VALUE ADDED TAX: BUILDINGS AND LAND

HC Deb 12 July 1989 vol 156 cc1036-63

Mr. Lilley

I beg to move amendment No. 5, in page 161, line 1 at end insert `in either or both of the following ways, namely— (a)'.

Madam Deputy Speaker

With this it will be convenient to take the following: Government amendment No. 6. Amendment No. 107, in line 3, insert— `(4A) Zero-rating shall also apply for extensions and alterations to village halls and other facilities used similarly in providing social and recreational facilities for a local community.'. Government amendments Nos. 37, 38 and 42.

Mr. Lilley

As you, Madam Deputy Speaker, will know, in implementing the European Court of Justice ruling, we have throughout sought to minimise the burden, especially on charities. Unfortunately, village halls represented a particular problem. In this context, I should declare a vested interest. I am the son of parents who throughout their lives have been concerned with the local village hall and it would be more than my life was worth if I had not sought every means to try to interpret the ruling in a way that was favourable to village halls.

However, after a considerable scrutiny of last year's court judgment, we reluctantly concluded that it was not permissible to retain zero rating for fuel, power and new construction for village halls and similar charitable community buildings, essentially because, although charitable, they appeared to be engaged in business as they were making supplies and hiring themselves out for a consideration.

A letter of 17 March from Madame Christiane Scrivener, the European Commissioner for tax matters, showed that the Commissioner might entertain a different interpretation of the judgment. I wrote to Madame Scrivener asking for clarification, and gave the Finance Bill Standing Committee an assurance that, if the Commission confirmed that it would not oppose the reinstatement of zero rating, the Government would bring forward any necessary amendments to the Finance Bill.

Madame Scrivener's reply suggested that, although continued zero-rating for supplies of fuel and power to village halls was ruled out by the court, the Commission would not raise legal objections to retaining the zero rate for the construction of village halls. The amendment therefore seeks to reinstate for the construction of charitable community buildings the zero rate which was abolished on 1 April as a consequence of last year's court judgment.

The amendment is confined to buildings run by charities. It covers church halls, village halls and other community buildings providing similar social and recreational facilities for a local area. It also extends to buildings such as cricket pavilions and changing rooms, constructed for charitable playing fields and recreation ground associations.

The VAT construction clauses of the Finance Bill were brought into effect on 1 April under the Provisional Collection of Taxes Act 1968 and because it is not possible retrospectively to amend the PCTA resolution, the date for the statutory implementation of the relief is 1 August, after Royal Assent for the Bill can be expected to have been received. However, Customs and Excise will waive, extra-statutorily, any tax incurred between 1 April and 1 August on village halls or other buildings covered by the amendment.

I pay tribute to many Committee Members who pressed hard for us to look again and for the Commission to waive any objections which it might have to the continued zero rating of village halls. I do so not least to my hon. Friend the Member for Corby (Mr. Powell), who described what a tremendous effect it would have on his constituency where there are a great many village halls in operation or in the process of being built.

Dr. Marek

Congratulations are once again due to the Government, perhaps somewhat fortuitously. It appears that a letter from Madame Scrivener to a Member of the European Parliament was spotted, and it allowed the Economic Secretary to press home the point.

It was not just the Opposition who pressed the amendments in Committee, but Conservative Members and Liberal Members. I do not think a single hon. Member would have wished VAT to be imposed on village halls. It is extremely pleasant to see such an amendment on Report.

Can the Economic Secretary be more specific about the types of hall that will be exempt? He gave us some help and said that cricket pavilions would be exempt. Will sports halls be exempt? Those sports halls might be built partly by local authority funding, and the community might have a fund and ask for subscriptions to it. Some of these halls, especially if they are big enough to contain a basketball court, may be quite big and expensive. If a big hall did not fit under the heading of a village hall, I presume that it would not fall within the scope of the amendment. Where does the boundary fall? 1 have not seen the original letter from Madame Scrivener to the European Parliament Member, but I hope—providing the hall was for a community purpose, with sporting recreational or educational facilities—that we would try to make the definition of such a hall as wide as possible. However, that is perhaps a detail, and I am pleased that there was no opposition to this type of amendment. The Government have done well. I wish they could do as well in many other matters about which the Opposition seek to persuade them.

Mr. Beith

I welcome this improvement to the Bill and the extra-statutory concession which the Minister has just announced to make it clear that a period of liability will not arise between the original and the operative date.

As has been said, there was pressure from both sides of the Committee from the Minister to act, in particular that he should write to Madame Scrivener to explore what had been thought and said in the Commission. There is a difference between the approach of this country and most other European countries towards the provision of such facilities. In most other European countries about which I know something, it is general practice for local authorities to provide a large proportion of the community halls, village halls, sports halls and such facilities.

We have a unique and valuable system of voluntary provision of local community halls. It is perhaps at its strongest in the countryside in the form of village halls, but it is not unique to the countryside, because many neighbourhoods in town have a similar provision. It involves voluntary effort and fund raising of the most dedicated kind. Everyone agrees that it would be unreasonable to face that sector with a high tax bill.

That is one reason why I shall tempt the Government to go further, and why I argue that we would be well within the spirit of the concession that we have secured so far if we went further and got extensions of, and repairs to, village halls exempted from VAT and returned to zero rating. A large number of village halls were built a long time ago, so the problems they face are of renewal, repair and extension. Many were built at the end of the first world war as a local community's memorial to its war dead, and some were built at the end of the second world war. Sometimes, these buildings were put up using cheap construction methods because that was all that the community could afford. Many of them now need a great deal of improvement, and some need extension.

The Minister could usefully keep this matter under review and continue his fruitful correspondence with Madame Scrivener. I am sure that he is becoming familiar with her through the letters that they are exchanging. There is no doubt that the correspondence has helped to make it clear that the Commission, in seeking to take legal action, was not aiming its sights at village halls and local community facilities. Perhaps the Minister could go further and suggest a dinner in Brussels between him and the good lady, where, against a background of flowers and music, the matter could be discussed. Much more useful work could be done for the benefit of village halls.

I press on the Minister the value of amendment No. 107. I welcome the Government's inclusion of this provision and the way in which they have secured an understanding from the European Commission that, since what this country provides, through voluntary efforts, in village halls would not be subject to VAT anywhere else in the Community, because there it is mainly provided by local authorities, it is entirely reasonable that it should not be subject to VAT here.

Mr. William Powell (Corby)

As my hon. Friend the Economic Secretary said, he was pressed on this point from both sides of the Committee, so when the hon. Members for Wrexham (Dr. Marek) and for Berwick-upon-Tweed (Mr. Beith) said that this was an all-party matter, they were correct. As the member of the Committee who initiated discussions on these matters all those weeks ago, I was hardly aware what I was letting myself in for, because no issue has involved me in more correspondence than this one.

Sir William Clark

It serves you right.

Mr. Powell

As my hon. Friend says, I should keep out of these things, because I would have far less work to do.

What my hon. Friend the Economic Secretary announced last week in answer to a parliamentary question from me was confirmed in his remarks today, and it has been received with real enthusiasm in thousands of communities. It is no exaggeration to say that. This will undoubtedly be one of the most popular results of the Finance Bill.

Mr. Ian Taylor

The result will be received with more than great enthusiasm—it will be received with great relief. Many projects are under way and in planning stage and the burden of VAT if the extra-statutory concession had not been introduced would have been frightening for those who have to do the fund raising. We are grateful to my hon. Friend the Member for Corby (Mr. Powell).

Mr. Powell

I am grateful to my hon. Friend.

I never doubted the real determination of my hon. Friend the Economic Secretary to ensure that VAT should be zero-rated in the way in which we shall approve tonight. His determination to achieve that was quite obvious and I congratulate him on the tenacity that he has shown in this matter and on his determination to secure a result that has been so widely applauded.

Mr. Lilley

The hon. Member for Wrexham (Dr. Marek) asked me to clarify the definition further and asked in particular whether it would include sports halls. For those sports halls that are both charities and run for the benefit of the local community, the answer is yes, they will be included, as they come under the general heading of providing recreational facilities.

The hon. Member for Berwick-upon-Tweed (Mr. Beith) inadvertently gave the impression that I wrote to Madame Scrivener only when pressed to do so in Committee. In fact, I had already written and was awaiting a reply. He suggested that I should go further in my familiarity with the lady, but although I am grateful to her for her courtesy, co-operation and pragmatism, I do not think that I should follow all the innuendos that he conveyed.

