HC Deb 29 February 1984 vol 55 cc365-72

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Hayhoe.]

11.14 pm
Mr. John Heddle (Mid-Staffordshire)

I am most grateful to you, Mr. Deputy Speaker, for having selected this motion for a brief debate this evening, and I am especially grateful to my hon. Friend the Minister of State for kindly attending the House to listen to my remarks on this rather obscure-sounding motion on the EEC sixth directive on value-added tax on non-domestic construction work. I am also pleased to have the support of my hon. Friend the Member for Warwick and Leamington (Sir D. Smith), who takes a close interest in the affairs of the construction industry and I look forward to the contribution which—with your permission, Mr. Deputy Speaker—he wishes to make after I have spoken.

I begin by declaring an interest. It is a very obscure interest, but it is right that I should declare it. I am a consultant partner to a firm of chartered surveyors and although I do not know whether this is currently the case I have no doubt that at some time in the future that firm might have among its clients builders and pension funds and insurance companies investing directly or indirectly in real estate, which is the particular matter to which I wish to draw attention.

I should not seek to raise this matter on the Adjournment but for a somewhat sensational article in The Sunday Times, Business News section, of 13 November last. Its front page lead read: A Common Market move to force Britain to levy value added tax on commercial and industrial property development could put thousands of jobs at risk". The following Thursday 17 November, there was an article in the Financial Times which said: The European Commission is inquiring into the desirability of maintaining the zero value-added tax rating for commercial and industrial property development in Britain. This is a serious matter, and the purpose of my debate is twofold: first, to highlight this obscure but substantial threat to jobs in the private sector of the construction industry; secondly, to secure from my hon. Friend the strongest possible assurances that the Government will do all they can to resist that threat robustly. There is no doubt that if the threat were carried out, now or in the future, it would create a crisis of confidence in that most crucial sector of our economy, the construction industry, which employs the largest element of skilled labour in the country's work force.

Inevitably, the threat potentially comes from the European Commission in Brussels. If successful, it would abolish the zero-rating for value added tax at present applied to certain types of construction work. I stress the word potentially because, in the words of the illustrious and, sadly, late-lamented coach of the victorious 1971 British Lions team in New Zealand, Carwyn James, "I am getting my retaliation in first." It is important to put that on the record.

No doubt, my hon. Friend will tell me in his reply that no formal proceedings have yet been taken by the Commission, and I hope that he will be able to assure me that they never will be taken. However, we know that informal signals have been transmitted across the channel from Brussels to the effect — in the Eurojargon that seems to crop up in our parliamentary proceedings from time to time—that it is forced to consider what are called infraction proceedings against the United Kingdom for our VAT zero-rating of non-residential new construction work.

Since the introduction of VAT in this country more than 10 years ago, it has been clearly established and accepted on both sides of the channel that all new construction work should be zero-rated for VAT purposes. Goodness knows what our constituency mailbags would be like if we woke up one morning and found that new homes, domestic construction work, had a 15 per cent. VAT price tag placed on them. I hasten to add that these infraction proceedings, which are the subject of immediate concern to the construction industry, have nothing directly to do with new homes or residential construction work. No. The proceedings would apply specifically to industrial and commercial building and also to all public works, which includes Government buildings, hospitals, schools, old people's homes, sheltered housing and other similar accommodation. Were it not for the fact that the construction industry is just beginning to emerge from the depths of a recession, much leaner, fitter and more efficient, it would not be pressing my hon. Friend the Minister of State as hard as it undoubtedly is.

Let us forget for the moment that all the housing investment for which the construction industry is responsible is not likely to suffer that threat in future. Let us concentrate purely and simply on the vast amount of investment, public and private, that goes into offices, factories, shops, hospitals and schools. About £8 billion of capital, public and private, is spent each year not only on new works but on major renovations and refurbishments. That activity creates jobs directly in the building process and indirectly in the related activities, employing about 1 million skilled people. That is the size of the market that could be vulnerable to any attempt by the European Commission to remove VAT from zero-rating on non-residential new construction work.

