DEDUCTION OF INPUT TAX

HC Deb 11 July 1972 vol 840 cc1413-25

Mr. Joel Barnett (Heywood and Royton)

I beg to move Amendment No. 8, in page 4, line 22, at end insert: 'Provided that no input tax should be disallowed by order in respect of sanitary ware or other articles of a kind ordinarily installed by builders as fixtures as referred to in Item 3, Group 7 of Schedule 4 of this Act'. This Amendment deals with house building. As the Bill is drafted, houses including fixtures which are ordinarily installed are zero-rated, but the problem is what exactly is meant by the words "ordinarily installed". This could be thought to mean that builders might ordinarily install fitted carpets, refrigerators, television sets and other things. When we debated the supply of builders' materials we were told that it would be an easy matter to define what is ordinarily installed because it would be up to the builders' merchants to decide when supplying goods whether or not they were ordinarily installed.

In Clause 3 the Government are taking powers to disallow by order certain inputs. They have the power where there is abuse, to decide that some inputs should be disallowed. I have no desire to prevent the Government seeking to stop the sort of abuses they have in mind. The only specific instance which has been given of how they will use the order is that they will not allow as an input the purchase of motor cars and entertainment expenses. I fully understand why such items of expenditure would be disallowed.

The Government might wish to use the powers in the Clause to prevent abuses by builders who sought to install items which are not installed at present, such as those to which I have referred. The Government are taking quite large powers to remove—at a stroke, or at a 1½ hours' debate—something which is now zero-rated or now allowed as an input.

The House should not lightly give these powers, and I hope we shall be told what sort of abuses it is felt builders will employ to get round the provisions of the Bill—in other words, to manipulate the legislation to their advantage and possibly to an advantage of house purchasers who will be able to purchase the contents of a house somewhat cheaper than otherwise.

Is it possible that the Government have learned through the grapevine and through their contacts with the building trade that some builders are getting ready to install gold-plated bathroom fittings and television sets which will be installed free of VAT, and wish to use these powers to disallow those inputs? I would be very much on their side if this were their intention, but I understand them to argue that the line would be easy to define between what is and what is not ordinarily installed by builders.

Let us take a situation in which the circumstances might not be easy to define; for example, a builder who constructs an average small modern semi-detached house. The Chancellor of the Exchequer will know that in the North-West of the country, in my own area, such houses are constructed at a price that is very different from the price of a house built in the South, since in my area one can still get a house for around £4,000. Builders as a general practice install in such houses sockets for plugs. Suppose they took it a step further and decided to install light fittings. Would this be considered an abuse of the words "ordinarily installed"? Many builders put in kitchen equipment, cupboards, sinks and so on, and one assumes that such fittings would be considered to be ordinarily installed and, therefore, not subject to VAT. Perhaps the Financial Secretary would advise us on this matter.

Suppose a builder in a more expensive house decided to include washing machines, which he might be able to install at a much cheaper price than that which the prospective purchaser would pay outside because the builder would be able to buy such items in reasonably large quantities. If that machine were considered to be ordinarily installed, it would be a method of avoiding VAT on that piece of equipment.

Many builders fit different kinds of electrical gadgets in houses which are being built. It is possible that at the same time they might consider installing a television set to be sold as part of the contents of the house. It would make things much simpler for the purchaser, because he could buy the set not on hire purchase over three years but on mortgage over 20 or 30 years. Would that sort of item be considered to be ordinarily installed? It is important that the Financial Secretary should spell out what is intended by this provision.

I have no wish to assist in evasion or avoidance of taxation on the sort of scale which might ensue, but, on the other hand, there could equally be a serious problem for contractors. It is important that when fixing the price of the house they should know whether or not a particular item of supply in that house will be allowed as an input. In other words, if it is to be allowed for them ordinarily to install kitchen cupboards and to incorporate them in the price of the house, and if that is to be allowed as an input, then it is important for them to know the situation.

