Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

I take the opportunity to welcome the Paymaster General to our debate on this part of the Bill.

In essence clause 17 is enabling, designed to permit the redrafting of schedule 10 of the Value Added Tax Act 1994, which deals specifically with the taxation of buildings and land. As the explanatory notes to clause 17 of the Bill point out:

“The VAT option to tax land and buildings legislation in Schedule 10 to the VAT Act 1994 is one of the most complex parts of the VAT legislation”.

The eyes of the hon. Member for Wolverhampton, South-West (Rob Marris) are positively lighting up as he reaches for the explanatory notes. I can see that he is not about to disappoint us.

The chief reason for this degree of complexity has been the piecemeal addition to schedule 10 since its introduction, chiefly by means of secondary legislation usually designed to add anti-avoidance measures to the original schedule. For instance, as just a small sample of the changes over the past 12 years or so, we have seen the Value Added Tax (Buildings and Land) Order 1994, which was the first attempt to tackle lease-back and similar anti-avoidance schemes. Then, as a further example, the Value Added Tax (Buildings and Land) Order 1999 closed a perceived loophole in the earlier anti-avoidance provisions. The Value Added Tax (Buildings and Land) Order 2004 aimed to head off further avoidance schemes used by partly exempt businesses, which the Treasury perceived to be another loophole.

The accumulation of secondary legislation has made the amended schedule 10 increasingly difficult to interpret in practice, to a point where HMRC’s partial regulatory impact assessment, which was released to accompany that proposed rewrite, admitted with admirable frankness,

“Adding layer upon layer of anti-avoidance provisions on to legislation that also has to deal with the complexities of English and Scottish land law has led to complaints about its complexity and virtual incomprehensibility.”

Indeed, the introduction of the consultation document provided advice that should perhaps inform the whole of our proceedings, with the recommendation that

“taxpayers would benefit from tax law which is clearer and easier to understand, and HMRC would benefit from being able to explain the law more easily”.

Finding any member of the Committee who would contend with that would be difficult.

There appears to be a broad consensus about the need for schedule 10 to be rewritten. The consultation document, which was issued in December 2005, laid out the general lines along which this would be undertaken. Moreover, the Paymaster General helpfully wrote to members of the Committee on5 May, providing copies of the draft Treasury order that would in effect rewrite the schedule. Members of the Committee should have had the opportunity at least to glance at that, although there has not been an opportunity to consult the professional bodies, because that draft order has only just emerged.

In particular, I note that the draft order is now designed to come into force on 1 October 2006. We have a timetable for implementation.

Rob Marrisrose—

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

I will gladly give way to the hon. Gentleman. I do not know why it has taken him so long to rise.

Rob Marris (Wolverhampton South West, Labour)

As the hon. Gentleman knows, I like to be measured and brief in my comments. I am grateful to him for giving way.

The hon. Gentleman said that this rewritten schedule 10 had come rather late, on 5 May. It is my understanding that, as he has mentioned, that is a second draft following the December 2005 draft, and therefore it appears to me that there has been quite a bit of consultation—4 months’ worth.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

For the avoidance of doubt, I was not trying to be critical of the Treasury. It undertook what I actually think in this instance was quite a good consultation—I will make a few remarks about the consultation process shortly. I was not in any way trying to have a pop at Government Ministers; I was simply making the point that we now have the draft order but because it has only just come out we have not had as much time as we would have liked to scrutinise it in detail. However, I am not knocking the fact that it is based on an original consultation which came out in December—and which I think was well conducted. I hope the hon. Gentleman will appreciate that nuance.

Rob Marris (Wolverhampton South West, Labour)

Is the hon. Gentleman revealing to the Committee that he has not read this draft order rewriting schedule 10?

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

No, he is not, because he has read it. However, if there were any problem, I am sure I could rely on the hon. Gentleman to help.

In essence, the schedule is being rewritten in three areas: first, by outlining the effect of an option to tax and the exclusions to those options; secondly, by including the revised and now consolidated anti-avoidance provisions; and thirdly, by outlining the mechanics of the administration of the options themselves, including their territorial scope, timing, revocation, notification and the operation of so-called permission options. The process also involves the repeal of certain aspects of the old schedule 10 which have effectively become time-expired, and which are therefore no longer needed. Therefore, it is fair to say that in this instance the Government have repealed some outdated legislation, and we should give them some credit for that.