Let me clearly admit that not all that work would be hit. Indeed, the Building Employers Federation, anxious riot to exaggerate the potential damage that the Euro-threat could cause it, commissioned an independent consultants' report entitled "The impact of levying VAT on industrial and commercial buildings". It was produced by the economists advisory group. That group was commissioned to undertake some detailed analysis of what is undoubtedly a highly complex and often tortuous estimate. Everyone concerned has nothing but praise for the expert advice, guidance and comments that Customs officials gave within the limits of confidentiality to the consultants who prepared the report. As no doubt my hon. Friend will be able to confirm from his reading of that research, the ultimate impact of any move to abolish VAT zero-rating on non-domestic work is still a difficult matter to estimate accurately.

At the bottom end of the scale, if the EEC threat were to become a reality but were to be implemented with every possible mitigating factor and with a smooth transition in the market place, the consultants estimate that between £120 million and £175 million could be added to the net costs of construction. At the top end of the scale it was reckoned that around £350 million could be added if the threatened proposals were implemented with no Government attempts to mitigate their effects.

The issue goes much deeper and wider than the bare statistics. Above all else, the independent report shows that market confidence and the reaction of the construction market will play a crucial role. To take an example to illustrate my point, if every pension fund, insurance company and financial institution presently involved in construction developments in the United Kingdom decided to halt all its building activities for six months after the introduction of this complex VAT on new construction work in order to sort out the implications of that tax regime on the industry, it could cost the construction industry £1.25 billion worth of work which could put at risk, albeit temporarily, 100,000 jobs. That is the scale of the threat according to the economists advisory group.

We have lost enough jobs in the construction industry over the past few years. Much of the public sector work has been cut heavily so that it should play its part in bringing the economy back to life. The construction industry has lifted itself off the ground by boosting its private sector work load and has shown enterprise and new ideas and has taken risks. Private housing starts have risen and commercial building activity has also taken off again, particularly with the development of small workshop units to give first-time industrialists the opportunity to get on the ladder of opportunity. What the Government want to happen has happened. The private sector has taken up the challenge. Can we now afford to allow that precious private sector flower to wither on the vine of any failure on our part to defend the vital interests of the non-domestic sector of the construction industry against this threat? Can we afford to risk many of the excellent inner city initiatives by private sector institutions, backed by solid Government investment in recent years?

One aspect of concern to me is that, if a 15 per cent. VAT price tag is put on building works in those areas of the inner cities where the line between profitability and loss is so marginal, 15 per cent. will have to come off the value of the land. If the land has a negative value in the first instance, the money has to be made up to bring the inner cities back to life by increasing by 15 per cent. the amount that Government give to encourage the private sector to breathe fresh air into the inner cities through the urban development grants and the derelict land grants. It has a knock-on effect. I therefore seek the assurance of the Minister that he has taken full account of how damaging this threat could be, and that he will do all in his power to persuade the Commission in Brussels against bringing it to pass.

I ask the Minister to appreciate that, if this impost occurred, the effect on the public sector borrowing requirement could be considerable, bearing in mind the amount that the Government invest in schools, hospitals and old people's homes. Whereas £100-worth of new building is zero-rated today, if this threat remains, only £85-worth of bricks and mortar will be zero-rated tomorrow.

11.26 pm
Sir Dudley Smith (Warwick and Leamington)

My hon. Friend the Minister knows of my interest as a consultant with the newly named Building Employers Federation, formerly well-known as the National Federation of Building Trades Employers. I do not believe in special pleading, and rarely indulge in it, particularly when I have a professional interest. However, I believe that this is something of an exception. It has widespread implications for the public, as my hon. Friend the Member for Mid-Staffordshire (Mr. Heddle) explained in his most able speech.

