Fifth Standing Committee on Delegated Legislation
Thursday 22 April 2004
[Mr. Joe Benton in the Chair]
Draft Value Added Tax (Buildings and Land) Order 2004
2.30 pm
The Economic Secretary to the Treasury (John Healey): I beg to move,
That the Committee has considered the draft Value Added Tax (Buildings and Land) Order 2004.
It is a pleasure to serve under you this afternoon, Mr. Benton.
In the pre-Budget report of 2002, the Government launched the protecting indirect tax revenues strategy. That was a strategy for tackling indirect tax lost through fraud, avoidance and general non-compliance. The provisions in the order were introduced in the Budget on 17 March and are in line with that strategy. They are designed to help tackle the problem of tax avoidance.
The order is one of two statutory instruments made and laid on Budget day that introduce legislative changes to counter a serious VAT avoidance scheme. Such measures are part of our wider effort to clamp down on artificial tax avoidance, in order to protect revenues for Government spending and public investment, to maintain the integrity of our tax system and to ensure that there is proper and fair competition between organisations that comply with tax legislation and those that attempt not to.
Businesses in exempt sectors—typically banks, financial institutions and insurance companies, but also those in the education sector—are not entitled to recover all of the VAT that they incur on the purchase of land or buildings or on major construction projects. The avoidance schemes that the order will tackle use artificial structures either to spread the VAT cost of the property over a number of years or, in some cases, to achieve an absolute VAT saving.
Although not new, the schemes that the order is designed to tackle have not previously been widely used because of their complexity and, in particular, because they require the involvement of a third party developer or vendor—in other words, a complicit developer or vendor. However, as we have progressively and successfully closed the simpler schemes, VAT avoidance on property has increasingly been forced into more complex and contrived schemes such as the one that the instruments will close down.
Moving to close the more complex schemes necessarily requires—though I regret it—more complex legislation. Blocking the schemes has therefore called for two statutory instruments, one the affirmative resolution that we are debating and one
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introduced by negative resolution. The latter is the Value Added Tax (Special Provisions) (Amendment) Order 2004.
The uptake of the avoidance schemes over the last year or so has become widespread and they are now costly. Our estimate is that tackling them will yield £155 million in the first year.
There are several variants of the scheme, and it may be helpful to the Committee if I summarise the most common version. A partly exempt business wants to buy a building that a developer has constructed but does not want to suffer the full VAT cost up front. The developer has opted to tax, so he can legitimately recover the input tax on his purchases of construction services and materials for the property. The developer and the partly exempt business contrive to grant a lease to the latter. The ownership of the building is then transferred as a going concern to a wholly owned subsidiary of that partly exempt user. Members will be aware that no VAT is charged under the transfer of going concern rules.
So, the partly exempt user has ownership of the building in its corporate group, but without suffering anything like the full amount of VAT on the up front purchase. The only irrecoverable VAT is that incurred by the partly exempt user on the lease payments, effectively drip feeding the VAT cost over the life of the lease. In some cases, once the building is in the hands of the subsidiary, it is possible to terminate the lease and make an absolute VAT saving.
We have considered various ways of stopping such schemes. As well as being concerned to deliver a workable solution that would prevent such schemes in the future, we have been equally concerned to target effectively our action on those seeking or achieving an unjustified tax advantage and to avoid additional compliance burdens on those undertaking normal property transactions.
We have also been concerned to limit additional complexity in an area of legislation—VAT and property—that is already one of the most complex, as the hon. Member for Hertford and Stortford (Mr. Prisk) will be well aware, given his professional expertise. We are therefore preventing organisations from using such arrangements that, in most cases, would deliver a quite unreasonable VAT benefit, including almost VAT-free buildings.
The order will ensure that those using such schemes in the finance and insurance sectors and in charities and education colleges will receive the same treatment as everyone else in their sector. They will be unable to gain an advantage by artificially using such avoidance schemes in the future. They will all be in the same position: VAT will be recoverable to the extent that a property is used to make taxable supplies; and VAT will not be recoverable to the extent that it is used for VAT-exempt purposes.
There are already times when the option to tax can be removed. I am tackling such schemes by further restricting the right to opt to tax. The Value Added Tax (Buildings and Land) Order 2004 essentially stops the option to tax being used in certain circumstances by extending the disapplication test.
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Up until Budget day only a person making an original grant had to apply the disapplication test in full. People making supplies under a grant made by someone else did not. I have an example of someone making a supply under a grant that they themselves did not make. Let us say that company A grants a seven-year lease to company B. Company A then sells the freehold of the building to company C and company C becomes company B's landlord. Company C therefore leases a building to company B under a grant originally made by company A. Company C must now apply the disapplication test in full, even though it is making supplies under a grant made by someone else. That is an extension to the test as it stood before Budget day.
Those provisions are supported by the Value Added Tax (Special Provisions) (Amendment) Order 2004—a negative resolution order—which is consequential upon the order under consideration today. Although that order is not the subject of discussion, it may be helpful to Members if I summarise its contents because it is the partner provision of the one that we are scrutinising.
The Value Added Tax (Special Provisions) (Amendment) Order 2004 has the effect of denying the VAT-free advantage of a transfer of a going concern where a purchaser of land or buildings has his option to tax disapplied in connection with that land or building. That means that tax has to be charged on the seller's supply of the freehold and that the tax will stick with the purchaser. Together, those measures block a loophole that is being used to promote an aggressive and costly avoidance scheme.
