Clause 21

Finance (No. 2) Bill – in a Public Bill Committee at 6:45 pm on 26th October 2010.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Clause 21 amends group 8 of schedule 8 to the Value Added Tax Act 1994. The amendment changes the criteria for zero-rating supplies of aircraft and associated supplies. We broadly welcome the clause and have no problems with it, so we will not be pushing the Committee to a Division.

None the less, I have some quick questions to ask the Minister to clarify a couple of points. The current definition of a qualifying aircraft also extends to supplies made to state institutions, and that is preserved. What discussions has the Treasury had with suppliers of aircraft and of parts and services for aircraft and aircraft operators as part of the consultation on this piece of legislation? Has the Minister received any representations from individuals on this issue? What assessment has he made of the financial implications of this change for the aviation sector in the United Kingdom as a whole?

Again, we have no great difficulty with the clause. As has been indicated, we are, through EU law, requiring zero-rating on supplies of aircraft used by airlines operating for reward chiefly on international routes. The relief extends to supplies of parts and equipment for such aircraft and for certain services such as repair or maintenance. I wish to know whether the Minister has had any representations and to hear from him about the points I have made in discussing the clause.

Photo of David Gauke David Gauke The Exchequer Secretary

I welcome the constructive points raised by the right hon. Member for Delyn.

Clause 21 makes changes to the conditions that must be met before supplies of aircraft can be made at the zero rate of VAT. It also covers supplies of parts and equipment for such aircraft and certain services such as repair and maintenance.

We are required to apply the zero rate of VAT to a number of supplies connected with international transport, including supplies of aircraft used by airlines operating for reward chiefly on international routes. UK law applies the relief based on the aircraft’s weight and design by way of a proxy for the EU criterion, rather than by direct reference to the user of the aircraft. While that broadly achieves the intention of EU law, as international carriers tend to operate large aircraft, there is a mismatch at the edges. For example, purely domestic airlines also benefit from the zero rate, provided that their aircraft meet the weight test.

Following a challenge by the European Commission in 2008, the UK accepted that its provisions were not in strict conformity with EU law and agreed to amend the legislation.

The scope of the UK zero rate currently also includes supplies of aircraft made to state institutions, such as the Ministry of Defence, as the right hon. Gentleman has pointed out. The zero rate in respect of those supplies remains unaffected by the proposed changes.

Therefore, there will in future be two categories of supply that might be zero-rated: supplies of aircraft to airlines operating internationally, regardless of the weight; and existing zero-rated supplies of aircraft to state institutions. Although supplies to airlines operating chiefly on domestic routes, to non-airline businesses for corporate use or to individuals will now be standard rated, businesses normally entitled to recover VAT will be able to recover the tax charge under the normal rules.

The right hon. Gentleman asked about discussions with the industry and what help it is being provided with to cope with the change. HMRC officials met with industry representatives in August 2009 to discuss the changes, followed by an informal consultation between 1 October and 30 November 2009, to establish the impact on the various parts of the industry and to help determine workable solutions to any problems. In May 2010, HMRC produced draft guidance that it shared with the industry. Following feedback and a further meeting, revised guidance was circulated to representative bodies in June 2010.

It might also be worth highlighting that the measure is likely to affect a limited number of supplies—to low hundreds of businesses—as in most cases the status of the airline will be self-evident, as most contracts are with regular suppliers.

The industry would have preferred to maintain the status quo, but it understands that the UK had no choice but to comply with the Commission’s view. Consequently, we have progressed with the clause.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.