VALUE ADDED TAX (Hansard, 1 February 1973)

§ The Financial Secretary to the Treasury (Mr. Terence Higgins)
I beg to move, That the Value Added Tax (Cars) Order 1972 (S.I., 1972, No. 1970), a copy of which was laid before this House on 21st December, be approved.

§ Mr. Speaker
I think that it would be for the convenience of the House to discuss at the same time the second motion: That the Value Added Tax (Works of Art, Antiques and Scientific Collections) Order 1972 (S.I., 1972, No. 1971), a copy of which was laid before this House on 21st December, be approved.

§ Mr. Higgins
It would, Mr. Speaker, be convenient to take also the other order on value added tax.
May I first speak briefly about the order concerning motor cars. It is a composite order which applies to motor cars three separate provisions of the VAT legislation contained in the Finance Act 1972. Under the powers conferred by Section 3(6) of that Act, the deduction of input tax on motor cars acquired by a taxable person for use in his business is disallowed; under Section 6 tax is applied to the "self-supply" of certain cars, and, under Section 3(6) and Section 14 provision is made to relieve second-hand cars from the full tax and instead to tax them "on the margin", that is to say, the difference between their buying and selling prices.
In order to give traders as much advance notice as possible, two orders 1762 were made last year in respect of the non-deduction of input tax and the self-supply of motor cars. As it will be convenient, however, for those in the trade and their legal advisers to have all the provisions relating to cars in one order, the earlier orders are revoked and the substance of them is included in this order. I thought that it might be helpful to make the position clear regarding earlier orders.
On the restriction of deduction of input tax all countries with a value added tax have found it necessary to restrict the right to claim credit for input tax in the case of certain goods and services which are likely to be used for both business and private purposes.
Business cars are extensively used for private purposes, and it is desirable to prevent such use free of tax to avoid inequity of treatment between individual taxpayers, erosion of the revenue and distortion of trade due to the tax incentive given to the private use of business cars. The problem has been overcome by disallowing the whole of the input tax on the purchase of business cars.
On self-supply, Article 5 is required solely as a complementary provision to Article 4. Under Article 4 input tax is made non-deductible on cars acquired by taxable persons for use in their business. But Article 4 does not apply to new cars held in stock for resale by manufacturers and dealers. These traders could therefore take tax-free cars from stock for their own use without incurring any tax charge. This would clearly be discriminatory and inequitable. The article therefore imposes a self-supply tax charge on any such cars taken from stock for a registered trader's own use. This charge then becomes non-deductible under the provisions of Article 4. There could also be scope for tax avoidance if a registered trader bought a non-car—a van without side windows—for his business, on which he could claim a deduction of tax, and then converted it into a car for his own use, by making it a van with side windows, for use in his business. This is conversion by a registered trader of any vehicle which is not a car into a car. I thought it might be helpful to make that absolutely clear.
I turn finally on this order to the provision of relief for used cars. The House will be familiar with the discussions we 1763 had last year on this subject. I will make clear the conditions for obtaining relief. All used cars, except those which a car manufacturer has used solely for research and development, qualify for relief since, by virtue of the earlier provisions of this order, no deduction of input tax can be claimed on a car which is used otherwise than under the special provision for research and development cars. When relief is claimed the supplier must not show a separate amount as tax on the invoice since the buyer will not be entitled to deduction of any input tax. The relief is subject to the keeping of special records.
I turn to the nature of the relief. Instead of charging tax on the full value of the used car, tax will be chargeable only on the excess, if any, of the seller's price over his buying price—that is, the added value or margin. If there is no excess, no tax will be chargeable. But no refund of tax can be claimed if the sale was at a loss. Provision is made for determining the appropriate values to calculate the margin where the car was imported.
The second order is concerned with works of art, antiques and scientific collections. I need not weary the House with the discussions that took place last year on this matter during proceedings on the Finance Bill. This order is also made under Section 14 of the Finance Act 1972. Its effect is to apply VAT in respect of a specified coverage of works of art, on the dealer's margin instead of on the full proceeds of sale.
The House will recall the fairly extensive debates that we had last year both in Committee, when my right hon. Friend undertook to look into the matter, and on Report, when I was able to announce in principle that such a scheme would be introduced. We have since had numerous discussions with the trade, and the order has been produced as a result of the undertakings that we gave last year and the subsequent discussions.
I should make one initial point which has not been clear to those concerned with the coverage position. The margin scheme is optional. It will be a matter for the individual taxable person to decide whether it is worth his while in any case to comply with the additional 1764 accounting requirements which the scheme entails. It will be open to a dealer to use the scheme for some items and not for others.
I said on Report last year that the coverage is based upon, but not identical to, Chapter 99 of the Customs and Excise Tariff, which covers essentially paintings, engravings, sculptures, antiques over 100 years old and certain collections and collectors' pieces.
As to imports, importance is attached by the trade to the free movement of works into the country so that the international market based on London should not be jeopardised. The House will be pleased to see that it has been possible to meet the trade on this. The order provides for relief from VAT at import for the works of art and so on covered by the order, restricted to works of art acquired from the artist or his estate before 1st April 1973. This is to avoid discriminating against United Kingdom artists. In short, it will continue to be possible for an overseas resident to send a work to London for sale without incurring VAT. This has been welcomed by the trade and it is reasonable to suppose, given the response of hon. Members on both sides last year, that it will also be welcomed by the House.
The order applies to second-hand works of art and so on which have been sold at least once before 1st April 1973, or at least once after that date by a seller who did not charge value added tax. To take advantage of the scheme sellers will have to maintain a stock book allocating to each item a unique reference and maintaining its identity until it is sold. Tax will fall on the difference between the taxable person's buying and selling price, which will be regarded as tax-inclusive. Taxable persons will not be able to issue tax invoices when selling items under the scheme.
I hope that this summarises the main points arising on the orders. I shall do my best to answer any points hon. Members may wish to put to me.