7.45 pm

The hon. Member is correct to say that village halls are unique to this country, and that there is nothing similar on the continent. Both he and the House may think that it is odd, therefore, that how we tax them should be anything to do with the Community. I am happy that we have managed to achieve a possibly constitutionally bizarre result, whereby we have achieved a national solution rather than a uniform solution that fitted oddly to our unique national characteristics.

Amendment No. 107, tabled by the hon. Member for Berwick-upon-Tweed, would remove the charging of VAT on extensions. I am afraid that, under EC law, that is not possible. Under the sixth directive, to which we assented in 1977, we cannot reintroduce zero rating once it has been given up. We gave up zero rating in that respect in 1984.

I am grateful to my hon. Friend the Member for Corby (Mr. Powell) for his kind remarks and his welcome for these measures. I again pay tribute to him and to hon. Members on both sides of the Committee for the tenacity with which they pressed the case of village halls, a case which is dear to us all.

Amendment agreed to.

Amendment made, No. 6, in page 161, line 2 at end insert '; (b) as a village hall or similarly in providing social or recreational facilities for a local community.'—[Mr. Lilley.]

Amendment proposed: No. 7, in page 161, line 39, leave out from beginning to end of line 42.—[Mr. Lilley.]

Madame Deputy Speaker

With this it will be convenient to take Government amendments Nos. 8, 33, 39, 49 and 50.

Dr. Marek

I think I understand these amendments, but it would be helpful if the Economic Secretary said something about them. I hope that he will explain the purpose of these amendments so as to confirm that our understanding of them is correct. What will be the effect of the amendments on the difference between beneficial owners and legal owners, and how will that be worked out in practice if the amendments are passed? I am not sure about that and any help would be welcome.

Mr. Lilley

This additional provision is made necessary by an aspect of English land law which does not sit very readily with a tax on supplies such as VAT. The difficulties arise because the interests in land and property can be split into two—the legal estate or interest, and the separate beneficial interest. I am happy to say that there are no such difficulties, I understand, in Scotland, which, in legal matters, so often gets it right. This split gives rise to the possibility of there being two different suppliers for the purposes of VAT every time a property is sold or let.

The problem is compounded by the fact that the owner of the legal estate—whose name appears on the conveyance as the vendor or lessor—is often merely a nominee while the beneficial owner is the person who really instigates the transactions and receives the payments. The practice of separation of the two interests is widespread and I am told that, even when the two interests could be merged into one so as to produce a single supplier for VAT purposes, this would be very onerous and have substantial financial implications for the companies involved.

Therefore, for practical purposes, we have decided to disregard the person in whose name the property is conveyed and to look to the person with the economic interest in the transaction—the beneficial owner. What we have done is to make him the person responsible for the VAT transaction. At the same time, we have made sure that he will also be the person entitled to the benefit of any input tax recovery if his supply of the building is a taxable supply.

This principle is not new to VAT. Since the introduction of the tax, there has been a special provision attached to the zero rating of sales and long lettings of buildings, so that a person constructing them could benefit from the zero rating and cover the tax on materials and services that he bought in, even though another legal person conveyed the property, provided that the benefit of the sale or long letting of the property passed to him. This measure extends the same principle to the exemption and the taxing of property, either mandatorily or under the option to tax. It seeks to reduce uncertainty in the business community about who is making the supply and who can recover related input tax, and it therefore simplifies the VAT consequences of commercial property transactions.

Dr. Marek

The Economic Secretary appears to have a note in his hands. I do not know whether it is helpful. Has he received any representations from any part of the industry about the effect of the proposals? The amendments appear to be sensible, but having been tabled only two or three days before the debate, it is difficult to assess them and to ascertain whether there will be any consequences that we cannot readily foresee tonight. If the Economic Secretary says that he is not aware of any such consequences, I shall accept that. I do not intend to oppose the amendments.

Mr. Lilley

My discussions with the industry make me pretty confident that this clarification measure will be welcomed. It will deal with a problem that was not catered for in the original drafting. I am sure that it will be well received by the various groups to whom we have spoken, including industry groups and lawyers.

Amendment agreed to.

Amendment made: No. 8, in page 162, line 27, at end insert— `(4A) Note (5) shall be omitted:—[Mr. Lilley.] Amendment proposed: No. 9, in page 165, line 26, at end insert— `(2) The Treasury may by order amend Schedule 6A to this Act.'—[Mr. Lilley.]

Madam Deputy Speaker

With this we shall discuss Government amendments Nos. 34, 36, 40 and 41.

Dr. Marek

I must take the Government to task. I understand that the amendments seek to give the Government power by order—admittedly by affirmative resolution—to change aspects of tax law and VAT legislation. If the Government were confident that they had their legislation right, these amendments would not have been tabled. If they had their legislation right, yet still needed to table amendments, I should not be speaking to them because they would probably have gone through on the nod. I suspect that the Government do not have their legislation right. I wonder whether there are sufficient numbers of civil servants in the Treasury dealing with the legislation to ensure that it is right.

The history of all the changes to VAT legislation makes a pretty story. In Committee the Government tabled a great many amendments on a Friday that we had to debate on the following Tuesday. Many hon. Members have to return to their constituencies on a Friday and so were not aware of the amendments. We therefore had to table starred amendments so that we could properly consider the Government's amendments. The Chairman, the hon. Member for Staffordshire, South (Mr. Cormack), was not pleased, yet it has happened again on Report. Amendments were tabled on Thursday, appeared on the Amendment Paper on Friday, and have to be debated today.

They are not the easiest of amendments to understand. I am prepared to bet that not many hon. Members, other than the Economic Secretary, can understand their detail. I suspect that the Government have tabled the amendments because, even now, they do not have their legislation right. The Economic Secretary should come clean and admit that; after all, nobody is perfect. If he did so, it would be churlish of us to oppose the amendments.

The Government's practice on this occasion is certainly not a model for good legislation. The Opposition have learnt a lesson from this practice, and I hope that the Government also learn from it. It is an example of how not to conduct business. The Government should not table amendments at the last minute. If they intend to make complicated changes to next year's Finance Bill, they should table amendments at least a week in advance so that we have the opportunity to study them.

Sir William Clark

Hear, hear.

Dr. Marek

The hon. Gentleman and I do not often agree, but I am glad that we do so on this occasion. It is a sensible, non-party point. We need time to study the amendments and to consult outside bodies. If we are given only 48 hours' notice, it is impossible to do justice to the amendments—especially with a Finance Bill as long as this one. It has been impossible to do justice to all the Bill's provisions, although we did quite well in Committee in rather difficult circumstances. I hope that the Economic Secretary will tell us why he has tabled the amendments, although I suspect that I know the answer. If he confirms my suspicions, that will be the end of the matter and I will not oppose the amendments.

Mr. Lilley

The hon. Gentleman and other hon. Members who served on the Committee will recall that the original Bill contained provisions for amendment by order, by the negative procedure, if such an amendment was consequential to amendments made to the zero-rating and exemption schedules of the Value Added Tax Act 1983.

The new schedule 6A deals with some extremely complex and novel provisions—for example, the clawback provision contained in paragraph 1, the option for taxation in paragraphs 2 to 4, the self-supply charge on developers in paragraphs 5 to 7, and we have just dealt with a paragraph on legal and beneficial owners. The original proponents of VAT in this country extolled its virtues as a simple tax. That notion has long since been accepted as wishful thinking. Certainly VAT, as it applies to land and buildings and in the circumstances of this schedule, is extremely difficult.

It would be unrealistic to pretend that everything in schedule 6A will turn out to be perfect and incapable of improvement. We were forced by changes imposed upon us by the Commission to introduce new proposals at short notice. I decided, and I am glad that I did, initially, to introduce them in Committee, thereby giving hon. Members an opportunity to discuss them, and then to introduce further proposals, if necessary, on Report—which we have done, and in time for them to be discussed. It is possible that, in the light of experience, there will be gaps, and ambiguities and adjustments may be necessary. It would be wrong to wait for and then clog up the next Finance Bill with technical amendments.

I commend to the House this series of amendments, which gives the Treasury power to vary the schedule by order. That will usually be by affirmative resolution, other than where the amendment is merely consequential to an order providing relieving amendments to the zero-rating or exemption schedules, which requires only a negative resolution and was included in the original Bill. We are not setting an undesirable precedent because already many things can be done by order, including changes in VAT rates and liability.

I hope that the House will accept my frank admission that we are not quite perfect, but we are getting there.

Amendment agreed to.

Amendment proposed: No. 10, in page 166, line 45, leave out 'sub-paragraph (2)' and insert `sub-paragraphs (2) and (2A) and paragraph 3'.[Mr. Lilley.]

