VAT (European Court Decision)

– in the House of Commons at 3:31 pm on 21st June 1988.

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Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury 3:31 pm, 21st June 1988

With permission, Mr. Speaker, I wish to make a statement about the judgment delivered by the European Court of Justice today in the case brought by the European Commission on certain of our VAT zero rates.

The court ruled that the United Kingdom was not in breach of its treaty obligations by zero rating private housing, animal feeding stuffs, seeds and live animals yielding food for consumption. However, it ruled that the zero rating by the United Kingdom of a number of other goods and services was not permitted under European Community law. In broad terms, these items are: the construction of buildings for industrial and commercial use, water and sewerage services supplied to industry, news services supplied to other than final consumers, fuel and power supplied to other than final consumers, and protective boots and helmets purchased by employers. I have placed the full text of the judgment in the Library of the House.

I should make it clear that this adverse judgment is based on an interpretation of existing Community law to which the United Kingdom gave its assent in 1977. It has nothing whatever to do with the Commission's proposals for the approximation of VAT, which are not law and could not become law without the unanimous agreement of all member states.

The Government will study carefully the detailed terms of the court's judgment, against which there is no right of appeal and with which it is obliged to comply. The Government will consult interested parties, including trade and professional bodies, and also charities, on how the judgment can best be applied in practice. Legislation to implement the judgment will then be brought before the House for approval as part of next year's Budget. I can give the House an assurance that no changes will take effect before 1 April 1989.

In the meantime, I am concerned to avoid the damaging effects of a period of uncertainty for the construction industry and its customers, and to mitigate the effects of the extension of VAT to non-domestic construction. I therefore have the following decisions to announce.

Non-domestic construction, the sale of new non-domestic buildings, and the sale of building land for non-domestic developments will be taxed at the standard rate of VAT from 1 April 1989. All contracts entered into before today will continue to be zero rated. Public sector construction programmes will be protected by allowing, where necessary, compensating adjustments to the relevant central Government expenditure provision. Full refunds of VAT on non-domestic construction will be available to health authorities and local authorities.

Owners of non-domestic property will be given the option to charge VAT on rents, and on sales of used buildings, from 1 August 1989. This option will apply to existing buildings as well as new ones. Where it is exercised, landlords and tenants will be able to reclaim VAT on input costs in the normal way. This means that, where buildings are occupied by fully taxable businesses, neither landlord nor tenants will be worse off. To protect tenants who are not fully taxable, any VAT on rents will be phased in over two years. For charities, the transitional period will be five years. I hope that it will be possible to publish draft Finance Bill clauses relating to non-domestic construction by January.

The estimated yield from the proposals that I have announced will be some £65 million for the initial year, 1989–90, rising to a full year level of £160 million in 1991–92. That compares with the full year yield of £425 million that would accrue from the tax if the measures of mitigation which I have just announced were not introduced.

A consultation document on the changes affecting non-domestic construction will be available in the Vote Office and Library when I sit down. A more general consultation paper on the other aspects of the judgment will be available shortly. Much remains to be considered and there will be full consultation by the Customs and Excise on the implication of the changes.

We find ourselves obliged by undertakings Her Majesty's Government gave in 1977 to impose VAT on non-domestic construction and certain other services. I have announced today measures to mitigate their impact and to minimise uncertainty. I assure the House that there will now be full consultation so that the necessary legislation can be properly considered and prepared for next year's Finance Bill.

Photo of Dr John Marek Dr John Marek , Wrexham

The whole country will be disappointed at the outcome of the European court's judgment. Yet again new taxes are to be imposed on the public against the wishes of Government and Parliament. However, is the Economic Secretary aware that we welcome the court's decision not to insist on the imposition of VAT on all building for housing, animal feed, seeds, and live animals used as food for human consumption. Before implementing the court's decision, will he consult all interested parties carefully so that appropriate transitional arrangements can be found and so that those with contractual obligations are not unfairly penalised?

As some building land is to become subject to VAT, how does the Economic Secretary propose to define it? Will he confirm that, although the construction of schools and hospitals will become subject to VAT, full relief will automatically be available for any and all VAT payable in the future by the authorities responsible for those schools and hospitals when constructing the buildings, and for any associated expenses?

Will the Economic Secretary undertake to ensure that any extra moneys necessary to pay VAT on fuel for schools and hospitals will be provided by the Exchequer? Will county councils be fully reimbursed for any VAT that they may have to pay on road construction? Does he intend that VAT to be paid on construction of railways will be paid for by the travelling public, or can he give an undertaking to the House that the Exchequer will reimburse British Rail for all extra VAT costs? Can he assure the House that the Channel tunnel construction, until completion, will not be subject to VAT?

Will the Economic Secretary go the Commission to try to obtain derogation for some or all of the items to be subject to VAT, or can he introduce a second lower tier? If that is not possible, will he try to obtain an agreement within the Council of Ministers for a fairer and more just interpretation of the sixth VAT directive so that items such as these and spectacle frames, which have been the subject of legislation in the past, can be free of VAT?

Does the Economic Secretary think it fair that the United Kingdom should pay all the costs of the court case, in spite of being vindicated in two important areas?

It is a black day when the taxation of the British people is decided by other than their Parliament. The Common Market can succeed, but it is not going about it the right way.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The hon. Gentleman suggested that there will be universal disappointment at the ruling. However, we have won on the most important issue of private homes, and that will be greatly welcomed. There will also be recognition that the fundamental commitment to the sixth directive was taken by the Labour Government in 1977. It ill behoves the Labour party to express disappointment now.

