"except that, if the supply is treated as made on or after 1st April 1991, the value of it shall be calculated so that, to the extent only that grants and other supplies were made to the developer before 1st April 1991, the tax payable in respect of those grants and other supplies shall be calculated as if the supply had taken place on 31st March 1991.".'.—[Dr. Marek]
With this it will be convenient to take new clause 36—VAT: Developer's self-supply (No. 2)—after paragraph 6(2) of Schedule 6A to the Value Added Tax Act 1983 there shall be added
6(2A) Where the supply is treated as made by sub-paragraph (1) above, on or after 1st April 1991, the value of that supply shall exclude the value of all grants and the value of all taxable supplies set out in sub-paragraph 2(a) and (b) above, where those supplies were made to the developer before 1st April 1991.
6(2B) Where sub-paragraph (2A) applies, the value of all grants and taxable supplies referred to in sub-paragraph (2)(a) and (b) and excluded from the value in sub-paragraph (1) by sub-paragraph (2A), shall be deemed to be supplied for the purposes of sub-paragraph (I) on 31st March 1991.".'.
The Opposition have tabled these new clauses to remedy a fault that has occurred as a result of the increase in value added tax from 15 to 17·5 per cent. in the last Budget. It may be for the convenience of the House if I cover a little of the background so that it can appreciate the aim of the clauses.
The European Court judgment in June 1988 did not cover building land, although it covered non-domestic buildings. The then Economic Secretary, the right hon. Member for St. Albans (Mr. Lilley), who is now Secretary of State for Trade and Industry, in the Committee that considered the Finance Bill in 1989—I remember the occasion well—decided to abolish land exemption once it was clear that, as a result of the European Court judgment, the Government would be required to tax new domestic buildings. As a result, the developer's self-supply charge provisions were born and are now paragraphs 5 and 6 of schedule 6A of the Value Added Tax Act 1983.
Those paragraphs provide that, on completion of development, the self-supply charge is triggered and output tax is paid, based on the historic cost of land, together with the value of all goods and services. I have some quibbles about the historic costs of land which I believe should be on a different value, but that is neither here nor there in the debate on the new clauses. In practice, VAT is imposed only on the land element as goods and services output tax can be offset by an input tax rebate. The VAT levied on the charge may be treated as input tax subject, for example, to partial exemption and to the capital goods scheme provisions. However—and this is the crux of the problem—the increase in the VAT rate from 15 to 17·5 per cent. has given rise to an anomaly in cases where developers are exempt—for example, those developing schools and hospitals—and where work on those projects has taken place on either side of the 1 April 1991 deadline, when VAT was increased.
The land cost will be subject to VAT at 17·5 per cent. if the self-supply charge is triggered after 1 April 1991, but so will the goods and services. That is fine if the service was performed on or after 1 April 1991, as input tax can be reclaimed at the same rate. However, that is not the case if the goods were delivered or the services were carried out before 1 April 1991. Then VAT can still be reclaimed, but only at 15 per cent., while output VAT has to be paid at 17·5 per cent.
This is extremely complicated and I do not understand it. However, my hon. Friend said that developers would benefit. What kind of developers does he mean? I hope that it is not nasty property developers.
I seek not to make any distinction between nice and nasty developers. It is simply a question of equity, and the equity has always been that any developer, as a result of the introduction of the self-supply regime, ought to be able to recover his input tax for goods and services, and then have to pay output tax when the self-supply charge is triggered. The problem is that, because VAT was increased to 17·5 per cent., the amount of output tax may be greater than the amount of input tax.
My right hon. Friend may also care to dwell on the fact that if a future Government decided to reduce VAT the amount of tax that could be recovered by developers would exceed the amount of tax that they had had to pay. That would cause a general uproar as it would be manifestly unfair. The Opposition believe that it is unfair that allowance should not be made for this problem—which was probably unforeseen when the Government decided to increase VAT only a few days before the Budget was delivered, or so we are given to understand—for developers whose goods and services straddle both sides of 1 April 1991.
I do not want to prolong the debate because I am aware of the many new clauses and amendments with which we must deal. That being so, I shall be concise.
What is the solution? Happily it is a straightforward one, and the answer is apportionment. The Opposition, ever wanting to please and to help the House, have tabled not one new clause but two. I invite the Government to take their pick. The two clauses are worded differently, but they seek to achieve the same object. I hope that one of them will be acceptable to the Government. That being so, I hope that the Minister will regard one of them favourably and will accept it.
I accept that the hon. Member for Wrexham (Dr. Marek) has a point, and I am grateful to him for drawing it to the Government's attention. I wish to help, but this is a hideously difficult subject. I understand that that is accepted by the right hon. Member for Llanelli (Mr. Davies).
The self-supply charge was introduced only in 1989, so it is not surprising that there may be some teething troubles. I think that I am right in saying that the developers who are subject to the charge are the only people who pay value added tax who have, or have had, no choice about their tax point, which to my mind is probably the nub of the matter.