Madam Deputy Speaker

With this, it will be convenient to debate Government amendments Nos. 11 to 15.

Amendment No. 2, in page 168, leave out lines 4 to 7.

Government amendment No. 16.

Amendment No. 3, in page 168, line 8, after `irrevocable', insert `except where a building is totally demolished or where a major reconstruction occurs on a listed building'. Government amendments Nos. 17 to 20.

8 pm

Dr. Marek

This large group of amendments merits debate. The two Opposition amendments are not dissimilar to those debated in Committee, and attempt to cover a broad principle. I was not happy with the answers given in Committee as to why the Government inserted into the Bill the phraseology that they did.

Amendment No. 2 concerns buildings that are separated or joined. The Bill refers to buildings joined by covered walkways, and states that buildings, precincts and parades will be regarded as one building for taxation purposes. There is no justification for that view, other than that of simplicity. I hope that the Government will allow developers some leeway in deciding which buildings in parades and shopping centres can be separate and which cannot.

The problem can be overcome because it is not inconceivable that covered walkways could be covered one week and uncovered the next. Successful attempts could be made to present those as separate buildings for the purposes of the Bill. Also, a walkway that is currently uncovered might be covered later. It is in any event a somewhat artificial distinction, because covered walkways are needed in some parts of the country more than in others.

Government amendment No. 16 rectifies the position to a certain extent in respect of agricultural land. It states: Where such an election is made in relation to agricultural land (including a building on agricultural land), it shall have effect in relation to any other agricultural land if that other land is not separated from it by—

1. (a) land which is not agricultural land; or
2. (b) agricultural land in separate ownership."

The Government presumably received representations from the farming industry and saw the sense of providing a different option for different parcels of land, but they have not gone far enough in applying the same philosophy to shopping centres and precincts.

I do not suggest that landowners or developers should be given the right to dictate to the Treasury which property should be deemed separate, but there must be a little flexibility. I do not believe for one moment that the drafting of the Opposition amendments will be accepted, because they would probably lead to undesirable deficiencies in other parts of the Bill. I am under no illusion that the Economic Secretary will jump up and say, "I am persuaded by the hon. Gentleman's arguments and I accept his amendments." However, I wonder whether he agrees that there should be some flexibility in the interpretation of a single or multiple unit.

Amendment No. 3 would provide another option where a building is totally demolished, save for one facade—[Interruption.] Obviously the hon. Member for Croydon, South (Sir W. Clark) is not interested, but that aspect is of importance to people who are concerned about historical and listed buildings.

Value added tax leaflet 708/2/89 spells out on page 8 the position in respect of demolished buildings, albeit in a different context. It states that demolition is considered total even if there remains a single facade. It would be entirely reasonable to adopt the same definition for the purposes of the Bill. Suppose a staircase inside the building, as well as its facade, is listed. The developer could not then demolish that staircase, and the chances are that the site would not be developed. If the staircase is very fine but is not listed, the developer might say, "There is no question of my being able to exercise a new option unless I can demolish that staircase." That is the nub of the matter.

The danger is that architecture that should be preserved will not be protected unless the Government interpret VAT rules more flexibly. Although one appreciates that demolition must be more or less total, if a building has other features of architectural merit, demolition should still be regarded as total save for those features. That argument is not one that met with much sympathy from the Government in Committee, but I hope that Ministers have considered the arguments, and the slightly different amendments now before the House, and will be able to make an encouraging response.

Mr. Lilley

The group of seven Government amendments can all be described as drafting amendments because they do not represent any changes to our basic policy. The intention has always been that people should opt for buildings, including their sites and curtilage; for agricultural land, including agricultural buildings thereon; and for other land, including land containing civil engineering works. There is no great dissent over those categories.

However, the Law Society in particular was unhappy that the Bill contains ambiguities as to the word "land", which under the Interpretation Act includes buildings. Parliamentary counsel agreed that there was some substance to the Law Society's observation and redrafted to use the term "land" in the Interpretation Act sense, whereby there is no need to distinguish between land and buildings, and to reserve the use of the word "buildings" for cases where it is necessary to refer to buildings as such. The draftsman has therefore defined buildings for the purpose of the option by expressly including site and curtilage. I hope that there will be no difficulty in the House agreeing to the amendments.

As to amendment No. 2, if groups of individual units are in the same ownership and are managed as one coherent development, it seems reasonable that they should be regarded by the landlord as a whole for the purpose of the option. Where separate parts or units are in separate ownership, each legal person has his own option anyway. Similarly, if buildings are linked by a common covered walkway, it is likely to mean that there is some community of purpose in their use and, if they are in the same ownership, it seems reasonable that they should be subject to a single option. Buildings linked by a covered walkway in separate legal ownership would not be covered by a single option anyway.

The hon. Member for Wrexham (Dr Marek) suggested that in some parts of the country covered walkways may not be necessary. If he will tell me what parts of the country they are, I shall spend my holidays there.

We try to maintain unitary operation of the option where there are a number of facilities within a common development because allocation of input tax on common facilities to different shops in a shopping development is difficult.

If all the shops are owned by a single owner who also owns the common facilities, it will be much better for him to make a single option and then to be able to reclaim the VAT on all inputs relating to common facilities as well as to the individual shops. If there is deviation from that principle, more complexity will be introduced, along with a greater opportunity for avoidance and even fraud, and I do not think that Opposition Members would wish to encourage that.

As far as we can see, there is no real problem except in relation to exempt tenants—building societies and banks, for example. An owner might wish to make a different option in respect of premises occupied by building societies and banks from that in respect of shops. Again, I am rather surprised that the Opposition should wish to facilitate tax avoidance by means of those parts of the exempt sector, thus giving rise to the complexities that I have mentioned.

The hon. Member for Wrexham saw a contrast with agricultural land; I find a parallel. I do not know what would happen if two separate estates were joined by covered walkways—as far as I know there is no example of that in the countryside—but where pieces of land are contiguous they are treated as a single unit. Where two estates are clearly separate, they are treated as separate units. That strikes me as similar to the principle that we are using for shopping centres.

Dr. Marek

If a shopping precinct included a right of way—down the middle, let us say—that was dedicated to the local authority and thus not in the ownership, beneficial or otherwise, of the developer, would the precinct be treated as two precincts?

Mr. Lilley

I fear not. As I recall, our definition of agricultural land does not define a farm divided by a road as two separate farms, and it would be equally perverse to apply such a definition to a shopping centre. Although at first sight there may appear to be a problem that the amendment would resolve, I think that on closer inspection it may prove to be a non-problem, which therefore requires no solution.

The hon. Gentleman, along with others, raised the points contained in amendment No. 3 in Committee. Concern was expressed about the conditions of the option to tax commercial and industrial buildings: hon. Members wished to know whether it provided an incentive for total demolition, as opposed to the retention of a feature of architectural merit such as a facade.

If a building is listed or is in a conservation area, planning constraints are likely to prevent such action. It is right that planning constraints rather than a tweaking of the tax laws should constitute the primary way for us to make planning decisions. Even if no such constraints existed, however, I do not believe that the incentive suggested by the hon. Gentleman and the amendment would exist. A considerable amount of tax will be at stake in a redevelopment, whether or not there is total demolition. The presumption, therefore, must be that the redeveloper will want to continue to opt tax in the majority of cases.

In addition, the special charge on developers will, if anything, encourage the retention and refurbishment of existing buildings, because the special self-supply charge—assuming that Government amendment No. 32 is accepted—will not apply to reconstructions, enlargements or extensions of, or the addition of annexes to, existing buildings. Customs and Excise will in any case continue its current practice of regarding a building as new and thus subject to a fresh option, although part of a previous building—such as a single facade—is retained and incorporated within it. Developers, of course, may not always be eager for a building to be regarded as new if as a result the self-supply charge on developers takes effect, or the sale of the building becomes compulsorily taxable. The case for amendment is therefore not compelling.

The hon. Gentleman asked specifically whether, if a staircase or similar internal feature were retained, it could be compatible with demolition. I am reliably informed that it would not be accepted that the building had been demolished if a staircase were retained. Obviously, the best way in which to ensure that staircases of great value are not destroyed is generally to protect them through the planning rules rather than the tax system.

8.15 pm

Dr. Marek

I am not sure that we have progressed any further as a result of the Economic Secretary's reply. Let me deal with his points one by one, although I do not expect him to reply again.