I have made it clear that there will be full consultation with all those affected by the decisions relating to the implementation of the points that I have made and the other items covered by the ruling. The definition that we propose on building land is that such land without planning permission for domestic housing will be subject to VAT, but we shall obviously consult on how that will be interpreted in practice. I assure the hon. Gentleman that schools and hospitals in the public sector will be fully reimbursed for any VAT that they may incur. County councils likewise are automatically reimbursed for all VAT on all items that they purchase. That will consequently apply equally to roads.

I imagine that the constructors of the Channel tunnel will also secure registration for VAT and be able to reclaim VAT. However, I will confirm that and write to the hon. Gentleman if there is any difference.

With regard to the hon. Gentleman's question about seeking derogation or a lower tier rate, any attempt to seek derogation from the European Commission would scarcely be credible since the Commission brought the case. As for the lower tier rate, we believe that it is far better to have a single positive rate and an extensive zero rate. We do not want to return to a complex system with multiple rates.

We understand that the Commission will not be seeking payment of its costs in the court case. That is the normal practice in the circumstances. We will have to pay our costs, the bulk of which are internal. Only some £7,000 of consultancy fees and counsel opinion costs were incurred.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

Is the Minister aware that he is absolutely right to stress that the decision does not affect the fundamental issue of zero rating? Will he take careful note of the court's view that the Commission does not dispute the legality of the zero rating system in general? May I congratulate my hon. Friend the Minister on stating that the right system is one with zero rating and a single positive rate? Will he fight for that in the political negotiations which are to come? In general, I believe that it is right that my hon. Friend has abided by the rule of law, even though that is the consequence of a decision taken by a predecessor Government.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I am grateful for my right hon. Friend's remarks. I confirm that we shall stick to a single positive rate and the extensive use of zero rating, as has been the practice. I believe that my right hon. Friend oversaw that system when it was introduced. It is correct that in the court case the Commission did not try to overrule our basic right to have zero rates. We welcome that.

Photo of Simon Hughes Simon Hughes Shadow Spokesperson (Education), Shadow Spokesperson (Health)

Will the Economic Secretary to the Treasury accept that the judgment seems eminently reasonable and that the Government are to be congratulated on arguing successfully for an exemption for domestic housing, which clearly is a case on its own? Will the hon. Gentleman therefore confirm that now there is no VAT—a policy which has been upheld—on domestic house new building but that there is still VAT on renovation, restoration, and the like? Does he accept that in the next Budget the Government's inner city policy should require further tax changes, in addition to the changes that the Minister has already announced, to give incentives to people to restore and to build in the inner city rather than equal encouragement to build on green field sites?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The hon. Gentleman will probably be in a very small minority in welcoming the judgment as a whole, although possibly he is harking back to the dead parrot manifesto of his erstwhile leader, who wanted VAT extended to almost everything. There will be no change to VAT on renovation and repairs in relation to domestic properties and we do not propose to make any changes.

Photo of Mr John Biffen Mr John Biffen , North Shropshire

When the legislation necessary to give effect to these somewhat contentious proposals is before the House and the House amends or rejects it, what then?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

Exactly the same consequences would flow as would always be the case if we failed to implement legislation passed to us from the European Community.

Photo of Mr Peter Shore Mr Peter Shore , Bethnal Green and Stepney

We have heard not so much a statement as a mini Budget. Is this not another brutal reminder of the extent to which the House has ceased to be master of its own affairs? Is it not a clear breach of faith? Were we not assured that the existing United Kingdom zero rate would continue until the Council, by a unanimous vote, agreed to adopt what it called a "Europe without fiscal frontiers"? Have not the procedures laid down by the Commission for review under article 28 simply been flouted and ignored? Is not the court acting ultra vires? In those circumstances, what obligation has Britain to carry out the court's ruling?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The right hon. Gentleman is correct in saying that the ruling is a brutal reminder of the decision taken by the Government of whom he was a member. He is also correct in saying that we will retain a zero rate. There is no question of the court acting ultra vires; it is intepreting the sixth directive that was agreed by the House and the Government in 1977. Any attempt to remove zero rates could be taken only with the unanimous consent of all member states, including this country.

Photo of David Curry David Curry , Skipton and Ripon

Does my hon. Friend accept that there will be great relief that the Government have acted so promptly in outlining the precise measures that they intend to take in response to the judgment? Nothing could have been worse than a long period of delay with uncertainty. Does he also accept that the construction industry will be especially pleased by the offer of an option for taxation and that the public spending targets will be upgraded to take account of VAT that the Government will now charge on their construction projects?

Will my hon. Friend remind the House that the mitigation measures have cost the Treasury a substantial sum? Will he speculate on whether the Opposition would have been in a position to grant such generous mitigation?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I am grateful to my hon. Friend for his remarks, the last of which is very apposite. I cannot imagine that a party committed to such widespread increases in public expenditure would have been prepared to forgo the large amount of revenue that we have forgone by mitigating the measures. I hope that the construction industry will welcome the decisions that we have taken today, although it will not welcome the ruling itself any more than we do. It sought—and we have endeavoured to provide in the statement—a delay before its implementation so that there would be time for consultation, protection of existing contracts, the option to rent and protection of public sector construction programmes. We have provided for all those and more, because we have also suggested that the procedure be phased in over a couple of years—five years in the case of charities—which, in fact, goes beyond what the construction industry sought.

Photo of John Taylor John Taylor , Strangford

Does the Minister agree that the ruling is a total routing of the Government by the European court? Is that why he has hidden the fact that the entire costs of the case have been awarded against the Government? Is it not true that this Parliament has lost because it has no option other than to accept the new legislation that the Minister will propose? Is it not also true that the people of the United Kingdom have lost because they will have to spend £160 million more per annum in higher costs throughout the land? Have not the Government surrendered their authority to an agency outside the United Kingdom?

