VALUE ADDED TAX

HC Deb 28 January 1974 vol 868 cc173-87

10.27 p.m.

The Financial Secretary to the Treasury (Mr. Terence Higgins)

I beg to move, That the Value Added Tax (General) (No. 2) Order 1973 (S.I., 1973, No. 2151), a copy of which was laid before this House on 20th December, be approved. It is now more than nine months since purchase tax and selective employment tax were abolished and value added tax was introduced. I think it is generally accepted that the changeover has been more smooth than many had forecast. This was, of course, partly due to the extensive process of consultation which we undertook before value added tax was introduced. But there can be no complete substitute for practical experience, and it is not surprising that in a small number of cases it should now be found desirable to make minor changes in the schedules which define the goods and services relieved from value added tax.

The present order introduces these changes. If we think of the original intention of the tax as a straight line, practical experience has shown up certain deviations from it—all of minor importance—some on one side favouring the Revenue and others on the other side. This order represents a line-straightening operation.

The most significant change in the order is probably the zero rating of further exports of services. The supplies in question include the preparation of payrolls for overseas companies, and similar computer operations, and performance as the legal representative of an overseas company, for example, in an arbitration action. Such services are, of course, taxed when supplied to United Kingdom companies, but in most cases the tax can be reclaimed as deductible input tax. Overseas companies cannot reclaim the tax and naturally have objected to bearing the burden of United Kingdom taxation. This is a point which the hon. Member for Heywood and Royton (Mr. Joel Barnett) raised during the Committee stage of the Finance Bill in 1972. Now that experience has in- dicated a method of defining with the necessary legal precision the services affected, the case for zero rating seems unquestionable.

If the House wishes, I will outline article by article the purpose of the various sections of the order. I think that perhaps it would be more appropriate to wait until hon. Members, who may have particular points to raise, have done so before I reply to the debate. I know there may be several matters of interest to hon. Members. The hon. Member for Manchester, Ardwick (Mr. Kaufman) corresponded with me recently about his interest in Article 9. I shall gladly go into the issues in detail and I shall do my best, as always, to elucidate them.

10.30 p.m.

Mr. Gerald Kaufman (Manchester, Ardwick)

The Financial Secretary has introduced the order as though it were simply a small tidying-up operation. But from representations I have received from constituents it emerges that the order embodies a particularly mean example of retrospective legislation.

I have been approached about the matter by two religious halls of residence in my constituency, one a Catholic hall of residence and the other a Baptist hall of residence. I am assured that many other halls of residence attached to universities, though not part of them, are involved all over the country.

In the city of Manchester these halls are largely religious foundations. Although the halls of residence are not themselves part of a university, they provide accommodation for university students. For example Allen Hall, a Catholic hall of residence in my constituency, provides facilities exclusively for students of Manchester University.

Last January the warden of Allen Hall consulted the local representatives of the Commissioners of Customs and Excise and was advised that the hall of residence was exempt from VAT as far as its students were concerned. It came under the exemption provided in Group 6 of Schedule 5 to the Finance Act 1972. Nevertheless, despite that notification of exemption, in July Allen Hall received a letter saying that it was subject to VAT.

The governors appealed to the tribunal and on 6th November 1973 their appeal was heard and was upheld. They won against the ruling that they should be liable for VAT. The tribunal ruled that the hall was not liable for VAT on supplies and services made to students of the university.

The Government did not like the ruling of the tribunal which they themselves had set up. Now, under Article 9 of the order, the Government are reversing the tribunal's ruling. A Government who prate about the sanctity of the rule of law and insist that we should all abide by the rules of the courts are not themselves hesitating to reverse what amounts to a legal ruling for their own purposes.

The Financial Secretary to the Treasury wrote to me on the matter. His letter said that the change was being made to clarify the position. His further remarkable words were that it was being made to ensure that there is not severe distortion of competition. What on earth do those words mean in relation to this impost which is being imposed on these religious halls of residence? With whom are these halls of residence supposed to be competing? All of them are of the highest reputation. They are not fly-by-night institutions. They are bodies which have a high reputation throughout Manchester.

