VALUE ADDED TAX (Hansard, 20 March 1973)

§ The Financial Secretary to the Treasury (Mr. Terence Higgins)
I beg to move, That the Value Added Tax (General) (No. 1) Order 1973 (S.I., 1973, No. 324), a copy of which was laid before this House on 6th March, be approved. This order requires an affirmative resolution because some of the changes apply the standard rate of tax to items which previously were zero rated or exempt. The order makes changes in the descriptions of supplies which are zero rated or exempt from VAT under Schedules 4 and 5 of the Finance Act 1972.
There have been full and continuing discussions with various sectors of trade and industry over the past months to consider the detailed effects of some of the zero rated and exempt provisions in the Finance Act 1972, and I acknowledge the help and co-operation given by different trades and trade associations in these consultations. As a result of the discussions, the Government have decided that it would be right to make certain changes to Schedules 4 and 5, though I feel bound to say that they are mostly of a fairly specialised nature.
Contrary to the view expressed in some parts of the House there have not been statutory changes to the arrangements to date, and the order is an omnibus one, which covers a number of changes regarded as necessary in the light of the further discussions which have taken place.
Much of the detail is esoteric but if there are specific points which hon. Members wish to raise 1 shall, as always, do my best to answer them.

§ Mr. Joel Barnett (Haywood and Royton)
I was delighted to hear the Financial Secretary make one of his briefer speeches. I am even more delighted that we have not heard any more talk of the reform of the tax system, and that it was very simple, broad based, free from anomalies, and so on—

§ The Minister of State, Treasury (Mr. John Nott)
'Tis.

§ Mr. Barnett
I do not know whether that is supposed to mean "it is". I noticed that the Financial Secretary was not agreeing with the hon. Gentleman, and I am not surprised. I did not notice the Financial Secretary agree with his right hon. Friend the Chancellor of the Exchequer when he confessed himself to have been wrong about children's shoes and clothing. After hearing all that the Financial Secretary had to say, I feel that he will not find it quite so easy to agree that all the wonderful words that he used in support of this great tax were all wrong. It was not just a matter of children's shoes and clothing. It ruined the hon. Gentleman's whole argument about anomaly-free taxes. However, I will not go on about that.
I have a feeling that some of the items in the first order are not quite so technical as the Financial Secretary would have us believe. I think that some of them are designed to prevent tax avoidance before it even arises. Otherwise, why amend some of the provisions contained in the 1972 Finance Act, as the order does? I should be interested to know why the provisions relating to holidays were changed, why the provisions relating to advertisements were changed, and, above all, why the provisions relating to deionised water were changed.
I must confess that I genuinely did not know what deionised water was. That is an awful thing to admit.

§ Mr. Tam Dalyell (West Lothian)
Terrible!

§ Mr. Barnett
I am sorry that my hon. Friend the Member for West Lothian (Mr. Dalyell) was not available at the time. I should have been able to ask him, because I am sure he knows what it is. However, he not being available, I looked it up in one of the scientific journals of the House. I was astonished to find exactly what ionisation and deionisation is: With few exceptions the great utility of ion exchange rests with the ability to use and reuse the ion exchange materials. For example, in water softening: 2R̄Na++Ca²+=R̄₂Ca²++2Na+. I have always wanted to say that in the House. I am sure that the Hansard reporters will get it exactly right.
385 We are also told: The exchange R̄ in the sodium ion form is able to exchange for calcium and thus remove calcium from hard water and to replace it with an equivalent quantity of sodium. All that is apparently to be subject to the standard rate of VAT. I do not know why that should be. After all, this learned journal also tells us that water softening is important. It says: Hard waters which contain principally calcium and magnesium ions cause scale in power-plant boilers, water pipes, and domestic cooking utensils. Hard waters also cause soap precipitation producing an undesirable gray curd and a waste of soap. We do not have this problem in the North-West because we have very nice, soft water like the very nice people there. But people in London and other parts of the country have hard water. It seems a little hard that they should now have to pay value added tax to soften their water. I understand that if, in building a new house, a water softener is installed it would ordinarily be free from VAT. I can see that the Financial Secretary is wondering whether that is so. I see his PPS dashing off to make sure whether it is or not.