Therefore, so far so good, but there are still some general questions that arise about the proposed rewrite, and I should like to go through them in turn with the Minister. First, why does this have to be done by order, instead of being written into primary legislation, which is what schedule 10 itself is? As an Institute of Indirect Taxation briefing note pointed out:

“We think it would be more appropriate for amendment to primary legislation to be made by primary legislation, not secondary legislation. In the case of buildings and land, as the draft legislation has already been exposed for comment it is unclear why it cannot be included in the Finance Bill, rather than  including the best part of a page of enabling legislation, which will presumably have no use once the proposed Treasury order has been approved by the House of Commons.”

The Institute of Chartered Accountants has also expressed reservations about this process. It, too, has argued that such changes should have been brought about through primary legislation rather than by means of statutory instrument.

Brooks Newmark (Braintree, Conservative)

I was interested to read that the august institution, the Chartered Institute of Taxation, also commented. It said:

“We doubt whether the suggested changes will have any impact on lay persons, so the only people to benefit are likely to be advisers.”

That is a concern, because it is important that whatever changes are made are sufficiently clear, so that lay people can understand the proposed changes.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

I thank my hon. Friend for that point. As I will discuss, the law has been particularly complex in this area, and that has been a particular challenge—for instance, for small businesses. Therefore, my hon. Friend makes a valid point.

I think it is fair to say that what has been produced is simpler and less complex than what it replaced, and the Government should be given credit on that point. However, my specific question to the Minister is: why were they not in a position to do that by primary legislation? Why did the Government decide to do this by secondary, rather than primary, legislation? Was it because the revised schedule was not available in time, perhaps because the consultation—which I think was well conducted—only finished at the end of February 2006 so parliamentary draftsmen could not come up with a proposed new schedule in time to include it in the Finance Bill when it was published on 7 April? I would accept that point, but I would then ask another question: could the Government not subsequently have tabled a new schedule to the Bill in Committee and put the proposal into primary legislation, rather than relying on an enabling clause and a subsequent statutory instrument? Is there a technical reason why the Government have done that? It would be helpful to have an answer from the Paymaster General when she replies to the debate.

Stephen Hesford (PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office; Wirral West, Labour)

I should like to raise the hon. Gentleman’s quotations from the two institutions with the VAT and duties sub-committee of the Law Society, which said:

“The Law Society welcome the proposal to rewrite schedule 10 VATA 1994 in more accessible language and look forward to reviewing the draft statutory instrument to give effect to this proposal.”

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

I thank the hon. Gentleman for his intervention. Far be it from me to provoke a dispute between the professional institutions, not least the Law Society, as I am always wary when dealing with m’learned friends.

Several bodies expressed reservations about why the Government acted as they did. The hon. Gentleman quoted the fact that the Law Society was interested in  seeing the draft order; that did not necessarily mean that it endorsed that way of doing it, just that the Law Society was looking forward to seeing it and will now have a chance to do so. I look forward to the Paymaster General’s response to that point.

Secondly, in respect of the consultation exercise, the Government consulted a number of interested bodies about the proposals, including, but not limited to, the British Property Federation, the British Retail Consortium, the Chartered Institute of Taxation, the Confederation of British Industry and the Law Society. The explanatory notes to the Bill state:

“A consultation document containing draft legislation, which might replace schedule 10 in its current form, was published in December 2005. This was very positively received by business.”

If that is the case, can the Minister give us some idea of the types of responses that were received? Will she say specifically whether any additional changes were made to the draft order as a result of that consultation? In other words, will she give us examples of what was published in December having been amended to prove that the Government were listening to those whom it took the trouble to consult?

Thirdly, there is the effect of the changes on small businesses. Under the heading “Sectors and Groups affected” the regulatory impact assessment states that the changes will affect

“virtually all businesses registered for VAT in their capacity of landlord, tenant or owner-occupier.”

However, under the associated heading “Small Firms Impact Test”, the regulatory impact assessment states:

“It has not been possible to consult with small businesses before the public consultation stage, but small businesses often complained about the cost of professional advice incurred in relation to VAT land and property transactions. We will be taking soundings from small businesses alongside the formal consultation.”

Can the Minister give the Committee some idea what comprised the “soundings” of the small business community? How were they conducted and which organisations were involved? Can she show that some changes took place in the recently published new draft schedule as a result, particularly in relation to how it might affect small businesses?

This is an especially technical area of VAT law and there appears to be a consensus on the need to rewrite schedule 10. The Opposition do not challenge that and the Government have responded to it, initiating what appeared to be a good consultation exercise. They then published the draft order, which they hope will be in force in October.

To summarise, before we allow this enabling clause to stand part of the Bill, will the Minister tell us, first, why the Government did not use primary legislation? Secondly, will she provide examples of the draft order being informed by the consultation exercise and of changes having taken place since December? Thirdly, how was the small business community consulted and what changes have been initiated as a result?