Allen Hall is owned by the Roman Catholic diocese. The warden of Hulme Hall, another hall which is not affected by this change in the law, has written to me about Allen Hall as follows: During its 12 years of existence Allen Hall has built up a fine reputation for good quality accommodation, a sociable environment for a varied mixture of students, and an outgoing attitude of service to the community. Despite having to pay rates and full maintenance costs from revenue (compared with the University-owned halls which are subsidized in these respects) Allen Hall has, by skilful management, managed to keep its charges on a par with those at other Halls. The imposition of VAT would make this impossible, would deter most students from applying to Allen Hall, and might very well lead to the closure of the Hall. Another example, the Northern Baptist College, is a recognised college of the Faculty of Theology of Manchester University. Its principal has written to me: In many ways we can be properly regarded as integral parts of the University. We are officially recognised for purposes of residence and appear in the University's information about accommodation alongside its own halls. In addition, we are recognised for teaching purposes by the Faculty of Theology and members of our staffs lecture within the University itself. We are therefore closely identified both with the University's educational pursuits and those opportunities for residence which are thought to be a desirable feature of a university course. A student in one of our halls, not in training for the Christian ministry, receives exactly the same services as students in University-owned halls and in some respects we provide added advantages from an educational point of view by way of extensive working libraries as well as tutorial assistance. It seems unreasonable that a student should be treated differently when it comes to finance, since we would have to pass on to him the added tax, or that we as colleges should in effect be penalised for pursuing precisely those educational purposes which are normally exempt from value-added tax. Nevertheless, these two institutions will have to pay VAT, for example on student meals.

Colleges may be compelled because of these taxes to increase their fees—

Mr. Higgins

Would the hon. Gentleman repeat the last sentence he gave? I am not sure that I caught it correctly, and it is rather important.

Mr. Kaufman

Does the Minister mean the quotation from the letter sent to me by the Principal of the Northern Baptist College?

Mr. Higgins

I am seeking to be helpful. Could the hon. Gentleman simply repeat the last sentence or two before I intervened?

Mr. Kaufman

My last sentence or two were based upon the letter which the Minister himself sent to me and which I have in my possession—the letter dated 28th January which I received today.

What I was saying, based upon the Minister's letter, was that the colleges will have to pay VAT on catering, which I take it includes student meals. The colleges have written to tell me that they may be compelled, as a result of this extra taxation, to increase their fees to the students. They might well price themselves out of the students' price range.

Mr. Higgins

Could I be clear that there was not a slip of the tongue? The hon. Member is talking now about the colleges. Does he mean by that the university, or does he mean the halls of residence?

Mr. Kaufman

The halls of residence, one of which is a recognised college, the Northern Baptist College. I am sorry if I confused the two, and I am grateful to the Minister.

They have also written to tell me that they may have to consider whether they can stay open at all, since they are already in difficulties. In Manchester there is already a terrible shortage of student accommodation for a growing university. This in itself is exacerbating the appalling housing problem in my constituency. The university is not in my constituency but it abuts my constituency, which has one of the 20 worst housing problems in the country, according to Government census figures. The need for student accommodation splays over into my constituency and increases the difficulty there.

For example the warden of Hulme Hall, in writing to support the case of Allen Hall, wrote to me last week: I am growing increasingly concerned at the effect which continual enlargement of the University is having on housing for ordinary Manchester people. A small terraced house in this area can bring the landlord a weekly income of £16 or more if let to four students—a rent which would be prohibitive for a private family interested in a house of that size. Any discouragement of purpose-built accommodation for students can only worsen the general housing shortage. That is the considered judgment of a man who has great experience in this matter in the area. It is a likely consequence of what I can only describe as a mean little piece of legislation. I appeal to the Financial Secretary even at this stage to withdraw that part of the order.

10.40 p.m.

