Session 2010-11
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General Committee Debates
Delegated Legislation Committee Debates

Value Added Tax (Exceptions Relating
to Supplies Not Made to Relevant Business Person) Order 2010
Value Added Tax (Payments On Account) (Amendment) Order 2011
Value Added Tax (Buildings and Land) Order 2011

The Committee consisted of the following Members:

Chair: Mr David Crausby 

Baker, Steve (Wycombe) (Con) 

Beresford, Sir Paul (Mole Valley) (Con) 

Bingham, Andrew (High Peak) (Con) 

Brown, Lyn (West Ham) (Lab) 

Burt, Lorely (Solihull) (LD) 

Cunningham, Alex (Stockton North) (Lab) 

Gapes, Mike (Ilford South) (Lab/Co-op) 

Gauke, Mr David (Exchequer Secretary to the Treasury)  

Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

Hands, Greg (Chelsea and Fulham) (Con) 

Hanson, Mr David (Delyn) (Lab) 

McGovern, Alison (Wirral South) (Lab) 

Norman, Jesse (Hereford and South Herefordshire) (Con) 

Parish, Neil (Tiverton and Honiton) (Con) 

Roy, Lindsay (Glenrothes) (Lab) 

Williams, Stephen (Bristol West) (LD) 

Wilson, Sammy (East Antrim) (DUP) 

Winnick, Mr David (Walsall North) (Lab) 

Miss Griffiths, Miss Menzies, Committee Clerk s

† attended the Committee

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Third Delegated Legislation Committee 

Monday 31 January 2011  

[Mr David Crausby in the Chair] 

Value Added Tax (Exceptions Relating to Supplies not Made to Relevant Business Person) Order 2010 

4.30 pm 

The Exchequer Secretary to the Treasury (Mr David Gauke):  I beg to move, 

That the Committee has considered the Value Added Tax (Exceptions Relating to Supplies not Made to Relevant Business Person) Order 2010 (S.I. 2010, No. 3017). 

The Chair:  With this it will be convenient to consider the Value Added Tax (Payments On Account) (Amendment) Order 2011 (S.I. 2011, No. 21) and the Value Added Tax (Buildings and Land) Order 2011 (S.I. 2011, No. 86). 

Mr Gauke:  It is a great pleasure to serve under your chairmanship, Mr Crausby. All three orders are VAT orders. They cover changes to definitions for the special rules governing the place of supply of natural gas; increases in the thresholds above which businesses must make payments on account; and changes to the VAT liability of land. It is fair to say that all the orders are technical, but let me see whether, in saying just a few words about each of them, I can anticipate some of the concerns that members of the Committee want to raise. 

The first Treasury order is part of a package of measures implementing changes to the VAT treatment of natural gas, heat and cooling. Special rules have applied to natural gas and electricity since 2005. They were introduced to simplify VAT accounting and to encourage cross-border trade in goods that presented difficulties in applying the normal VAT rules. They were welcomed by business at the time. Member states were required by an EU technical directive to implement further changes with effect from 1 January 2011. The changes remove unintended restrictions and make other technical changes to the existing arrangements in so far as they apply to natural gas. Heat and cooling are also brought within the scope of the rules for the first time. 

Some of the changes were introduced by section 20 of the Finance (No. 3) Act 2010 and others by a number of statutory instruments, of which this is one. The main focus of the technical directive package is on the treatment of supplies of natural gas, heat and cooling. However, the order is necessary to make corresponding changes to the treatment of services associated with the networks and systems through which natural gas, heat and cooling—along with electricity—are transported. That applies where such services are supplied to a non-business customer who belongs outside the member states, in which case the place of supply becomes the place where the customer belongs. Although the change in itself will have minimal impact, it is nevertheless part of the wider package of measures that is beneficial to, and has been warmly welcomed by, UK business. 

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The Value Added Tax (Payments On Account) (Amendment) Order 2011 is a consequence of the increase in the standard rate of VAT that occurred earlier this year. It adjusts the thresholds for the payments-on-account regime to best maintain the status quo of the regime. Businesses with a VAT liability of more than £2 million a year are required to make two monthly interim payments on account and one balancing VAT payment with their quarterly VAT return. That protects the cash flow to the Exchequer. The VAT rate increase means that businesses whose annual VAT liability is just below £2 million would be brought into the payments-on-account regime, and face a cash-flow hit, solely as a result of the VAT rate increase and not because of any increase in their size. The order increases the £2 million threshold to £2.3 million to reflect the VAT rate increase. The exit threshold for the regime is similarly adjusted from £1.6 million to £1.8 million. 

The increase in the standard rate of VAT would bring some businesses that were previously below the £2 million threshold gradually into the payments-on-account regime in the course of 2011 as a greater proportion of their previous 12 months’ VAT liability was based on the 20% rate. Therefore, the threshold changes are being made in June and December to mitigate the number of businesses that are temporarily affected by the interaction between the rate change and the threshold change. As far as is possible, the changes maintain the status quo of the regime, as announced in the June Budget. 