It is doubtful whether Government amendment No. 16 provides a concession; exempt concerns unable to reclaim their input tax may not regard such action as tax avoidance. The amendment provides that land shall be taken not to be separated from other land if it is separated from it only by a road, railway, river or something similar". What if a shopping centre includes a public green, perhaps with a fountain? That hardly constitutes a road, railway or river; a road is, in a sense, one-dimensional, while a green could be described as two-dimensional. The Economic Secretary mentioned farms divided by roads, which he said would be deemed as single units, but what if one part is a mile or two away from the other?

The Minister says that there will be no problems, because land that is separated will be clearly delineated, and no arguments will arise with Customs and Excise. I accept that, although I am still a little worried about the possible problems with shopping centres and arcades. I am prepared to take the hon. Gentleman's word for it if he says that there will be no problems.

I have mixed views on what the Minister said about facades and staircases. At one stage he said that Customs and Excise was prepared to regard a building as being demolished if a facade, for instance, was retained. That led me to believe that the same could apply to two facades, or to a facade and a staircase. A minute later, however, the hon. Gentleman said that staircases would not be included.

I am apprehensive. I hope that Customs and Excise will read the report of our debate, and will treat any applications with the utmost flexibility. It is all very well to say that we should use the planning laws to safeguard staircases and facades. I should be the first to agree if the planning laws had teeth, were obeyed and were not overturned on appeal by Conservative Secretaries of State, but unfortunately that is not the case. I am not saying that the planning procedures do not work well, but they do not work well enough.

Having said that, I hope that the Economic Secretary's reply will be read by interested parties in the United Kingdom, and that Customs and Excise, having also read it, will treat any further negotiations with some flexibility.

Amendment agreed to.

Amendments made: No. 11, in page 166, line 45, leave out 'has been made under this paragraph in relation to any building or' and insert `under this paragraph has effect in relation to any'. No. 12, in page 167, line 7, at end insert— '(2A) Sub-paragraph (1) above shall not apply in relation to a grant if—

1. (a) the grant is made to a registered housing association and the association has given to the grantor a certificate stating that the land is to be used (after any necessary demolition work) for the construction of a building or buildings intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose; or
2. (b) the grant is made to an individual and the land is to be used for the construction, otherwise than in the course or furtherance of a business carried on by him, of a building intended for use by him as a dwelling.'.

No. 13, in page 167, line 16, leave out 'or building to which the election relates' and insert 'in relation to which the election has effect'. No 14, in page 167, line 18, leave out 'or building'.

No. 15, in page 167, line 44, leave out from 'above' to second 'of in page 168, line 4 and insert 'shall have effect in relation to any land specified, or of a description specified, in the election. (2A) Where such an election is made in relation to, or to part of, a building (or planned building), it shall have effect in relation to the whole of the building and all the land within its curtilage; and for the purposes.'.

No. 16, in page 168, line 7, at end insert— '(2B) —Where such an election is made in relation to agricultural land (including a building on agricultural land), it shall have effect in relation to any other agricultural land if that other land is not separated from it by—

1. (a) land which is not agricultural land; or
2. (b) agricultural land in separate ownership.

(2C) For the purposes of sub-paragraph (2B) above—

1. (a) land shall be taken not to be separated from other land if it is separated from it only by a road, railway, river or something similar; and
2. (b) land is in separate ownership from land in relation to which an election is made if the person by whom the election is made has no interest in, right over or licence to occupy it and, where that person is a body corporate, no relevant associate has any such interest, right or licence.'.

No. 17, in page 168, line 10, leave out `notification of the election shall be' and insert `shall not have effect unless written notification of it is'. No. 18, in page 168, line 17, after 'above', insert 'and this paragraph'.

No. 19, in page 168, line 18, leave out 'that paragraph' and insert 'paragraph 2 above'.

No. 20, in page 168, line 30, at end insert— '(6) In paragraph 2 above "registered housing association" means a registered housing association within the meaning of the Housing Association Act 1985 or Part VII of the Housing (Northern Ireland) Order 1981.'.—[Mr. Lilley.] Amendment proposed: No. 21, in page 169, line 33, leave out from 'period' to 'on' in line 34 and insert 'beginning with the day when the construction of a building or work within sub-paragraph (2) below is first planned and ending ten years after the completion of the building or work'. —[Mr. Norman Lamont.]

Mr. Deputy Speaker (Sir Paul Dean)

With this, it will be convenient to consider amendment No. 4, in page 169, line 37, after `supply;', insert 'except where he intends to make a taxable supply under 5(3)(b) below;'. Government amendments Nos. 22 to 32 and 43 to 48.

Mr. Anthony Coombs (Wyre Forest)

Having struggled with the concept of a one-dimensional river, and given the byzantine complexity of many of the clauses, it is appropiate to congratulate the Government on devising a narrow and fairly safe path for most self-developers whose sole lets are to exempt tenants. We are between the devil of the European Commission and its interpretation of article 27 of the 16th directive and the deep blue sea of the need to minimise the effects of VAT on non-domestic construction, in particular the imposition of VAT on building land associated with it.

In retrospect, I am glad that the Commission had reservations about the first scheme that was put before the Committee. It would have required declarations from owners when they were beginning their development as to whether they intended to sell the buildings or tax rents to exempt users. It would have constrained their commercial judgment. It would have meant that they had to fund VAT on land during construction. That is not the case now.

The second scheme, to impose VAT at valuation on land and buildings self-supplied within 10 years of construction, would have hit a number of institutions-in particular, educational institutions that are not exempt from VAT via their charitable status because they take fees. They would have been hit very hard-in particular, the universities that bought land many years ago, possibly many centuries ago, or that were given land or bought it cheaply. VAT would have been charged on the present-day valuation, which would have led to a significant increase in project costs.

The Committee of Vice-Chancellors and Principals tells me that the graduate business school at Strathclyde would have faced increased costs amounting to £150,000, which would have led to it not being viable, and that costs on a sports pavilion would have increased by £105,000. The university of Cardiff was concerned that costs of existing capital programmes would increase by £660,000. What is possibly even more important, London university said that the future development on land that was released by the merger of King's college, Chelsea college and Queen Elizabeth college would have been put at risk. That would have been detrimental to the restructuring and to the greater efficiency and responsiveness of the university sector, which is part of the Government's higher education strategy.

The new historic cost basis valuation will help, and ought to be warmly welcomed. Nevertheless, the new regulations are not a bed of roses, particularly in the education sector. That is why I tabled an amendment that provided for the specific zero rating of education buildings. However, I am told that, under the VAT directive, that is not possible.

The maintained sector of education, which I believe includes city technology colleges and grant-maintained schools, will be zero-rated or will be reimbursed for the VAT that is paid on buildings under clause 20. However, when independent schools undertake projects of more than £100,000, they will pay VAT on construction for the first time. If they buy land for construction, they will pay VAT on that, too. VAT will also be payable on land that universities have recently acquired for restructuring purposes. It will be payable at market cost.

I hope that the Universities Funding Council will distinguish between the different kinds of restructuring to which I have referred and that it will be funded appropriately by the Government. I hope that the Government will continue to press the European Commission on the question of independent schools so as to ensure that non-profit-making independent schools with charitable status are allowed VAT relief on capital building, since that relief is now available to the public sector of education.

Mr. Curry

I congratulate the Government on having teased out a solution with the Commission on yet another issue. The European Court ruling is subject to various interpretations, so it is very difficult to obtain absolutely precise guidance on it. I am pleased that the Government were willing to enter into negotiations. The Commission's willingness to respond pragmatically has also been helpful and perhaps could be described as the acceptable face of Brussels bureaucracy.

I am also pleased that the Government have been willing to err on the side of adventure regarding village halls and the question that is being debated now. They have decided to take a chance, knowing that they are faced with a Commissioner who is likely to adopt a sensible approach.

I have two questions to put to the Minister on Government amendment No. 31. The first relates to a building contract that has been entered into before 21 June 1988, before the date of the court ruling and before the statement was made in the House. Secondly, if the owner of a building has paid the contractor for work, what will happen if he is paid before 1 April but the work does not start until after 1 August? I should be grateful if those two points could be clarified.

Mr. Beith

The hon. Member for Wyre Forest (Mr. Coombs) has obviously studied this matter carefully and knows a great deal about it, but we are still receiving representations from the Committee of Vice-Chancellors and Principals and others expressing considerable anxiety about the matter, despite the Government's efforts to find a fresh solution. I hope that the Minister will clarify the law concerning future gifts and acquisition of land. Would it be, rather like the National Trust, that universities would have to ask for a dowry before they accepted land because of the valuation that would be placed on ii if they developed the land?