§ Mr. Higgins
I was merely reminiscing on our previous debates.

§ Mr. Barnett
I understand that if a water softener is put in during the building of a house it will not be subject to VAT. If, however, it is put in later it is subject to VAT. I should be delighted to hear that that is not so, that deionisation is nothing terrible—that it is not important, is merely a technical amendment, and nothing more than the distilled water used in car batteries. I do not know. I should also be glad to know whether water softeners used by householders in hard water areas will be subject to VAT. There are already enough things VAT-able without adding water softeners. I shall be delighted to hear from the hon. Gentleman exactly what the situation is. I hope that he will give me the answers to the various points which I have made.

§ Mr. Higgins
I shall seek to answer the various points made by the hon. Member for Heywood and Royton (Mr. Joel Barnett). The hon. Gentleman normally prefaces his technical remarks with various generalities. I am bound to tell him that my right hon. and hon. Friends 386 on the Treasury Bench are unanimous in their view that the proposals made in the Budget were absolutely justified and splendid.
As for anomalies, I must point out to the hon. Gentleman that the Budget proposal to zero rate purchase taxed foods gets rid of at least three anomalies which would otherwise have existed. The hon. Gentleman will remember that there was a difficulty over the distinction between biscuits and chocolate biscuits. That difficulty has gone. Secondly, the hon. Gentleman may remember that there was a distinction between yoghurt and frozen yoghurt. Thirdly, there was the question of certain proprietary forms of soft drinks, and rose hip syrup. The Budget proposals make it a less anomalous tax than it was before.

§ Mr. Barnett
That is what we were trying to persuade the hon. Gentleman to do, and he refused consistently throughout the whole of our debates. As we are talking about a general order, and as he is talking about sweets, and so on, can he confirm that sweets eaten on the premises of a cinema are free from VAT?

§ Mr. Higgins
Where catering is provided the usual provisions will apply. However, the hon. Gentleman has raised various general points, and I must not be tempted too far. If he wants to obtain an answer on that point he would be better advised to pursue the matter when the appropriate occasion arises.
The hon. Gentleman mentioned deionised water, holidays and advertisements, and, in particular, the wording relating to those matters. With regard to Article 3—purified water—which is an amendment to Schedule 4, Group 2, the relief under that group in that schedule of the Finance Act, was intended to be restricted to ordinary potable water, by analogy with the relief given to food. The hon. Gentleman, and the hon. Member for West Lothian (Mr. Dalyell) will recall our debate on that matter. However, purified water is now made by other processes than distillation—for example, by deionisation. Such water is used for the same purposes as distilled water and has almost completely replaced it in some respects. The exclusion from relief has therefore been extended to include purified water, and thus brings the group into, line with what was intended.
387 If hon. Members will cast their minds back to last year they will recall that we discussed advertising services. The purpose of the article is to restrict relief under Items 3 and 4 of Group 9 to advertisements placed in the United Kingdom media on behalf of overseas residents, which was the original intention. Services supplied to overseas residents in connection with advertisements placed in overseas media will fall to be considered for zero rating under Items 1, 6 or 7 of Group 9 as appropriate. That fulfils the original intention.
The hon. Member for Heywood and Royton also referred to the wording of the section relating to holiday accommodation. As originally drafted, holiday accommodation was determined by whatever use a house—or whatever it might be —might be put to over a period of time. Tax would or would not be chargeable on all the lettings of the house, according to its principal use. Those taxes would be due on residential lettings which would otherwise be exempt, if the house was primarily for holiday use, and not due on holiday lettings which would otherwise be taxable if the house was primarily for residential use.
Under the new note, holiday accommodation includes any accommodation advertised or held out as such, and other criteria—the terms of the agreement, the period of occupation and the amount charged—will also need to be taken into consideration, but the Customs and Excise authorities are now satisfied that this distinction can be administered, and it should be much easier for the trade to operate. There is no question of the owner's having to ask the occupants of their intention. If he lets the house as holiday accommodation, bearing in mind the above criteria, his supply will be taxable at the standard rate. This is a better way of tackling the problem, and it is for that reason that we have included it in the order, which, as I said, is something of a catch-all.
This covers all the hon. Member's points and I hope that in the light of that—