On the other hand, if such an item is eventually to be disallowed and the builder discovers that information nearer the time when he has to deliver the house, this could cause considerable difficulties for the builder and indeed for the house purchaser, with whom I am much more concerned. It would not matter so much for a taxable trader because he would be able to claim for VAT on any input and there would be no problem in those circumstances, but where the house is built invariably for someone who will not be a taxable trader, it is important for the house builder, the contractor, to know how many and which of the items which he considers he is ordinarily installing are items which might be disallowed under the provision.

I move the Amendment largely to sort out the Government's intention and to help the trade know where it is likely to stand.

4.0 p.m.

Mr. Higgins

In responding to the points raised by the hon. Member for Heywood and Royton (Mr. Joel Barnett), I do not think the hon. Gentleman would wish me to go into detail on the provisions of the Amendment. Perhaps he will regard the Amendment as what came to be known in Committee as a "proving" Amendment. Perhaps by the end of the day in Committee we were a little clearer than we were at the beginning about the difference between a "proving" Amendment and a "probing" Amendment. At all events, it is the intention of the Amendment to seek clarification of the Government's position on this issue, and I willingly respond to the invitation.

The argument is what is called in jargon terms "the fitted carpet" argument. Perhaps we might use that as a shorthand expression. The Government's intention is to relieve from VAT items of a kind ordinarily installed by builders as fixtures when they are supplied in connection with the sale of a new building or in connection with the construction, alteration or demolition of a building. That intention is achieved in Schedule 4, Group 7, Item 3, regarding the construction of a building on land not owned by the builder. It is intended to maintain parity of treatment with houses built by builders on land which they own which are then conveyed to the client with the freehold of the land by making an order under Clause 3(6).

It may be helpful to distinguish between the case when the building is on the client's land and when the building is put up on the builder's land. The position under the Bill is that articles of a kind ordinarily installed by builders as fixtures are taxable under the Government proposals, except where they are supplied in connection with the sale of a new building, in which case they are zero rated under Schedule 4, Group 7, Item 1, or where they are supplied in connection with the construction, alteration or demolition of a building, in which case they are zero-rated under Schedule 4, Group 7, Item 3.

There is no problem about the treatment of articles of a kind ordinarily installed by builders as fixtures. Where there might be a problem is in the treatment of articles of a kind which were not ordinarily installed by builders as fixtures but which were occasionally installed, possibly, as the hon. Gentleman will recognise, for tax avoidance purposes, to benefit from the zero rating for new construction. The hon. Gentleman cited a number of examples where a builder might install in the building something which is normally added after it has been constructed and subject, therefore, to tax—at the moment purchase tax, or, in future, value added tax.

I turn now to the position of articles installed by builders on the client's own land of a kind other than those ordinarily installed by builders as fixtures. Articles installed in connection with services in the construction, alteration or demolition of a building will be excluded from the zero-rate under Schedule 4, Group 7, Item 3. This means that articles such as built-in washing machines, television sets or fitted carpets will be taxable when installed in a building constructed on the client's land. No further provision is needed in these circumstances to ensure that such articles axe taxed. There is, however, a complication, as the hon. Gentleman recognised if the builder is building on his own land and then conveying the house. Where articles other than those installed as fixtures are installed in a building which the builder is constructing on his own land, then the sale of the building and the land will be zero rated under Schedule 4, Group 7, Item 1. The item would cover any articles installed as fixtures and forming part of the conveyance. That is the point worrying the hon. Gentleman. As Item 1 stands, a builder who was engaged in speculative building would be able to supply at the zero rate anything which he was willing and able to install in the house. This could give rise to the problem to which the hon. Gentleman has referred. If nothing were done, there would be an anomaly in the treatment of such articles, depending on whether the builder owned the land on which he was building or did not. That could give rise to a serious leakage of revenue, as is recognised by the hon. Gentleman.