Finally, the buildings and land order deals with two issues that have arisen in respect of schedule 10 to the Value Added Tax Act 1994, which is the legislation taxing supplies of land. The first issue concerns provisions that allow land and property owners to choose whether to apply VAT to what would otherwise be VAT-exempt supplies of land and buildings. That is commonly known as the option to tax. A business that exercises an option 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 therefore provides flexibility for developers and landlords whose customers are businesses. 

During the 1990s, however, there was considerable tax avoidance in relation to supplies of property and the option to tax, and in 1997 an anti-avoidance measure was introduced to prevent further abuse. That measure was and continues to be very effective in stopping some highly aggressive tax-avoidance arrangements. However, it applies a series of objective tests and takes no account of whether the transactions in question are driven by avoidance motives. Last year, a change in the anti-avoidance test was made that did not increase the avoidance risk but helped to ensure that some property transactions ceased to be unfairly caught by the provisions. That change was well received by business. 

Business has now identified further circumstances in which the anti-avoidance provision can cause problems, particularly for those involved in business development. The order’s changes will remove many of those concerns while ensuring that the anti-avoidance provision continues to act as a safeguard against tax avoidance. They will also mean that the provision is better focused on those deliberately attempting to avoid tax, with fewer innocent transactions being caught. This change means that an option to tax will not be disapplied in situations in

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which the landlord, or someone connected with them, also occupies a minor part of the premises for exempt purposes. This will be helpful in situations in which landlords retain some presence in property they have leased, such as janitor’s cupboards or boiler rooms, and car finance offices in car dealer showrooms and so on. 

Minor occupation is determined as 2% of the interest in the building that is held by the landlord. The higher the percentage, the greater the avoidance risk, so the 2% is set at a level that is beneficial to business but does not increase the avoidance risk. This change, together with clarification of the rules regarding ATM machines in buildings, is supported by representatives of the property sector, who have agreed that 2% is very helpful to them. 

The second of the two issues addressed by the Treasury order relates to the change-in-use provisions that enable HMRC to charge tax where the construction or acquisition of a building has been zero-rated on the basis of its expected use, but where that use has changed so that the zero-rating is no longer appropriate. A new building that is intended to be used solely for a relevant residential purpose—a children’s home or care home, for example—or a relevant charitable purpose that is a non-business use by a charity is zero-rated. However, if, within 10 years of completion, the building ceases to be used solely for one of those purposes, a change-in-use charge will be payable. This ensures that buildings that are no longer used for a relevant purpose are taxed in the same way as other commercial buildings. 

The current legislation is complex and provides different VAT results depending on how the change in use arises. It also lacks clarity, so it has the potential for tax avoidance. The changes introduce a single calculation to be applied in all situations. If the relevant use of a building changes, the adjustment will be the same irrespective of how the change in use came about. 

During consultation on the measure, HMRC officials met representatives of the Charity Tax Group and the British Universities Finance Directors Group to seek their views on the changes. As a result of that meeting, changes were made to the draft legislation, together with some clarifications that will be put in agreed guidance. The representatives were very supportive of the changes, which will provide fairness, certainty and consistency. They will minimise avoidance risks and will be more straightforward to apply, which will be of particular benefit to charities. 

I hope that my explanation has helped the Committee, and I commend the orders to it. 

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4.39 pm 

Mr David Hanson (Delyn) (Lab):  I welcome you to the Chair, Mr Crausby, and thank the Minister for his explanation of the three orders. We are taking them together and could spend up to an hour and a half debating them. The last time we sat in this room, as the Minister knows, we had 24 Divisions over the course of a few weeks, so it is not in my nature not to try to pick holes in Government policy. However, try as we might, we have been unable to find any issues relating to the three orders on which we disagree with the Government, and I will not press them to a Division—or, indeed, press the Minister hard following his explanation. 

We support the measures relating to gas supply and value added tax on buildings and land, but we could have a wide debate on the changes to the VAT threshold. The orders are being moved today because the Government have increased the rate of VAT from 17.5% to 20%. We could, as I say, have a wide debate on the VAT increase, because we think the Government have got it wrong. The increase is already damaging confidence in the business sector and could lead to difficulties in the future. However, the second of the three orders simply raises the threshold to ensure that there is no change in the impact of that increase for those who pay on account. Even though I opposed and had concerns about the VAT rise, now that it has happened I cannot disagree with the implied need to increase the threshold for payments on account. 

With those few warm and supportive words, which I promise the Minister he will not receive on every occasion, I give him our support on this occasion. 

Question put and agreed to.  

VALUE Added Tax (PAYMENTS ON ACCOUNT) (Amendment) Order 2011 (S.I. 2011, No. 21) 


That the Committee has considered the Value Added Tax (Payments On Account) (Amendment) Order 2011 (S.I. 2011, No. 21)—(Mr Gauke.) 

VALUE ADDED TAX (Buildings and Land) Order 2011 (S.I. 2011, No. 86). 


That the Committee has considered the Value Added Tax (Buildings and Land) Order 2011 (S.I. 2011, No. 86)—(Mr Gauke.)  

4.42 pm 

Committee rose.