The universities are being asked to engage in their own fund raising and to finance their own development as much as possible from non-Government sources. Therefore, they are understandably anxious about aspects of the tax regime which may make that more difficult, even after the changes.

Sir William Clark

On Government amendment No. 31, will the Minister confirm that the word "value" means cost price and not market value? Furthermore, where grants are mentioned, does that mean the immediate grant by means of which an interest in the land is acquired and not any previous grants? In other words, will he confirm that the various costs of acquisition will not be added together?

Mr. John Heddle (Mid-Staffordshire)

I have to declare an interest as the consultant partner in a firm of surveyors that may have clients, institutional or otherwise, who may be affected directly or indirectly by the amendments. I am pleased that the amendments have been tabled after the tabling of new clauses that caused some concern to the financial sector when the Bill was considered in Committee. I am also pleased that about 20 minutes or so ago we were told that further amendments may be made by means of order, in the light of experience.

In that context, I wish to raise a technical but very important matter. I accept, as do my hon. Friends the Members for Wyre Forest (Mr. Coombs) and for Skipton and Ripon (Mr. Curry), that it is right and proper that VAT should be levied on the historic cost and construction cost of land rather than on the valuation—the residual value of the ultimate development. That is fine in regard to a freehold property, but the position of a leasehold interest is not at all clear. Although the grant of a lease is a supply, a further supply is treated as taking place each time rent is due or paid. As the rent is further consideration for the grant, the fiction appears to be that a grant is made with each rent payment. That appears to be the meaning behind the drafting. Otherwise, the final words referring to consideration in the form of rent would be meaningless.

8.30 pm

If a developer-contractor has a long leasehold interest on a site, its value would include not only the purchase price or the premium paid to acquire it, but the rent payable in the past or in future, apparently without any discount for time. If that is correct, the value of the developer-contractor's interest may equal or even exceed that of the freehold—for example, if he holds a lease at a full rent.

I do not believe that my hon. Friend the Economic Secretary intended that when he he said that the self-supply would be based on the land cost. I ask him to consider that it is perhaps reminiscent of development land tax, where the value of a leasehold included the value of the right to receive the rent, although it was only the present-day value. Presumably, in future any developer-contractor who wishes to minimise the impact of the self-supply charge will make sure that he leases the site at a rent which is unascertainable at the time of the self-supply charge.

In practice, the provision may catch only existing land interests and the unwary. I ask my hon. Friend to consider that, arguably, the provision is not in accordance with the directive, which requires supplies of building land to be taxable, but leasing and lettings to be exempt. By taxing the rents, the measure appears to go beyond the spirit and the letter of the directive. I ask my hon. Friend to consider this and to consult officials in Customs and Excise to find out whether that was the intention of the amendments; if not, perhaps he will be prepared to come back at a later stage with an amendment by order.

Mr. Christopher Hawkins (High Peak)

I ask my hon. Friend the Economic Secretary to clarify a couple of points, as I was not on the Committee. Am I right in thinking that the main effect of amendment No. 31 will be that land already owned by universities or other institutions will have VAT levied on the historic cost and not on the market value when it is developed? If so, the provisions will be greatly welcomed by universities.

I add to the projects mentioned by my hon. Friend the Member for Wyre Forest (Mr. Coombs) another which would have been in jeopardy as a result of the original proposals. At St. Bartholomew's hospital medical college, a new building is now at the planning stage. It will house a new institute of preventive medicine and has been funded entirely by the private sector. That project would have had to be aborted if there were to be an unanticipated VAT bill, which would have totalled £1.5 million, on the self-supply of land. These concessions are greatly welcome and are extremely important, if I have understood them correctly.

Today I talked to the Committee of Vice-Chancellors and Principals; it still has one concern, which I hope my hon. Friend will clarify. We understand the position of land already owned by universities, but how will gifts of land be treated for tax purposes? It would be a great shame if universities had to refuse gifts simply because they could not afford to pay tax on them.

Dr. Marek

We now come to what could be termed the Barclays bank clauses, which will no doubt save Barclays bank about £40 million. I do not say that in any spirit of envy. If the changes were not made, there would have been a general unfairness in other matters. The Government have gone some way towards getting rid of that unfairness, not least of which involves the problem which has beset the Committee of Vice-Chancellors and Principals, the problem referred to by the hon. Members for Wyre Forest (Mr. Coombs), for High Peak (Mr. Hawkins) and for Berwick-upon-Tweed (Mr. Beith). I too have received a sheet of paper from the Committee of Vice-Chancellors and Principals, and I hope that the Economic Secretary will address that problem. It has been almost completely alleviated, but there are still concerns about future gifts and acquisitions. I am sure that the Committee of Vice-Chancellors and Principals will read very carefully what the Economic Secretary says, and any reassurance that he can provide will be very welcome.

For the record, I refer to the debate in Standing Committee, when I asked: Will a developer who has developed and intends to sell within three years as a new building, but meanwhile leases, perhaps to exempt tenants, still be unable to recover his inputs, although he will be required to standard rate the building when he sells it?"—[Official Report, Standing Committee G; 18 May 1989, c. 139.] The Economic Secretary said that he would write to me, and he did, saying: On the question of self-supplies of new commercial buildings by developers you asked about the position of input tax recovery by developers who intended to sell within three years—a standard-rated supply—but meanwhile let on an exempt rental. In the straightforward case, the letting on an exempt rental would trigger the self-supply charge. All input tax attributable to the self-supply, eg on construction costs and professional fees, would be recoverable as it was incurred during the course of the development. When the standard-rated sale of the building took place at a later stage a proportion of the tax on the self-supply itself would be recoverable—under the proposed capital goods provisions which apply to buildings costing over £250,000 and which are due to come into force from next April. For example, if the building had been let at an exempt rent for two years since it was built and then sold, in principle eight-tenths of the VAT on the self-supply would be recoverable. I hope that this is clear and has set your mind at rest on these two points. It has certainly helped a great deal, as there is nothing in the Bill about the possibility of recovering input tax.

Amendment No. 4 was tabled to cover that point. I shall not press it, but for the purposes of the debate is it fair for a building to be let on an exempt rent for a couple of years, with only 80 per cent. of the input recoverable? If the rental was for only a short time—perhaps not two years but only six months or a year before the building was sold—should that short period be completely exempt from the provisions set out in the Economic Secretary's letter to me? I ask the Economic Secretary for a little more elucidation.

Does the Economic Secretary accept the point we made about input supplies if a new building has to be constructed if a fire completely burns it down and a new building has to be constructed and tax would be payable on the building and the land? Although the building had burnt down, the land would still be there. We felt that it was unfair for tax to be paid on the construction and the land; perhaps it would have been fairer if tax had to be paid only on the building. Does Government amendment No. 32 do anything about that? Some helpful explanatory remarks by the Economic Secretary would be greatly appreciated.

Are the amendments in conformity with the sixth VAT directive? Can the Economic Secretary assure the House that they will not result in further infraction proceedings in the European Court? I should have thought that some element of inflation would have to be added to the historic costs, and then the self-supply would be charged on the historic costs plus a little more. There is a danger that the Commission may say that this is not good enough, and other countries may start proceedings. I do not know—[Interruption.] I will not tempt them. Time is getting on. I should like the assurance of the Economic Secretary that my fears have no foundation. [Interruption.] The hon. Gentleman thinks that that is not a problem. In that case, perhaps I should not say more. If he does not spend too much time on my last point, I hope that he will give us an explanation of the others.

Mr. Lilley

We are considering a number of amendments and perhaps it would be helpful if I dealt first with amendment No. 4, to which the hon. Member for Wrexham (Dr. Marek) has referred. The present scheme encourages developers building for letting to opt to tax rents from the beginning of the letting. If they do not, they must account for tax—on the value of the land and construction services—straightaway. The amendment would bring back the requirement for certificates of intent, which were a feature of the building land scheme originally in the Bill. Although a necessary feature of that scheme, it made for added complexity, and its absence is a welcome simplification to the Bill.

If the developer did not carry out his declared intention of making the taxable sale, he would simply have to account for tax at the end of the three-year period, and then only on the historic value of the land and construction services. There would be no penalty for spurious declaration. Effectively, the developer could delay accounting for tax on the building even though he had no real intention of making a taxable supply of it. It cannot be right to encourage spurious declarations in that way. I hope that the Opposition, having seen that that is probably the unintended consequence of amendment No. 4, will find it unnecessary and unattractive.