§ Mr. Joel Barnett
In the note, holiday accommodation is said to include any accommodation advertised or held out as such, but if one advertises a house to let 388 in Blackpool or Bournemouth one does not have to say that it is holiday accommodation. One does not have to hold it out as such, but it would certainly be holiday accommodation. Would it still be subject to VAT?

§ Mr. Higgins
I had hoped that I had made that point clear. I am saying that, under the note, holiday accommodation includes any accommodation held out or advertised as such, but that other criteria, such as the terms of the agreement, the period of occupation and the amount charged will also need to be taken into consideration, and the Customs authorities are satisfied that this distinction can be administered. We believe that it will be easier for the trade to operate. On that basis, it is something which has been represented to us as a better way of catching this problem, and we think that it will be important.

§ Mr. Joel Barnett
I am sorry to trouble the Financial Secretary, but I do not know who is holding it out to him— whether or not it is those concerned— that this would be better. I am not sure what he means when he says that it will be easier to recognise whether it is stated in the agreement that it is holiday accommodation. It certainly would not be stipulated in an agreement that a house or flat was being let for a holiday. The agreement would just say that it was being let. The owner of the house or flat would not care a damn what is stipulated in the agreement so long as he had an agreement under which he received rent. I am not sure that the Financial Secretary, is not being misled by someone into believing that he will catch the people concerned when in fact he will not.

§ Mr. Higgins
On these occasions we tend to have variations of the same explanation. It is all very simple. Let me try, as I have on former occasions, on other orders, an alternative formula. The amendment clarifies the point on the position of accommodation. It applies tax at the standard rate to the provision of holiday accommodation in houses, flats and caravans by excluding it from the general exemption for interest in land.
Under the legislation as previously drafted, tax fell on the provision of 389 accommodation—holiday and residential —if it was used wholly or mainly for holiday purposes. This could have led to anomalies which, I say frankly, we did not envisage at the time of drafting. For example, the residential letting of a flat which was wholly or mainly for holiday purposes would be taxable at the standard rate. In view of this, it was decided to confine the tax to holiday accommodation per se, with individual circumstances being taken into account. But, in general, the supply of accommodation advertised or offered as holiday accommodation will be taxable at the standard rate.

§ Mr. Joel Barnett
I have no desire to press this matter to a vote, but the Financial Secretary has not answered the point. Once he has removed the words "wholly" and "mainly" he cannot know whether or not a house or flat is being let for holiday purposes. He cannot have the faintest idea. Surely what will happen is that holiday accommodation let in houses or flats will be free from VAT. Is not that the position?

§ Mr. Higgins
No, I would not accept what the hon. Gentleman has said. I understand that in debating this matter on an order problems arise about giving an explanation. I have made almost three attempts at explaining it. For the reasons I have mentioned, I do not believe that this is a problem. I think that it will be a workable definition. We believe that it is an improvement. Obviously, in the light of experience we shall need to see how it works.
However, having had discussions and having looked at the various problems that are likely to arise, we believe that this is a better solution than that which I originally commended to the House.

§ Mr. Higgins
It may be for the convenience of the House, Mr. Deputy Speaker, if we take the other orders— the Value Added Tax (Motor Cycles) Order 1973 and the Value Added Tax (Caravans) Order 1973, together. Perhaps 390 the House would care to indicate its wishes.

§ Mr. Dalyell
Are the orders being taken together?