As Northern Ireland has no local authorities other than district councils, what will be the position of education boards and of housing associations that provide ancillary facilities for elderly residents in their complexes? Will they, too, have to pay VAT?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The hon. Gentleman is not correct in saying that this is a complete routing. I have already said that we won on the crucial point of domestic housing. However, he is correct in saying that we have no option but to implement the ruling of the court, which is a consequence of the treaty obligations that we entered into in 1972 and the subsequent decisions taken in 1977 specifically affecting VAT.

In response to the hon. Member for Wrexham (Dr. Marek), I said that the costs were very small—only £7,000 of out-house costs. We do not expect to have to bear the costs of the Commission, which usually expects to bear its own costs.

I believe that education boards and housing associations in Northern Ireland will be protected in the same way as are comparable authorities in this country. We will, of course, be consulting as to the precise definition which is appropriate within the ruling for residential property, and what will constitute residential property in that context, and that consultation will apply throughout the United Kingdom. I welcome comments from Northern Ireland as well as from elsewhere.

Photo of Mr Richard Body Mr Richard Body , Holland with Boston

Further to the question of my right hon. Friend the Member for Shropshire, North (Mr. Biffen), if we are to adhere to the principle of no taxation without representation, are we not now on the way to transferring the fiscal powers of the House to that supranational institution which the House, by statute, has elevated to a Parliament?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The decision to transfer some powers of taxation to the European Community was taken much earlier. This is merely a consequence of it. No transfer of the House's powers to the Community can be made without the consent of the House. We have a veto in these matters.

Photo of Mr Rhodri Morgan Mr Rhodri Morgan , Cardiff West

Will the Economic Secretary undertake to consult his colleagues in the Department of Trade and Industry as to the effect of the ruling, particularly in regard to VAT on new commercial and industrial construction, and on the level of investment forthcoming in the next few financial years in Britain? Does he agree that that will have a particularly harsh effect on regions of high unemployment such as Wales? Will he consult the Department of Trade and Industry and his Treasury colleagues about whether the level of investment will now drop because of the combined effect of this ruling increasing the cost of construction of new building, the national non-domestic rate in areas where it will increase such as my own constituency in Cardiff, plus the South American-style inflation in the building industry in the past year? If that has a devastating effect on the level of investment, will he agree to reconsider bringing in investment allowances to compensate for the effect of the EEC ruling and to preserve the level of investment?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The level of activity in the construction industry in this country is extremely healthy; the industry is growing fast. We are determined that its prospects should be preserved, and that is why I have announced an extensive range of measures to protect its future. I believe that the industry will be able to continue growing well, nationally and in Wales. In particular, we have protected the position of the public sector.

The main burden of the extra tax which cannot be passed on or reclaimed from the Government will fall on industries such as the financial services sector, which is exempt from VAT and therefore cannot claim back VAT on the cost of inputs. That is an important industry, even in Wales, but it is not the principal industry in Wales, as it is in parts of England and Scotland.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

Contrary to what the hon. Member for Wrexham (Dr. Marek) said, is it not clear that the impact of this decision on the final consumer will be very limited, mainly because of the victory on private sector house construction? What will be the effect of the decision on the retail prices index?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

My hon. Friend is quite right. The effect of the decision on the man in the street will be negligible and unnoticeable. There will be no effect on his housing costs, and the effect on the retail prices index will be extremely small. When £160 million of extra tax is spread across the whole of consumer expenditure, it is a fraction of I per cent.

Photo of Mr Bob Cryer Mr Bob Cryer , Bradford South

If the Minister is right and Parliament has a lingering power of veto, why does he not invite Parliament to use that veto, and, instead of producing legislation imposed by the European court, why does he not produce legislation to repeal section 2 of the European Communities Act 1972 which would place beyond any doubt the power of this Parliament to raise money and decide expenditure, instead of accepting the continuing drift and erosion of our powers so that this place becomes something like a parish council and the European Community strips away all our powers?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

It ill behoves the hon. Gentleman to talk about losing our lingering power of veto since he voted in favour of that measure when it was brought before the House in 1976.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

That was on 29 November 1976. Unlike the hon. Member for Newham, South (Mr. Spearing), who voted against the measure, the hon. Member for Bradford, South (Mr. Cryer) voted in favour.

Photo of Tim Yeo Tim Yeo , South Suffolk

I warmly welcome the extended introductory period in applying these measures to charity. Is my hon. Friend aware that the judgment's consequences for charities are serious and that the annual expenditure on unrecoverable VAT of the 45 charity organisations which are members of the Charities VAT and Tax Reform Group will rise from £6·2 million a year to more than £12 million a year? Is my hon. Friend aware that the effect of this judgment on charities is the same as if my hon. Friend had announced an increase in the rate of VAT from 15 per cent. to 30 per cent.?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I pay tribute to the role that my hon. Friend has played in voicing the concern of charities generally about the impact of VAT before this ruling. I recognise the important consequences for charities of that ruling. Naturally, we shall consult my hon. Friend, and the organisations which he represents, to ascertain how best to deal with the consequences of the ruling, within its scope and latitude.

Photo of Mr Nigel Spearing Mr Nigel Spearing , Newham South

Does the Minister agree that if, in 1975, the British people thought that tax would be levied on public facilities, such as roads, railways and water, they might have given a different answer? Does he recall that the Prime Minister has made no statement on taxation of domestic water, which is in the next package which awaits the House? When the hon. Gentleman talks about a veto, will he correct himself and agree that, although the Government may have a veto under the treaty of Rome, at the moment the House has not?