I respond to the hon. Gentleman's invitation to set out our intentions because it was pointed out in Committee that it would be helpful if, at an early stage, we gave Parliament an indication of what our proposals would be on Orders. To bring the situation where a completed building is sold into line with the situation where construction services are supplied on the client's land the intention is to make an order under Clause 3(6). The hon. Gentleman will rightly say "What have we in mind as far as that order is concerned?" We will make an order which will need an affirmative Resolution. I stress that fact. Under such an order, builders will not be entitled to deduct the tax which is charged to them on articles other than those of a kind ordinarily installed by builders as fixtures.

The hon. Gentleman will immediately say that that is a circular argument. I shall break the circle by taking the example of a television set. The distributor will charge the builder tax, the builder will be unable to deduct or reclaim the tax and, though the sale of the house with the television built in will be zero rated, the price the builder charges will reflect the element of tax on the television which the builder has borne. I think that is clear.

Mr. Joel Barnett

I follow the example the hon. Gentleman has given, but there is the point that presumably the builder will be buying the television at a cheaper price than the price at which it could be bought by the ordinary man in the street. Therefore, the level of VAT will be cheaper. There is no uplift as there is in purchase tax. In other words, the person buying the house including the television set would presumably get it rather cheaper than he would otherwise do.

Mr. Higgins

We always run into the same trouble as to whether the Opposition are in favour of prices going down. However, I do not make any broad political point on that. If the builder, in buying these items, does so in quantity, and thereby secures economy of scale, then, as the hon. Gentleman rightly says, the tax will be disallowed and the builder will therefore seek to recoup that in the price. It may be that the item is obtained by the purchaser of the house at a lower rate, but that is so in many circumstances where a person buys in quantity and sells at a lower price. As the hon. Gentleman rightly pointed out, that is one of the advantages of value added tax as against purchase tax. When things are supplied at a lower price, there is not the uplift of the kind which we have with purchase tax.

I will conclude my ground-clearing exercise, if that is not the wrong expression in this context, before I turn to the specific points which the hon. Gentleman has raised.

Taking the example of a television set, the distributor will charge tax to the builder. The builder will be unable to deduct or reclaim the tax and though his sale of the house with the television built in will be zero-rated, the builder will have made a corresponding increase in the price, which is reflected in the price paid by the purchaser of the house. The intention is to make an order under Clause 3(6) which will take effect from 1st April, 1973, in respect of articles installed in houses. I shall not digress on to the question of industrial buildings, where different considerations apply.

The hon. Gentleman the Member for Heywood and Royton asked what was the scope of the expression "articles of a kind ordinarily installed by builders and fixtures". We thought it right to use a general term which has already been judicially considered under purchase tax and which is sufficiently flexible to reflect changes in building practice and national habits. This is an expression which has been before the courts on previous occasions. Therefore, there is an element of experience here from which we can benefit. That is why we have used that expression. It is based on a similar form of words used to exempt certain items of furniture from purchase tax.

One of the advantages of VAT will be to get rid of some of the bad purchase tax line-drawing problems: under VAT that phrase will apply to articles other than furniture. Whereas the purchase tax exemption applied to the articles concerned whatever the circumstances of the supply, under VAT the relief will apply only when the articles are supplied either in connection with the sale of a building or in connection with construction, alteration, or demolition.

The crucial question is: where will the borderline be drawn? That is a difficult question. The Customs and Excise department has, as part of its broader consultations, discussed this with the trade associations concerned and it proposes to issue a notice concerning construction, which will give guidance and examples of what is and what is not regarded as "ordinarily installed". Examples of what would be covered are bathroom fixtures, sinks, work units and cupboards, central heating equipment, water heaters; whereas items such as washing machines, fitted carpets, television sets, cookers will not be so regarded.

What has happened? We have carried out consultations with the trade. The department of Customs and Excise will be issuing a notice which will seek to give guidance on that. That will be subject to appeal to the VAT tribunal if there is a dispute upon it.

In the past the practice has been to deal with this on a judicial basis. It is not a concept which is wholly unfamiliar to the courts. We believe that is the best way of setting what is unnecessarily a difficult line-drawing problem. This will prove in practice a workable way of setting about things.

We hope that the Opposition will not feel it necessary to press this Amendment to a division. Should they do so, other complications will arise. In some respects the drafting is complicated.

