Good afternoon, Mr Caton. It is a pleasure to be back in business talking about the non-business use of business assets. Clause 19 has a series of reforms to tax law, which are complex and important in their impact.
It might be relevant to note that as we stand here talking about the Lennartz accounting procedure in respect of value added tax and other changes, my right hon. Friend the Member for Delyn, who would normally be here considering these particular measures, is on his feet in the Chamber talking about the Government’s proposal to remove vital money from pregnant women as they try their best to stay healthy. It is a shameful measure. Unfortunately, I am unable to attend the Chamber. However, I know that my colleagues on the Labour Front Bench are aware of my support as they valiantly try to rebut the worst excesses of the Administration’s nasty policy approach.
The clause seeks to amend the Value Added Tax Act 1994 to implement a set of changes that have become necessary as a result of European Union legislation in the form of technical directives. Government Members are always keen and punctilious when the European Union speaks; they immediately legislate to correct British law as a consequence. It is a hallmark of their politics and the clause is understandable, given their attitude to the European Union.
Under the clause, the current exemption, known as the Lennartz accounting mechanism, removes taxpayers’ ability to reclaim VAT paid on expenditure on land and property, such that it might be used for non-business or private purposes. Under the arrangement set out in the directive, the changes in the clause will remove the ability to use the current Lennartz accounting arrangements for ships and aircraft.
The use of Lennartz accounting for those assets is replaced by the ability of the taxpayer to adjust for subsequent changes in private use under the capital goods scheme—a related minor change to other parts of the 1994 Act—bringing the rules relating to the recovery of VAT on directors’ accommodation into line with European Union law and a set of other arrangements that followed the judgment of the European Court of Justice in 2007, although I might be wrong on that. Perhaps the Minister can tell me whether I have the year wrong in respect of those judgments.
As I understand it, the Lennartz arrangement enables a buyer to use assets for both business and non-business purposes, and to claim the input tax in full when the asset is purchased. It enables the buyer then to pay an amount of output tax—VAT, in this case—to relate to that non-business use at the point either of disposal or later, at a given point in time.
My understanding of the European Court of Justice decision, which was subsequently taken up in the EU Council directive, was that there was a suggestion that the United Kingdom and Her Majesty’s Revenue and Customs were not applying the arrangement correctly, that there was an excessive use of the arrangement within the UK and that therefore a change needed to be made to it.
Members of the Committee might not themselves have used a Lennartz arrangement for their own business and non-business purposes. If that were the case, I would have declared an interest. However, given that we are talking about rather wealthy individuals—those who purchase ships, aircraft or yachts—they might be more familiar with such practices than certainly my constituents would be.
However, it is important that we take the opportunity to correct the lacuna that might exist in the Bill. The clause probably attempts to do that, but several other policy changes were highlighted in the discussion on the directive that have given rise to an interesting set of questions. For example, let us consider the extent to which many taxpayers were wrongly allowed to use the Lennartz accounting arrangement and whether the Bill ensures that, when those taxpayers choose not to unravel those arrangements, there will be some obligation on them to continue to account for VAT thereafter.
The extent to which we should seek retrospectivity within our legislation is something that I have raised before in Committee. I am interested to know whether the Minister can explain the provisions in the clause that seem to ensure that the obligation to make those payments has always had effect, and that it should be treated as having always been in place. What studies have been done about the effect of that particular provision? Current legislation on the recovery of value added tax on a director’s accommodation becomes redundant, for example, as the directive and related European case law ensure that there is no entitlement to VAT recovery on the private use of such accommodation. I understand that the law in respect of those arrangements is due to be amended under the clause.
What assessment have the Minister’s officials made of the effect of removing the Lennartz form of accounting for businesses that might be affected by the change? There might be a difference in the case of those individuals who seek to use that particular accounting device, but then businesses might have a legitimate use for doing so. Has a regulatory impact assessment been made of that particular change because it could be both complex and burdensome for businesses making such changes?
Has the hon. Gentleman received many representations from external bodies advocating this particular set of cases? Was it a product of a set of tax working groups that he set up or was it the result of spontaneous representations from particular interested parties? Is it the case that those taxpayers who are not permitted to use that particular Lennartz accounting arrangement will have the parallel freedoms to apportion their economic or non-economic activities on the basis of use and intended use from the date of this announcement, or are we restricting ourselves to the Lennartz accounting arrangement? In other words, are there parallel arrangements for a wider set of taxpayers who might not fall under that particular definition of the Lennartz accounting arrangements?
