Twelfth Standing Committee on Delegated Legislation
Thursday 25 March 1999
[Mr. Bill Olner in the Chair]
Value Added Tax (Finance) Order 1999 on Delegated Legislation
4.30 pm
The Financial Secretary to the Treasury
(Mrs. Barbara Roche): I beg to move,
That the Committee has considered the Value Added Tax
(Finance) Order 1999 (S.I. 1999, No. 594).
The Chairman: With this it will be convenient to
consider the Value Added Tax (Buildings and Land)
Order 1999 (S.I. 1999, No. 593).
Mrs. Roche: I believe that this is the first time that I
have had the pleasure of being in a Committee under your
chairmanship, Mr. Olner, and I look forward to the
experience tremendously. I am sure that I speak for the
whole Committee.
The Government are committed to fairness in taxation.
the orders demonstrate that commitment. Order No. 593
is an anti-avoidance measure. Order No. 594 confirms that
certain backroom services supplied to businesses in the
finance sector should properly attract VAT.
The buildings and land order is designed to stop VAT
avoidance. It amends schedule 10 to the Value Added Tax
Act 1994 to strengthen an existing anti-avoidance measure
introduced in March 1997 that restricts the scope of the
option to tax land and buildings. Section 51(2) of that Act
allows for schedule 10 to be amended by a Treasury order.
The order stops a device that is used to get around the
original measure, and it will protect £30 million of
revenue each year.
It may help if I explain the background to the orders.
Businesses supplying services that are exempt from VAT,
such as banks, insurance companies and universities, do
not add VAT to their income. In turn, however, they
cannot claim back all the VAT that they incur on their
own capital and overhead costs, which includes the
construction of the buildings that they occupy. Some
businesses have tried to get the best of both worlds by not
adding VAT to their income but by entering into
avoidance schemes to spread the VAT cost of their
buildings over many years.
The method of doing that was complicated. Instead of
occupying the buildings immediately, some of the
businesses that I have referred to leased the property to
associated companies and then took a lease back again
before taking up occupation. By opting to tax the rents
they were able to recover all the VAT incurred on the
building, whereas without that device, very little of the tax
would have been recoverable. Although they paid VAT on
the rents charged by the associated company, that was
spread over a considerable number of years.
The measure introduced in March 1997 was intended to
counter those lease and leaseback schemes by preventing
exempt businesses from opting to tax the leasing of
buildings that they actually intended to occupy. In that
way, businesses could not inflate their recovery of VAT
on the cost of the buildings. That measure, however, was
confined to buildings falling within the capital goods
scheme essentially those buildings that cost £250,000 or
more to purchase, construct or refurbish.
Some people, still seeking to avoid tax, have found a
way around that by artificially bringing forward the date
of the lease to a time before the building actually
existed that is, before construction has started. At that
stage, the building is not a capital item within the capital
goods scheme, so the 1997 anti-avoidance measure does
not apply.
These newer schemes have mainly been used by
universities and colleges of further education, although
they were capable of much wider use, and there was a
real risk of others jumping on the bandwagon. Many of
those using the schemes were already receiving funding
from the Government, which is calculated on a gross cost
basis. Tax avoidance undermines the basis of managing
public expenditure, with the result that the shortfall in
revenue could lead to other worthy causes being deprived
of their fair share of state funding.
The order will stop that VAT avoidance scheme. It will
bring into the scope of the 1997 measure not only a
building that is regarded as a capital item under the capital
goods scheme, but the lease of land on which such a
building will be constructed. To prevent the parties from
merely transferring the development after the lease is
granted but before building works have started, the
measure will apply either when the building is a capital
item for the person granting the lease or when it is a
capital item for a person to whom the site is
subsequently transferred.
It has been a mischievous scheme, which has been
marketed and taken up even though the Government's
views on avoidance have been made clear and although
Customs and Excise has explained time and again that
such schemes are likely to be closed. I propose today to
do just that. Not only will the order stop any future use
of such schemes, but it will bring existing schemes to a
timely halt. That will be done by treating the original lease
as though it had been made on 10 March 1999, the date
that the order came into force. Consequently, any rents
received after 10 march 1999 in respect of an existing
scheme will become exempt from VAT. The practical
effect of the measure is that the VAT originally recovered
will become subject to annual adjustments over 10 years
under the capital goods scheme in order to reflect the true
use of the building.
