HC Deb 11 March 1998 vol 308 cc724-30

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

2.56 am
Mr. Jonathan Shaw (Chatham and Aylesford)

The purpose of this debate is to make a contribution to the very welcome Government White Paper that my right hon. Friend the Deputy Prime Minister published recently, "Planning the Communities of the Future". When publishing the White Paper, he announced that the Government would increase the target for new homes built on previously developed land to 60 per cent. I and many others applaud that. However, much of the headline debate has focused on green-field and brown-field issues. It is vital that part of the debate includes how we make best use of empty properties and bring them back into use. There are 767,000 empty homes in England, the great bulk of which are in the private sector.

Existing but idle stock could make a significant contribution to the 4.4 million houses that will be required, according to current estimates. I want to discuss how we can unlock and recycle homes that are derelict and in need of refurbishment. To achieve that, we need changes in the application of value added tax to housing. There is an overwhelming case for harmonisation of VAT on new build and refurbishment of empty properties.

The Environmental Audit Committee, of which I am privileged to be a member, took evidence recently—[Interruption.]

Mr. Deputy Speaker (Mr. Michael Lord)

Order. I do not know who is responsible for that pager, but Madam Speaker takes a very serious view of this matter.

The Economic Secretary to the Treasury (Mrs. Helen Liddell)

I am sorry, Mr. Deputy Speaker.

Mr. Shaw

The Committee considered whether VAT should be harmonised between new build and empty homes. One of the witnesses who gave evidence was the Financial Secretary who, I regret, is not able to be here this evening. In the Committee, she reiterated the Government's commitment to sustainable development. Maximising the use of empty homes is the perfect example of sustainable development. It fulfils the three criteria: social, economic and environmental.

The pre-Budget report contains a commitment to taxing environmental bads and encouraging environmental goods. Most environmental groups are convinced that the use of empty homes would make a significant contribution to housing the nation, save the existing fabric of the buildings and reduce the toxic emissions associated with the manufacture and transportation of materials.

The current VAT system penalises those repairing or converting empty homes, as the full levy is charged, yet it encourages builders to attack green-field sites, as such development is zero-rated. When confronting the nation's massive housing problem, the previous Tory Government argued in Europe that, under article 17, the conversion of barns should be exempt from VAT, because there was a clearly defined social reason. Goodness knows how they managed to get away with that: in the same year, 1994, local councils received 120,000 families as homeless, and only one of those families was rehoused in a converted barn.

My proposal is not new. There has been VAT exemption for social housing since 1977. It was agreed by the previous Labour Government that local authorities building new properties and refurbishing empty ones should be exempt, but in those days, local authorities were the main social housing provider and since then, the provision of social housing has expanded to housing associations and private enterprise, neither of which can benefit from VAT relief.

Housing associations have done a tremendous job in tackling the regeneration and refurbishment of our towns, cities and villages but, because of the full VAT, the homes, which are in the main provided for people on low incomes, have been more expensive to rent or buy. For low-income families or those wanting to move from welfare to work, high rents can often prove a barrier or a disincentive.

Some good work has been done. Local authorities have developed many empty homes strategies. In partnership with housing associations and private owners, they have devised many excellent initiatives and brought properties back into use. I was responsible for introducing an empty properties strategy in Rochester city council, and last year, I was proud to open the 100th empty home that, with grant aid and partnership, had been brought back into use—a decent home for a young family. Without the burden of VAT, we could have helped a further 15 families.

More can be done. VAT harmonisation would focus the energy and talents of our construction industry. At present, there is nothing to encourage investment in empty property refurbishment and every incentive to continue building on green-field sites.

Among the 767,000 empty homes in England are 230,000 that have been in disrepair for a year or more. The Empty Homes Agency, which has done so much good work, calculates that there are a further 250,000 potential homes in empty residential buildings, all of which, if put into repair, would attract VAT. Those homes represent £on of assets, yet they remain idle.

What is the bottom line? As my right hon. Friend the Chancellor puts the finishing touches to the Budget, perhaps he can consider what the change would cost. Between 1994 and 1997, 90,000 such homes were brought back into use, but at a high cost to tenants, first-time buyers and Department of Social Security budgets.

My proposal would cause an annual loss in VAT collection of around £125 million. Set against that, there would be an increased collection of VAT at 5 per cent. on new build. If our targets for new housing of about 176,000 homes a year, and for renovated properties of about 70,000 a year, were met, at least £200 million would go to the Treasury. There would be no loss to the Treasury.

House builders might oppose a modest levy of 5 per cent., and their representative organisations have no doubt lobbied Treasury Ministers, but I ask my hon. Friend the Economic Secretary to consider the observations of the Royal Institution of Chartered Surveyors. It reported that such a levy would not be a barrier to new housing provision.