Finally, it is my understanding that the Treasury will consider claims from taxpayers who have already entered into binding commitments for projects on the understanding that the Lennartz accounting arrangement will be available. Will the Minister say whether that is indeed the case and tell us how HMRC might deal with the issue? I have made a number of points, but in general we support the intentions behind clause 19.
It is a great pleasure, Mr Caton, to serve under your chairmanship once again. Clause 19 implements part of the EU VAT technical directive. As we have heard from the hon. Member for Nottingham East, for assets such as land, property, ships and aircraft, it ensures that the taxpayer reclaims VAT only to the extent that the asset is used for business purposes. Schedule 8 protects revenue at risk following a European Court of Justice decision.
By way of background, I should say that currently a taxpayer can recover all the VAT on the cost of an asset, even if the asset is used partly for private purposes. Over subsequent years, the taxpayer pays VAT back to the Exchequer in respect of its private use. That is known as Lennartz accounting, from the ECJ case of the same name, which allowed VAT recovery on private use of the asset.
Lennartz accounting gives taxpayers a cash-flow benefit by allowing them to claim all the VAT on the cost of the asset up front. Following representations from a number of European member states, including the UK, the technical directive was agreed. Lennartz accounting has been an area in which there have been considerable changes over the past few years, following high-profile ECJ decisions and a number of avoidance issues. The UK therefore supported the case for change.
Clause 19 and schedule 8 will mean that, from 1 January next year, up-front VAT recovery on the cost of land, property, ships and aircraft will be limited to business use, with no recovery for private use. To help ensure a fair recovery of VAT over the life of the asset, the clause provides the basis for an adjustment mechanism to take account of changes in use. That will also be implemented at the same time by secondary legislation. HMRC has been working closely with external stakeholders to design an adjustment mechanism that meets business needs.
As well as implementing the EU VAT technical directive, these changes also protect revenue at risk following an ECJ decision—a Dutch case known as VNLTO. I shall attempt to help the Committee by giving the name in full: it is Vereniging Noordelijke Land—en Tuinbouw Organisatie.
The answer is no. The hon. Gentleman will be aware that that decision confirmed that many taxpayers in the UK have been wrongly using Lennartz accounting. To ensure that taxpayers do not attempt to use the decision unfairly, the changes ensure that those who have already benefited from the up-front VAT recovery afforded by Lennartz accounting continue to pay the VAT due back to the Exchequer.
The hon. Gentleman asked a number of questions, and I will try to deal with them. First, he highlighted that part of this legislation is seen to be retrospective. It is worth pointing out that the revenue protection element of the legislation ensures that VAT due under existing Lennartz accounting arrangements is protected and paid to the Exchequer. These rules simply maintain the status quo and are deemed to have always been in effect. That ensures that taxpayers who embarked on Lennartz accounting arrangements before the change of policy in January 2010 continue to pay VAT that is due back to the Exchequer. Such taxpayers, having benefited from generous VAT recovery, should not be able unfairly to avoid paying VAT that would otherwise be due as a consequence of the VNLTO case. To answer a point of information, I should say that the decision in that case was delivered in 2009, while the case was listed in 2007.
The hon. Gentleman also asked about how businesses will be affected, whether there has been consultation on that matter and whether an impact assessment has been prepared for the measure. HMRC has been consulting on the detail of the changes, which will be contained in secondary legislation. Until that detail has been finalised, it is not possible to quantify costs and benefits and, therefore, to prepare an impact assessment.
A full impact assessment is expected to be published on the implementation of the secondary legislation, which is likely to be made and laid in December. HMRC has consulted us informally on the relevant part of the EU VAT technical directive. There was general acceptance of the proposed changes. HMRC continues to discuss the implementing regulations with external stakeholders and the representative bodies. I understand that, to date, there has been positive engagement and enthusiasm for simplifying the rules for the new adjustment mechanism.
The adjustment mechanism will cater for changes in business use over the economic life of the asset, and, as I said, it will be introduced by secondary legislation. It will operate as part of the existing capital goods scheme, so taxpayers do not have to deal with two separate adjustment mechanisms. That will ensure overall a fairer covering of VAT on costs that take into account the use of the asset over the economic life.
Finally, there is a minor related technical amendment, deleting current law on VAT recovery for directors’ accommodation, which is now no longer necessary as a result of the other changes in this measure. Overall, clause 19 and schedule 8 ensure that VAT is recovered fairly and only in respect of business use. I therefore urge the Committee to allow the clause to stand part of the Bill.