To stop such problems arising in the future, would it not be better for the House to pass a motion saying that any future VAT package should be passed by an affirmative resolution of the House and not be entirely in Ministers' hands, even if it is in the Prime Minister's name? Is not such a provision entirely within the terms of the treaty of Rome, retaining those few powers that the House has left in that respect?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

None of today's rulings has any bearing on consumers. I do not think that if they had been known at the last election—I hope that I correctly interpret the hon. Gentleman's question——

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I do not think that if the rulings had been known at the referendum they would have had any impact on the outcome.

On the hon. Gentleman's remarks about the Government and the House, I stand corrected. He is right. If any change were to be made, it would have to he made in the manner that he suggests; but it would not necessarily obtain a majority in the House.

Photo of Mr Teddy Taylor Mr Teddy Taylor , Southend East

Does my hon. Friend recall that, when the House agreed to the directive in 1977—without my support—a clear assurance was given in good faith that this kind of decision could not be made because we had residual powers under article 26 of the sixth directive, provided the Council of Ministers unanimously decided to abolish exemptions? As the assurances in this case and many others are being overturned and, basically, breached by the various institutions of the Community, can my hon. Friend, who has given a splendid answer today, give us an assurance that the Commission has said that it will not seek any more cases of this sort, or does my hon. Friend foresee the power of the House being slowly eroded, not by what we or the Common Market do but by the institutions taking more and more power and authority?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

Under the sixth directive, the British Government were entitled to maintain zero rating where it was for a clearly defined social purpose and for the benefit of the final consumer. The court has ruled that these specific items, on which we lost, were not for the benefit of the final consumer. The court merely made a legal judgment as to whether those items fell within the directive, to which the House assented with that caveat and definition in 1977. Any changes in exemptions from zero rates of VAT which are not made on that legal basis in conforming to the legislation can be made only by unanimous decision of the Council of Ministers and, therefore, with our consent. That applies to any wholesale changes that anyone might seek to make, including those proposed recently by Lord Cockfield.

Photo of Alex Salmond Alex Salmond Deputy Leader, Scottish National Party

The Economic Secretary dealt at length with non-domestic construction. How closely has he analysed the impact of that, and the decision to impose VAT on fuel and power supplies, on industry? Will he undertake to examine the matter to establish whether particular industries or areas will be affected by the extension, and will he introduce measures in mitigation similar to those that he has announced for non-domestic construction?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The overall impact of VAT on fuel and power supplies for industry is comparatively small. The vast majority of industries affected will be able to reclaim the VAT that they pay as an input cost. Therefore, the decision will have no impact upon them except possibly a small cash-flow effect. The only major exceptions are the financial services industries, which will have to bear the cost of VAT on their fuel and power; they cannot reclaim it because they are exempt from VAT.

Photo of Mr John Heddle Mr John Heddle , Staffordshire Mid

My hon. Friend said that the effect of the judgment on the consumer would be nil. Does he not agree that, given time, the judgment will ultimately affect the cost of land upon which non-domestic buildings were constructed? In that context, will he reconsider whether two years will be long enough, given the length of the planning process? Similarly, will he have regard to the effect that the judgment may have on inner-city renewal—on mixed buildings, shops, offices, houses and flats?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I think that I said that the effect on the consumer and the retail prices index would be minimal rather than nil. We acknowledge that there is likely to be a full year revenue in 1991–92, when the charges are fully operational, of £160 million, which will obviously have to be paid for by someone. To the extent that it affects consumer goods, it will be paid for by the consumer. To the extent that it comes out of profit margins, it will be paid for by investors and shareholders. To the extent that it comes out of land values, it will be paid for by landowners. A two-year phase-in period is perfectly reasonable. The industry did not ask us for any phase-in period; we have gratuitously offered the two-year period, which we think will be beneficial. The period for charities will be five years to give them longer to adjust.

Photo of Ms Joyce Quin Ms Joyce Quin , Gateshead East

Does the Minister agree that the court's judgment as it affects protective boots and helmets is unreasonable, especially as to the final consumer—the employee—the equipment is vital? Will he assure the House that safety in factories and other places of work will not be jeopardised as a result?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I do not think that there is much point in criticising the reasonableness or otherwise of the judgment. It has been made and there is no appeal, and we have to try to implement it as sensitively as possible, using such discretion as remains to us. By and large, protective footwear and helmets are required by health and safety legislation. There will not be a fiscal penalty on employers who purchase them because they will be able to offset the purchase cost against VAT and reclaim it. It will not make a great deal of difference to them, although we should have preferred to have kept the original system.

Photo of John Redwood John Redwood , Wokingham

Does my hon. Friend agree that there is widespread feeling on both sides of the House that we have already surrendered too many powers and that we have gone too far in allowing the sovereignty of this House to be removed? Will he assure us that, unlike their predecessors, the Government do not plan to give away any more powers in negotiations on tax harmonisation?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

It is manifest from the response to my statement that the sentiments expressed in the first part of my hon. Friend's remarks are echoed on both sides of the House; that is a simple fact. I recognise that there is concern about these matters. We are certainly jealous of the powers of the House and, as regards the proposals on the table from Lord Cockfield, we have no intention of acceding to proposals that would restrict the right of the House to retain zero rates.

Photo of Mr Harry Ewing Mr Harry Ewing , Falkirk East

The Minister made a clever debating point. He has been briefed well. Can he tell us how the Tory Opposition voted in 1977, when the matter came before the House? Before he tells me that I also voted for the measure that night, may I confirm that. Having reversed the results of every other vote cast during that Labour Government's period in office, why do not the Government reverse that vote as well? I assure the Minister that he has my full permission to reverse that vote, and I shall help him to do so.