Let us consider the value of arable land, at £3,000 an acre. That can increase to £400,000 if residential use is granted. It may just be possible to conceive that, within that profit margin, there is room to accommodate 5 per cent. The proposal meets the EC VAT law test. I am not arguing for zero-rating. I think that we have met the revenue test, and we have certainly met the environmental test. What, then, of collection? What of the administration and the red tape? How will that work?

Harmonisation is not problematic. It would rely on the issuing of exemption certificates in respect of homes that have been empty for a long time—for a year or more. All English councils already record such details as part of their council tax activity; this would ensure that the exemption would be properly applied.

Exemption certificates would not lead to the creation of tax loopholes in regard to refurbishment. They would not mean that everyone purchasing do-it-yourself materials—which contribute some £4 billion to expenditure—would be exempt; exemption certificates would not embrace such materials.

I ask the Government to explore my proposal. I know that the Local Government Association and Government regional offices would be anxious to help to devise a system that would create a simple exemption mechanism.

In directing the energies and skills of our builders—both large and small—to securing the best value for those investing in a sustainable resource, we must bear in mind that harmonisation of VAT on new build and refurbishment of empty properties creates a win-win situation. I think all hon. Members will find it odd, as I do, that a regime that seeks to allow member states to adjust VAT for clearly defined social reasons has not been harnessed to reflect our need to house the nation. The current arrangements offer little by way of sustainability. It is currently more economic to demolish homes and build new homes on the same site than to preserve and refurbish the existing ones. We are contriving to create a constructive vandalism that leads to the needless production of raw materials and emissions.

We are getting better at recycling metals, paper and other precious materials that we used to waste. Surely we can see the sense of recycling resources of more substance—wasted homes.

The proposals to harmonise VAT for the repair of empty properties have not come only from Labour Members, but from Opposition Members—and, moreover, from the Chartered Institute of Housing, the Civic Trust, the Campaign for the Preservation of Rural England and the Empty Homes Agency. As I said earlier, the Environmental Audit Select Committee, of which I am a member, has made similar recommendations.

I appreciate that, given the hour, the fact that I am a new Member and the fact that this is my first Adjournment debate, it is unlikely that my hon. Friend the Minister will disclose the Chancellor's decisions tonight, but I ask the Government to consider the issue seriously. I have tried to set out how harmonisation of VAT on new build and empty homes meets our sustainable development objectives. I believe that my proposal passes the test in relation to EC law, and there is certainly no loss to the Revenue; indeed, I think that there will be a net gain. It is workable, through the allocation of exemption certificates.

I ask my hon. Friend the Minister to evaluate my proposal—if not now, at a later stage. I think that there is considerable consensus in favour of it, and I ask my hon. Friend not to put it in the tray marked "Too Difficult".

3.8 am

The Economic Secretary to the Treasury (Mrs. Helen Liddell)

I thank my hon. Friend the Member for Chatham and Aylesford (Mr. Shaw) for his speech, which was all the more impressive given that he is a new Member and this was his first Adjournment debate. He must be very pleased with the amount of work that he has put in and in the ultimate product. I regret to say that my hon. Friend the Financial Secretary to the Treasury is indisposed, but she joins me in congratulating him on securing this debate. She and I agree that we should make the best possible use of our empty stock of homes. However, as I shall explain, using the value added tax system to achieve that objective is by no means as simple as it may first appear.

Before I clarify some of the important and very perceptive points made by my hon. Friend, it may be helpful if I explain the background to our zero and reduced rates. After infraction proceedings by the Commission against the United Kingdom, the European Court of Justice ruled, in 1988, that the scope of our zero rates was too wide. The court said that zero rates should apply only when there was a benefit to the final consumer, and that, in construction, they should apply only for clearly defined social reasons. The ECJ ruling resulted in changes for commercial property, but that is not the issue in this debate.

The United Kingdom took the view on domestic construction, which the Commission accepted, that to implement the United Kingdom's social policy, we were right to zero-rate the new construction of dwellings, residential accommodation and certain charity buildings.

Another important point is that construction of buildings for residential use has always been VAT-free, since the inception of VAT in 1973, whether built by local authorities, by housing associations or by private enterprise. The ECJ decision confirmed that practice. The United Kingdom was able to show that zero rating was for the benefit of the final consumer, and that it fell within the social reasons requirement of the second directive because it implemented social policy in housing matters.

Those buildings continue to be zero-rated under the arrangements provided by the sixth VAT directive. The arrangements permit member states to retain rates that were in existence in January 1991 and that fall below the minimum otherwise permitted by the directive. The directive also permits us to move away from the zero rate to a reduced rate of 5 per cent. or more. Theoretically, the United Kingdom could apply a reduced rate to the construction of all buildings that are currently zero-rated.

