§ 10.28 p.m.
§ The Financial Secretary to the Treasury (Mr. Terence Higgins)
I beg to move,That the Input Tax (Exceptions) (No. 1) Order 1972 (S.I., 1972, No. 1165), dated 1st August 1972, a copy of which was laid before this House on 9th August, be approved.It may be for the convenience of the House if I outline briefly the purpose and effect of the order. It is made under Section 3(6) of the Finance Act, 1972. It disallows the deduction of input tax by builders on certain articles incorporated as fixtures in dwelling accommodation in which they hold or own a major interest.
The order is necessary, as hon. Gentlemen opposite will realise, following the Finance Act, to maintain parity of treatment between articles installed as fixtures in speculative building and similar articles installed in buildings constructed to a client's order on land he owns himself and also articles bought by a householder subsequent to the purchase of a new house. The need for the order was explained at some length by my hon. Friend the Minister of State in Standing Committee on 24th May and in further detail by myself on Report on 11th July.
Schedule 4, Group 8, Item 2 of the Finance Act, 1972, zero-rates construction services, and Item 3 zero-rates the supply, in connection with such services, of articles of a kind ordinarily installed—and the House will recall that that is the crucial expression—by builders as fixtures. Items such as washing machines, television sets and fitted carpets are not ordinarily installed by builders and so are excluded from the zero rate if they are installed by a builder in a house which he builds for a client.
Items 1 of Group 8, however—which zero rates the granting of a major interest, by a person constructing a building, in the building or its site—does not impose any similar restriction on articles installed as fixtures. Therefore, without this order, a speculative builder would be able to supply at the zero rate anything which he was able or willing to install as a fixture, and there would then be an anomaly in the taxation of such articles, depending on whether the builder owned 401 the land on which he was building or not; and a serious loss of revenue could develop.
The order applies only to articles installed in domestic accommodation. As regards other buildings, the House will appreciate that the operation of the credit mechanism applies, and there is thus no tax incentive for a builder to install fitted carpets and so on in such a case.
The items which are regarded as ordinarily installed by builders as fixtures include bathroom fixtures, work units and cupboards in kitchens, central heating equipment and water heaters, and not things like washing machines, waste disposal units and cookers. We have issued Notice No. 708 on the Construction Industry, which illustrates the kind of thing which is in one category or the other.
These lists are intended to be regarded as illustrative and representing Customs' current interpretation of the law. It may be argued that one item or another ought to be in the opposite list. This does not strictly arise on the order. Such matters are, in the first place, within the discretion of the Customs, but, consistent with our overall Green Paper approach, we have discussed the matter with the main trade associations, and they will be kept under review. Any decision of Customs on the matter in an individual case is open to appeal to a VAT tribunal or a court. We envisage that, when a new ruling is given, we shall publish this by means of Press and public notices.
I hope that, with that explanation, the House will feel that this is consistent with the line which was taken during the Finance Bill debates, which, I think, was generally understood, and I hope that the order will be approved.
§ 10.33 p.m.
§ Mr. Joel Barnett (Heywood and Royton)
We have heard this before. In effect, this is where we came in—or, rather, where we left off. The order demonstrates the failure to clarify how the system would work, and it emphasises the chaotic state of unpreparedness both in the Customs and Excise and in the Government, and among the traders who will have to operate the system.
The documents which are supposedly issued by the Customs and Excise in relation to this tax, as set out on page of Customs and Excise Notice No. 700, 402 so far as I have been able to ascertain, are not even all available. They are not available in the Vote Office. Of Nos. 700 to 711 of the guides, five were not available in the Vote Office yesterday. One of those five was available in the Library. They are certainly not all available in the various VAT offices throughout the country.
Where they are available, many of them—this order is one example—are utterly incomprehensible to the people who will have to deal with them. I take the example of the retailers who will have to deal with the four schemes. How are they to be able to cope with the so-called simple scheme 2? All I can say to the Financial Secretary is that he should go round and talk to some of the small retailers.
As for registration, it is early days yet, but the As to Cs are supposed to be registered by the end of October, and it would be interesting to know how many have yet registered, and how many are aware that, if they do not register, they will be liable to a fine of £1,000 and up to two years' imprisonment.