My hon. Friend the Member for Gateshead, East (Ms. Quin) made a specific point about safety helmets and footwear. Will the Minister give us an absolute assurance that the Government will watch developments carefully and that no damage will be done to health and safety at work? The Minister speaks eloquently about the construction industry, but some of us have a greater feeling for those who work in the industry than for those who own it.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I am grateful to the hon. Gentleman for his compliments on the quality of my briefing and his revelations about the inconsistency of his voting habits. The Government are not in the habit of standing on their heads that frequently and we do not intend to do so on this occasion.

The hon. Gentleman asked about how the then Opposition voted in 1977. From my examination of the records, they appear largely to have abstained.

I shall take up the hon. Gentleman's point about the health and safety implications of the protective clothing and helmets item and we shall make sure that health and safety objectives are not undermined.

Photo of David Heathcoat-Amory David Heathcoat-Amory , Wells

Will the Minister confirm that the permitted derogations for zero rating are not time-limited in any way? Will he also confirm that there will be no more court cases and that the unfortunate legacy of the last Labour Government is finally behind us?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

As far as we know, the Commission has no further disagreements with the existing structure of zero rates in this country. The Commission has clearly brought forth in this case all the aspects of the present structure with which it disagrees on legal grounds. My hon. Friend asked about the durability of our zero rates. As long as we insist on the retention of zero rating for exports, we can retain zero rates domestically as well. We have no intention of conceding that point while we wish, as we do, to keep the right to retain zero rates.

Photo of Mr Sydney Bidwell Mr Sydney Bidwell , Ealing, Southall

The Minister alluded to the Labour Government's bringing in VAT. Does he not agree that it was a Tory Government who almost doubled it and that the recent Budget made matters substantially easier for the rich? In face of his difficulties, would it not be a good idea to recommend to the Chancellor that in his next Budget he cuts the rate of VAT substantially? He should restore high income tax for those in the higher income bracket and substantially cut consumer taxation which affects the poor.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

One thing that my right hon. and learned Friend the Foreign Secretary did when he was Chancellor of the Exchequer in 1979 was to simplify the system so that we had just one positive rate of VAT instead of two rates of VAT and the multiple rates of purchase tax that we had prior to that. I am determined that we should not go back to a multiple-rate system of VAT. Whenever I think of it, I almost feel the shade of Sir Gerald Nabarro hovering over the House and imagine him raising all the absurdities that arise from multiple rates of indirect taxation. I entirely reject the proposal of the Labour Front Bench spokesman, the hon. Member for Wrexham (Dr. Marek), that we should have a lower rate of VAT alongside the present rate. I do not think that that would be helpful.

Photo of Mr John Taylor Mr John Taylor , Solihull

Does my hon. Friend agree that, regardless of the merits of the arguments about migration of powers, it would be far simpler to have VAT on everything at a lower rate than 15 per cent., and thus do away with all the contradictions and anomalies?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

That might have a brutal simplicity, but it is not a policy that appeals to the British Government.

Photo of Mr Ron Leighton Mr Ron Leighton , Newham North East

Does the Minister recall the manifesto of the Government in office at the time of the referendum, which said that no new tax would be levied on the British people without the support of British Ministers and the British Parliament? Is he not humiliated that this Parliament is being robbed of its powers over taxation? As that comes on top of Common Market interference with the Government's industrial policy in relation to the Rover Group, should we not increasingly seek the repeal of section 2 of the European Communities Act to bring those powers back to the House?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

It was the Labour Government who in 1975 held the referendum and gave the assurances. It was the same Labour Government who in 1977 gave their permission to the sixth directive under which this court case was heard. They fulfilled the claim that there can be no changes to the tax system without the assent of the British Government, but they then gave that assent.

Photo of Ian Taylor Ian Taylor , Esher

Will my hon. Friend reflect on the fact that the ruling shows that the British Government achieved a considerable success in winning their case for the exclusion of domestic housing construction, particularly as I understand that VAT rates are applied to that sector in other continental countries? Will my hon. Friend confirm that no VAT will be levied on private individuals for fuel and power? Will he also note that the judgment seems to comment favourably on the principle of zero rating, which is this Government's policy?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

My hon. Friend is absolutely correct. He is right to point out that domestic heating was the big and potentially painful item had we lost this case. I never doubted that we would win it. The position is now clear and the whole House and country will be relieved to know that on that issue we won. My hon. Friend is correct in saying that the European Commission never sought to impose VAT on fuel and power for individuals. He is also right in saying that during the case the European Commission accepted Britain's right to have zero rates and did not contest that right. The court seemed to endorse it.

Photo of Dennis Skinner Dennis Skinner Member, Labour Party National Executive Committee, Vice-Chair, Labour Party

If the Minister wants to complete the history lesson, why does he not refer to the fact that on 28 October 1971 it was a Tory Government, supported by the present Prime Minister, who dragged an unwilling Britain into the Common Market, along with such allies as Lord Jenkins, Shirley Poppins and the rest of them? Is he aware that some of us fought against that decision, which turned out to be an unmitigated disaster, and that in 1977 the Labour Government, bogged down with the Lib-Lab pact, went along with it? If the Minister wants to take the history lesson a bit further, it is no use rabbiting on about vetoes and all the other technicalities. The truth is that the only way to stop this happening is to get out of the Common Market and prevent this bureaucracy, this bankrupt Common Market—£5 billion in the red once again and wanting another £900 million loan from the British people this autumn—from running our lives.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I admire the hon. Gentleman, first, for his consistency and, secondly, for his willingness to criticise the Labour Government. I think that we can learn from both aspects.