The order merely tightens an existing anti-avoidance
measure. People who tried to avoid the measure knew full
well its purpose and knew about our commitment to stop
tax avoidance. They should not be surprised that the
schemes have been closed down.
In addition, as part of our commitment to fairness in
taxation, we believe that each group or business sector
should pay its fair share of tax. Recent decisions taken by
the courts have meant that the share of VAT paid by the finance sector has been reduced. The amendments made
by order No. 594 are designed to redress the balance and
restore the position to what was intended before those
cases and to what is required under European law. I stress
that they do not introduce new taxation. They do not
affect the treatment of the services that financial
institutions offer consumers or businesses. The
amendments affect some services bought in by financial
institutions, which were always intended to be taxable and
are taxable in other member states of the European
Community. The changes therefore restore a level
playing field.
Most services provided by financial institutions are
exempt from VAT, but the finance sector makes its
contribution by paying VAT on the goods and services
that it buys in, which are generally taxable. The VAT on
them is not recoverable by the institution if it is used in
making exempt supplies. Recent court decisions have
extended exemption to cover may such services.
In the finance sector, European law requires a clear
distinction to be made between intermediary services,
which are exempt, and financial management services,
which are taxable. That distinction has been blurred by
the courts. While those cases were developing, Customs
and Excise undertook extensive consultation in Europe on
the issues, which established that the way in which the
exemption was being interpreted in the United Kingdom
courts was out of step with the position elsewhere.
For those hon. Members who follow such matters, there
has been some comment suggesting that the changes
introduced by the order are contrary to European law in
particular, that credit card management services are
exempt under the sixth EC VAT directive, and that the
European Court of Justice has ruled to that effect. That is
quite wrong. The changes have as a primary aim the
proper implementation of the relevant EC directive, in
accordance with the UK's treaty obligations, and reflect
the consultation exercise, the relevant rulings of the
European Court of Justice, and very important our
legal advice.
It may help the Committee if I give a few examples of
the kind of services at issue. They include services
provided by a motoring organisation to a bank in
connection with devising and marketing an affinity credit
card; clerical, administrative and management services in
connection with a hire purchase operation; and, in a case
currently before the courts, computer processing of credit
card transactions and general management of the card
operation. In none of those cases does the subcontractor
provide the exempt credit. Contracting out such
administrative services is no different from contracting
out book-keeping, secretarial or legal services. They
should all be taxable.
The changes were introduced without notice by
Treasury order laid on Budget day, 9 March, and coming
into effect on 10 March. There is a history of the finance
sector forestalling tax changes by artificial prepayment
schemes, and the timing was designed to limit the
opportunity for that. We received clear legal advice that
it was impossible under existing EC law to provide
anti-forestalling provisions in the circumstances.
The changes restore the proper scope of exemption for
services bought in by financial institutions. They do not
introduce new taxation, nor do they constitute any
widening of the scope of VAT. They are necessary to
ensure that the finance sector continues to pay its fair
share of VAT.
Mr. Oliver Heald (North-East Hertfordshire): How
much extra revenue will result?
Mrs. Roche: As we have shown in the Red Book, the
changes wil protect revenue. It is estimated that the Value
Added Tax (Finance) Order 1999 will restore about £100
million of revenue currently being lost as a result of court
judgments. It is not about raising extra revenue, as the
hon. Gentleman suggests, but about protecting the
revenue base.
The order is necessary to ensure that the finance sector
continues to pay its fair share of VAT, and to ensure
continued compliance with European law. It does not
introduce a tax on supplies made to consumers or
businesses, other than the financial service providers
themselves, and will ensure that the finance sector
shoulders its fair share of the tax burden.
I look forward to a constructive debate and hope that
at its conclusion, both orders will meet with the approval
of the Committee.
4.43 pm
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