I know from personal experience that many small trades and industries are unaware of how VAT will affect them. I do not exaggerate when I say that there is a chaotic state of unpreparedness.
The order relates to the construction industry. The Minister of State said on 24th May that as much guidance as possible would be given. We know now what that amounts to. We have heard the exposition of the guidance by the Financial Secretary and we have the guide for the construction industry. This is what the trade will have to use in the operation of this broad-based, comprehensive, anomaly-free tax, to use the language we heard so often from the Financial Secretary. I do not know whether it means anything, but I noticed that tonight the Financial Secretary did not tell us once more that this was a broad-based, comprehensive, anomaly-free tax. I do not know whether that means that the hon. Gentleman, too, has recognised what we told him repeatedly throughout the debates we had on the Floor of the House and in Standing Committee.
From the guide and from what the Financial Secretary said this evening, the 403 trade will know little more than we had in Committee and on Report. Yet houses are being built now that will be sold after 1st April, 1973, and builders will not know for certain which of those items will be subject to VAT and which will not. This will be in effect a marvellous excuse for builders to do what many of them are, unfortunately, doing today, namely, increasing the price from that first quoted. The gazumping going on in the building trade now by builders and others will be given a boost by VAT.
We are left with the basic problem from this industry under VAT, namely, what is "ordinarily installed" and what are luxury fittings? In the debate on 11th July the Financial Secretary gave us some examples. He spoke of washing machines, television sets, carpets, cookers, and a few more which are now referred to in the guide.
I will give a few examples of what I mean when I say that we are not much further advanced with the guide or with the Financial Secretary's exposition. We are told that carpets are to be disallowed as an input but tiles are to be allowed. The hon. Member for Folkestone and Hythe (Mr. Costain), who is experienced in the building industry, told the Minister at the time that we debated this matter on Report, in a phrase which the Minister will no doubt recall, that there would be a "hubble dubble" in this industry. I have no doubt that after this explanation there will be a hubble dubble.
How will builders distinguish between carpets and the sort of tiles which are frequently fitted in the building industry? We are then told that bedroom furniture is to be disallowed. What about cupboards? That will be an interesting situation. Cupboards are allowed. When a cupboard is a piece of bedroom furniture will be an interesting problem for the building industry to decide. Kitchen furniture, on the other hand, whether it be a cupboard or anything else, is apparently to be allowed. Baths are to be allowed. What about fancy baths? What about a black bath as opposed to a pink one? Is that "ordinarily installed"? What about the round baths which I understand are now being installed? I am sure that the hon. Member for Rochester and Chatham (Mrs. Fenner) is 404 very concerned with that type of bath. I understand that refrigerators and cookers are to be disallowed, even though many are, and will be in future, fitted with the kitchen.
Sinks are to be allowed, but waste disposal units which are being more and more frequently fitted with sinks, are not to be allowed. I do not know how the builder will sort that out. A garden shed and summerhouse is disallowed, while a garage is allowed. There will be some interesting distinctions between garden sheds and garages when builders are constructing houses in future.
On the general question of "ordinarily installed" there is a considerable difference between what is ordinarily installed in a house costing £4,000—there are still a few of those in my area, but none in the South—and one costing £40,000. There is a considerable difference in the type of fittings ordinarily installed in those different types of houses. I would be interested to know how it is suggested that the building industry will decide on a distinction.
I recall that the Financial Secretary said in our last debate that this great tax would at least remove the bad purchase tax line-drawing in furniture. If he believed that I hope by now he is disillusioned. All this simply emphasises more than ever the need for much more time for the Government, traders and the public to prepare for the massive upheaval there will be with the introduction of this tax. Apart from anything else, a time of rapidly increasing inflation—when it is as the Prime Minister constantly tells us, the major problem of the day—is, I would have thought, precisely the time to do nothing to make the problem worse.
No one can doubt that VAT will increase the inflationary spiral. There is a tremendous case for postponing VAT altogether. Even at this late stage I appeal to the Chancellor to give serious consideration to delaying the introduction of VAT for at least a year.
§ Mr. Higgins
By leave of the House, may I reply to some of the points raised by the hon. Member for Heywood and Royton (Mr. Joel Barnett).
The first point to be made is that it would not be to anyone's advantage to create uncertainty at this stage by delaying the introduction of VAT. We have 405 made the timetable clear. We have taken into account throughout the views expressed to us, and it is true to say that this tax had had more careful preparation before introduction than any other in this country.