I am sure that the hon. Member for Wrexham will understand that the new clauses are not quite right. I do not criticise him for that, because if one thing is clear it is that the self-supply charge is extremely complex. As the new clauses are drafted, they would apply a 15 per cent. rate of VAT to all land acquired before the Budget, no matter how far in the future the land comes to be developed. I am sure that that was not the hon. Gentleman's intention. It would make no more sense to do that than to say that land acquired before June 1979 should always be liable to VAT at 8 per cent., whenever it comes to be developed.
The new clauses would apply only to the change in the VAT rate that has just occurred. That may or may not be the intention of the hon. Member for Wrexham.
I thank the hon. Gentleman for that clarification. He will wish to know, however, that I am advised that there are other, more technical, problems with the drafting of the new clauses. As it happens, it would not be necessary to introduce primary legislation to amend the self-supply rules. The Government have the power under section 35 of the Value Added Tax Act 1983 to amend the rules by order. It would be sensible, of course, to take time to try to get these matters right.
If the House is content, I am prepared to consider the subject again, and to write to the hon. Member for Wrexham. I cannot give a commitment, but I am happy to say that if we can be convinced that it would be fair and reasonable to amend the self-supply provisions governing the construction element of the charge, if it proves technically possible to do so and if—this is important—that need not upset other relationships within the tax system, I would propose to bring forward an order. If for any reason we come to the conclusion that that could not be done, I undertake to explain that fully to the hon. Gentleman. I hope that on that basis he will be prepared to withdraw the new clause.
I am slightly worried about my Front-Bench colleagues. I hope that they are riot backsliding from the faith. A previous new clause was designed to support manufacturing industry, and my hon. Friend the Member for Wrexham (Dr. Marek) slightly—I do not know whether this is possible—poured cold water upon it. The new clause that is now before us seems to support the property industry, which is quite dominant in Britain and which has done well over the past 10 or 12 years. I know that it is facing some difficulties now, but I shall not weep if it has over-borrowed or geared too much—I think that "geared" is the vogue word for borrowing. That is a matter for the industry. The Minister has promised some action, as I understand it, and if the new clause is refined and accepted it will support the property industry.
I have nothing against the property industry, but I wonder which pressure group briefed my hon. Friend. Whichever group it was, it did not draft the new clause very well according to the Minister, but it must have been a group representing property interests. I am rather worried. I read in the newspapers about the debates on Lloyd's in the Standing Committee on the Finance Bill.
Clearly, we do not believe everything that we read in the newspapers, but I hope that my hon. Friends on the Front Bench are not accepting the new age—or the new vogue—of market-based economies which, we are told, will solve our problems in the 1990s. I should have hoped that my hon. Friend would give more support to the new clause that favoured the manufacturing industry and that he would not have been so keen to support this new clause which, as I understand it, is aimed at and will eventually give some money to property interests.
I support the new clause. I do not agree with the right hon. Member for Llanelli (Mr. Davies) that there are good and bad property developers and that to chase and make a profit is necessarily bad in itself. Property development brings enormous investment into this country across the range of property—industrial, residential and commercial. It is a high-risk industry and, although profits have been made, there are also enormous losses and high interest charges, despite the reductions of recent months.
I welcome the attitude of the Opposition Front Bench in trying to create circumstances that are fairer for the property industry, and I must declare my interest. I am delighted that the Opposition are trying to correct an anomaly. I also welcome the Minister's constructive response. In addition to some of the changes that she is thinking of, I ask her to simplify the legislation. I also ask her and the Inland Revenue to be sensible about imposing misdeclaration penalties. The Chancellor mentioned that in the Budget, but self-supply is a legislative minefield for construction, development, land and buildings and I hope that the Minister will try to simplify the taxation regime in her future efforts.
I wish to probe what the Minister of State, Treasury said. She mentioned three possible scenarios adding to each the phrase "if technically possible". She will know that I am not wholly happy at the way in which Ministers are forced to accept the views of officials who deal with value added tax. For example, they—and not Ministers—have decided that VAT is to be imposed on Jaffa cakes, because they believe that they are not cakes, but biscuits. Ministers have no control over that. I ask my hon. Friend to take the decisions and not to let the mindless bureaucrats in Customs and Excise impose this decision on her.
I hope that my right hon. Friend the Member for Llanelli (Mr. Davies) will accept that we are passionately in favour of British manufacturing industry and of providing the prosperity that the country needs to survive, but I hope that he will also accept that we are equally as passionate about trying to be fair. From what the Minister says, I hope that we can leave the matter in her hands and that if anything can be done, she will see that it is done.
It would be a pity not to mention the domestic dispute on the Opposition Front Bench—let us hope that it simmers elsewhere. I thank my hon. Friends for their contributions and I assure my hon. Friend the Member for Hampstead and Highgate (Sir G. Finsberg) that Jaffa cakes are never far from my mind.