Any developer who has to pay the special self-supply charge will be able to recover his inputs on the development—the VAT that he incurs on construction services and materials and any VAT that he may have been charged, under the option, when he acquires the land. There would be complexities over input tax recovery attributable to up to three years of exempt letting before taxable sale of the building. It would be wrong to allow input tax recovery on the construction services and on the purchase of the land if that purchase were taxed under the option when there were, initially at least, to be exempt lettings of the building. As the Bill now stands, there are no such complexities.

The proper mechanism for dealing with the change from exempt lettings to taxable sale lies in the proposed capital goods scheme, which is due to come into force from next April. Draft regulations for this have been published. This scheme will enable a developer who initially pays the special charge to recover a proportion of it if, as a fact, he makes a taxable sale of it, or opts to tax the letting of it, within 10 years.

I must admit that Government amendment No. 23, to delete reconstructions and enlargements of existing buildings from the scope of the self-supply charge, owes more to expediency than to conviction. The Government's decision to alter the basis of the self-supply from open market value to cost, although a useful simplification for most new buildings, introduces complexities in determining the appropriate cost basis for reconstructions and enlargements in respect of the land element of the cost. There are many different circumstances in which works of this type are affected, and it is not clear what is the most appropriate and equitable cost basis.

Certainly, a self-supply charge will be necessary to prevent easy avoidance by leaving minimal elements of an existing building and calling the subsequent development a reconstruction or by abutting a new structure on to an existing one with unnecessary internal access between them, so that it can be claimed that the new structure is an enlargement of the existing one. I have therefore authorised Customs to consult interested bodies to see whether it is possible to establish a consensus on the type of reconstructions or enlargements which should be liable to the self-supply charge and the most equitable basis for assessing the cost. We shall obviously come back to the House when those discussions are complete.

8.45 pm

The central amendments in the group are Government amendments 29 and 31, on which most hon. Members who have spoken have concentrated. I gave the Standing Committee a lengthy explanation of how and why the need for the self-supply charge arose, and I will not weary the House by repeating what I have said. Broadly speaking, the self-supply charge is needed because sales of finished buildings bear tax on their sale value, which obviously includes the value of the land. Building land itself is not taxed. Exempt businesses could therefore avoid VAT on land by developing untaxed land themselves rather than buying completed buildings which bear tax on the selling price, including the inherent land value. All new buildings going into consumption should be taxed; otherwise, there will be avoidance and distortion.

The Commission refused to endorse our original solution to the problem by taxing the self-supply of building land as such. Taxing the self-supply of the finished building was, from our point of view, the second best solution, but it was the only one acceptable to the Commission. I thought it right to introduce amended proposals, compatible with the Commission's objections, as soon as possible in Committee to ensure full discussion and to leave scope for further revision on Report. I regret, as I said at the time, that that gave the Opposition a minimal chance to prepare before the debate in Committee, but I think that they recognise that it has been useful to air the subject before reaching this stage of the Bill.

The amended provisions would have put everyone acquiring new buildings on the same footing, whether they bought the buildings, leased them or built them on their own land. However, the only way to do this was to tax the open market value of the self-supplied buildings. I have received representations that that would place an unreasonable tax burden on institutions which may have to redevelop land they have held for generations or land they may be given at some time in the future. This was not the Government's intention. In addition, the burden of taxation would inevitably depend on somewhat subjective valuations.

We have therefore devised a solution intended to meet the concerns of the institutions affected, including universities, colleges, schools and charities as well as banks and other members of the exempt financial sector. While meeting the Commission's objections to our original proposals on building land, the buildings concerned will now be valued at the historic cost of the land involved, plus the cost of construction.

A number of hon. Members have raised specific points, to which I shall endeavour to respond. My hon. Friend the Member for Croydon, South (Sir W. Clark) has apologised to me because he had to leave the Chamber at 8.45 pm. To respond to his point, I should say that "grant" means latest grant of freehold, not the cumulative total as he feared.

The hon. Member for Berwick-upon-Tweed (Mr. Beith) referred to future gifts. Gifts should be valued at historic cost. Therefore, there should be no need for tax arising on the full value of the land that is subsequently built upon. If someone takes the trouble to sell something to another person for a very small sum, that will be the cost basis for VAT purposes, if that person then builds something for self-supply upon it. Let us suppose that a generous benefactor gives a university a piece of land for £1. The university would be liable to VAT of 15p on that £1, which would not be crippling.

My hon. Friend the Member for Skipton and Ripon (Mr. Curry) asked about the wording of sub-paragraph (2)(b) in Government amendment No. 31, and in particular the reference to other than any that are zero-rated". The objective here is to exclude from the tax base for the self-supply charge any services on which the developer has been charged no tax, either because he pre-paid his contractor before 1 April 1989 for services to be rendered after that date, or because he has been entitled to receive zero-rated services from his contractor if supplied before 21 June 1993 under relief for legally binding obligations. The developer who himself makes a zero-rated supply of his interest in the building because he is entitled to the transitional relief under paragraphs 12(1) or 12(2) of schedule 3 is not in any event caught by the self-supply charge by reason of paragraph 12(6). All supplies which are or have been properly zero-rated are excluded from the cost of construction for the purpose of the self-supply charge. My hon. Friend's concerns are fully met in that respect.

I have already effectively dealt with the issue raised by my hon. Friend the Member for High Peak (Mr. Hawkins). My hon. Friend the Member for Mid-Staffordshire (Mr. Heddle), who, in the course of consultations last summer and autumn, made some helpful and thoughtful contributions which were of great benefit to us in framing the legislation, also raised some other points today. We are not compulsorily taxing rent. The self-supply charge is on the finished building, but we are valuing the self supply at land cost plus construction costs. That is the basic framework and we have abandoned the proposal based on the open market value of finished buildings.

The point about future rents payable by leasehold developers is significant. There would be a particular problem where the developer has acquired a leasehold interest in the site for his new building, but on terms that he will pay the freeholder a percentage of the rent that the developer actually receives over the period of the lease. That obligation to pay the freeholder is a cost to the developer, albeit an unquantifiable cost.

Our amendment includes proposals to exclude from the tax value of the self-supply charge rents that cannot be ascertained at the time of the self-supply. However, to leave the tax value on that basis permanently would simply invite developers to undertake all their developments for exempt or partly exempt tenants on a leasehold basis with cost expressed largely or wholly in terms of a percentage of future rents received. I have instructed Customs and Excise, therefore, to consult interested bodies to devise an appropriate solution to this problem. Subject to that qualification, I recommend the amendment to the House.

Amendment agreed to.

Amendments made: No. 22, in page 170, line 8, leave out from beginning to end of line 11 and insert— `(b) the building or work is not used by him at any time during the period in, or in connection with, making any exempt supplies of goods or services.'.

No. 23, in page 170, line 13, leave out 'paragraphs 6 and 7' and insert 'paragraph 6'.

No. 24, in page 170, line 15, leave out 'constructed' and insert 'constructs'.

No. 25, in page 170, line 16, leave out 'ordered' and insert 'orders'.

No. 26, in page 170, line 17, leave out 'financed' and insert 'finances'.

No. 27, in page 170, line 27, leave out 'paragraphs 6 and 7' and insert 'paragraph 6'.

No. 28, in page 170, line 37, leave out 'land' and insert `work'.

No. 29, in page 170, line 42, leave out from 'applies' to `shall' in line 43 and insert `the interest in, right over or licence to occupy the building or work (or any part of it) held by the developer'. No. 30, in page 170, line 47, at end insert `or, if later, of the prescribed accounting period during which the building or work becomes substantially ready for occupation or use.' No. 31, in page 170, line 48, leave out from beginning to end of page 171, line 5 and insert— '(2) The supply treated as made by sub-paragraph (1) above shall be taken to be a taxable supply and the value of the supply shall be the aggregate of—

1. (a) the value of grants relating to the land on which the building or work is constructed made or to be made to the developer, other than any grants to be made for consideration in the form of rent the value of which cannot be ascertained by the developer when the supply is treated as made; and
2. (b) the value of all the taxable supplies of goods and services, other than any that are zero-rated, made or to be made for or in connection with the construction of the building or work.

(3) Where the value of a supply which, apart from this sub-paragraph, would be treated as made by sub-paragraph (1) above would be less than £100,000, no supply shall be treated as made by that sub-paragraph.'.

No. 32, in page 171, line 6, leave out from beginning to end of line 33.

No. 33, in page 171, line 34, at end insert— '7A. Where the benefit of the consideration for the grant of an interest in, right over or licence to occupy land accrues to a person but that person is not the person making the grant—

1. (a) the person to whom the benefit accrues shall for the purposes of this Act be treated as the person making the grant; and
2. (b) to the extent that any input tax of the person actually making the grant is attributable to the grant it shall be treated as input tax of the person to whom the benefit accrues.'.