I look forward to hearing contributions from other members of the Committee and I will listen to the Paymaster General’s no doubt thoughtful reply.

Rob Marris (Wolverhampton South West, Labour)

I merely want to congratulate the Paymaster General and her team on producing the  draft Treasury order in time for this debate. The Treasury is good at that. Too often when we are considering legislation there is a lack of draft orders but not when they are Treasury proposals.

I have one small question for the Paymaster General. Am I right in looking at page 18 of the draft Treasury order that there is a schedule to the schedule? Because if that is the case—namely schedule 1 to schedule 10—that is a new one on me in legislation.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I will extend the general introduction to the VAT section of this Bill and merely say that of course we welcome the simplification of one of the most complex parts of the existing VAT legislation and would echo concerns that have already been expressed.

If a consultation took place in December 2005 and was generally positively received I do not understand why it is not possible to get this primary legislation in the Bill. That is all I have to say.

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

I beg your pardon for being slow to stand up, Mr. O’Hara. I was lulled into a false sense of security in believing that lots of other Members would want to speak, although I was perplexed as to why they would want to. Just to remind the Committee, this is a rewrite of current legislation. It always worries me—this has happened before in finance Bills—that when legislation, particularly VAT legislation, is rewritten in the tax law rewrite style, it has often led to a misunderstanding, particularly from Conservative Members, that somehow new legislation is being introduced. I remember having to explain to a Conservative Member, who used to be a Minister and who is now in opposition, that all that had happened was that the legislation that he introduced had been rewritten into the tax law rewrite style and if he was shocked about the contents of the legislation I wondered how he had not noticed it when he introduced it in the first place.

Perhaps I could answer the questions posed by the hon. Member for Rayleigh (Mr. Francois) succinctly, in the spirit of the rewrite. The reason why this is a schedule by order is that the original legislation in 1989, drawn up under the Conservatives, and consolidated in 1994 by a Conservative Administration, provided new legislation for it to be done this way and a rewrite follows; otherwise it cannot be just a rewrite.

To answer my hon. Friend the Member for Wolverhampton, South-West, no it is not a schedule to a schedule; it is an order schedule, or a schedule to an order. I always fear when my hon. Friend gets up because I know that he studies all the papers assiduously and I fear that he will find something that I have missed—he often does. But I can reassure him on that point at least.

In terms of the responses and the changes to the two drafts, I am happy to take the general areas but I would say to the hon. Member for Rayleigh that, of the responses received in the consultation, The CBI welcomed the new format and considered it an improvement on the existing legislation, much easier to understand, and the British Property Federation welcomes the Government’s decision to rewrite schedule 10, believing that this is an “excellent  initiative”. The Institute of Chartered Accountants welcomes the rewriting of complex legislation to put it into plainer English. I will come in a moment to the differences, the points that were raised in the consultation and how I propose to deal with those in the order, having listened to the consultation, once I have given way.

Brooks Newmark (Braintree, Conservative)

As always I remain concerned when Ministers use selective quotes. I have a comment from the British Property Federation in response to this consultation:

“Notwithstanding our support for the government’s decision to rewrite legislation”—

the Paymaster General was absolutely right to point that out, but the comment continues—

“we do believe there are a number of improvements that might be made to the draft legislation.”

I would encourage the Paymaster General to talk to the British Property Federation to understand what those improvements might be.

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

I was just coming to those points. I am aware of them, and they will be reflected in the draft. We have returned to the point raised by the hon. Member for Rayleigh concerning the nature of the consultation and how things will change. I shall just briefly go through the small number of proposed changes. The original order was less positively received and I hope that in responding to these points, we have now dealt with that. Discussions are still going on, and the order will be dealt with by the affirmative procedure, so there will be ample time to ensure that the draft reflects people’s concerns.

I want to give hon. Members an absolute assurance: our purpose is to rewrite the legislation. The Department and my officials will do everything possible in that rewrite remit to ensure that we respond to those points. They basically fall into three broad areas.

Mr. Newmarkrose—

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

Perhaps the hon. Gentleman would allow me to tell him about the three broad areas that the consultation wanted us to consider and how I am prepared to deal with it. I will be happy to give way to him afterwards.

The first area concerns the anti-avoidance test. The hon. Member for Rayleigh touched on the complexities involved. I agree with what he said about passing piece after piece of anti-avoidance legislation; we often do not have a choice about that. The issue in question, which has been discussed in Committee before, concerned the definition of

“wholly or mainly for eligible purposes”.

That was to be changed to

“wholly or almost wholly for eligible purposes”.

For those who really want to study the VAT regulations, the original intention was to ensure that the provision reflected more closely the application of HMRC’s understanding of the meaning of 80 per cent. or more.

