Members of the Committee will recall that the last Budget contained an important package of measures to deal with VAT fraud and avoidance. They will also be aware of some of the strides that we have since made in reinforcing the VAT system against abuse and revenue leakage. In the 2002 pre-Budget report, we announced immediate action to tackle a highly threatening avoidance scheme involving the sale of new freehold commercial buildings. It may help if I outline the background of the scheme and, therefore, of clause 20.
Normally, the supply of commercial land and buildings is exempt from VAT. However, the European Union's sixth VAT directive specifically deems the supply of new commercial buildings to be taxable, and in the UK we have traditionally taken the definition of new building to be one that is sold within three years of its construction.
VAT is usually due on the sale of a commercial building at the time of legal completion. However, in some circumstances, the final selling price is not known at that point, which can cause complications
in determining the VAT liability of the sale. Therefore, a trade facilitation measure was introduced in 1993 that allowed VAT to be declared at the time payment was received rather than at the legal date of the sale.
Regrettably, as unfortunately often happens, a measure introduced to help the majority of businesses has been undermined by a minority of businesses and their tax advisers, who saw it as an opportunity to exploit the rules and to avoid tax. They contrived to ensure that the final selling price on the new building remained uncertain. They then ensured that the bulk of the payment was made after three years, when the VAT liability of the building automatically changed from taxable to exempt.
Therefore, we took action to block such avoidance schemes in last November's pre-Budget report by amending the secondary legislation that governs the VAT treatment of commercial buildings with effect from 28 November 2002 in order to block future avoidance schemes and safeguard some £165 million that we estimated would be at risk each year if the scheme went unchallenged. In clause 20, we are taking the opportunity to strengthen and simplify anti-avoidance legislation. We are taking steps to ensure that it does not impose undue burdens on businesses that are not engaged in avoidance.
The clause provides that on sales of new commercial properties made on or after Budget day, the liability of payments made after three years will remain taxable and standard rated. In other words, all the uncertain payments for the freehold of a new building will be taxable if the freehold was granted on or after Budget day. Like the changes introduced in the pre-Budget report, the clause will also block avoidance involving the sale of vacant land and the subsequent construction of a commercial building. Deferred payments for the freehold of bare land will be exempt, subject, of course, to the option to tax, even if a new building is later constructed on the land.
As a consequence of the clause, the changes to the VAT regulations made at the time of the pre-Budget report will be considerably simplified and made less burdensome for non-avoiders. A separate statutory instrument was laid on Budget day to amend the regulations to do just that.
I have explained to the Committee that we took steps to block the avoidance scheme in the pre-Budget report. At that stage, we had recourse only to secondary legislation, which we laid. We estimate that the revenue at risk from future avoidance schemes is £165 million a year. Clause 20 puts the powers in primary legislation. That allows us to simplify them and to take away some of the burdens for non-avoidance, which we implemented because we had to use the second-best, but nevertheless immediate, instrument of secondary legislation. The
clause is a further demonstration of our commitment to tackling VAT avoidance in a well-targeted way.
Clause 20 relates to the time of supply of land transactions. The Economic Secretary has explained the clause thoroughly. Basic VAT law—for the record, paragraph 1(a) of schedule 9 to the Value Added Tax Act 1994—states that the sale of a freehold new building or new civil engineering work must be standard rated, regardless of whether the seller has elected it. However, by entering into sale contracts where payment of the price was delayed, sellers of new buildings or works could take advantage of section 96(10A) of the 1994 Act and VAT regulation 84(2) in its original form, which delayed the time of supply until payment of the price and made the sale exempt. That provision has been used in VAT avoidance and was partially dealt with by a statutory instrument in November 2002, which amended VAT regulation 84(2).
By inserting new section 96(10B), clause 20 lays down a general rule that if at the date of the grant—in other words, completion—the building or the work is new, the price will always be standard rated, even if payment is delayed. Having considered the Minister's explanation carefully, I regard the clause as reasonably sensible.
Question put and agreed to.
Clause 20 ordered to stand part of the Bill.