Mr. Alexander W. Lyon (York)

Could the Financial Secretary clear one matter up? This depends upon different impressions of house building. There is a greater tendency towards building package houses. Kitchen equipment is being built into buildings. If that process goes on and if meanwhile the Customs and Excise or the VAT tribunal has ruled against the installation of one type, will the VAT tribunal be able to overrule itself on this matter and allow for the change in fashion, or shall we be rigidly limited according to the decisions of the tribunal?

Mr. Higgins

The hon. Gentleman's point concerns a difficulty. One of the advantages we saw in dealing with it in this way is that fashions change. What is normally fitted may change between 1850 and 2000.

The department of Customs and Excise will be publishing a notice showing what it considers to be "ordinarily fitted" at this moment. That line may not in the event turn out to be where the Customs thinks it is, depending on how the tribunal, if the case does go to appeal, decides.

Fashions may change in the course of time. It may well be felt right to take something to the tribunal again. This enables one to adopt a more flexible approach which will reflect changes in building practice and national habits. That would commend itself to the House.

The alternative would have been to write into the Bill rigorously and exactly what is and what is not applicable. That did not seem to us either a flexible or a sensible way of setting about these matters.

4.15 p.m.

Mr. Tam Dalyell (West Lothian)

The Financial Secretary is in such a sunny frame of mind this afternoon that I hesitate to start nit-picking or line-drawing. But we are dealing with something of importance to a great many people. I understood the hon. Gentleman to say that, whereas fitted carpets, bathroom equipment and accoutrements are ordinarily installed, somehow a cooker would not be. Have I misunderstood him? In most houses a cooker is ordinarily installed. We do not know of many houses where there is no cooker.

Mr. Higgins

In Committee the hon. Gentleman tended to ask a theoretical question and to follow it with a long pause. We did not feel that that was a satisfactory way of proceeding. We now have something of a difficulty; not being in Committee there is a limit on how often I can intervene, but I respond on this occasion to the hon. Gentleman's invitation.

The crucial question is not whether a cooker is installed but whether a cooker is normally installed by the builder. It would not be our view that that is normally the case. It is a question of publishing a list, and the matter can go to appeal if it is felt necessary.

Mr. Dalyell

Fashions change. More and more people are buying a package when they purchase a house. I would have thought a cooker could be said to be "ordinarily installed". I do not wish to labour the point. Concerning the tribunal, unless one has a series of test cases fairly early on the VAT appeals tribunals will be swamped.

In pursuing the subject of what the Financial Secretary called "ground clearing", when he comes to wind up he can say what is the anticipated burden on the VAT tribunal. Is it in the Treasury's mind to have a series of test cases to give guidance in the early stage, or are we going to have an overwhelming number of appeals throughout the country?

One should look forward to building habits and how they will change. Any lay member knows that building habits are changing rapidly. I see that the hon. Member for Folkestone and Hythe (Mr. Costain) is longing to contribute to the debate. Perhaps he will have something to say on that subject.

Dramatic changes are taking place. What costs are we dealing with here? If we say cookers are not "normally installed", and within reason extend the exemption to cookers and a number of other items which are sold in the package, how much would it erode the revenue if a much more generous view is taken? It could save a vast amount of administrative costs. If the Treasury takes a more generous view of what is ordinarily installed, and include cookers, curtains, fitted carpets, how much would it erode the revenue? Has any calculation been made to establish the sum involved?

Mr. A. P. Costain (Folkestone and Hythe)

I approach this point as a builder. The hon. Member for West Lothian (Mr. Dalyell) said that I was impatient to intervene. I did not rise when the Amendment was first moved because I wanted to hear what my hon. Friend the Financial Secretary said.

I do not support the Amendment because I believe it to be too restrictive. Once we start setting out items which should not be excluded, we imply that we intend that everything else shall be. When my hon. Friend spelt out what he proposed might be allowed he had regard not only to the historically changing patterns of the building industry but to the fact that in different parts of the country there are different patterns. My right hon. Friend the Chancellor of the Exchequer, being a North countryman, will realise that even today most people install ranges in houses. A range is an in-built fixture, and I am sure that that would be allowed for VAT. However, if the range is replaced by a gas cooker, I do not see why that, too, should not be excluded.

