§ I now turn to taxes on personal income and spending. As the House knows, Her Majesty's Government are obliged to implement the European Court's judgment that certain of our zero rates of VAT on supplies to business, notably on non-residential construction, but also on fuel and power and on water, are not lawful. This derives from the court's interpretation of the Community's sixth VAT directive, to which the United Kingdom agreed in 1977. The necessary changes will be introduced in this year's Finance Bill, and draft clauses have already been published.305
§ In implementing the judgment, I have sought to do as much as possible to minimise the burden. From 1 April, VAT will be payable in respect of all non-residential construction, unless carried out under agreements entered into before the court ruling. As from 1 August, Iandlords will have the option to tax rents, which means, in practice, that in most cases no extra VAT will be paid at all.
§ These measures will reduce the burden of VAT on construction, so far as the private sector is concerned, to just £35 million in 1989–90, rising to £110 million in 1992–93. Without them, the yield from VAT on construction in the private sector would have risen to £450 million. There will also be a first-year yield of £250 million from construction carried out for the public sector, and the public sector programmes concerned have already been protected by compensatory adjustments where necessary.
§ So far as water for industry and fuel and power for business use are concerned, VAT will not be payable until July 1990. VAT on fuel and power will apply to business users above a specified threshold. Private households will remain zero-rated.
§ I have been particularly concerned about the impact of the European Court's ruling on charities. Unfortunately, charities' business activities cannot lawfully be shielded from the effects of the ruling, but I have been able to retain zero rates for construction, water, fuel and power for all charities' non-business activities, for churches, and for residential accommodation such as hospices, students' hostels and old people's homes.
§ I have considered whether there is anything further I can sensibly do to assist charities with their VAT bills in these special circumstances. I propose to relieve charities from VAT on fund-raising events, on sterilisng equipment for medical use, and on classified advertising.
§ I also propose to relieve from car tax cars leased to the disabled. This is equivalent to an overall saving of about £400 on each vehicle leased to a disabled person. However, in general, I continue to believe that the best way of helping charitable causes through the tax system is by directly encouraging the act of charitable giving. The payroll giving scheme, which I introduced in my 1986 Budget, has been growing steadily. Some 3,400 schemes have now been set up, and over 100,000 employees are already participating, quite a few of them giving the full £240 annual limit for tax relief. I now propose to double that limit to £480, or £40 a month.
§ I now turn to the excise duties. For some years now, the potential damage to the environment in general, and the risk to child health in particular, from excessive lead in the atmosphere has been a matter for concern. Lead in petrol accounts for 80 per cent. of lead in the atmosphere. The Government are firmly committed to phasing out leaded petrol, and in successive Budgets I have sought to assist this.
§ I first introduced a tax differential in favour of unleaded petrol in 1987, and I increased it last year, but, although sales are undoubtedly rising, unleaded petrol still accounts for only some 5 per cent. of total petrol sales, even though two-thirds of the cars now on the road could use it, either without any modification, or else with only a minor modification, which should not usually cost more than £20 and, in many cases, will be carried out free.
§ One of the problems is ignorance of the facts. Many motorists do not realise that their cars can already use unleaded petrol. Othes are unaware of how modest the 306 modification cost usually is, and many are under the false impression that if they do switch to unleaded petrol, their cars will no longer be able to use leaded petrol.
§ It is clearly essential that these myths are rapidly dispelled. Meanwhile, I propose to take the opportunity of this Budget to increase still further the tax differential in favour of unleaded petrol, by nearly 4p a gallon. This means that, at a shade over 14p a gallon, or more than 3p a litre, our tax differential in favour of unleaded petrol will be greater than that of any other country in the European Community, with the solitary exception of Denmark.
§ If the benefit of today's change is fully passed on to the customer—and I look to the oil companies to see that it is—it means that the price of unleaded petrol at the pump will generally be getting on for lop a gallon, or just over 2p a litre, cheaper than four-star leaded petrol.
§ But I do not intend to stop there. I also propose to raise the tax on two and three-star petrol, so that the pump price of these grades will be at least as high as that of four-star.
§ This should encourage garages to phase out two-star petrol, which is already down to about 6 per cent. of the total market, thus enabling them to switch storage capacity, and in some cases pumps too, to unleaded petrol—quite apart from the incentive to the remaining two-star users to switch to unleaded fuel.
§ I am confident that the duty changes I have announced, which will take effect from six o'clock this evening, will contribute to a marked increase in the use of unleaded petrol over the next 12 months. They will also lead to a loss of revenue of some £40 million in 1989–90. I propose to recoup this from vehicle excise duty.
§ At the present time, a bus or a coach has to have 66 seats before it pays as much in vehicle excise duty as a family car. I propose to rectify this anomaly by increasing the tax rates of this group of vehicles so that they cover their track costs. I also propose to increase the rates of duty for the heaviest non-articulated lorries, to put them on a more equal footing with articulated lorries. At the same time, I propose to simplify the system, greatly reducing the number of separate rates of vehicle excise duty.
§ I have no further changes to propose this year in the rates of excise duty.