I have found, as, indeed, I am sure my hon. Friend has, because he moves in these circles in the course of his activities as a Member of Parliament, that big and small builders are deeply worried about the implications of the case that he has deployed before the House. They are worried that VAT will be applied to construction development in this country. As my hon. Friend said, it would be wildly inflationary, and would do considerable damage to the industry, which is now showing such good signs of recovery.

I urge my hon. Friend to take a positive approach to the problem. The impression has been gained in some quarters that he may be not entirely opposed to the move that my hon. Friend the Member for Mid-Staffordshire has predicted. I am sure that that is incorrect. I realise the difficulty in which Treasury Ministers find themselves at this tight-lipped season of the year. I hope that the Minister will be positive in British industry's interests. If he is not positive it could have formidable and harmful effects on British industry. I very much hope that the Government will resist these effects.

11.29 pm
The Minister of State, Treasury (Mr. Barney Hayhoe)

While congratulating my hon. Friend the Member for Mid-Staffordshire (Mr. Heddle) on using the Adjournment debate to raise an important question of national importance, I know that he and my hon. Friend the Member for Warwick and Leamington (Sir D. Smith) will appreciate the particular sensitivities applying to any Treasury Minister talking about tax matters some two weeks before the Budget. I must, therefore, begin with the traditional disclaimer that I cannot anticipate, and I am not anticipating, the Budget Statement of my right hon. Friend the Chancellor of the Exchequer in any way.

It may be helpful to my hon. Friend the Member for Mid-Staffordshire and the House if I start by setting out the general background to the present position on the United Kingdom's zero rates in relation to our EC obligations and the sixth directive. That directive lays down the permanent ground rules for the operation of the tax including the harmonisation of reliefs but not the harmonisation of rates. The sixth directive contains no permanent relief from construction services whether in the course of new building, alteration, repair or demolition. Apart from Greece, which has no VAT, all the other member states tax these services at the standard rate, except Ireland where the rate is 5 per cent. Likewise, the directive contains no permanent relief for sales of new buildings and the land on which they stand. All the other member states tax such sales at positive rates—mostly the standard rate—except for Germany, which exempts them as a transitional measure.

As I have said, the directive lays down a structure of permanent reliefs from the tax and those reliefs—at any rate so far as internal as opposed to export transactions are concerned — take the form of exemptions rather than zero-ratings. That difference is particularly important. Exemption, unlike zero-rating, confers no right to deduct input tax on purchases and general overheads. However, it was recognised in 1977 that there would have to be transitional provisions which allowed member states some latitude in continuing with their existing liability structures, both for reliefs over and above those provided for in the permanent provisions of the directive and for taxing activities which the directive said should be relieved.

Article 28 is the provision in the directive containing the transitional provisions. It is under paragraph 2 of that article that we are maintaining our existing zero rates.

The conditions attaching to the continuation of the zero rates are, first, that they were in force on 31 December 1975 and, secondly, that they satisfy the conditions that they are, to quote from the directive— for clearly defined social reasons and for the benefit of the final consumer On the basis that those two conditions are satisfied, our zero rates can be maintained for an unspecified period. This is because it requires the unanimous decision of the Council of Ministers to alter or abolish these transitional provisions. Nevertheless, the directive lays a duty on the Commission to review the transitional reliefs every five years and to propose measures required to ensure their progressive abolition. The Commission has been carrying out its first five-year review, but so far it has made no formal proposals to the Council. Any such proposals would take the form of a draft directive, but, as I have indicated, the United Kingdom Government would not agree the directive if it contained any unacceptable measure.

The immediate challenge to some of our zero rates, including that applying to non-domestic construction, does not come from the Commission's review of the transitional provisions but from its belief that these particular zero rates do not satisfy the condition in the second directive that exemptions with refund must be for clearly defined social reasons and for the benefit of the final consumer". The Commission argues that supplies of new office blocks, shopping centres, and so on are not for clearly defined social reasons and that they are for the benefit of other businesses—the financial and property sectors in particular—rather than for the benefit of the consuming public generally. The Government — I stress this—do not accept those assertions and arguments. We have reminded the Commission that nothing was said in 1977 about any of our existing zero rates being contrary to the directive, and indeed the United Kingdom accepted the sixth directive on the basis that all our zero rates might continue, if we so wished, until the end of the transitional period, whenever that might be. Our zero rates pre-dated our accession to the Community and nothing was said then, on accession, about any of them being in breach of Community requirements.

