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