Photo of Mr Michael Latham Mr Michael Latham , Rutland and Melton

Can we please not have any talk about this decision being welcomed by the construction industry? The industry will be appalled by the rate of 15 per cent. Why has my hon. Friend agreed to impose VAT on contracts as from tonight, although that provision is to be included in a Bill that will not be introduced until next year? That was not done with beer, and there is no possible justification for it.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I certainly did not suggest that the construction industry would welcome the ruling. I suggested only that it would welcome the decisions that we have taken to mitigate the impact of the ruling. The industry made mild allusions to the possibility of a lower rate, but only as an alternative to the option to tax, which was the first preference and the one for which we have opted.

Photo of Mr Michael Latham Mr Michael Latham , Rutland and Melton

But why impose it as from tonight?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

If we had not made it clear that contracts entered into before tonight are zero rated and that those after tonight by implication will not be, there would have been a tremendous incentive for people to bring forward contracts and there would have been a boom and bust in the construction industry.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The construction industry was very anxious to avoid the possibility of a boom and bust because of people rushing to complete contracts ahead of the next Budget or introducing new contracts ahead of the next Budget. We listened very carefully to the industry and introduced this provision at its request.

Photo of Mr Win Griffiths Mr Win Griffiths , Bridgend

Will the Minister confirm that all other countries run more than a single rate of VAT and that it would be possible for the Government to introduce a lower band of VAT? Is he saying that the Commission's proposals for the single market will be vetoed all along the line and all the time? Does he not believe that it would be far better if charities were given a complete derogation of VAT? The only reason for that not being done is that the Government do not want to do it rather than because there is a legal impediment to that process being undertaken.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

It is true that virtually all our partners in the Common Market have more than one positive rate of VAT. However, we consider that our system is simpler and more desirable. Also, it has a social benefit, in that certain supplies that are more likely to be consumed by those who are on low incomes tend to be zero rated. It is not, therefore, a regressive tax.

We shall not assent to Lord Cockfield's proposals on tax approximation because we do not approve of them. There is no question of having to introduce a veto because the proposals have failed to gain the support of other countries. They have been extremely widely criticised by other member states, many of whom have a range of difficulties over them. There is certainly no question of the Government vetoing the proposals on some occasions but not on others.

Photo of Mr Ian Gow Mr Ian Gow , Eastbourne

Is my hon. Friend aware that, despite the assurances that he has given that the Commission is now well satisfied with our system of value added tax, following the decision of the European court, Treasury Ministers will come to the Dispatch Box again and again over the coming months and tell the House that VAT is to be altered or extended in a way that is not approved of by Her Majesty's Government?

Is my hon. Friend further aware of the inconsistency of his statement? He said, first, that we are required to implement the judgment of the European court, and, secondly, that that implementation requires the approval of the House. There can be no requirement to implement if there is also the right of this House to reject what the Government propose.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I am sure that I did not express a view about the European Commission's mental state about our zero rates. I have no idea about its internal state of satisfaction with them. We are well satisfied with the present tax structure and we intend to retain it. Proposals for change may emanate from a variety of spheres, but they will always remain proposals unless they have the assent and the consent of this Government and this House. Under the European treaty to which we gave our consent—some willingly and some unwillingly—in the early 1970s, this House must consent to legal measures that are agreed to by the combined countries of the European Community. If the House failed to do so, there would be a constitutional impasse, the consequences of which would be very serious.

Photo of Austin Mitchell Austin Mitchell , Great Grimsby

Will the Minister confirm that when we accepted the sixth directive in 1977 we were assured that it precluded changes in zero rating without the unanimous decision of the Council of Ministers? Will he accept that this is a change of what is loosely called the Commission's mind? That change has been ratified by the European court, which is essentially just an instrument of European unity. Will the Minister confirm that we can throw out the legislation without it coming into force under section 2 of the European Communities Act 1972? If that is so, why does he not give hon. Members a free vote so that he can test how his hon. Friends feel about this grovelling abdication of Britain's rights?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

The hon. Member must take up with the Ministers who were concerned with the matter in 1977 any assurances that they gave in respect of the sixth directive. However, it has always been the case that it is only possible for us to introduce zero rates under that directive that conform to the criteria that they are for clearly defined social purposes and for the benefit of the final consumer. It is solely on their alleged failure to fulfil those criteria that the European Commission was able to take this country to court and, in some respects, win its case. In others it lost. It was unable to alter the law of the land or of the Community unilaterally, and any changes in the law will require the Government's consent and that of Parliament. It has always been the case in this country that laws emanating from this place must be interpreted as is appropriate by courts when there is any dispute as to their meaning.

Photo of Mr Robert McCrindle Mr Robert McCrindle , Brentwood and Ongar

In view of the Minister's comments about the effect of this measure on the financial services industry, was it correct for him to say that there will be no effect on housing costs? Is it not likely that banks, insurance companies and building societies will pass on their VAT commitments on the supply of gas, electricity and water, which will result in at least marginal increases in borrowing costs for those of us who are buying our houses on mortgages?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

My hon. Friend is correct and there could be a few arithmetically detectable implications of the kind he suggests. I do not believe that they would be detectable by the consumer because they would be so small as not to be measurable against all the other changes. The total revenue collected as a result of this measure, when it is fully implemented, is likely to be about £160 million per year. When that sum is spread over all the industries which will bear it, the overall effect will be very small, and it will not seriously alter the cost of housing or anything else.

