Fourth Standing Committee on Statutory Instruments, &c.


Monday 5 July 1993


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The Committee consisted of the following Members:

Chairman: Mr. Martyn Jones

Beith, Mr. A. J. (Berwick-upon-Tweed)

Berry, Dr. Roger (Kingswood)

Cash, Mr. William (Stafford)

Cope, Sir John (Paymaster General)

Garnier, Mr. Edward (Harborough)

Gill, Mr. Christopher (Ludlow)

Greenway, Mr. John (Ryedale)

Livingstone, Mr. Ken (Brent, East)

MacKay, Mr. Andrew (Lords Commissioner to the Treasury)

Milburn, Mr. Alan (Darlington)

Mudie, Mr. George (Leeds, East)

Roche, Mrs. Barbara (Hornsey and Wood Green)

Rooney, Mr. Terry (Bradford, North)

Smith, Mr. Andrew (Oxford, East)

Spicer, Sir Jim (Dorset, West)

Spicer, Mr. Michael (Worcestershire, South)

Spring, Mr. Richard (Bury St. Edmunds)

Ward, Mr. John (Poole)

Mr. R. G. James, Committee Clerk.

3 Fourth Standing Committee on Statutory Instruments, &c. Monday 5 July 1993

[MR. MARTYN JONES in the Chair]

Value Added Tax (Supply of Services) Order 1993

4.30 pm

The Paymaster General (Sir John Cope): I beg to move, That the Committee has considered the Value Added Tax (Supply of Services) Order 1993 (S.I. 1993, No. 1507). When a trader buys an item that is partly for business use and partly for non-business use, the VAT is apportioned so that only the amount related to business use can be offset as input tax. Sometimes expenditure at first appears to the trader and to the taxman as wholly for business purposes, but it turns out to be partly for non-business purposes as a result of a change of intention, or for some other reason. If goods are involved, a VAT charge on the non-business portion can be imposed under the Value Added Tax Act 1983. This order allows the same system to apply to expenditure on a service if it turns out to be partly for non-business purposes. It covers only those rare circumstances, but it is desirable and I commend it to the Committee.

4.31 pm

Mr. Andrew Smith (Oxford, East): As the Paymaster General said, the purpose of the order is to tax the private or non-business use of services if such use was not initially envisaged but there was subsequently a change to non-business use. I am advised that the order applies only when all the VAT on the supply of services has been treated as input tax and there has been no apportionment between business and non-business use. It applies, however, when there has been a partial exemption apportionment between taxable and exempt use. It would be helpful if the Paymaster General could explain to us the difference between the two. I shall take an example to ensure that both I and other hon. Members understand the statutory instrument properly. Let us suppose that the sole proprietor of a small business has an extension built on to his or her house, with the intention of using it for the purposes of the business only and recovers the input tax in full. If the business prospers and he or she decides to move to premises in the high street, the extension will then be put to wholly private domestic use. At present, there is no means of clawing back the input tax recovered on the building services, but the order provides the means of doing so by requiring the person to account for output tax on a deemed supply at the time the extension was put to private use. The question that is bound to arise is how that can be valued. Article 5 of the order states: "The value of a supply which a person is treated as making by virtue of this Order shall be taken to be that part of the value of the supply of the services to him as fairly and reasonably represents the cost to him of providing the services." That is a vague formulation I should be grateful if the Paymaster General would clarify how it is to be operated in practice. 4 The Paymaster General said that these are rare circumstances. Can we take it from that that the order will apply in relatively few circumstances? Most of the services to which this measure might apply are supplied periodically or continuously, so the adjustment in the apportionment would occur automatically through the usual assessment procedure. The order will apply to an up-front lump sum payment for construction work, or for computer software that is subsequently put to continuous use. As that is such a rare circumstance, why do the Government need to pursue the matter? Is there any real evidence of abuse of the current system? Does revenue leakage occur, or is the order simply a tidying-up exercise to remedy a theoretical anomaly? Does the provision, that the order will not apply if consideration is charged for the onward supply of the service, mean that a recipient, who is not a connected party, could avoid the application of the order by charging a notional consideration for the onward supply of the service? Charities that may be affected by the order have raised several points. They are worried that the order will place a new monitoring burden on them. They will have to ensure that they recognise the potential VAT charge on services bought for business purposes which are subsequently used for non-business purposes. Charities have asked whether the order should include a built-in, de minimis threshold, such as that which exists for the capital goods scheme. If that is not included, will an operational or de facto minimum exist in terms of the rules by which Customs and Excise will work? If not, trivial sums could cause much bureaucracy, worry and aggravation: Why does the order contain no time limit for the duration of the claw-back period? The process could go on for 20, 30 or 40 years, and some liability could still exist. It would be sensible to establish a time period beyond which attempts to recover the charge would no longer be appropriate. Perhaps such a period could be related to depreciation. Will depreciation of the value of the asset on which the VAT is originally reclaimed be recognised? Those are the key questions. They are important questions about an otherwise apparently innocuous order. I look forward to the Paymaster General's arguments in favour of the order. We can all understand the theoretical case. The acceptability of the order and whether we attempt to rally the massed ranks of the Opposition to vote against it, as a vicious imposition, depends on the right hon. Gentleman's response. It is important to close genuine tax loopholes. The Opposition are keen to support that principle. However, we can do without adding unnecessarily to the burdens and bureaucracy that are imposed on small businesses.

