§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Malone.]2.30 pm
§ Mr. John Heddle (Mid-Staffordshire)
In the very last Adjournment debate of this Session of Parliament I congratulate you, Mr. Speaker, upon your timely selection, because what I have to say in a few moments' time will have a bearing on certain matters that are to take place within the European Community during the parliamentary recess.
I thank also my hon. Friend the Parliamentary Under-Secretary of State for the Environment for kindly being here to reply to the debate. The subject which appears on the Order Paper — EEC infraction proceedings on United Kingdom zero-rating policy on value added tax for the building industry—is all very heavy stuff, but the subject of this debate is not to be taken lightly or wantonly by the private sector of the building industry, and in particular not by those who ultimately will wish to buy the houses that the private sector provides.
Hansard recorded in February 1984 that on the Adjournment I raised the subject of value added tax on construction work. On that occasion my right hon. Friend the Minister for Health, who was then Minister of State, Treasury, was kind enough to reply. I should place on record the fact that in one sense I am sorry that my hon. Friend who is now the Minister of State, Treasury is unable to be here to reply, but I am particularly delighted that my hon. Friend the Under-Secretary of State is here to reply. I do not know, Mr. Speaker, whether in your office or elsewhere in the Palace of Westminster there is a league table of those of one's right hon. and hon. Friends who reply to Adjournment debates, but I am bound to say that if I were a betting man my hon. Friend the Under-Secretary of State would be nearly at the top, if not at the top, of that table because of the assiduity with which he attends Adjournment debates.
I was reminding him a few moments ago that during the seven illustrious years that he has adorned the Government Benches I have raised on the Adjournment of this House on Friday afternoons subjects which almost invariably have led to my constituents being satisfied. In the absence of my hon. Friend the Minister of State, Treasury, who, because of his responsibilities in Europe this week, is unable to be here to deal with this specific point of VAT on housing, I look to my hon. Friend the Under-Secretary of State for an assurance, as do my constituents and the construction industry, that certain matters that are now being considered by the European Court will ultimately be settled to Britain's satisfaction.
The matter to which I wish to refer is that of infraction proceedings. In an Adjournment debate in 1984 I said:I should not seek to raise this matter on the Adjournment"—the matter was value added tax on construction work generally—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:920'The European Commission is inquiring into the desirability of maintaining the zero value added tax rating for commercial and industrial property development in Britain.'As recently as 1983 and early 1984, neither the British public nor those great national newspapers believed that VAT might be levied on private housebuilding, let alone on commercial property development. At column 366, I said this: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."—[Official Report, 29 February 1984; Vol. 55, c. 365–6.]That was only two years ago.
VAT zero-rating is an option allowed under the rules of the EEC provided that it meets these two criteria: first, it must be for the benefit of the end user, who is the customer and the constituent of every right hon. and hon. Member; and, secondly, it must be within a social policy objective. Under that concession, the United Kingdom applied zero-rating to a range of goods from food to newspapers and including most building work. In 1984, to the great regret of many people on both sides of the House and outside, zero-rating was removed from repair, maintenance and improvement work.
A range of bodies, including the Building Employers Confederation, the Royal Institute of British Architects, the Royal Institution of Chartered Surveyors, the British Property Federation and the local authority associations, blamed that removal for the increase in the volume of small building works now undertaken by the black economy.
As long ago as 1981, the European Commission expressed anxiety about the amount of zero-rating in the United Kingdom, and last year — five years later — it commenced infraction proceedings in the European Court. As a result, the Government have had to show that their zero-rating policy meets the tests of the two criteria that I mentioned: that it benefits the end user, and that it is within a social policy.
At the end of last month, no doubt after a robust defence by the Government, the European Commission told the court that it did not accept the Government's case on construction. Today's debate is timely, because the Government have until 4 September — almost equidistant between today and when we return on 21 October —to make their final submission to the court, following which the court's verdict will be known some time between the spring and autumn of next year.
To those of us used to Anglo-Saxon legal proceedings, evidence and pleading are public and open to cross-examination by both sides, whereas those of the European Court are obscure and secret, occurring behind closed doors. One hesitates to say it, but it smacks of Star Chamber proceedings. The proceedings are not as open and above board as they would be in a British court. Perhaps more importantly, some Conservative Members harbour the suspicion that the decision is based more on political objectives than on a balanced view. That is what the construction industry believes.