No. 34, in page 171, line 39, leave out from beginning to end of line 41.

No. 35, in page 171, line 46, after 'contract', insert `except that a term of a tenancy or lease shall not be taken to provide that the rule contained in that subsection is not to apply in the case of the tenancy or lease if the term does not refer specifically to value added tax or this section.'.

No. 36, in page 171, line 49, at end insert— '7A. In section 45(4) (orders etc.) of the Value Added Tax 1983, there shall be added after paragraph (c)— (d) an order under section 35A above, except one making only such amendments as are necessary or expedient in consequence of provisions of an order under this Act which—

1. (i)vary Schedule 5 or Schedule 6 to this Act; but
2. (ii) are not within paragraph (c) above.".'.

No. 37, in page 172, line 41, after 'to', insert `sub-paragraphs (1A) and (1B) and'.

No. 38, in page 172, line 43, at end insert— '(1A) Note 4(b) to Group 8 of Schedule 5 to the Value Added Tax Act 1983 shall have effect in relation to grants, assignments and other supplies made on or after 1st August 1989.'.

No. 39, in page 172, line 43, at end insert— `(1B) In relation to grants and assignments made on or after 1st April 1989 but before 1st August 1989—

1. (a) that Group shall have effect as if the Notes to it included a Note in the same terms as Note (1) to that Group as it had effect before the substitution made by paragraph I above; and
2. (b) Group 8A of that Schedule shall have effect as if the Notes to it included a Note in the same terms as Note (5) to that Group as it had effect before the amendments made by paragraph 2 above.'

No. 40, in page 172, line 44, leave out 'and 10' and insert '7A, 10 and 12(6) and (7)'. No. 41, in page 172, line 45, leave out `paragraphs 2 to 7 and 9' and insert `section 35A(2) of, and paragraphs 2 to 7A'. No. 42, in page 172, line 47, leave out `sub-paragraphs (1) and (2) above' and insert 'the preceding provisions of this paragraph'. No. 43, in page 174, line 1, leave out `to 7' and insert `and 6'. No. 44, in page 174, line 2, leave out `(or substantially reconstructed a protected building)'.

No. 45, in page 174, line 9, leave out 'or 8A'.

No. 46, in page 174, line 11, leave out '(or substantially reconstructed a protected building)'.

No. 47, in page 174, line 14, leave out '(or reconstruct) the building or to construct'

and insert 'the building or'.

No. 48, in page 174, line 16, leave out '(or reconstruction)'—[Mr. Lilly.]

Mr. Heddle

I beg to move amendment No. 105, in page 174, leave out lines 21 to 23 and insert— '(7) The supplies made pursuant to sub-paragraph (I) above shall be taken to be zero rated supplies for the purpose of sub-paragraph 2(b) above if:

1. (a) the building was constructed (or reconstructed) pursuant to a legally binding obligation incurred before 21st June 1988; or
2. (b) the grant referred to in paragraph 5(1)(a) of Schedule 6A is made pursuant to a legally binding obligation incurred before 21st June 1988; or
3. (c) input tax thereon is attributable to zero-rated supplies.

(8) For the purposes of sub-paragraph (7) above—

1. (a) a grant shall be treated as made in pursuance of a legally binding obligation incurred before 21 June 1988 if sub-paragraph (c) below applies.
2. (b) a person shall be treated as having been under a legally binding obligation incurred before 21st June 1988 to construct (or reconstruct) a building or any development of which it forms part if sub-paragraph (c) below applies.
3. (c) this sub-paragraph applies if—
1. (i) the person making the grant or assignment or constructing (or reconstructing) the building or any development of which it forms part had before that date arranged (without being legally bound) to make such grant or other supply or carry out such construction or reconstructions; and
2. (ii) the arrangement was made in writing, or were evidenced by a note or memorandum thereof made in writing before that date; and
3. (iii) a legally binding obligation to make the grant or other supply or to construct the building (or reconstruct) is on or after 21st June 1988 but before 21st December 1989 entered into by that person.

and any such obligation shall be treated as having been made on the date when the arrangement first came into existence. (9) If the Commissioners so require, proof of any of the matters specified in subparagraphs (6)(a), (b), (c)(i) or 8(c)(ii) above shall be given to their satisfaction by the production of documents before 21st June 1988.'. My hon. Friend the Member for Corby (Mr. Powell) paid tribute to my hon. Friend the Economic Secretary for the way in which he wanted to ensure the minimum impact in practical terms at all times. I associate myself with those remarks and thank my hon. Friend the Economic Secretary for his kind remarks a moment ago. It is a pleasure to be able to endeavour to make some practical contribution to legislation before that legislation is cast into stone. In that spirit, I ask my hon. Friend to consider the amendment and to see whether he can find some way to meet the practical concerns of many contractor-developers, who will be hit by the transitional arrangement if the time limit is not extended.

The amendment's purpose is to extend the proposed VAT transitional relief to the position where, before I April 1989, a person has constructed a building, or paid for a new building, and so VAT on the construction costs is recoverable or to the position where, before 21 June last year—the date of the judgment—a person constructing a building or granting or assigning the relevant interest in land had entered into arrangements for carrying out the construction, or for granting or assigning the interest, and where those arrangements subsequently mature into legally binding contracts before 21 December next. The amendment is designed to ensure that the benefit of zero-rating for grants or major interests in new buildings is not clawed back by the self-supply charge and to deal with circumstances that commonly arise.

It is common practice in the development and construction industry that a development project will commence on the basis of letters of intent, heads of agreement or other similar arrangements which, while falling short of creating legally binding obligations, nevertheless form the basis of agreement between the parties which is eventually embodied into formal legal documentation. The amendment adopts a principle and a format used in previous Finance Acts to extend transitional relief on the introduction of tax changes to the situation where the parties are essentially committed to a course of action which, at a later stage, becomes legally binding and legally documented. The amendment in no way alters any previous form, but takes account of the practical effect of agreements entered into in principle which ultimately become enshrined legally, in this case before 21 December next.

The transitional reliefs recognise that where a person had become legally committed to carrying out building work or to constructing a building before the judgment of the European Court on 21 June last, he should not be prejudiced by the changes to VAT on non-domestic construction. Many developer-contractors will rightly take advantage of the transitional reliefs. However, many projects are of such size and complexity that a developer who was, before 21 June last, committed to carrying out a project may not have the benefit of the transitional reliefs. That is because—especially in the case of large-scale developments—formal contract documents are often entered into after a considerable time. The preparation and planning stages may take months—or even years in the case of, for example, the Liverpool Street station complex. Construction frequently commences before legal documentation is finalised. The parties are prepared to proceed on the basis of detailed heads of agreement because of the delays caused by the complexity of the legal documentation, which deals with many matters that are not relevant to the principle—the construction of the building—such as subsequent letting and so on.

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As a result, a number of contractor-developers who became committed to projects before 21 June last and who have incurred substantial expenditure on the projects will not have entered into formal construction contracts by that date or into a legally binding obligation to construct the building. Much of the work will be carried out before the grant of the final detailed planning consent under which the building is constructed. Such contractor-developers will not be able to take advantage of the transitional reliefs enshrined in the Bill. They will have made an appraisal of the viability of their projects on the basis of existing VAT rules and will have entered into commitments on that basis, but will now have to bear an unforeseen additional cost if they are to complete the project. I hope that my hon. Friend the Economic Secretary will have some sympathy with my view that that unforeseen additional burden may call into question the economic viability of projects committed before the date of the judgment.

Although the introduction of the option to tax will, in many cases, enable the developer to recover the VAT, many major inner-city regeneration schemes will be affected. That is why I feel so strongly about the matter. The Government are wholly commited to the regeneration of our inner cities and it would be a shame if they could not find a way to grant additional transitional relief to ensure that the projects can go ahead, in accordance with our manifesto commitment.

Many of the projects depend for their viability on occupation, at least in part by tenants in the financial or insurance sectors. It is tenants in those sectors who are most likely to acquire space in the larger city developments— precisely the type of developments to which developers who are unable to take advantage of the proposed transitional relief may have become committed before 21 June last.

I realise that, in the longer term, developers who undertake developments aimed at the financial sector will have to face this question, which arises as an inevitable consequence of the European Court's decision. But any developer-contractor who becomes committed to such a development after 21 June will do so having had the opportunity to take the new VAT regime into account. It is only developers who were already committed to a project before 21 June last who will be unfairly prejudiced and to whom I believe additional transitional relief up to 21 December next should be made available.

