Clause 21

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

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Photo of David Gauke David Gauke The Exchequer Secretary 6:45 pm, 26th October 2010

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.