§ Mr. Higgins
I was merely seeking to establish whether the House wished to take them together. I was proposing to make some preliminary remarks if hon. Members wished. I understand from the assent of the hon. Member for Heywood and Royton (Mr. Joel Barnett) that it is the wish of the House that they be taken together.
I beg to move, That the Value Added Tax (Motor Cycles) Order 1973 (S.I., 1973, No. 328), a copy of which was laid before this House on 6th March, be approved. I understand that the House may discuss at the same time the motion That the Value Added Tax (Caravans) Order 1973 (S.I., 1973, No. 329), a copy of which was laid before this House on 6th March be approved. The House will be familiar with the basic point here, because virtually all hon. Members present took part in the previous debates on the orders and discussions of the Bill last year.
The effect of these orders is to extend to used caravans and used motor cycles relief similar to that provided for used cars by Articles 6 and 7 of the Value Added Tax (Cars) Order 1972, which the House debated and approved on 1st February.
The provisions are somewhat similar. Under Section. 3(6) and Section 14 of the Finance Act 1972 they provide for the relief of caravans and motor cycles from tax on the full selling price in favour of taxing them on the margin—that is, on the difference between their buying and selling price. The order concerning caravans relates to all caravans, including motor caravans, other than those zero rated under Group 11 of Schedule 4 of the Finance Act 1972. There would be no point in including zero rated caravans in this scheme.
In the previous order we were debating showmen's caravans, including any zero rated. These are now included, in the light of representations made by my hon. Friend the Member for Totnes (Mr. Mawby) and my hon. Friend the Member for Tynemouth (Dame Irene Ward).
391 The order concerning motor cycles relates to motor bicycles and scooters, whether separately or in combination with a sidecar; any other form of mechanically propelled two-wheeled vehicle which is required to be licensed; and motor tricycles and any other mechanically propelled three-wheeled vehicle capable of accommodating only one person—for example, a disabled person's car.
The Finance Act 1972 included a provision enabling the Treasury, by order, to introduce special schemes for taxing certain secondhand goods on the dealer's margin instead of on their full value. We included these with the secondhand car market primarily in mind, and that order has already been made.
In the case of caravans and motor cycles, the respective trades have based their representations largely on the need for parity of treatment with the secondhand car market where broadly similar conditions apply. The Government have accepted the arguments which have been advanced, which is why I am asking the House to approve the orders tonight.
No doubt hon. Members will wish to raise various matters. The hon. Member for West Lothian (Mr. Dalyell) has indicated a desire to do so. Perhaps I may deal with those by replying to the debate.

§ Mr. Tam Dalyell (West Lothian)
I agree with the Financial Secretary that we shall have to wait to see how these things work out. However, Article 2(3) of the caravans order says that In this Order 'caravan' includes a motor caravan but does not include a caravan of a description specified in Group 11 in Schedule 4 to the Finance Act 1972. There may be some secret explanation. Group 11 in that schedule refers to Caravans exceeding the limits of size for the time being permitted for the use of trailers on roads. Note: This item does not include removable contents other than goods of a kind mentioned in Item 3 of Group 8. Item 3 of Group 8 refers to Section 12(3) of the Act. This all presents quite a maze. There may be a good reason for this labyrinthing approach. I am sure that there is an easy explanation for the differentiation between the types of caravans as itemised in Article 2(3) of the 392 order. Perhaps the Financial Secretary will explain.

§ Mr. Robert Cooke (Bristol, West)
I hope to do my hon. Friend the Financial Secretary a service by asking a question which will not require such an intellectual effort on his part as the question posed by the hon. Member for West Lothian (Mr. Dalyell) and I hope therefore to give him time to think up an answer to the hon. Member. It is completely illogical that caravans should in some way be lumped in with motor cars and motor cycles. The caravan is not licensed, but the car is. To drive a car it is necessary to pass a test and acquire a licence. To drag a caravan along our West Country roads and obstruct the other motorists requires no licence and no test. Therefore, the caravan has to meet none of the requirements demanded of the car and its driver. Why should it be lumped in with the car?
We have devised a special scheme for the international art market based on London. We have dealt with that matter before, and although some people are still bellyaching about the difficulties which arise, on the whole, it has been put right. I suppose that if a caravan is an antique—a gipsy caravan, painted in delightful colours, for example—it will be dealt with under some other order. But why the caravan which causes a blot on the landscape and an obstruction on the roads should be lumped together with the motor car I cannot imagine. It would be helpful if my hon. Friend would give an answer to that before we agree to the order.