The Government's views to this effect have been made fully clear to the Commission, and there the matter rests at present. It is for the Commission to decide the next step. If it wished to proceed with a challenge to any of our zero rates, its next step would be to issue a reasoned opinion under article 169 of the treaty of Rome.

We have strongly urged the Commission not to take this formal step, which would lead to proceedings against us in the European Court. Nevertheless, unlike the position on the ending or phasing out of the transitional provisions which requires unanimous consent, this is essentially a legal matter, the proper interpretation of the directive, and neither the United Kingdom Government nore any other Government of the Community can prevent the Commission going forward to the court if it so decides. We hope that it will not, but it is not within my power to give the assurance that my hon. Friend has sought, as I am sure he will understand. I do not propose to speculate about the Government's reaction if our hopes — that the Commission takes no action—are not realised.

My hon. Friend has spoken about the possible effect on the construction industry and its clients if it were to lose the zero rate for non-domestic work. Having seen a reference in Monday's edition of The Times to builders and developers facing a possible tax bill of £700 million, I asked for that report to be checked urgently. I am advised by Customs that that is an unrealistic figure because it takes no account of the ability of the construction industry's customers to deduct the VAT charged as input tax. Moreover, much would depend on the precise arrangements in any regime to replace the existing zero rate structure.

Again, I do not think that it would be appropriate to speculate on the various possibilities. Like my hon. Friend, I have seen the recent report by the economists advisory group, consultants to the National Federation of Building Trade Employers, and noted its conclusion. Although estimates are very uncertain partly because of the lack of basic data and partly because of all the variations on a theme that are possible, I would not quarrel to any major extent with the figures in the report, which showed that charging VAT on non-domestic construction would yield tax in a range of £120 million to over £300 million per annum. Having mentioned the National Federation of Building Trade Employers, perhaps I should add that I am in touch with it and that I have agreed to meet a deputation from it in about a fortnight's time, when I shall be willing to discuss all these matters.

As I am sure my hon. Friend will recognise, I can give no assurances or make any other comment about the future tax treatment of non-domestic construction with the Budget less than a fortnight away. But the Government are fully seized—I say that with great deliberation—of the importance of this issue to the construction and property industries, and my right hon. Friend the Chancellor of the Exchequer will not make any move to change the present VAT regime without the most careful consideration of all the arguments and implications. I shall let my right hon. Friend know what has been said in this debate about the construction industry, an important section of our economy.

Mr. Heddle

My hon. Friend's reply will give the construction industry the assurance for which it is looking, that it has in my hon. Friend a doughty fighter, who is clearly aware of the value of the construction industry to the entire economy. He argued fairly that under the directive the EC is bound to review the matter every five years. Five years from 1977 brought us to 1982, and we are now in 1984. Would he be kind enough to speculate—if that is the right word in the circumstances—if the form of proceedings did take place, about the number of years' grace that would be given before the VAT would be levied? Would there be a further five-year review, or would the VAT be levied some time between the date of the infraction proceedings and the end of the five years?

Mr. Hayhoe

My hon. Friend tempts me to venture into interesting pastures, but I think that he will appreciate the unwisdom of my moving in that direction. I do not think I can ponder on what may or may not happen. I thought it was important to say what options are open to the Community and what the requirements are under the various provisions of the treaty and the directives, and also to make absolutely clear the position of the United Kingdom. It would be wrong for me to go beyond the specific points I made on those matters.

Question put and agreed to.

Adjourned accordingly at twenty minutes to Twelve o' clock.