921 Although the loss of zero-rating would seriously affect all building work, with the consequence of increasing the cost to the consumer and, inevitably, reducing the workload in the industry still further, with the consequent knock-on effect on job vacancies, its consequences would be most severe on private housebuilding. The customer is not a large institution but the private individual. Inevitably, if VAT were to be imposed on private housebuilding, it would put the price up eventually, if not immediately, by 15 per cent. As night follows day, secondhand prices would rush to catch up and they, too, would be caught up in this house price inflation.
We do not know whether the European Court has it in mind to impose this VAT levy across the board for new housebuilding in both private and public sectors. If it is to be across the board, that will have the effect of putting up the cost of local authority housing, high as it is. Who is to define the social objective? The construction industry, whether private or public, is providing the same sort of commodity whether for the ultimate tenant or the ultimate purchaser. The private sector is taking up much of the responsibility that was once that of the public sector. Sheltered housing is now provided, to a large extent, by the private sector. What will happen if the European Court case goes against us in, say, just the private sector? What will happen to those properties being developed on what we know, colloquially, as the half and half scheme, where the private sector joins in partnership with the public sector to provide homes for those who want to buy part now and part later?
If the European Court decision went against the Government, it would be a fundamental challenge to the housing policies of the Government in the new build sector, particularly with its emphasis on the switch from the public to the private sector. This point was made last week by the president of the House Builders Federation in a letter to my right hon. Friend the Prime Minister. I understand from the federation that it was invited by the Department of the Environment to discuss the defence of private housebuilding zero-rating and that it was satisfied with the case that it had prepared. It fully covered the range of social objectives sought by policies for both public and private housing and it made clear that the indivisibility of the housing market precludes any distinction between luxury and non-luxury housing. It may well be within a social policy objective to ensure a wide range of new houses built in an area, including luxury homes.
The United Kingdom places a far greater emphasis on home ownership and private housing than many of our European partners. If VAT were ultimately to be added to the private housing sector, this would discriminate against us as a nation and in favour of our European partners. I am thinking also of the inner cities and the role of urban development corporations such as those in London and in the Liverpool docks. In the revival of confidence in such areas, new housing across the price and social spectrum plays a large part. It is a major objective of social policy and for that reason, as much as for many others, this sector should be zero-rated.
Should the court refuse to accept the strong case being put up by my hon. and learned Friend the Solicitor-General, the immediate difficulties facing housebuilders and purchasers of new homes, particularly first-time 922 buyers, would be considerable. If VAT is added to the final price, it will immediately add to the cost and reduce the market, reflecting the scale of VAT that has been imposed.
As the president of the House Builders Federation wrote to my right hon. Friend the Prime Minister:the imposition of VAT on new homes will requre higher selling prices where they are built on land bought at current prices. This will inevitably reduce demand — and hence output—quite considerably.It will also reduce jobs.Moreover, the threat of its imposition will put builders who are in the process of acquiring land in great jeopardy, not knowing if VAT should be included in the residual calculation of value, and if so, at what rate. This will further reduce output and increase unemployment, in the short-term at least.Some people will argue that the price addition due to VAT will be subtracted from the land price and that the market will quickly readjust, so that the short term referred to by the president's letter could be just that. That is theorectically a neat proposition but it leaves two major problems.
The first is the transition and the effects of output on land bought recently at current prices. That is what is referred to in the president's letter. How many housebuilders could be bankrupted in the short term and how many jobs could therefore be lost? Secondly, the practical effects on the market, even in the longer term, will not be quite so tidy. Housebuilders, and those of us with practical knowledge of the land market, know that the price of land is very sticky downwards. Land will just not be put on the market. As it becomes scarce, so its value will increase, thus adding to the upward pressure on the price of the house that is finally built on it.
Landowners take a long time to accept that land values have fallen. The first effect of falling prices, which could last some time, is that landowners will withhold that most essential commodity. The supply of land will simply dry up indeterminately. I understand that the purpose of the EC imposing VAT is to make every state capable of trading on fair and free terms. None of us would contradict that policy but harmonisation has no hearing on United Kingdom housing policy.
There is no question of competition between member states. There are no obstacles in Britain to European building firms. Housing markets are highly localised, even in the United Kingdom. Housing in Lichfield, Rugeley and Stone in my constituency does not compete with housing in Kent or Scotland or even with housing in Birmingham just 20 miles down the road. Still less does housing in those markets compete with housing in Hamburg, Paris, Rome or Madrid.