§ Mr. Tam Dalyell (West Lothian)
As one who took part in the discussions last summer, may I confirm that in the discussions with the trade the trade has 1765 indicated that the present arrangement is wholly to its satisfaction?
May I also confirm my impression that the order in no way discriminates against the living artist? The Financial Secretary will remember the discussions about the position of the living artist. Will he confirm that the living artist is in no way disadvantaged? Thirdly, what precisely was meant by the phrase "additional accounting requirements"?
I have one question on the first order. In our constituency work we hear complaints from time to time about the definition of what is and is not a business car. Most of the complaints may well be without foundation, but we all know that there are complaints that So-and-so has a car on business expenses but uses it for his private purposes. Is the definition of "business purposes" to the Treasury's satisfaction?

§ Mr. Patrick Cormack (Cannock)
The order applying to antiques was produced only recently. There is a fair amount of anxiety in the trade that it has been left for a long time before all the details could be known. It is a very complicated process. Can my hon. Friend briefly comment on that?

§ Dr. John Gilbert (Dudley)
I will take the orders in the sequence which the Financial Secretary has dealt with them.
We entirely accept the arguments put forward about the self-supply provisions. The Financial Secretary tended to lose us in a metaphysical discussion about when a car was not a car and how one turned what was not a car into a car. One of these days we might get him to give us a definition of what is a car. I predict that it will not be long before he comes here and has the same sort of problem changing what is not a taxi into a taxi or back again. We had similar problems last year, and I am afraid that we have not seen the end of them in this tax which is supposed to be so free from anomalies.
We had a full discussion last year on the treatment of second-hand cars, and I do not want to add anything to what the Financial Secretary has said. This is acceptable to us. I am interested in getting information from him about the 1766 disallowance of input tax on new cars acquired for use by persons in their business. Why is a distinction being drawn between bought cars and rented cars? Why is the tax being disallowed solely on the purchase of cars whereas the great fleets of hire cars will apparently still be able to have the input tax deducted as a business expense?
It will not come as news to the hon. Gentleman that more and more large firms lease their cars and trucks—these things that might not be cars and will be cars and these things that are cars already. This is an enormous loophole which makes nonsense of the disallowance on the acquisition of new cars. Any firm in its right mind will go out and make sure that it does not buy any cars for its own use but merely leases them.
I support the question asked about the second order by my hon. Friend the Member for West Lothian (Mr. Dalyell) about the way in which the living artist is being treated. Works of art by such artists are taxed at the standard rate—I am grateful to the Financial Secretary for nodding—on the full value of the work at its selling price. It seems that there is discrimination in favour of the foreign artist, at least with respect to works of art which are imported having been acquired from that artist before 1st April 1973. I should refine that and say discrimination not in favour of a foreign artist but in favour of any artist who executed his work abroad before 1st April 1973. This seems an unimportant anomaly but it is one requiring explanation.
Will the hon. Gentleman confirm that items that have not been sold at least once before 1st April 1973 will attract VAT on the full selling price?

