The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,

I bid you a warm welcome to the Chair, Mr. Evans. The order addresses issues that business has raised about simplification of the option to tax in VAT. This is the third buildings and land order in three years, and it simplifies the process of opting to tax. It also includes a consequential change arising from the Housing and Regeneration Act 2008.

Schedule 10 of the Value Added Tax Act 1994 sets out the rules governing the operation of the option to tax, under which 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 the option to tax is required to charge VAT on all future lettings or sales of the property concerned, but it is also able to recover the VAT on associated costs, such as repairs and refurbishments. The option to tax 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 are generally not affected by the option to tax.

Following consultation with businesses, a series of measures has been introduced since 1 June 2008 to simplify schedule 10. After consultation, we have identified three further opportunities to simplify the rules. First, we are removing the condition that taxpayers must not have occupied or used a property if they revoke an option to tax during the initial six-month cooling-off period. That measure will provide more flexibility for up to a quarter of the businesses that seek to revoke in that way.

Secondly, we are amending the anti-avoidance rules, which create a potential barrier to financing property developments. Legislation was introduced in 1997 to counter avoidance by banks that used lease and leaseback schemes to avoid paying the VAT that they could not recover on property, as they were exempt from VAT. The anti-avoidance legislation automatically disapplies the option to tax where the person providing finance for the development of a new building is also an occupier of the building and is using it for exempt purposes. That has worked very well in stopping avoidance, but it means, for example, that a developer of a shopping centre will find their option to tax disapplied to the lease of an individual retail unit if the tenant is a bank, and that same bank, or someone connected with it, provided finance for the development.

In the past, developers in that situation would often have sought funding from alternative sources, but the current financial climate and the credit crunch mean that alternative funding may be difficult to find, so under the order, providers of development finance, such as banks, will now be able to occupy up to 10 per cent. of the development before anti-avoidance provisions take effect.

The last change arises from a consequential amendment to the Housing and Regeneration Act 2008. If the VAT reliefs available to housing associations are to continue after 1 April 2010, we need to amend the definitions in schedule 10 of the Value Added Tax Act 1994 so that they are consistent with the 2008 Act. The term “registered social landlord” is to be replaced by

The amendments to schedule 10 in the order ensure that business is able to benefit from the option to tax, without creating any new tax avoidance risk. I commend the order to the Committee.

Mr. Mark Hoban (Fareham) (Con): It is a pleasure to serve under your chairmanship, Mr. Evans. I do not have a huge amount to say on the statutory instrument. I gather that it is widely welcomed by the people whom I advise on VAT; that might perhaps ring an alarm bell in the minds of hon. Members of all parties.

I have a couple of questions about the order. Will the Minister explain why the need for the amendment made by article 4 was not identified during consideration of the Housing and Regeneration Act 2008? What process led to identification of the omission, and what are the consequences of its rectification? Will social landlords be able to make any claims retrospectively to take advantage of the amendment proposed in the order?

On the broader point to which the Minister referred and the amendments in articles 5 to 7, he said that the complex restrictions in schedule 10 were introduced as anti-avoidance measures. Is he content that the relaxation of the legislation, which he has set out today, will not be taken advantage of by developers or others? What behavioural changes does he expect as a consequence of the amendments? Will up to 10 per cent. of property be occupied by banks in every new shopping centre, or will the measure have other consequences? What assessment has he made of the revenue implications of the order? He said that, in the past, developers found alternative sources of finance, which implies that there will be no significant revenue impact as a consequence of the amendments. I would be grateful for some clarification on that.

I was keen to find out what sort of issues would be tackled by the SI, but the Minister referred to that in his remarks on bank finance. What steps have the Treasury and Her Majesty’s Revenue and Customs taken to make sure that the industry is aware of the changes? Obviously, it is important that they know about the impact and consequences of the changes. What information has been made available to businesses to assist with that?

John Hemming (Birmingham, Yardley) (LD): I am pleased to serve under your chairmanship, Mr. Evans; I think it is the first time I have done so. I need to refer hon. Members to my declaration of interests, which shows that I am involved in various businesses that are VAT-registered. I also own commercial property—I do not know whether we charge VAT on it or not, but we have the option. The order does not affect any of my businesses, but I thank the Minister for his interesting explanation of the measure, which sounds entirely reasonable.

Mr. Timms: I am grateful for the wide support that the measure enjoys across the Committee. In response to the remarks of the hon. Member for Fareham, let me say that there has been widespread consultation on the measure. He made the point that the provision has been widely welcomed, and I think that is right. We have consulted with representatives from property sector trade bodies, and those from legal, accounting and advisory bodies.

The hon. Gentleman asked what the revenue implications were, and he anticipated my answer. There will not be an impact on Exchequer revenue, because we are simply facilitating developments that would, in the past, have been financed in one way, and which will now be financed in a slightly different way. He asked me why the issue was not spotted in 2008, when the Housing and Regeneration Bill was being taken through Parliament. The changes amending part 2 of the Housing and Regeneration Act 2008 have just been laid before the House, and they come into effect from 1 April this year. No social landlord has yet been affected and, by making changes through the order now, we are in good time to ensure that there is not an adverse impact on any housing association.

One can only speculate on whether there will be much of a behaviour change on the part of banks. The intention of the measure is to secure a greater degree of willingness and ability on the part of banks to fund developments of the kind that we have discussed. Clearly, one hopes that such a behaviour change will occur. I hope that I have answered the hon. Gentleman’s questions. The measure is a significant and welcome step, and I hope that the Committee feels able to agree it.