Once a European company is competing in a local market and everybody is on the same VAT footing, competition faces no obstacles, so the removal of United Kingdom zero-rating is harmonisation for its own sake. It serves no fundamental Community purpose. It would damage the British private housing market, probably for many years, without conferring any advantage on our European partners. It would be a tax on home ownership for the benefit of the European Community and not for my constituents or those of my hon. Friend the Parliamentary Under-Secretary of State who is to reply.
I invite my hon. Friend to assure the House, the construction industry and the buyers of private homes, whom we all want to be properly housed and not to have to endure the long and frustrating wait for a key to a 923 council house, that the Government will submit a robust and positive defence to ensure that there is always a free supply of private houses to buy.
May I conclude, Mr. Speaker, by wishing you a happy and rewarding recess? I should like to associate with that sentiment my hon. Friend the Parliamentary Under-Secretary of State, my hon. Friend the Whip and all Officers of the House. I hope that we shall return in October renewed, refreshed and invigorated.
§ The Parliamentary Under-Secretary of State for the Environment (Sir George Young)
The House is very grateful to my hon. Friend the Member for Mid-Staffordshire (Mr. Heddle) for raising today the important issue of the infraction proceedings being brought by the Commission against the United Kingdom, alleging that we are in breach of certain of our obligations under the treaty of Rome with some of our VAT zero ratings.
I was delighted to learn that I have been of some assistance to my hon. Friend and his constituents in the past, and I hope to uphold that record. Until now, I thought that infraction was something that happened when a straight stick was put into a bowl of water. However, I now understand that it is something wholly different and far more serious. I should like to make two points clear. First, the Government fully appreciate the great concern felt in the construction industry about this threat. We know the effect that it could have on the industry's work load. We share that concern, and my hon. Friend has dramatically outlined the potential implications.
Secondly, the Government are determined to fight those proceedings. We have been doing so all along, and that remains our position. My hon. Friend said a word or two about the timetable. We are seeking an extension until 4 October to lodge our rejoinder to the Commission's reply. I understand that, as I think my hon. Friend said, the oral hearing before the court will follow, but it is unlikely until March 1987 at the earliest, and the court's judgment will not be available until several months after that.
Perhaps I could say a word about the background of this. Zero rating of new construction in this country goes back a very long way. Indeed, it goes back to purchase tax days and beyond. When we joined the Community in 1972, it was recognised that there had to be transitional arrangements. These were provided for in the relevant VAT directive. There has never been any disagreement between us and the Commission that these zero ratings were in force at that time. They do not represent anything new or changed on the part of the United Kingdom. What has happened is that, for reasons best known to itself, the Commission has chosen to challenge those zero ratings. We do not think that it is right to do so, and we have said so very publicly. My hon. Friend will be well aware, looking specifically at the question of house building, which I know is of deep concern to him, of the letter of 5 July 1984 from my right hon. Friend the Prime Minister to the then HBF president, Terry Royden. It is worth quoting that letter in full. It says:I am happy to confirm that we have no plans to alter either the present zero rating for new housing, or the current 924 base of mortgage interest relief. We shall also continue to resist firmly moves within the European Community to bring the current VAT concession to an end.That was what the Prime Minister said two years ago and that remains the Government's position. My hon. Friend will know that that stance was reiterated by my right hon. Friend the Chancellor of the Exchequer very recently.
The current position is that the Commission has initiated proceedings against the United Kingdom in the European Court of Justice. We have lodged a defence for that case, the Commission has replied, and we are currently considering our rejoinder to the Commission's reply.
The Commission's case is based on the sixth VAT directive, which states that zero-rating may be applied only as a transitional measurefor clearly defined social reasons and for the benefit of the final consumer".The Commission contends that our current concessions for new construction do not meet these criteria. We deny that utterly. Whether or not we are in pursuit of a social policy must be for us to determine. It is a matter for our discretion. Moreover, we believe that it is for us to define what those social reasons are, and not to have our social policies determined by the Commission, nor even to have them challenged.
The same is true of our interpretation of the phrase "the final consumer". We do not believe that that can be narrowly equated with just the private individual who is the immediate recipient. "Consumers" can be defined more widely than private individuals — they are the people at the end to the distribution chain for a particular product, and that can be treated more widely than individuals.
The Commission's current challenge is to a wide range of goods and services. It is not restricted just to the construction industry. For instance, it covers news services, water for industry, protective boots and helmets for industrial use, and so on. I make that point to draw attention to the peculiarity of some of the Commission's current challenges.