§ Mr. Higgins
I will seek to reply to the points which have been raised. I take first that made by the hon. Member for Dudley (Dr. Gilbert) about the initial situation. Normally the VAT credit mechanism operates and it flows forward. The provisions in the order create a situation where, if it is wished to operate an optional scheme thereafter, in, say, the antique trade and the dealer so opts, he will be charged only on the margin.
I deal now with the living artist. Hon. Members will remember that when we debated this matter upstairs in Committee 1767 on the Finance Bill, there were before us two separate issues. One related to the living artist and the other to the subsequent sale of works of art. An additional argument was that sale should be subject to a margin scheme. It will not be in order for us tonight to debate the topic of the living artist, since we debated that matter at great length during the Finance Bill proceedings. I must confess that that was one of the most enjoyable debates of the Committee stage. Reference to those proceedings will show that the various points were covered in some detail on that occasion.
I was asked about the reaction of the trade, and I must point out that we have gone to great lengths on this and on other issues relating to VAT to consult the trade. That is why the order is in this form. Although no doubt it will be said, as it is always said on these occasions, that we should have gone further in one direction or another, I think it can be said that these proposals have had the broad support of the trade.
I have already described the additional accounting requirements. It is essentially a question of identifying individual items. If any members of the trade have problems or are not sure of the precise interpretation, the best course is to consult local VAT offices whose officials will be glad to go into matters in detail. The House will appreciate that, while waiting for this order to be approved by the House, local VAT officers have been somewhat inhibited in their actions. Therefore, anybody with VAT problems should now consult those officers and we shall be issuing a notice as soon as it can be printed.
The hon. Member for Dudley asked for a definition of "motor car". The definition used for purchase tax purposes has been generally satisfactory and is used as the basis of definition in this order. There are some differences in the terms of definition in the corresponding purchase tax group but they have only a marginal effect on the situation. Incidentally, the purchase tax provisions include horse-drawn as well as motor vehicles, whereas in the present order we have a reference to vehicles of a kind normally used on public roads instead of a reference to "road vehicles." These are minor changes which largely 1768 reflect our experience of working with purchase tax. There has certainly been no broad problem of definition.
The hon. Gentleman also asked whether there was any discrimination between purchasing, hiring or renting a car. The order involves no discrimination between the outright purchase or renting of a car for business purposes. The input tax on the car is blocked. The tax on subsequent charge for hiring or renting the car is deductible. There is no element of double disallowance, which I think was the point at the back of the hon. Gentleman's mind. There is no element of discrimination, and I hope I have put his mind at rest.

§ Dr. Gilbert
We were concerned not so much about double disallowance but about deduction of input tax where cars were hired as distinct from purchase tax. As I read Article 4 of the order, tax shall not be deducted except where the supply is a letting or hire. Surely where there is letting or hiring now, tax must be deducted. Is not that the meaning of the provision?

