Value Added Tax (Construction Work)

Part of the debate – in the House of Commons at 11:14 pm on 29th February 1984.

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Photo of Mr John Heddle Mr John Heddle , Staffordshire Mid 11:14 pm, 29th February 1984

I am most grateful to you, Mr. Deputy Speaker, for having selected this motion for a brief debate this evening, and I am especially grateful to my hon. Friend the Minister of State for kindly attending the House to listen to my remarks on this rather obscure-sounding motion on the EEC sixth directive on value-added tax on non-domestic construction work. I am also pleased to have the support of my hon. Friend the Member for Warwick and Leamington (Sir D. Smith), who takes a close interest in the affairs of the construction industry and I look forward to the contribution which—with your permission, Mr. Deputy Speaker—he wishes to make after I have spoken.

I begin by declaring an interest. It is a very obscure interest, but it is right that I should declare it. I am a consultant partner to a firm of chartered surveyors and although I do not know whether this is currently the case I have no doubt that at some time in the future that firm might have among its clients builders and pension funds and insurance companies investing directly or indirectly in real estate, which is the particular matter to which I wish to draw attention.

I should not seek to raise this matter on the Adjournment but for a somewhat sensational article in The Sunday Times, Business News section, of 13 November last. Its front page lead read: A Common Market move to force Britain to levy value added tax on commercial and industrial property development could put thousands of jobs at risk". The following Thursday 17 November, there was an article in the Financial Times which said: The European Commission is inquiring into the desirability of maintaining the zero value-added tax rating for commercial and industrial property development in Britain. This is a serious matter, and the purpose of my debate is twofold: first, to highlight this obscure but substantial threat to jobs in the private sector of the construction industry; secondly, to secure from my hon. Friend the strongest possible assurances that the Government will do all they can to resist that threat robustly. There is no doubt that if the threat were carried out, now or in the future, it would create a crisis of confidence in that most crucial sector of our economy, the construction industry, which employs the largest element of skilled labour in the country's work force.

Inevitably, the threat potentially comes from the European Commission in Brussels. If successful, it would abolish the zero-rating for value added tax at present applied to certain types of construction work. I stress the word potentially because, in the words of the illustrious and, sadly, late-lamented coach of the victorious 1971 British Lions team in New Zealand, Carwyn James, "I am getting my retaliation in first." It is important to put that on the record.

No doubt, my hon. Friend will tell me in his reply that no formal proceedings have yet been taken by the Commission, and I hope that he will be able to assure me that they never will be taken. However, we know that informal signals have been transmitted across the channel from Brussels to the effect — in the Eurojargon that seems to crop up in our parliamentary proceedings from time to time—that it is forced to consider what are called infraction proceedings against the United Kingdom for our VAT zero-rating of non-residential new construction work.

Since the introduction of VAT in this country more than 10 years ago, it has been clearly established and accepted on both sides of the channel that all new construction work should be zero-rated for VAT purposes. Goodness knows what our constituency mailbags would be like if we woke up one morning and found that new homes, domestic construction work, had a 15 per cent. VAT price tag placed on them. I hasten to add that these infraction proceedings, which are the subject of immediate concern to the construction industry, have nothing directly to do with new homes or residential construction work. No. The proceedings would apply specifically to industrial and commercial building and also to all public works, which includes Government buildings, hospitals, schools, old people's homes, sheltered housing and other similar accommodation. Were it not for the fact that the construction industry is just beginning to emerge from the depths of a recession, much leaner, fitter and more efficient, it would not be pressing my hon. Friend the Minister of State as hard as it undoubtedly is.

Let us forget for the moment that all the housing investment for which the construction industry is responsible is not likely to suffer that threat in future. Let us concentrate purely and simply on the vast amount of investment, public and private, that goes into offices, factories, shops, hospitals and schools. About £8 billion of capital, public and private, is spent each year not only on new works but on major renovations and refurbishments. That activity creates jobs directly in the building process and indirectly in the related activities, employing about 1 million skilled people. That is the size of the market that could be vulnerable to any attempt by the European Commission to remove VAT from zero-rating on non-residential new construction work.

Let me clearly admit that not all that work would be hit. Indeed, the Building Employers Federation, anxious riot to exaggerate the potential damage that the Euro-threat could cause it, commissioned an independent consultants' report entitled "The impact of levying VAT on industrial and commercial buildings". It was produced by the economists advisory group. That group was commissioned to undertake some detailed analysis of what is undoubtedly a highly complex and often tortuous estimate. Everyone concerned has nothing but praise for the expert advice, guidance and comments that Customs officials gave within the limits of confidentiality to the consultants who prepared the report. As no doubt my hon. Friend will be able to confirm from his reading of that research, the ultimate impact of any move to abolish VAT zero-rating on non-domestic work is still a difficult matter to estimate accurately.

At the bottom end of the scale, if the EEC threat were to become a reality but were to be implemented with every possible mitigating factor and with a smooth transition in the market place, the consultants estimate that between £120 million and £175 million could be added to the net costs of construction. At the top end of the scale it was reckoned that around £350 million could be added if the threatened proposals were implemented with no Government attempts to mitigate their effects.

The issue goes much deeper and wider than the bare statistics. Above all else, the independent report shows that market confidence and the reaction of the construction market will play a crucial role. To take an example to illustrate my point, if every pension fund, insurance company and financial institution presently involved in construction developments in the United Kingdom decided to halt all its building activities for six months after the introduction of this complex VAT on new construction work in order to sort out the implications of that tax regime on the industry, it could cost the construction industry £1·25 billion worth of work which could put at risk, albeit temporarily, 100,000 jobs. That is the scale of the threat according to the economists advisory group.

We have lost enough jobs in the construction industry over the past few years. Much of the public sector work has been cut heavily so that it should play its part in bringing the economy back to life. The construction industry has lifted itself off the ground by boosting its private sector work load and has shown enterprise and new ideas and has taken risks. Private housing starts have risen and commercial building activity has also taken off again, particularly with the development of small workshop units to give first-time industrialists the opportunity to get on the ladder of opportunity. What the Government want to happen has happened. The private sector has taken up the challenge. Can we now afford to allow that precious private sector flower to wither on the vine of any failure on our part to defend the vital interests of the non-domestic sector of the construction industry against this threat? Can we afford to risk many of the excellent inner city initiatives by private sector institutions, backed by solid Government investment in recent years?

One aspect of concern to me is that, if a 15 per cent. VAT price tag is put on building works in those areas of the inner cities where the line between profitability and loss is so marginal, 15 per cent. will have to come off the value of the land. If the land has a negative value in the first instance, the money has to be made up to bring the inner cities back to life by increasing by 15 per cent. the amount that Government give to encourage the private sector to breathe fresh air into the inner cities through the urban development grants and the derelict land grants. It has a knock-on effect. I therefore seek the assurance of the Minister that he has taken full account of how damaging this threat could be, and that he will do all in his power to persuade the Commission in Brussels against bringing it to pass.

I ask the Minister to appreciate that, if this impost occurred, the effect on the public sector borrowing requirement could be considerable, bearing in mind the amount that the Government invest in schools, hospitals and old people's homes. Whereas £100-worth of new building is zero-rated today, if this threat remains, only £85-worth of bricks and mortar will be zero-rated tomorrow.