My hon. Friend the Financial Secretary spoke about making an omnibus order. But what is essential for a flat is not essential for a house. A sink disposal unit is probably necessary in a flat because it saves the local authority certain dustbin clearance expenses, whereas such a unit might be considered a luxury in a bungalow. When the order is made, will it specify which type of building will be allowed or disallowed?

What fun we shall have getting a proper specification for a carpet. When is a carpet a tile? When is a tile a carpet? A tile is normally regarded as part of a building because it replaces a wooden floor. Now there is a fashion for tile-carpets. I was not clear about my hon. Friend's attitude as regards carpets. But I am afraid that we shall get into a hubble-dubble about it.

My hon. Friend referred to his conversations with the industry. Has he had them with the industry in all parts of the country? Can we have his assurance that he will bring in specific orders for specific types of buildings? As a practical person, I can assure my hon. Friend that they will be necessary. He must specify the difference between what is essential for a flat, for a bungalow and for a house.

Equally, when it comes to outbuildings, there are many different patterns in different parts of the country. If my hon. Friend is not careful he will alter the building pattern, just as occurred when different rates of tax were introduced for different horsepowers in motor cars. The result was a new breed of car. If the Treasury intends to reorganise the specifications of the building industry by VAT, we shall have some very peculiar types of construction as a result.

As we go in for labour-saving houses we shall get more and more fitted furniture. I suspect that my hon. Friend may be considering that fitted kitchens should be accepted as part of a building, but not fitted bedrooms. An order late at night is not necessarily the way to deal with problems of this kind. We want some assurances from my hon. Friend that he will have a small panel of experts whom he can consult before arriving at any final decision.

Mr. Joel Barnett

With the leave of the House, perhaps I might take up one or two of the points that have been made.

I am sure that the Financial Secretary will agree that this has been an interesting debate, especially the contributions from the hon. Member for Folkestone and Hythe (Mr. Costain), who has a vast knowledge of the industry.

The Financial Secretary spoke about the advantages of VAT in this respect. I was taken back many months. I thought that we had left all that behind. He said again that the great advantage of VAT as opposed to purchase tax was that there was no uplift. Of course there is not, since the burden falls upon the consumer, whereas purchase tax fell on the wholesale price.

The Financial Secretary said that he was pleased at least that VAT would remove the line-drawing problems about furniture. I made a note of that remark. I thought at the time that there would be a few new lines. But I did not think that we should hear about them quite so soon. I thought that there would be some demarcation disputes of the kind that we get in many other industries, but the hon. Member for Folkestone and Hythe spelt out clearly some of the terrible demarcation disputes that we are likely to have. What is the difference, for example, between disallowing a carpet and allowing linoleum or a linoleum tile? What is the difference between allowing a sink disposal unit in a flat and not allowing it in a house, or possibly disallowing it for both? Apparently kitchen furniture will be allowed, but why not bedroom furniture?

The hon. Member for Folkestone and Hythe used a phrase that I had not heard previously. He warned that the Government would get into a "hubble-dubble". I do not know the phrase, but I think that I know what the hon. Gentleman means.

Mr. James Well beloved (Erith and Crayford)

It is a Kentish expression.

Mr. Barnett

I am sure it is a very interesting one. When we have these demarcation disputes on VAT, we shall all know that the shorthand term for it is a "hubble-dubble".

The hon. Member for Folkestone and Hythe also said that we were likely to have a new breed of houses. I am not sure what he meant by that. However, I have an idea that it could have some very serious consequences. Although we are taking the matter a little light-heartedly, it could be quite serious in its effect on house building generally.

It was not my intention to press the Amendment to a Division, as the Financial Secretary readily understands. But I am pleased that we have had this opportunity of a brief debate. I now beg leave to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.