§ Mr. Higgins
Perhaps I may try an alternative form of words. That course is sometimes useful to the House. It is alleged that the tax on fleets of hire cars will be deductible. That is not so. The tax will be non-deductible when a car is bought by a firm for subsequent hiring out on rental. Therefore, there is no loophole. Tax will be blocked on all cars used on the road whether on hire or on outright purchase.
The question was also raised about whether the order covers all cars used for business or private use. The answer is "Yes". All cars bought by a firm for any use will be tax blocked. Perhaps the problem is arising because the order is not being read as a whole. It covers three separate points and it is necessary to relate the various parts of the order. The effect of the order is as I have described it to the House.

§ Mr. Brian Walden (Birmingham, All Saints)
My hon. Friends and I have obviously discussed the order but I am still not clear. Maybe we are under an illusion but I do not think so. I refer the hon. Gentleman to the Explanatory Note. The first sentence says: 1769 This Order disallows deduction of input tax on new motor cars acquired by taxable persons. That is clear enough. The second sentence says: The disallowance does not apply.… It does not apply to a number of things—for example, cars for sale and other things or to the charge for the hiring of a car. Why is the input tax disallowed for the purchase of a new car but not disallowed for the purchase of hiring a car? My hon. Friends and I do not understand that.

§ Mr. Higgins
The purchase of hiring a car?

Mr. Waldren
I withdraw those words. Let me rephrase it. Why is the input lax disallowed for the purchase of a new car but not disallowed for the hiring of a car? What is the principle involved in that?

§ Mr. Higgins
I am seeking to understand the point which the hon. Gentleman has made. I was under the impression that I had already answered it in the form of words I first used and again in another form of words. It has always been a problem when dealing with these matters to find the exact form of words in order to elucidate the matter. Perhaps I might try again. The tax will be non-deductible when the car is bought by a firm straight, for whatever purpose, for private use within a firm or otherwise. So much is clear.

§ Mr. Joel Barnett (Heywood and Royton)
Surely, when a car is bought for the purpose of resale by a dealer, the dealer is liable for input?

§ Mr. Higgins
Let us not complicate the issue. If the hon. Gentleman looks at my original remarks he will find that that point is covered. I have already said that the order will cover all cars used for business or private purposes. All cars bought by a firm for any use, business or private, will be tax blocked. So far it is common ground.
I understand that it is suggested that fleets of hire cars will be tax-deductible. However, tax will be non-deductible when the car is bought by a firm for 1770 subsequent hiring out on rental. Therefore, there is not a loophole. The tax will be blocked on all cars used on the road whether on hire or on outright purchase. I hope that that has made the position clear. I hesitate to try again in another form of words for the fourth time. We are not in Committee, but if hon. Members are still in some doubt about it I shall be happy to discuss the matter with them.

§ Mr. Deputy Speaker (Sir Robert Grant-Ferris)
Order. We must remember that we have abolished the Committee of Supply and that we are in the House of Commons. This is not a Committee.

§ Mr. Higgins
I think that when hon. Gentlemen study what I have said they will find that I have dealt with the matter. We are not in Committee, and it is difficult for the debate not to become disorderly if we go over the same ground more than three times.

§ Mr. Barnett
I am sure that the hon. Gentleman does not wish to mislead the House. There will be VAT on the rental element. When a car is rented to a firm, there will be VAT on the rental price. That is allowable as an input. In those circumstances, surely there must be an element in the rental price relating to the depreciation of the vehicle. Rental is not the purely profit part. It is on the basis of profit plus depreciation of the vehicle. In that sense, surely a person gets an allowance for input of the cost of a car—the depreciation element in it—when he hires a car as opposed to when he sells it.

§ Mr. Higgins
I understand the point. There is no anomaly. The position is that the normal workings of the credit mechanism apply in the circumstances which the hon. Gentleman has outlined. The exact basis on which the price is calculated is a flatter for the person hiring the vehicle. It is for him to decide what accounting basis to adopt. That is not something which, even in theory, we need go into tonight.
The position with regard to the purchase of a car, whether by a firm hiring a car or otherwise, is the same in both instances. Therefore, I do not believe that there is an anomaly. I suspect that this is a fifth form of words. I think hon. Gentlemen will find the position to be as I have described it, but if they 1771 care to pursue the matter with me individually I shall be happy to discuss it as I am anxious to clear up any misunderstandings that may still exist in the minds of hon. Gentlemen opposite.