As to the general position of trade, I have met a large number of businessmen who are concerned with the introduction of the tax and they did not reflect the kind of view which the hon. Gentleman, perhaps in rhetorical phrases, has put forward. If it is the case that in a particular instance the information required is not available at the appropriate moment then I hope hon. Members will bring these cases to my attention and I will certainly look into them. It is true that the explanatory literature is long, but it is also true that if the matters are spelled out at length it facilitates understanding of the tax where a short explanation might have the opposite effect.
If particular people have questions about certain items, it is open to them to go to the local office of Customs and Excise, which will be glad to give any help it can. That is the general approach we have adopted, and it is one which has been generally appreciated by traders. This has taken me a little wide and I do not want to go out of order. It is right to stress that we have carried out consultations with the trade and trade associations particularly concerned in the area covered by the order. Their views are reflected in the position which I outlined in my opening remarks. The hon. Member for Heywood and Royton made considerable play, as he did during the Finance Bill debates, with the expression "ordinarily installed" and asked precisely what it meant. It is right to stress that the wordsbuilders' hardware, sanitary ware and other articles of a kind ordinarily installed by builders as fixturesare taken from purchase tax law. They have been judicially considered. There is a body of case law and administrative decisions which are likely to be helpful in this matter. As the hon. Gentleman and the House will know, we have not felt it inappropriate, where there are purchase tax precedents and where matters have already been judicially considered, to ensure that they can still be the basis 406 for interpretation either by the VAT tribunal or the courts.
We have indicated in Notice 708 a broad classification, but if there is any doubt on a particular instance, the Customs and Excise will be glad to clarify the position, if a query is raised with it, or the matter can go to appeal. There is a distinction between individual cases which is brought out in paragraph 5 of Notice 708, which excludes bought-in articles of furniture other than those specified in paragraph 4. There is a distinction between bought-in furniture if it is installed as a fixture and the airing cupboards and other cupboards which the builder would make himself.
I do not accept that there is likely to be a massive upheaval. That is not the impression which I have gained from talking to traders. However, we will look into any cases which hon. Members would like to bring to our attention.
We are not complacent. It would be remarkable if in introducing a new tax there were not instances where communications were not as good as they should be. I shall be happy to look into any instances where that is so and deal with them as rapidly as possible to ensure that the situation is clarified. For those reasons, I hope that the House will feel able to approve the order.
§ 10.48 p.m.
§ Mr. Tam Dalyell (West Lothian)
The Financial Secretary is right in saying that the local officers of Customs and Excise have been helpful. Certainly that applies in the area which I know and I am sure that it applies throughout the country. However, the Financial Secretary is far less right in suggesting that there is no uncertainty. There is still a great deal of uncertainty judging by correspondence which I have received. Therefore, my hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) has an argument when he suggests that there is uncertainty.
I should like to know to what sort of business men the Financial Secretary was talking. I suspect the truth is that a good job has been done by the big business men at the centre of things, but it is a different story with small traders who are dependent on their trading associations. The fault may lie in poor communications between such traders and 407 the professional and trading associations to which they belong. Some of the trading associations have not distinguished themselves by the help that they have given to their members. That is by the by. The fact is that there is a great deal of uncertainty amongst small traders.
I have formed the impression that the big builders have arranged matters rather better than some of us thought likely during the passage of the Finance Bill. I know very well what the medium and smaller firms are doing—they do not have any kind of idea of what costs there are and they are therefore thinking of the maximum charge that can possibly accrue to them, and therefore prices are rocketing because of the uncertainty.
Brought-in fitments have been mentioned. The truth is that the picture is not as the Financial Secretary sees it, but as my hon. Friend the Member for Heywood and Royton sees it. I cannot think that the Scots are very different from anybody else and I assure the hon. Gentleman that there is considerable lack of understanding about what is to be disallowed and what allowed. For the Treasury to say that everything is taped is, I will not say complacent, but an optimistic attitude and wide of the mark.
§ Question put and agreed to.
That the Input Tax (Exceptions) (No. 1) Order 1972 (S.I., 1972, No. 1165), dated 1st August 1972, a copy of which was laid before this House on 9th August, be approved.