I propose a change to the draft legislation that will enable HMRC to define by tertiary legislation—a discussion is going on with those concerned about the rule—the 80 per cent. figure with a discretion to accept a lower amount; the point being that those in certain circumstances should be reassured that a lower figure could be taken.

The next major issue concerned the condition relating to non-residential buildings intended for use as dwellings and residential accommodation. That can be treated as outside the option to tax. We really do not need to discuss the option to tax, nor would we want to; it is complex. The current provisions cause problems because the supplier of the building, who has to decide whether to charge tax, faces uncertainty in knowing their customer’s intention. That has always been a problem.

A great deal of clarification was sought as to whether the proposed wording was insufficient to give that certainty. Therefore, I have decided to introduce a certification requirement with clear rules on timing and content of the certificates, so that the customer will give a certificate to the seller, indicating how he or she intends to use the building. That removes that uncertainty for the seller. If further work needs to be done to ensure that it works properly, there are always the guidance notes. I stress again that we want to get it right.

Another issue that emerged in the consultation is that when businesses opt to tax, they have to check whether the land is exempt. However, they have to go all the way back to 1 August 1989, which is quite a long way. I was asked whether that was fair or reasonable. Because it is a fixed date, I cannot change it; to do so would involve retrospection, and I am sure that Opposition Members would have something to say about that. None the less, such a period of look-back is difficult, so I propose limiting it to 10 years. If the hon. Member for Rayleigh wonders where that figure comes from, my officials advise me that it is the period of adjustment under the capital goods scheme. It works well for that scheme, and it seems sensible to adopt it. Those were the major points from the consultation.

In answer to the hon. Member for Braintree(Mr. Newmark), he can see that certification could help small businesses enormously, because if there was any question the Department would go to the buyer, not the seller. I promised that I would give way to the hon. Gentleman; if I have not answered his questions, I can do so now.

Brooks Newmark (Braintree, Conservative)

I am always encouraged when the Paymaster General tries to answer my questions. Unfortunately, I have to go back a bit. She said that the purpose was to rewrite schedule 10. As I see from the explanatory notes, and to reiterate a point made by my hon. Friend the Member for Rayleigh, the purpose of rewriting the schedule is to make its language clearer and easier to use. Once again, I reflect on the comments of the Chartered Institute of Taxation and its concern about the impact that the changes will have on lay persons. I want an assurance from the right hon. Lady that the changes will be in a format that is clearer and easier to use.

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

I assure the hon. Gentleman that it is being done. I am struggling with the idea that the bedtime reading of citizens of the United Kingdom and Northern Ireland might be schedule 10 to the 1994 Act on land and property options. Who knows? I would prefer something slightly lighter at that timeof day.

The hon. Gentleman is in danger of over-egging the pudding. I doubt whether the Chartered Institute of Taxation would put it that strongly. It knows full well who will use it. The tax law rewrite was established by a previous Government, it has proceeded under the present Government, and it is widely welcomed as delivering precisely the point that the hon. Gentleman now makes. He may remember that rather a lot of legislation is affected by the rewrite.

Mark Francois (Shadow Minister, Treasury; Rayleigh, Conservative)

My hon. Friend the Member for Braintree said that the British Property Federation still had some concerns. In fairness, the Paymaster General has given some thorough answers, for which I am grateful. However, the federation has one outstanding question on the definition of beneficial ownership of land and buildings. As the right hon. Lady will know, beneficial ownership is not always the same as the physical ownership of the land itself. It is a technical point, which follows from a High Court case Abbey National plc v. Commissioners of Customs and Excise in 2005. We have Treasury questions in the Chamber in a few minutes, so perhaps it would be sensible if, rather than reading all of this into the record, I were to write to the right hon. Lady so that she could look into the matter.

Secondly, because the order will, rightly, be subject to affirmative resolution, and because it will come into effect on 1 October, I take it that we will pass that affirmative resolution before the House rises for the summer recess and that, no doubt, the Paymaster General and I will be involved in debating it. Can she confirm that?

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

On the question of further observations from the British Property Federation, I am happy for the hon. Gentleman to write to me. I will ensure that my officials chase up any issues that need to be pursued. As to the date on which the order will be debated, it will not, alas, be fixed for the convenience of my diary or that of the hon. Gentleman, but will be set by negotiations through the usual channels. Clearly, the sooner we discuss the order the better. However, I also want to be sure to leave ample time for all those who have been consulted to express their views and to digest the way in which the Department is responding to them. I hope that we can proceed within a reasonable time. Having said that, I trust that I have answered all the questions put by hon. Members.