§ Mr. Cormack
There is one point which applies to both orders. If either a car dealer or an antiques dealer has a great deal of restoring work to do on an item before he sells it, presumably that can be allowed against his profit. In other words, if he makes a profit of £100 but has spent £50 on restoring the item, that can be taken into account.

§ Mr. Higgins
That raises a more complex point. I think that my hon. Friend's interest is in antiques rather than in cars. The matter that was raised earlier by the hon. Member for Heywood and Royton (Mr. Joel Barnett) on the question of cars will obviously turn on the normal operations of the firm hiring the car. Certain inputs will come into operation, to which the usual rules will apply.
The situation with regard to the art market is as I outlined in my opening remarks, and I think that the order makes the position clear. It is the case that the margin is the selling price minus the buying price, with no allowance for repairs and restoration. That is to say, it is charged on the margin itself. That is essentially the position which has been discussed with the trade and I believe that the trade is now familiar with it. If any trader has problems no doubt he will wish to approach his local VAT office, which will be very glad to go into the matter in as much depth as he wishes.

§ Mr. Robert Cooke (Bristol, West)
No doubt the local VAT office will be helpful and friendly but perhaps my hon. Friend w ill say something here because his words might have a little more force. Obviously we do not want to expose the Revenue to a possible "racket", that the trader says it cost him the whole of his margin to restore the article and there is therefore no profit. We must guard against the situation where a dealer purchases particularly a picture but it may be a piece of furniture or any work of art, but because he is not allowed to charge any of the restoration against that margin he will do a quick clean-up 1772 and polish job which will be bad for the work of art.
I am not a tax expert but I do not want to see anything in the tax system which will be a disincentive to do the job properly. Bad restoration may not be possible to be put right later and it sometimes does permanent damage. There are inducements in the other direction. The fact that books are zero-rated and prints are mentioned in the order will be an incentive not to split books up to sell them as prints, and that is a good thing.
This is a difficult matter and we always knew it would be. In the order we have made it quite clear to anyone from abroad who wants to use the international art market based on London that there is no fear of VAT having a deleterious effect on his transaction. We do not want the international art market to be chased away from London because of anything we might do.

§ Mr. Higgins
My hon. Friend's intervention was as courteous as it was long. I can confirm that I agree—[Interruption.] With great respect, we are not in Committee. I cannot keep standing up and sitting down indefinitely and it is therefore necessary for me to keep giving way. I in no way detract from my hon. Friend's remarks but I confirm that the provisions of the order are designed specifically to ensure—I must get the expression right because my hon. Friend has corrected me twice—that the international art market based on London will not be put at a disadvantage in its competitive position in international markets.
I think that I answered the specific question which my hon. Friend raised when I replied to my hon. Friend the Member for Cannock (Mr. Cormack). The issue is clear from a study of Article 4 which defines the margin as the difference between the acquisition price and the selling price. The margin will thus include the cost of any restoration and so on effective between the acquisition and the sale. Any tax incurred by the seller in having such work done would be deductible input tax. I believe that makes the position clear.
I think I am right in saying that I have covered all the various points raised in the debate.

§ Mr. Higgins
I always hesitate to say that because the hon. Member for West Lothian (Mr. Dalyell) always remembers one which I have forgotten. But I think I am right in saying that I covered even the initial point he made, which is apparently, the one he thinks I have not covered.

§ Mr. Dalyell
It was the question of business abuse, but I do not want to labour it too long.

§ Mr. Higgins
I think I have made the position clear. The hon. Gentleman is concerned about whether there is business abuse of cars. If he gives the matter thought, he will appreciate that this does not arise in the context we are discussing here because, as I have indicated, the input tax is applied to all cars which are bought by businesses for whatever purpose. Therefore, in this, context, the possibility of abuse does not exist. That is the answer. I am now reasonably sure that I have answered all the points raised, none of them more than three or four times. That being so, I hope that the House will feel able to give approval to the orders.