Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Before raising a point that the Charities Tax Reform Group has brought to my attention, I shall welcome the clause in general. The Government are right to introduce an extra relief for such building work. [Interruption.]

Mr Edward O'Hara (Knowsley South, Labour)

Order. There is rather a lot of subterranean noise in the Room. As we are picking our way through drastically changed circumstances, the Committee's co-operation would be appreciated.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Thank you, Mr. O'Hara.

The Charities Tax Reform Group is concerned about quite a technical point, which relates to the definition of accommodation in the context of building work. The Value Added Tax Act 1994 distinguishes two types of residential accommodation: ``dwellings'' and buildings

``intended for use solely for a relevant residential purpose''—

or RRP. In the context of building work, a dwelling must be ``designed as a dwelling''. Most communal residential accommodation is not sufficiently self-contained to qualify, so it is treated as RRP accommodation instead.

That can cover a range of accommodation types that are significant for charities. I am sure that you are aware, Mr. O'Hara, that relevant residential accommodation may be for people with learning disabilities, or people whose carers are having a break. A range of charities run such accommodation, which could include accommodation for people who require personal care because of old age, past or present problems with alcohol dependency, drug abuse or mental disorder. It could also include hospices or even residential accommodation for educational purposes.

The current law, with VAT on building work at 17.5 per cent., does not discriminate between dwellings and buildings for a relevant residential purpose. The problem with clause 95 is that, in reducing the VAT rate from 17.5 to 5 per cent., it introduces discrimination against buildings with a relevant residential purpose. I can exemplify that rather technical point in several ways.

The clause proposes that the 5 per cent. VAT rate will apply to building works involving renovation of dwellings that have been empty for three years or more—that is excellent—conversions of non-dwellings, commercial or relevant residential purpose buildings into dwellings, conversions of dwellings into RRP buildings, and conversions of dwellings resulting in a different number of dwellings. All building works with accommodation in those categories will benefit from the VAT reduction, but most RRP buildings will not. As I said, some will benefit, if they are conversions in the direction of a relevant residential purpose, but others will not.

For example, the VAT rate will make it cheaper to convert commercial premises to dwellings than to RRP buildings, and cheaper to convert an empty RRP building to dwellings than to renovate it for RRP use. That is an oversight and a mistake, and I am flagging up a technical point to the Government, rather than criticising them. That failure could result in absurdities, as is demonstrated by the fact that conversions from offices to flats, and from flats to RRP use, will qualify for the 5 per cent. rate, but conversions directly from offices to RRP use will not; instead, they will be subject to VAT at 17.5 per cent.

The current law treats dwellings and RRP accommodation without discrimination. To maintain that state of affairs, we would need provision in tax law to ensure that the new 5 per cent. rate applied to renovations of RRP buildings that have been empty for three or more years, conversions of commercial and similar buildings for RRP use, and conversions of RRP buildings resulting in a different number of units.

The Minister will agree that it would be wrong to exclude such buildings from the preferential rate, because they are being used for charitable purposes and could be used for the social inclusion purposes that the Government have in their broader agenda. Therefore, the Government should re-examine the point again—or, ideally, clarify in Committee today that they are happy to take it as read that all RRP buildings will benefit from the reduced rate, and that they will tighten up the laws to clarify that in due course. The Minister may feel that she needs to write to me on the point, but if she assures me that she will be writing in a positive way, I will not press the Committee to divide on the clause.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I am grateful to the hon. Gentleman for speaking to me about this issue just before the sitting started.

The changes do nothing for residential properties in the way that the hon. Gentleman suggested. A conversion of a non-residential building into an RRP unit already benefits from having no VAT burden, so there is no need for change there. There is no relief for renovations of RRP buildings just as there is no relief for general renovations, apart from for the special category of properties that have been empty for three years. The Government did not believe that we should introduce a general relief on all renovations, and we do not plan to make such a radical change. However, I listened carefully to the hon. Gentleman's comments and I know that he has had particular representations. I would like more time to consider his points, and I will ensure that my officials have discussions with the relevant organisation to determine whether a perverse incentive has inadvertently been put into the system. Naturally, we want to follow that up. I would be pleased to write to the hon. Gentleman when I have had time to examine it in a little more detail. I know that other members of the Committee, too, are interested in the issue.

Mr. Alun Michael (Cardiff, South and Penarth) rose—

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I shall give way to my right hon. Friend, who has a long history of interest in charities.

Mr Alun Michael (Cardiff South & Penarth, Labour/Co-operative)

I am grateful to my hon. Friend for giving way to me. Sometimes, those who are involved with charities view such issues differently from those who are dealing with them in terms of taxation or legislation. The concerns set out by the Charities Tax Reform Group were intended to be helpful rather than critical, as the hon. Member for Kingston and Surbiton (Mr. Davey) made clear. Will the Paymaster General respond to the points that have been raised in the terms in which they were raised by the group concerned, to try to provide clarification? It would be helpful if all members of the Committee were to receive that information; we would then be able to engage in helpful discussion with those who contact us.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I entirely accept the points that have been made by the Charities Tax Reform Group. It has been genuinely helpful in exploring the issues that are of concern to it, particularly when the Government undertook the review of charities taxation. Given our timetable, I will endeavour to reply as quickly as I possibly can to the hon. Member for Kingston and Surbiton and my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Michael), and also inform other members of the Committee.

My officials will discuss the issue again with the Charities Tax Reform Group. Obviously, in those discussions, we must clarify whether there is a problem. If there is not, further explanation and reassurance are necessary, but if there is, we must consider how to deal with it. As members of the Committee know, various vehicles are available to deal with inadvertent errors in the interval between Finance Bills.

I want to be helpful to the Committee, but I am sure that it appreciates that, rather than attempt a full explanation this afternoon, I would like to examine the point in detail to determine whether there is a real issue, or whether it would be wiser to ensure that full clarification is given to the Charities Tax Reform Group about how the measure will operate.

Question put and agreed to.

Clause 95 ordered to stand part of the Bill.