Hon. Members should be aware that we have agreed with our European partners that, once we have given up a zero rate, we will never reintroduce it. Similarly, we cannot introduce any new zero rates.

It may be useful to correct another misconception. The zero rating of barn conversions, which was introduced in 1994 by the previous Government, was not negotiated in Europe, as it was a relatively minor and legal change to an existing zero rate to include dwellings created for the first time from buildings used previously For commercial or non-residential purposes. It is important to make the distinction that it applied not only to barn conversions but to conversions using redundant factories, warehouses and hospitals.

More important in the context of my hon. Friend's comments, help was also targeted specifically at housing associations. A special rule allows them to convert old non-residential buildings into housing VAT-free, without having to comply with the condition applying to all other conversions that the property is sold.

My hon. Friend suggests harmonisation of VAT rates for new construction and renovation. I should mention the limitations on that matter. Repairs and renovations to all buildings are, and always have been, taxed at the standard rate. Goods and services that are currently standard-rated are not covered by the arrangements provided by the sixth directive. The relevant law is contained in annexe H of the sixth VAT directive, which lists goods and services to which reduced rates may be applied. Category 9 on the list is the supply, construction, renovation and alteration of housing provided as part of a social policy. The last few words are especially important. A general reduced rate for all housing is not permitted. It is permitted only for housing provided as part of a social policy". We understand that phrase to mean housing provided for the less well-off, as part of a Government's social policy, such as local authority housing and housing provided by housing associations. Housing in general cannot be said to be provided as part of a Government's social policy. It is important to recognise the difference between the ECJ judgment in 1988, which accepted that zero rating of housing was for social reasons because it implemented social policy, and the requirement that annexe H is restricted to what we call social housing.

I should add that there have been several views over the years about the meaning of the words in category 9 of the annexe. We did think that, in theory, we could have a general reduced rate. In the context of introducing a reduced rate for the installation of energy-saving materials, we sought the view of the Commission. Its view is that a reduced rate provided under this category could be applied only narrowly, and should be specifically targeted to benefit the less well-off. After taking legal advice, we are now clear that it applies to social housing only.

My hon. Friend the Member for Chatham and Aylesford forcefully argued that there was a strong case for a reduced rate for renovation because it would encourage the regeneration of Britain's many empty homes. However, many empty homes are in private ownership and therefore would not qualify for a reduced rate. Any change in law would have to be negotiated in Europe. It would take a long time, and the chances of success would be low.

The House will realise from what I have said that a reduced rate is not the universal panacea that some people claim it to be. Furthermore, the European Commission recently examined the operation of the reduced rates and reported that reduced rates were a very imprecise tool for policy making, and should not be used as a substitute for direct subsidies.

That is very much in line with the Government's thinking on the application of reduced rates. In general, we believe that widespread use of reduced VAT rates is likely to result in unnecessary complication of the tax, to the detriment of business and the integrity of the tax. We do, however, believe that in some circumstances a reduced rate, such as the reduced rate for domestic fuel and power, may be a useful tool to tackle specific problems. The reduced rate for certain installations of energy-saving materials is another case in point.

My hon. Friend asks: what will it cost? Obviously there is a revenue issue. A recent estimate of the cost of reducing VAT to 5 per cent. for all house renovations was £1.1 billion. Even combined with a reduced rate on new construction, there would still be a very substantial loss to the Exchequer, which would have to be made up by increased taxation elsewhere.

It would be very easy to rush headlong into introducing measures that sound like good ideas. Let us be clear in our mind about the consequences of introducing a harmonised reduced VAT rate for housing. VAT might then become chargeable on new social housing. Only renovations permitted under annexe H would enjoy a reduced rate from the current full VAT rate of 17.5 per cent. It is important to reiterate that work on all other existing housing will continue to be rated at 17.5 per cent. That will create new borderline difficulties between different types of housing, which will become subject to different VAT rates.

I fully understand, and am sympathetic to, the views of my hon. Friend, but I am not yet convinced that using the VAT system to address the issue of regeneration of empty properties is the right course of action. Furthermore, there is little hard evidence at the moment to support claims that a reduced rate would generate more jobs, lower consumer prices or counteract environmental effects to any real extent. VAT, even at a reduced rate, on new housing would be very unpopular with house buyers.

We should explore other options for achieving the objective of reducing the cost of renovating properties. The possible results of hasty changes are too uncertain. We do not want to risk leaving a legacy of VAT on new houses without fully considering all the options and all the likely pitfalls.

I assure hon. Members that the Government will continue to explore all possible means of addressing the issue. It will not be filed away where my hon. Friend suggested, although I am sure that he agrees that it is a difficult issue. I thank him for giving us an opportunity to explore the issues and congratulate him again on securing this important Adjournment debate.

Question put and agreed to.

Adjourned accordingly at nineteen minutes past Three o'clock.