I accept that the Government must comply with their obligations under Community law. The question whether fresh infraction proceedings would be brought in respect of additional transitional provision is both practical and political. However, assuming that existing transitional provisions are not unacceptable to Mrs. Scrivener and the Commission, it is unlikely that a loosening of the term "legal obligation" without substantially extending the scope of the transitional relief in time or nature would necessarily prove unacceptable.

My hon. Friend the Economic Secretary has heard the broad thrust of my argument before. I hope that, in this context, as a contribution to inner-city regeneration and because so many schemes are entered into under heads of agreement before the confirmaton of legally binding documentation my hon. Friend will find it in his heart to extend the period of transitional relief.

Dr. Marek

I listened with interest to the argument of the hon. Member for Mid-Staffordshire (Mr. Heddle). There can be no doubt that there has been some rough justice for some companies which had decided on projects that were absolutely certain to go ahead, but for which contracts had not yet been signed by 21 June. The hon. Member for Mid-Staffordshire said that the Economic Secretary had heard his arguments before. If the Economic Secretary had heard his arguments before and done nothing about them, they must have fallen on stony ground. In my view, it would not be in the interests of good government to listen to them at this stage and amend the Bill accordingly. I suspect that many developers have now realised that the arrangements were not perfect. But the Bill has had its Second Reading and its Committee stage and we are now on Report, quite late in the parliamentary year. I cannot recommend that the Economic Secretary accept the amendment. However, I recommend that the hon. Member for Mid-Staffordshire put his name down to join the Standing Committee and consider the Finance Bill next year. We would be very pleased to see him. He could advance his arguments in Committee and we could talk about them.

However, the Committee's wish prevailed and many hon. Members regretted that a perfect solution could not be found. The Opposition would support the Economic Secretary if he refused to listen to the arguments put forward by the hon. Member for Mid-Staffordshire.

Mr. Beith

To proffer support for the official Opposition will immediately flash a red light to the Treasury Bench, and the Government will realise that this must be an important point. I must not criticise the hon. Member for Wrexham (Dr. Marek), for he did me a favour. The Minister will recall that, in Committee, I tabled an amendment on this subject, but, because of the death of a close relative that day, I was unable to be present when the Committee reached it. The hon. Member for Wrexham was kind enough to move the amendment for me. Any lack of conviction on his part was not to his discredit, because he was performing a kind service. I hoped that the act of moving the amendment might persuade him of the merits of the argument, but it obviously has not yet done that.

One of the reasons I wanted the amendment to be accepted and not be withdrawn in Committee and moved for the first time on Report was that I wished Ministers to consider the matter in sufficient time to bring changes on Report. I am disappointed that they have not seen fit to do so. It is not a matter that we can leave aside until next year. It affects decisions that have already been taken and projects that are already in hand. It has about it a rather worrying retrospective character, not because of the Government's original intention but simply because the drafting was not sufficiently wide.

The hon. Member for Mid-Staffordshire set out some of the problems that arise. I will not go over the ground that he carefully covered, but there are other problems. A case in Newcastle was brought to my notice. A developer had made his original commitments with the city council, but, because of the changed policy on how things are to be handled on Tyneside, the responsible body became the development corporation. The legally binding contract was subsequently made with the development corporation, which apparently wanted an unencumbered company to make the commitment, and therefore a new company was created by the same people to carry out the same projects. The effect was that the legally binding commitment was too late to benefit from the transitional relief, even though all the other circumstances suggested that the transitional relief was intended for precisely such a case.

The object must surely be not to impose on people tax burdens that they would not have had to accept if they had been aware of what was coming, and, in particular, not to do so in a way that might threaten the viability of a project.

As the hon. Member for Mid-Staffordshire pointed out, we are dealing with inner-city schemes on which the Government have set considerable importance in their policy for the regeneration of inner cities and, in some cases, schemes which, by their very nature, have a narrow margin of viability. Therefore, it does not make much sense for a substantial tax burden suddenly to be added when a project is well advanced. The principle is clearly recognised by the Government in the presence of transitional relief provisions, but those provisions do not extend to the reality of commitments actually made by developers to local authorities and development corporations for aspects of the work or phases of the scheme that may have already begun.

I am disappointed that Ministers have not followed precedents in statute for commitments other than legally binding commitments. They should have done something about the weakness in provisions that are well intentioned but would have been very much better if they had been drafted to include the sort of cases that the hon. Member for Mid-Staffordshire and I have tried to bring to their notice.

Mr. Lilley

My hon. Friend the Member for Mid-Staffordshire (Mr. Heddle) has moved a complex amendment. Not surprisingly, there are technical difficulties which mean that I cannot accept it. I will not pursue that point, because there are more substantial reasons why I cannot recommend that hon. Members accept amendments along those lines even if we could overcome the technical problems, and likewise the proposal by the hon. Member for Berwick-upon-Tweed (Mr. Beith).

In providing transitional relief, our primary concern was to deal with the problem of construction companies with a legal commitment to build a building, which they had entered into before the court ruling, at a price based on the contract being zero-rated, and which would subsequently find that contract bearing 15 per cent. VAT. Such companies would be legally required to go ahead and complete the building and might be faced with potential bankruptcy. We had to bring in transitional arrangements to deal with that position.

Partly as a result of the persuasive representations of my hon. Friend the Member for Mid-Staffordshire, we went further and extended our provisions more widely than had been proposed originally. I hope that we thereby met most of the legal obligations that people had entered into ahead of the court judgment.

However, we did not think it right to provide a relief where no legal obligation had been entered into, but simply an arrangement that might subsequently mature into a legal obligation. Although some such agreements may be precise, others may be vague and it would be difficult to extend the transitional relief without such arrangements becoming open-ended. Indeed, that would be all the more difficult to justify since from mid-December 1988 onwards—once the Advocate General's opinion had been published—developers who had been properly advised were pretty aware that zero-rating was likely to be declared unlawful under the sixth directive. Indeed, over the preceding three years many people had acted on the presumption that that would be the outcome of the case. Therefore, that change was not as difficult to foresee as some tax changes.

There is no precedent in VAT provisions for the sort of proposal that my hon. Friend the Member for Mid-Staffordshire has suggested. Although the development land tax has some similarities with the transitional relief once granted, DLT and VAT are different animals. Development land tax operated at rates of up to 80 per cent. which naturally affected the transitional relief appropriate in those circumstances.

The main relief that we have built into the operation of this tax is the option to tax. That means that any fully taxable tenant will be able to pass on—or rather, reclaim—any VAT that is imposed on his rents, so that it will not stick on him. In turn, the landlord will be able to reclaim the VAT on construction if he opts to tax his rents. The whole thing washes out of the system. It sticks only in the case of exempt and partially exempt tenants, of which there are about 45,000 out of a total of 1.6 million firms registered for VAT. We should not exaggerate the extent to which they dominate new developments and can render them profitable or unprofitable. We have no evidence of any schemes being aborted as a result of any lack of transitional relief in this respect.

Dr. Marek

It would be useful if the Minister could state how much money would be forgone by the Treasury if the amendment were accepted.

Mr. Lilley

Unfortunately, the cost is unquantifiable, but substantial. Because the amount is vague, the arrangement will inevitably be open-ended. There is no evidence that any harm is being done by the absence of such relief, given the extensive reliefs that we already have.

Therefore, although I understand the spirit in which the amendment has been moved by my hon. Friend the Member for Mid-Staffordshire and supported by the hon. Member for Berwick-upon-Tweed, I must recommend the House to reject the amendment.

Mr. Heddle

It may be news to you, Mr. Deputy Speaker, that I failed to satisfy the examiners in the general certificate of education at O-level on four successive occasions. Similarly, I have failed to satisfy the Chairman of the Committee of Selection and to be selected to serve on a Finance Bill Standing Committee on no less than nine successive occasions. Therefore, I suspect that I shall have to disappoint the lion. Member for Wrexham (Dr. Marek) in his kind invitation to join him in smoke-filled rooms in another part of this Palace next year.

I am well aware of the case in Newcastle to which the hon. Member for Berwick-upon-Tweed (Mr. Beith) referred. He illustrated very graphically the reason why, in equity and in practical terms, I would have wished my hon. Friend to accept the amendment. Such is my respect for my hon. Friend the Economic Secretary to the Treasury and such is my respect for the fact that he has taken on board a number of proposals that I have made to him informally in the past, so that when he says at that Dispatch Box that he is unable to accept the amendment, even if it were technically correct, I know that his word is as good as his bond. Therefore, with great reluctance, I have no alternative but to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.