§ Mr. Joel Barnett
I am sure that the Financial Secretary will be able to answer these simple questions. I therefore have another for him. It applies to other secondhand items. Value added tax is charged on the excess—the profit. If one dealer sells to another goods that are part of their normal stock in trade presumably that would be allowed as an input. How would the vendor keep secret from his purchaser his profit margin? With that simple thought I leave the question to the Financial Secretary.

§ Mr. Higgins
I shall seek to answer all the points which have been made, 393 dealing first with that raised by my hon. Friend the Member for Bristol, West (Mr. Robert Cooke). I do not wish to engage in the merits or demerits of caravans as such, because that might imply a degree of fiscal discrimination which would almost certainly provoke the hon. Member for West Lothian (Mr. Dalyell) —concerned as he is with the fiscal system—to launch into a considerable dialogue on the subject.

§ Mr. Dalyell
Not tonight.

§ Mr. Higgins
If I provoked the hon. Member I am not sure that would be the case.
The reason for these orders is that we have received representations from the trade. It is true that one does not need a licence to drive a caravan, but it is difficult to do so unless one is driving a car or, alternatively, a caravan that is motorised. I am not sure that it is true, as my hon. Friend the Member for Bristol, West, suggested, that one does not have to fulfil some of the licensing provisions to get a caravan to move.

§ Mr. Cooke
Can my hon. Friend refer to a single provision that has to be fulfilled to draw a caravan along the road?

§ Mr. Higgins
Yes—the same provisions that apply to driving the car that tows the caravan.
That brings me to the point made by the hon. Member for West Lothian, who asked why the order does not refer to types of caravans specified in Schedule 4 of the Finance Act 1972. We have already distinguished between two kinds of caravan; the kind of caravan which is a home or a residence, and not normally the kind that one tows around—because even outside the West Country it would be too large to tow conveniently—and that which is not regarded as a home. Because of the general provision in legislation for relief from VAT for housing it was thought appropriate to include large caravans within the scope of relief. We thought that we should also provide for showmen's caravans, although they can be towed on the road, and relief has been given there.
There would be no point in including the Schedule 4 type of caravan in the 394 provisions for taxing "on the margin", because that type is already zero rated. Therefore, the problem does not arise. Although it may take a little while to follow the legislation from clause to clause, the simple explanation is that which I have given.
There is one point under Article 4(1) of the order in respect of caravans. I say this in answer to the hon. Member for Heywood and Royton (Mr. Joel Barnett). This defines the margin as the difference between the acquisition price and the selling price. The margin will include the cost of repairs or renovations effected between acquisition and sale. Any tax incurred by the seller in such work would be deductible.
The second point relates to how the anonymity of the margin is concealed. This point was in the forefront of people's minds on the question of the secondhand scheme in the arts market. Under Article 3(3) no tax invoices can be issued under the order because the buyer will not need to claim input tax deduction when buying for resale. He will have to resell by virtue of Article 3(1). There will be no problem in terms of disclosure because of the different way in which the scheme operates in terms of secondhand schemes as against the normal working of the credit mechanism where an invoice will be issued and input tax will be deductible at the next stage.
With that explanation, I hope that the House will approve the orders.

§ Mr. Joel Barnett
I am sorry to trouble the hon. Gentleman, but he said that input tax would be deducted at the next stage.

§ Mr. Higgins
In the normal way.

§ Mr. Barnett
Not in this case? I thought he quoted this case as the pattern. That is all right.