Mr. Joel Barnett (Heywood and Royton)

I congratulate my hon. Friend the Member for Manchester, Ardwick (Mr. Kaufman) on the powerful case he has presented this evening. I know something of Manchester, having been born there, and representing a constituency 15 miles north-east of the city I also have some constituents who go to Manchester University, though not as many as my hon. Friend, and I know something of the terrible shortage of student accommodation and housing accommodation generally of which my hon. Friend has spoken.

To me a serious anomaly appears to be perpetrated here. I think I understand what the Financial Secretary is getting at. He is seeking to treat these halls of residence on exactly the same level as any other student accommodation provided by a private landlord. That is what I believe he means by distortion of competition. I hope I am wrong, because if that is what he means it makes my hon. Friend's case even more powerful. I hope that the Financial Secretary will be prepared to take the order back because a serious problem will clearly be created if specially-built halls of residence are treated in this way and quite differently from a hall of residence provided by the college authorities.

After all, we all know what the Catholic authorities and the Baptist authority that my hon. Friend has referred to do in these circumstances and we should be seeking to encourage and not discourage them. I am sure that my hon. Friend is right. There is a strange situation here that where meals are provided in that kind of hall they must have VAT imposed on them. The alternative for the students is to find some kind of crummy residence where they simply pay the rent and buy the food, making up the meals for themselves without paying VAT on them. That is the worst kind of alternative

My hon. Friend pointed out that the students would also be taking up accommodation which is desperately needed by the city of Manchester. This is a most important case and I hope that the Financial Secretary will give us a better reply than he seems to have given in correspondence to my hon. Friend.

10.44 p.m.

Mr. Higgins

I take it that there are no points arising on other articles that hon. Members wish to raise with me.

Mr. Barrett

There are.

Mr. Higgins

In that case, perhaps the hon. Member would care to spell them out for me. It might be more for the convenience of the House if I replied only once—indeed, it might be out of order if I sought to do so more than once.

Mr. Barnett

I want to put a few questions to the hon. Gentleman. I am delighted to learn that there is no complete substitute for practical experience, bearing in mind that my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and I were telling the hon. Gentleman that fact for, so it seemed to me, days, night and months throughout our discussions on value added tax when it was first introduced. I am fascinated to hear the hon. Gentleman refer to "line-straightening". I am always suspicious when I hear that the Government are proposing to introduce line-straightening, especially when they take the trouble to do it by introducing an order of five pages.

The explanatory note tells us that the order removes from Group 2 a redundant reference to mineral waters". Originally, the reference was not only to distilled water but also to deionised water and water of similar purity. What sort of line-straightening is taking place there?

Then we come to repairs and maintenance. I notice that (a) and (b) have been added and (c) states that item 2 does not include the supply of any services in the course of the construction or alteration of any civil engineering work within the grounds or garden of a building used or to be used wholly or mainly as a private residence". What "fiddles" have been going on here to justify line-straightening? Has an enormous amount of VAT been avoided through "fiddles"? If not, why have the Government taken the trouble to introduce this provision?

Under Article 5 I am obliged to the hon. Gentleman for covering the point I made nearly two years ago. I cannot recall precisely what I said on that occasion, but the Government are now adding the words "person present". Why? What has happened to justify their inclusion now? What have the Government learned from practice? How many hundreds of thousands of pounds or more has been lost in the meantime?

In the changes relating to transport, why has the weight been slightly reduced for the purpose of zero rating?

Previously houseboats were not exempt; now they are to be exempt. I recall that, when the hon. Gentleman was originally proposing to exempt caravans used for holiday accommodation, I asked how he would find out whether a caravan was being used for holiday accommodation. Once again, in the order we have the expression holiday accommodation including any accommodation advertised or held out as such. I hope that the Customs and Excise can determine when a houseboat has been held out as holiday accommodation, but I doubt it. I have a feeling that next year or later we shall have another line-straightening exercise.

Those are the few brief points I have to make, and I shall be pleased to have an answer from the hon. Gentleman.

10.49 p.m.

Mr. Higgins

As the hon. Member for Heywood and Royton (Mr. Joel Barnett) knows, on such orders it is easy to ask brief questions but not quite so easy to give brief answers. Perhaps it would be convenient for me to take up the detailed points he raised before going on to the more general points put by the hon. Member for Manchester, Ardwick (Mr. Kaufman).

