham—refers to the degree to which the measures make tax avoidance easier or, as I imagine the Financial Secretary would claim, harder. Is there a differential in operation? Some companies are very alert to the possibilities of reducing their tax liability and can see ways in which these mechanisms can be brought to bear for their benefit, but smaller organisations may have more difficulty in that regard. It would be helpful if the Financial Secretary reassured the Committee that the nature of the arrangements is such that they do not mean that companies would have to go to elaborate lengths to try to calculate many different models of taxation to try to find which one is most advantageous to them.
I know it would require some projections or assumptions, but it would be helpful to the Committee to have an estimate of how much additional revenue would be raised for Treasury coffers as a result of such measures. Is this primarily about trying to comply with a European Union-wide approach? Is it about trying to make the taxation regime easier for business to understand? Is it about trying to encourage more investment by companies? Is it about trying to maximise revenue to the Treasury at a time when we have very straitened public finances? Perhaps it is a combination of all of those considerations, but I am interested in the motivation and the projected consequences.
Will the Financial Secretary give us an indication of the effect of the temporary VAT cut on this measure? More pertinently, what effect will it have in just less than two months, when the temporary VAT cut no longer applies and we revert back to the 17.5 per cent. rate? What would be the potential consequences of increasing VAT to, for example, 20 per cent.? That has been widely mooted in the press and elsewhere and is seen by many as a possible policy in the years ahead to try to grapple with the budget deficit—although for the record that is not a policy of my party.
Finally, the measures take effect from 1 August 2009. Perhaps I simply do not understand the procedures—and I realise that the House does not sit in August—but it seems to strange that we are brought into such Committees, more than three months after the date the measures take effect, to discuss whether we approve of them. Presumably, if the Committee decided that it did not approve of the measures, there would be all kinds of complications trying to reverse something that has already been set in train. Procedurally, would it not be better for us to have an opportunity to discuss these matters in advance, rather than many months afterwards?
4.39 pm
Mr. Timms: It might help the Committee if I say a little bit more about the avoidance measure, particularly on the automatic revocation rule. That will enable me to address the questions raised by both hon. Gentlemen. I am grateful for their support in principle for these changes.
Once the cooling-off period has expired, an option to tax cannot normally be revoked for 20 years. That ensures a fair balance between the VAT recovered by the business—for example, on building or refurbishment costs—and the VAT received by HMRC from supplies of land or property. The Budget changes allowed an option to tax to lapse automatically if the taxpayer had not held a relevant interest in the property in the immediately preceding six years. That automatic revocation included an anti-avoidance rule to prevent abuse but, in discussion with businesses, three new situations were identified that could create a tax-avoidance opportunity not prevented by the current rule. The order addresses the three avoidance opportunities by denying automatic revocation in each of those circumstances. We are not aware of any current avoidance on that basis and we are not expecting a significant impact on receipts as a result of the changes we are making. But it is estimated that the changes—particularly the one on the automatic revocation rule—could protect up to £100 million a year in future. That is the scale of what we are dealing with.
I can tell the hon. Member for Hammersmith and Fulham that leading up to the order there was extensive discussion with interested businesses to discover their thoughts on the proposals. Representatives of the trade bodies for the property sector and leading legal accountancy and advisory bodies were involved in the consultation process and expressed themselves content with what we are proposing.
The hon. Member for Taunton asked a fair question about the delay. However, as he said, we have not been here for most of the period since the order was laid. We seek to bring such matters to the House as soon as we can. Sometimes there are several, leading to bunching, which can cause delay. I agree with him that these matters should be brought to the House as quickly as possible. In this instance, given the summer break, we have done so.
I am grateful to both hon. Members for what they have said and I hope the Committee will feel able to agree the order.
Question put and agreed to.
4.43 pm
Committee rose.
 
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