When it comes to construction, there can be no doubt that it is for social reasons, and for the benefit of the final consumer. The built environment is one of the most important ingredients of our social fabric. What we see about us in terms of building, whether it is aesthetic, efficient and well maintained or ugly, inefficient and run down, has a big effect on the morale of the community and its power to earn its living with ability and enthusiasm. In that sense, a good working environment is essential to the contentment and social stability of society. More specifically, what happens when the working environment is run down can be seen in the examples of riots in our inner cities last year, in Brixton, Toxteth, Tottenham and elsewhere. My hon. Friend spoke of the implications of the Commission's action for our inner cities. A new tax on construction would be a deterrent to development where it is most needed.
I have spoken about the industrial and commerical sectors, but, as I am sure the Commission knows, the United Kingdom was the first country to industrialise. We still have a large stock of obsolete buildings, more than any other comparable country. In many parts of Britain, and especially in the north, there are vast areas, hundreds of acres of wasteland, covered with obsolete factories, warehouses and offices that can never be used again as 925 they stand. They must either be totally modernised or demolished and replaced if they are to play an effective part in the social and economic life of the country.
§ Mr. John Butterfill (Bournemouth, West)
Does my hon. Friend agree that the renewal that we have seen in docklands and the renewal that we are trying to encourage in places such as Liverpool would he gravely prejudiced if we agreed to this measure?
§ Sir George Young
My hon. Friend the Member for Mid-Staffordshire spent some time speaking about the work of renovation in our inner cities and he paid tribute to the work of the London Docklands Development Corporation and the Merseyside Development Corporation. He rightly drew attention to the barriers that would he placed in their path by this additional imposition. I totally agree with what he said.
House building is the most bizarre part of the challenge by the Commission, and I say that for three reasons. First, the Commission, almost as a throwaway line, casually lumps the £5 billion a year that we spend on new housing alongside safety boots and helmets. I do not decry the importance of safety boots and helmets, but I wonder whether the Commission really has any sense of relative values when it can lump those things in a flimsy, ill-considered and narrowly based approach.
Secondly, the Commission has simply asserted that it does not think that our zero rating is justified. This seems to be one of those occasions when harmonisation is being pursued for its own sake, without regard to the merits of the argument or any detailed consideration of what is involved. As my hon. Friend said, any builder in the European Community is perfectly free to come here, buy land and sell houses in competition with our domestic house building industry. One cannot trade houses across frontiers, and the moment one looks at the industry one sees that economic theory which may be valid for other goods and services does not apply to that industry.
Thirdly, I find the Commission's stance legally bizarre. The sixth directive is quite clear and says that zero rating may be appliedfor clearly defined social reasons and for the benefit of the final consumer".926 What is more clearly for the final consumer than a house? All our houses are lived in by private individuals. I do not believe the Commission can, on any sensible grounds, challenge that part of it.
In terms of social policy, housing as a whole in the United Kingdom has for many years clearly played a major part in the broadly defined social policies of Governments of all parties. We had major investment in housing in the 1960s. We have the policy of subsidising rents through housing benefit, fixed rent levels, security of tenure and tax relief for owner-occupiers. All those things are designed to encourage either public or private sector housing through the use of taxation or other financial advantages for the good of the final user and in pursuance of social policies.
I am grateful to my hon. Friend for raising this subject. He has performed a service for the construction industry and I hope that what I have said will reassure him about the complete and utter rejection by the Government of the Commission's case. We have fought it steadily all along the line and will continue so to do.
As the final speaker before the House rises, I should like to extend to you, Mr. Speaker, and to your fellow occupants of the Chair our deep appreciation of the patience, good humour and impartiality with which you have supervised our proceedings, not least during July, when the temper of the House is often raised. We are also greatly indebted to the Officers of the House. As you cancel the papers and put out the milk bottles and go on your holiday, Mr. Speaker, you do so with the good wishes of the whole House.
§ Mr. Speaker
I thank the Minister for his final comments, and I also thank the hon. Members for Mid-Staffordshire (Mr. Heddle) and for Newham, North-West (Mr. Banks). This is an admirable way in which to finish a very busy sitting. We have had hard-hitting debates, but they have been conducted in a spirit of mutual respect and good will. I hope that every hon. Member and every member of our staff, who serve us so well, will have a restful holiday.
Question put and agreed to.
Adjourned accordingly at one minute to Three o'clock till Tuesday 21 October, pursuant to the resolution of the House yesterday.