The hon. Member for Heywood and Royton raised the question of deionised water. This was added by the Value Added Tax (General) (No. 1) Order 1973 because it is comparable to distilled water, which was charged at tax at the standard rate. Essentially, therefore, we are now removing an otiose provision.

As the hon. Gentleman said, we have debated at some length the question of caravans and how to define a caravan for purposes of holiday accommodation. We have received representations about houseboats and it seems to us appropriate that we should extend zero rating to them, although, as in the former case, it is necessary to make provisions in respect of those which are used for holiday accommodation.

On the question of the weight limit on ships and aircraft, I think that the hon. Gentleman is referring to the fact that, as part of the operation, it also seemed appropriate to metricate and slightly alter the limit. I queried this point and I am assured that it does not have any great significance as regards the scope of the tax.

The hon. Gentleman referred, I think, on the question of repairs and maintenance. This is an anti-avoidance device necessitated by a blatant system of avoidance which was advertised as such. I shall not quote the name of the firm in order not to give it a "commercial". Let me refer to it as "Bloggs' Scheme of VAT and how to avoid it".

I turn to the important point raised by the hon. Member for Ardwick and reinforced by the hon. Member for Heywood and Royton. There is no question of doubting the high reputation of any of the organisations to which the hon. Member for Ardwick referred. That is not the point at issue between us. He referred to several organisations and, as he pointed out, we have been in correspondence on this matter. He referred to retrospective legislation. For reasons which I shall explain, I do not think that the order can be fairly described in that sense. It would, however, be helpful if I were to fill in the general background.

Under the law there is no general relief for VAT for students as such. After much consideration, however, it was decided to exempt from VAT the essential activities of schools, universities and so on. Any borderline is likely to create some anomalies, as the hon. Member for Heywood and Royton frequently points out, but my right hon. Friend the Chancellor of the Exchequer felt that confining this exemption to supplies by educational establishments anomalies should keep these to a minimum. The creation of some anomalies is inevitable the moment one draws a line. The only way to avoid that would be to give no relief from VAT, but the Chancellor felt it right that some relief should be given to schools and universities.

Item 2 of Group 6 of Schedule 5 to the Finance Act 1972 exempts from VAT the supply of any goods or services incidental to the provision of any education included in Item 1"— that is, Item 1 of the group. It was always intended that this exemption should apply only where the goods or services are supplied by the provider of the exempt education, such as board and lodging provided by a boarding school to its pupils or by a university to its students in its own halls of residence. The exemption is not intended to apply to hostels for students where the accommodation is not provided by the school, university or other institution supplying the exempt education.

Mr. Kaufman

The hon. Gentleman will be aware that in Schedule 5 to the Finance Act 1972 there is specific reference to the provision of education if it is of a kind provided at school or university and if it is provided otherwise than for profit. That surely covers the question of halls of residence.

Mr. Higgins

The hon. Gentleman raises an important point. That was the reason why I intervened in the case to which he referred, because I thought there was a slip of the tongue in the use of the word "college". The terms of the Act are drawn precisely. How it applies in any particular case, if there is no doubt about the wording of the Act, depends on the facts of the case. I cannot tell, without hearing full details of the particular case to which the hon. Gentleman refers, whether that would be regarded as "education" in the narrow sense. It would depend whether the institution were a college and were providing education of a kind normally provided by a university not for profit. If that were so, the situation would be different from a case where it was simply an organisation providing accommodation or catering. If the hon. Member for Ardwick will send me details, I shall as far as possible look into the matter. I emphasise that it would depend on the facts of the case.

I should now like to pursue the main line of my argument which in some respects I think the hon. Gentleman will find helpful. I was saying that the exemption was not intended to apply to hostels for students where the hostels were not part of the school, university or other institution supplying the exempt education. The point to which the hon. Gentleman refers is whether an institution is supplying exempt education, not whether it is supplying services related to that exempt education. I hope I have made myself clear.