The order under consideration supports, complements and reinforces our action to curb VAT avoidance in the land and property sector, and it sends a strong message about the unacceptability of tax avoidance more generally. On that basis, I hope that it will receive the full support of members of the Committee.
2.40 pm
Mr. Mark Prisk (Hertford and Stortford) (Con): I add to what the Minister said and welcome you to the Chair, Mr. Benton, for this afternoon's deliberations. I thank the Minister for his opening remarks. It is fair to say that he and I have the unlimited joy—I use the word ''unlimited'' with care—of the prospect of working on the Finance Bill during the next two months. I look forward to discussions with him on issues related to today's debate and others.
The tax avoidance to which the order refers leads in most cases to contrived situations. As the Minister said, it creates highly artificial structures and business activities. In such circumstances, we on the Opposition Benches—I use the word ''we'' with due care—support the Government's stated aim. However, as the Minister would expect, it is important that we try to clarify the meaning, effects and scope of the order.
Before I do that, I would like to refer to some of the Minister's comments on allied order No. 779. I have taken the opportunity to look at that order, as orders Nos. 778 and 779 are interwoven. It also deals with related issues concerning VAT and the tax treatment
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of transfers of going concerns. My concern as a Member of this House is that it might have been better for understanding the changes to the law if the elements that are in order No. 779 had been incorporated in order No. 778. It is difficult for us to understand the Government's end purpose and, therefore, it will be difficult for those who will be affected by the orders to understand exactly their combined effect. Indeed, the Minister said that order No. 779 is entirely consequential on order No. 778.
Could the Minister explain the thinking in the Treasury behind the separation of the orders? It is not simply procedural, in the sense that one needs the affirmative procedure and the other needs the negative procedure. The principle is that if we are to make the law more effective, we ought to deal with the two together. Would it not have been better for the two to have been brought to the Committee together so that we could understand the totality, if I may use the word, of the Government's thinking?
To understand the background to the order, I took the opportunity to consult those who are engaged in the property world. I am especially grateful to the Royal Institution of Chartered Surveyors, which has looked into the matter and identified several concerns. I should put on record my membership of the RICS as a professional chartered surveyor.
I understand that the main intent of the order is to ensure that, if a landlord purchases a tenanted building and opts to tax, the option can be disapplied by the existing anti-avoidance legislation. Proposed new sub-paragraph (3B) in article 4 will rectify the position so that a new landlord's collecting rent for the first time will be taken as the grant of a new lease for VAT purposes. I believe that that is the principle; I welcome the Minister's clarification of it.
From the Minister's opening remarks and the explanatory memorandum, which I am sure members of the Committee have considered with care, we understand that the amount of tax that is lost through these avoidance schemes could equate to approximately £155 million. That is not an insubstantial amount of money. Indeed, the Minister described the schemes as aggressive and said that the structures involved are contrived. He is an eminently sensible Minister and a very honourable man. Therefore, he will appreciate why I have to say that the Government's case is somewhat undermined by reports in the press, including Property Week, that the Labour party saved nearly £1 million in a VAT avoidance scheme. One report states:
''Labour used 'Labour Party Properties (Two)' to acquire the property . . . five weeks before it bought . . . Old Queen Street''—
its new headquarters. The report goes on to provide the technical background. It states:
''Customs allows companies to treat the acquisition of properties as a TOGC''—
transfer of a going concern—
''when they are leased to tenants and the property rental is transferred to the purchaser. However, a TOGC is more regularly used when a property is expected to be treated as a continuing business, with arm's length tenants staying in residence for the remainder of their lease.''
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It continues, in much greater detail, about how it is believed that the Labour party was able to save £1 million through the changeover.
My concern is that in making the changes there is a danger that the principles of the order could be undermined. I am certainly no expert in tax avoidance schemes, as the Economic Secretary will understand. Will he explain to the Committee whether the scheme that was referred to, and made use of by the Labour party as reported in the press, would be stopped by this statutory instrument or the Value Added Tax (Special Provisions) (Amendment) Order 2004? If not, what is the difference between what took place in the case I mentioned, and what the order is trying to prevent?
I would like the Economic Secretary to respond to a number of other concerns from property professionals. First, there do not seem to be any transitional or grandfathering provisions. That is quite unusual in this instance. Why have those provisions been left out? I would welcome his response. Was it the Government's intention to include existing and genuinely innocent transactions that were in hand on 18 March? There is the question of the transition period. If the law suddenly changes, at what stage is a genuinely innocent transaction that is in hand deemed to be caught up in the new arrangements? As we all know, with any property transaction, there are a number of stages between agreeing a price and completion. It would be helpful if the Economic Secretary would provide advice and explain whether there will be some recourse to ensure that innocent transactions that were ongoing on 18 March are not charged unduly.
There is no regulatory impact assessment. The explanatory memorandum states that there will be:
''a minimal impact on VAT compliant taxpayers who do not engage in these avoidance schemes.''
It therefore argues that there is no need for a regulatory impact assessment. However, if there has been no assessment, what is the basis for the claim? Does the Economic Secretary include in that assertion the innocent transactions that were in hand at the date of the Budget? That is an important question. I am always concerned to ensure that, when Governments are assessing the impact of their policies on those whom they seek to tax, they have carefully and rigorously thought through the genuine costs. That is an important part of scrutinising legislation, which is why I hope that the Economic Secretary can respond to my questions.
2.48 pm
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