Photo of Mr Anthony Beaumont-Dark Mr Anthony Beaumont-Dark , Birmingham, Selly Oak

Does my hon. Friend accept that many of us have a genuine personal respect for the fact that he has made for our country the best that he can out of a very difficult situation? However, we keep on being told that we are jealous of our powers, but in the next breath we are told that we must consent to this, that and the other. As the country is now being run, week after week, another regulation is brought before the House and hon. Members are told that there is nothing they can do about it. Ultimately, Parliament must decide who runs the country. Are we to be the United Kingdom or are we, by stealth and by the death of a thousand regulations, to become the "United States of Europe", which is something for which this country should not and will not vote?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I am grateful to my hon. Friend for his opening remarks. I agree that there is an excessive passion in some quarters of the Community to introduce harmonisation measures that are not always necessary and to pursue legalistic points which make no effective change to the amount of tax which people bear but merely alter the name by which it is known and from whose pockets it comes and to which it is then returned. We deplore such unnecessary changes, but they are the consequence of our adherence to the treaty of Rome. Unless my hon. Friend is suggesting that we should resile from that treaty, we must accept those consequences, while arguing with the Commission that it should not pursue too vigorously unnecessary harmonisation measures.

Photo of Mr Christopher Gill Mr Christopher Gill , Ludlow

Does not my hon. Friend deprecate the fact that, as fast as the Chancellor simplifies and reduces taxes, the Community appears to frustrate his efforts?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

I am not sure that this measure vastly complicates matters, although it creates a certain amount of tax churning, which is to no one's great benefit. I acknowledge my hon. Friend's basic point that it is far more important to simplify and reduce taxes than it is to harmonise items for which there is no international trade. After all, I do not imagine that many people export houses or buildings from this country, or that enormous distortion was introduced by our having a different system previously for taxing protective helmets from that which applied on the continent.

Photo of Mr Spencer Batiste Mr Spencer Batiste , Elmet

Is my hon. Friend telling the House that a problem arises as a result of the Labour Government failing in 1977 to understand the implications of their own legislation, or that it is a consequence of the European Commission subsequently changing its grounds in a way that could not be foreseen? If the latter is true, that is certainly a matter of constitutional importance. If the former, what other problems remain unresolved in this area as a result of the Labour party's inability to understand its own policy?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

It is always possible, with the benefit of hindsight, to have 20/20 vision. However, at the time it could have been foreseen that some cases might be brought under those aspects of the legislation specifically stating that any zero rating had to be in respect of a clearer defined social need and for the benefit of the final consumer. It might not necessarily have been possible to predict absolutely the court's ruling on all the items, but to avoid the possibility of any such court cases it would have been necessary at that earlier stage to have agreed to a wider permission in the sixth directive than that to which we assented.

Photo of Mr John Watts Mr John Watts , Slough

While undertakings entered into by a former Labour Government may oblige the present Government to seek the House's consent to extending VAT in accordance with the judgment, can my hon. Friend confirm that there is nothing in the judgment requiring us to apply VAT at the current standard rate? Could we not comply with the letter of the judgment by introducing a rate of 0·00001 per cent.? In this instance, are not the merits of the simplicity of a single rate system outweighed by the importance of the House insisting that its will to maintain zero rating as near as possible shall prevail?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

My hon. Friend is correct, in that the court has not ruled that we must apply the standard rate. It is up to us to choose, but the law applies a constraint in respect of which low rate will apply. It is stated in the directive that the low rate must be sufficient to cover all the VAT likely to be reclaimed on the inputs into the industry to which that low rate applies. It is difficult to calculate what the lowest rate could be, but I recently saw a study by Arthur Andersen and Co. suggesting that the lowest rate we could apply in those circumstances would he as high as 10 per cent. We see little advantage in having a second tier rate of 10 per cent. alongside one of 15 per cent. That would cause difficulties for business and industry, as well as boundary problems.

Photo of Mr Barry Field Mr Barry Field , Isle of Wight

Is my hon. Friend aware of the considerable concern there is in private industry and commerce at the inability to recover VAT, particularly among service industries, and the considerable privilege that local government enjoys in being able to recover VAT? Are not the concessions that my hon. Friend has announced this afternoon another example of the Treasury erecting a fence of privilege around local government and public enterprise to the detriment of private enterprise, which completely contradicts the Government's policy of privatising local government services?

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

My hon. Friend is correct, and those who are exempt from VAT often regret that they are unable to reclaim the tax on their inputs—though they probably welcome the fact that they do not have to pay the tax on their outputs. Local government has long enjoyed exemption. Many years ago an assurance was given that services financed from the rates would be reimbursed their VAT. That continues, and it automatically applies to the measures announced today. We have not given local authorities any special new privilege but have merely taken advantage of an existing one.

Photo of Mr Tony Marlow Mr Tony Marlow , Northampton North

The Government are proud, and quite rightly so, that they have made life simpler for business and industry, but what my hon. Friend has announced today is a bureaucratic nightmare. My hon. Friend says that it is a small one, but it is a bureaucratic nightmare none the less. The only businesses that will benefit from it are the legal and accountancy professions. My hon. Friend is also a democrat, and he knows that right hon. and hon. Members will vote for what they feel is correct.

Can my hon. Friend expand on the answer he gave to my right hon. Friend the Member for Shropshire, North (Mr. Biffen)? What happens if the House votes down a Government proposal on VAT? Will we all be clapped in irons by the European court? What will happen about the tax? Will it be applied or will it not be applied? Is the House sovereign or is it not sovereign? The House ought to know.

Photo of Peter Lilley Peter Lilley The Economic Secretary to the Treasury

My hon. Friend goes a little far in describing this measure as a bureaucratic nightmare. It extends the VAT system—which has its complexities, but which in other ways is a simple, structural tax—to an area where it did not apply before, or where it did not apply in full. We have introduced a number of transitional measures, which always creates a certain amount of complication. However, it will be possible for industry, by and large, to cope. It would certainly prefer the kind of measures that I have announced to automatically proceeding without the measures of transition and mitigation that I have announced.