The interpretation of the law was upheld by one VAT tribunal in unanimous judgment, although it criticised the law as "lacking in clarity" on the point. However, another tribunal in hearing an appeal on this point disagreed and took the view that the exemption applied to goods and services supplied to an educational institution or—I underline the word "or"—to pupils and students. The tribunal went further. For example, in the case of a retail stationer supplying both students and members of the general public, the tribunal envisaged that the exemption covered all supplies made by a stationer supplying mainly—I emphasise the word "mainly" students. The order is necessary to clarify the position. Nothing I say should in any way whatever be taken as a criticism of the tribunal. It is its responsibility to interpret the law as it sees fit. The point at issue is whether the drafting of the law is correct and whether it is necessary to clarify the position.

I wish to spell out the point at issue. If one were to accept the view which I have summarised as the view of the second tribunal, there would be distortion of competition and the creation of numerous anomalies. I have already said that, once one gives any relief and draws a line, one is likely to create some anomalies. But if we were to move the line in the direction which the hon. Gentleman suggests, the situation would be a great deal worse.

The problem in explaining it is that there are two lines, if one accepts the view of the tribunal which I have just quoted. There would be a situation where difficulties would arise between hostels for students not provided by institutions supplying the exempt education, and other commercial institutions. If we went all the way with the view from the tribunal which I have just quoted, there would also be distortion between different shops and between different customers. I said that there were two lines. In fact there are three lines—if we accept the tribunal's view—between the halls of residence not provided by those supplying the exempt education, ordinary accommodation or catering, and between different shops and between different customers.

Let me expand on each of them, and perhaps I might take them in the reverse order. I take first the distortion between customers. In the case of the stationer's shop, whether a customer were or were not charged VAT on the stationery that he purchased would depend on whether that stationer happened to be mainly supplying students. This would create a bizarre situation and not one that we could accept.

The other line would be the distortion between one type of shop and another. Clearly the shop which was serving mainly students would be relieved of tax and that which was not would carry it. That would not be a reasonable line to draw.

Finally I come to the situation between the hostel providing accommodation but not being provided by an institution providing exempt education, and an ordinary commercial organisation, whether it be providing accommodation or suuplying catering.

The question is probably in practice very largely one of catering rather than of accommodation. The hon. Member for Heywood and Royton said he was glad that we had learned from practical experience. I know of no way of getting practical experience of anything until it has happened. This is a case where we have learned that there are some practical difficulties and that we ought to put them right. It is, as I say, largely a question of catering.

The problem with catering is that a great many private organisations not necessarily disreputable in any way, as the hon. Member for Heywood and Royton seemed to suggest, depend substantially on students. Some may be almost entirely supplying students' catering. But we could not accept a position where the only people who got their catering free happened to be students. There are many others—young people who are not students, pensioners and so on—who might like to be placed in that favourable position, and it would be unfair. Let us take the case of a hamburger stall next door to a university. It would be very unfair if an organisation said to be run for charitable purposes were not to be taxed and the hamburger stall were. There are some anomalies in the giving of relief. The difficulty is to know where the line should be drawn.

The other point is this, and I have spelt it out in a letter to the hon. Member for Ardwick, but as a number of hon. Members have written to me about it and there may be other letters on the way it may be as well to spell out this point.

The order is intended to correct the position as regards Schedule 5, Group 6, and supplies which would be liable at the standard rate if they did not fall within this group, such as supplies of catering to residents, will now be taxable.

The second tribunal to which I have referred also held that the provision of accommodation by Allen Hall was exempt from VAT under Schedule 5, Group 1—"licence to occupy land"—because the hostel was not a hotel, inn, boarding house or similar establishment

excluded from that exemption.

The tribunal drew a clear distinction between what might be called the bare provision of board and lodging which student hostels, not being institutions providing exempt education, might be supplying and that supplied by boarding houses. This provision of accommodation is, so to speak, a common feature of both the kind of hostel to which the hon. Gentleman referred and a boarding house.

