Clause 20 - Supplies arising from prior grant of fee simple
Finance Bill
9:45 am
Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)
Members of the Committee will recall that the last Budget contained an important package of measures to deal with VAT fraud and avoidance. They will also be aware of some of the strides that we have since made in reinforcing the VAT system against abuse and revenue leakage. In the 2002 pre-Budget report, we announced immediate action to tackle a highly threatening avoidance scheme involving the sale of new freehold commercial buildings. It may help if I outline the background of the scheme and, therefore, of clause 20.
Normally, the supply of commercial land and buildings is exempt from VAT. However, the European Union's sixth VAT directive specifically deems the supply of new commercial buildings to be taxable, and in the UK we have traditionally taken the definition of new building to be one that is sold within three years of its construction.
VAT is usually due on the sale of a commercial building at the time of legal completion. However, in some circumstances, the final selling price is not known at that point, which can cause complications
in determining the VAT liability of the sale. Therefore, a trade facilitation measure was introduced in 1993 that allowed VAT to be declared at the time payment was received rather than at the legal date of the sale.
Regrettably, as unfortunately often happens, a measure introduced to help the majority of businesses has been undermined by a minority of businesses and their tax advisers, who saw it as an opportunity to exploit the rules and to avoid tax. They contrived to ensure that the final selling price on the new building remained uncertain. They then ensured that the bulk of the payment was made after three years, when the VAT liability of the building automatically changed from taxable to exempt.
Therefore, we took action to block such avoidance schemes in last November's pre-Budget report by amending the secondary legislation that governs the VAT treatment of commercial buildings with effect from 28 November 2002 in order to block future avoidance schemes and safeguard some £165 million that we estimated would be at risk each year if the scheme went unchallenged. In clause 20, we are taking the opportunity to strengthen and simplify anti-avoidance legislation. We are taking steps to ensure that it does not impose undue burdens on businesses that are not engaged in avoidance.
The clause provides that on sales of new commercial properties made on or after Budget day, the liability of payments made after three years will remain taxable and standard rated. In other words, all the uncertain payments for the freehold of a new building will be taxable if the freehold was granted on or after Budget day. Like the changes introduced in the pre-Budget report, the clause will also block avoidance involving the sale of vacant land and the subsequent construction of a commercial building. Deferred payments for the freehold of bare land will be exempt, subject, of course, to the option to tax, even if a new building is later constructed on the land.
As a consequence of the clause, the changes to the VAT regulations made at the time of the pre-Budget report will be considerably simplified and made less burdensome for non-avoiders. A separate statutory instrument was laid on Budget day to amend the regulations to do just that.