As to the constitutional consequences of the hypothetical circumstances in which the House should vote against a fiscal measure required of us by the European court, the whole House must be aware that such action would create a constitutional impasse. I may be a democrat but I am not a lawyer, so I cannot elaborate. If I did so, you, Mr. Speaker, would rule me out of order.

Photo of Mr Harry Ewing Mr Harry Ewing , Falkirk East

On a point of order, Mr. Speaker. There is now genuine confusion because it is only during the last two or three questions and answers that it has become apparent that legislation is to be introduced into the House to back up the Economic Secretary's statement. In certain circumstances under the treaty of Rome all that is required is the Government's agreement and not that of the House. All I am asking is that it should be reinforced that legislation is to he introduced into the House and that it will be a House of Commons matter rather than purely a Government matter.

Several Hon. Members:

rose——

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

Order. I think that I can help the House. I listened carefully to the statement and I understood the Minister to say that new clauses would be introduced in the Finance Bill next year.

Photo of Mr Hugh Dykes Mr Hugh Dykes , Harrow East

On a point of order, Mr. Speaker. I was out of the Chamber during the later exchanges on the statement because I went to obtain a copy of the Customs and Excise document. It is not the fault of my hon. Friend the Economic Secretary, but the document was not available in the Vote Office until 4.22 pm whereas the Minister implied that it was available while he was speaking or would be available when he had concluded his statement.

On a different point of order, Mr. Speaker. Can you again guide and help the House? You may agree with me and other hon. Members that during education questions and Prime Minister's questions, and now during the statement, although the subjects are important, the questions and answers have been of exceptional length. Is not that a growing tendency that is preventing other hon. Members from asking their questions? I think that on this occasion I speak with the moral authority of someone who was not seeking to catch your eye.

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

I judged the statement to be of such importance that every hon. Member who wished to ask a question should be called and I did not curtail proceedings in any way. I cannot always promise to do that.

Photo of Mr John Biffen Mr John Biffen , North Shropshire

Further to the point of order raised by the hon. Member for Falkirk, East (Mr. Ewing), Mr. Speaker. I believe that what is promised for the Finance Bill next year is probably a pioneer in these experiences where the House is invited to validate a judgment of the European court. The point that I had in mind was not necessarily that it should be rejected, but that the House should make amendments, the House being satisfied that those amendments were within the spirit of the European court's ruling.

I seek your guidance, Mr. Speaker—obviously not now, but at some future moment, although the earlier this is resolved the better for the House—on how it is determined whether an amendment that is put down is within the spirit of the court's judgment and whether the House is entitled to take a view that that decision is consistent with the court's judgment without merely accepting the say-so of the Treasury Bench. May I leave the matter there, Mr. Speaker? It is a matter of substance for the House that should be resolved and adjudicated earlier rather than later.

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

I am not sure whether I can help. All I can say is that I shall consider carefully what the right hon. Gentleman has said.

Photo of Mr Michael Latham Mr Michael Latham , Rutland and Melton

Further to that point of order, Mr. Speaker. According to the statement made by my hon. Friend the Economic Secretary, the potentiality of the tax will be imposed on contracts signed after midnight tonight. Are we to assume that there will be no Ways and Means resolution, or any other vote of the House, before next year's Finance Bill Committee?

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

I cannot answer such a question.

Several Hon. Members:

rose——

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

Order. Hon. Members should have asked the Economic Secretary these questions when he was in a position to answer them. I am afraid that I cannot do so.

Photo of Mr Nigel Spearing Mr Nigel Spearing , Newham South

Further to that point of order, Mr. Speaker. This is a procedural matter, if not for you, perhaps you could tell us for whom, because it cannot be for the Minister. Following the point made by the hon. Member for Rutland and Melton (Mr. Latham), if the Minister is to try to impose a tax from midnight tonight, surely there must be either a constitutional provision or a Standing Order, which we have for the Finance Bill and the Budget resolutions, as I recall, which gives power for such executive action to be taken in advance of legislation.

The question that arises from the exchanges—not the Minister's statement—is what sort of constitutional mechanism exists, or what Standing Order there is in the House, which permits that executive action to be taken consequential to a European court judgment rather than consequential to a statement by the Chancellor of the Exchequer when he opens his Budget. I think that that is the point.

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

The House heard what the Economic Secretary said. I think that he said that new clauses were to be circulated to obtain the opinion of the House on this matter. I do not think that I can answer that question.

Photo of Richard Shepherd Richard Shepherd , Aldridge-Brownhills

Further to that point of order, Mr. Speaker. What we are asking is by what authority is taxation raised. The Treasury Bench tells us that the authority will come forward next year by amendment to the Finance Bill. We should like to know by what authority a tax is raised as of midnight tonight.

Photo of Mr Bernard Weatherill Mr Bernard Weatherill , Croydon North East

These are all questions that should have been put to the Minister rather than to the Chair. This is not a matter of order.

Photo of Dennis Skinner Dennis Skinner Member, Labour Party National Executive Committee, Vice-Chair, Labour Party

I think that your last remark, Mr. Speaker, was correct. You have been placed in some difficulty because one would have thought that by this time the Minister responsible, or his mate on the Front Bench, would have jumped to the Dispatch Box to remind the House how the Government will get over the 12-month period between the potentiality of taxes being raised from tonight and permission being granted by this sovereign House next year. If you will just cast your eye round the corner, Mr. Speaker—I know that you do not want to —there is a fellow there with a bit of paper in his hand who is anxious to tell the Minister something. He has now put that paper below the parapet. He has the answer that the Minister wants but he does not know how to get it to him and the Parliamentary Private Secretary has not been looking over there.