The tribunal sought to distinguish the hostel of the kind mentioned by the hon. Gentleman and it referred in particular to the selection of students, the control over students and the corporate life which might exist in such an institution. This distinction, and the exemption from the provision of accommodation at such hostels under the tribunal's judgment, is being accepted and, I stress, is not affected by the new order.

Having said that, I should refer to a point which the hon. Member for Ashton-under-Lyne (Mr. Sheldon) will no doubt comprehend. The exemption for accommodation is not necessarily an unmixed blessing if hon. Gentlemen will refresh their memories about the distinction between exemption and being taxed, for example. The law allows an appreciable reduction in respect of the value for value added tax on board and lodging for lengths of stay exceeding four weeks. Some halls of residence may find that the tax that they have levied in respect of their charges for lodging, as distinct from board, is not much greater, and perhaps less, than the tax they have paid on the inputs—their purchases of linen, new furnishings, cleaning materials and so on. On balance, therefore, it may be preferable for such a hall not to seek exemption in respect of accommodation which would deprive it of its right to deduct the relevant input value added tax that it had paid on relevant purchases but to continue to charge for board and lodging as a single taxable supply, with a reduced value for stays of over four weeks, and to deduct or to reclaim input tax.

I hope that I have explained—I am always anxious to give a full reply—the reasons which prompted us to introduce this part of the order. It is not doing any more than restoring and clarifying the position as it was always thought and intended to be. We are prepared to accept the aspect of the tribunal's decision, about accommodation on the lines I have outlined in my concluding remarks. That might be a mixed blessing. No doubt the organisations concerned will do the arithmetic and decide whether one situation is better than the other.

Mr. Kaufman

If this part of the order restores the position to what it was thought to be, may I ask why it was that in the first place the Commissioners of Customs and Excise told the wardens of Allen Hall that they were not subject to VAT? It was only later that, having thought about it, they wrote to them and said that they were subject to VAT. In January 1973 they wrote and said that they were not subject to it. Therefore, this part of the order is restoring the situation not to the original position but to the second position. Why not restore it to the original position?

Mr. Higgins

I will look into that point. Certainly the position always has been as I have outlined it. Indeed, I have had considerable correspondence on this matter with similar organisations to those mentioned by the hon. Gentleman, though not the particular ones he mentioned, at a much earlier stage in the course of the tax. As a result I became familiar with many of the problems that line-drawing in this area creates.

On balance, I think that the line we originally decided—I stress that it was our original decision—was right, for the reasons I have given, and it is therefore right that we should pass the order, both in this respect and in others that have been mentioned. By and large, it is intended to straighten out the various lines in the light of direct experience.

The order comes into effect on 1st March 1974 and Customs and Excise will circulate in mid-February to every trader registered for VAT a copy of the new quarterly publication Value Added Tax News, which will contain details of the changes introduced by the order on the assumption that the House will approve it tonight.

11.10 p.m.

Mr. Barnett

All hon. Members present will have noted with interest the Financial Secretary's statement that he has clarified the position. I am sure that what he said will be clear to every hon. Member. The answer to my hon. Friend the Member for Manchester, Ardwick (Mr. Kaufman), who asked why a local office said one thing and then another, is that all local offices in the country are saying different things because they find it as difficult to understand, as does the Financial Secretary and everybody else, which is one of the difficulties of this complicated tax.

The Financial Secretary mentioned the distortion that was possible without the change. I would have thought that there was still distortion inasmuch as it is still possible that in halls of residence provided by a university a service may be given that is exempt from tax while in halls of residence provided by a religious body or a non-profit-making organisation the service will be subject to the tax. I should have thought that the line needed still more straightening.

11.11 p.m.

Mr. Higgins

I do not accept what the hon. Gentleman says about local value added tax offices. But the implication of what he said is clear: that there is only one place at which to draw the line, which means giving no relief at all. If that is what he says, we are interested to hear it.

Question put and agreed to.

Resolved, That the Value Added Tax (General) (No. 2) Order 1973 (S.I., 1973, No. 2151), a copy of which was laid before this House on 20th December, be approved.