4.38 pm

Sir John Cope: I am more or less grateful for the hon. Gentleman's recommendation of the apparently innocuous—to use the hon. Gentleman's phrase—nature of the order. He was correct that the order applies only to cases in which the expenditure has all been treated as business expenditure in the first place. The hon. Gentleman gave a good example of a house, the extension of which was 5 originally for business purposes, but which is subsequently put to private use. That is an example of a case in which the order would work. The hon. Gentleman asked whether depreciation would be recognised and how the valuation would be made. In calculating the tax due, the taxpayer would use normal accounting conventions for depreciating business assets, or any fair and reasonable basis of valuing the cost to him of the private or non-business use. Each case must be examined on its merits. It would be a mistake to set down a firm method of valuation to apply in all circumstances, especially as they will be relatively few and far between. Minor or occasional private or non-business use will be treated as de minimis. Customs will not seek recovery in such cases. There is not, as the hon. Gentleman pointed out, a formal de minimis provision. I can assure him, however, and anyone else who is interested, that customs will not try to pursue all kinds of small claims in this way, nor will it wish to pursue matters over a long period. Plainly, depreciation will have written off many assets; it is extremely difficult to envisage anything being caught over 20 years, for example. However, to minimise complications, we have not burdened the order with a lot of elaborate rules. The hon. Gentleman asked about continuous supply as opposed to a single or large piece of expenditure. He is right to suppose that, with a continuous supply which starts off 6 as business use and subsequently becomes non-business use, the apportionment will apply to the later elements of the supply. This order would apply only when specific expenditure lasts for a long time. The hon. Gentleman asked about connected persons. If customs thought that there was an under valuation between connected persons, it could ensure that the open market value applied. That would ensure that there was no loophole in that respect. The hon. Gentleman is correct that charities are among non-business users—at any rate, in respect of most of their activities. As he knows, some charities operate businesses, too. I believe that the number of times when they will be caught by the order will be very few. Finally, the hon. Gentleman asked whether this measure is a tidying-up exercise as opposed to a response to specific cases. The answer is yes.

Question put and agreed to.

Resolved, That the Committee has considered the Value Added Tax (Supply of Services) Order 1993 (S.I. 1993, No. 1507).

Committee rose at eighteen minutes to Five o'clock.


Jones, Mr. Martyn (Chairman)

Cash, Mr.

Cope, Sir John

Garnier, Mr.

Greenway, Mr. John

MacKay, Mr.

Rooney, Mr.

Smith, Mr. Andrew

Spring, Mr.

Ward, Mr.