First Standing Committee on Statutory Instruments, &c.



Monday 17 July 1995


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The Committee consisted of the following Members:

Chairman:Mr. Patrick Thompson

Booth, Mr. Hartley (Finchley)

Bruce, Mr. Malcolm (Gordon)

Carttiss, Mr. Michael (Great Yarmouth)

Heathcoat-Amory, Mr. David (Paymaster General)

Lidington, Mr. David (Aylesbury)

Martin, Mr. David (Portsmouth, South)

Pearson, Mr. Ian (Dudley, West)

Prentice, Mr. Gordon (Pendle)

Primarolo, Ms Dawn (Bristol, South)

Purchase, Mr. Ken (Wolverhampton, North-East)

Rooney, Mr. Terry (Bradford, North)

Sainsbury, Mr. Tim (Hove)

Simpson, Mr. Alan (Nottingham, South)

Smith, Sir Dudley (Warwick and Leamington)

Smith, Mr. Tim (Beaconsfield)

Temple-Morris, Mr. Peter (Leominster)

Touhig, Mr. Don (Islwyn)

Willetts, Mr. David (Havant)

Mr. M. Hennessy, Committee Clerk

3 First Standing Committee on Statutory Instruments, &c. Monday 17 July 1995


Value Added Tax (Input Tax) (Amendment) (No. 3) Order 1995 (S.I. 1995, No. 1666)

4.30 pm

The Paymaster General (Mr. David Heathcoat-Amory): I beg to move, That the Committee has considered the Value Added Tax (Input Tax) (Amendment) (No. 3) Order 1995 (S.I. 1995, No. 1666)

The Chairman: With this it will be convenient to discuss the Value Added Tax (Supply of Services) (Amendment) Order 1995 (S.I. 1995, No. 1668).

Mr. Heathcoat-Amory: The two orders form part of the legislation giving effect to the important changes in the VAT treatment of cars that was announced by my right hon. and learned Friend the Chancellor of the Exchequer in last year's Budget. The changes have been widely welcomed by the business community and will take effect from 1 August, the earliest practicable date. They coincide with changes to the vehicle prefix—again at a convenient time. Under United Kingdom law, tax on the purchase of most business cars cannot be recovered, even when the car is for business use. That restriction on VAT recovery is a simplified procedure for taxing the private use of business cars. It is straightforward and easy to administer but, under the current scope of the restriction, some leased cars are subject to double taxation. That occurs when the tax on the leasing charges cannot be recovered in full by the end user—typically, businesses in the financial sector or private individuals—so effectively they suffer double taxation. The proposed changes are intended to remove that distinction. They are a response to trade representations and will allow a major concession for British business. The details of the changes are, first, that from 1 August, VAT can be reclaimed on all cars purchased for exclusive business use. The main beneficiaries will be buyers of cars purchased for onward leasing. Businesses that have reclaimed VAT on a car under that provision will have to charge VAT on the sale when they resell it. Secondly, to take account of private motoring in leased cars businesses leasing cars will be able to reclaim only 50 per cent. of the VAT on the leasing charges that they pay, where there is private use of the car. This is a simplification measure 4 that avoids the complex and difficult procedure of taxing private use on a case-by-case basis. It reflects the fact that across the board, about half of motoring in business cars is private. Finally, although the changes will incur a cost to the Exchequer of £140 million in 1995–96 and f100 million in 1996–97, their effect on VAT revenue is neutral in the medium term. That is because leasing companies' entitlement to input tax is offset by two factors—first, businesses will have to charge VAT on cars subject to tax recovery which they re-sell, and secondly, VAT registered lessees will be liable to a 50 per cent. input tax restriction. I commend the orders to the Committee.

Ms Dawn Primarolo (Bristol, South): Good afternoon, Mr. Thompson. In general terms, the unblocking of irrecoverable input VAT on the supply of cars is welcomed. However, I should like to raise a number of points with the Paymaster General. A person purchasing a car after 1 April 1995 can recover the input VAT only if he can show that the car will be used wholly for a business purpose—that there will be no private use of the car by that person or his employees. While leasing companies will usually meet this test, it will be difficult for the trader to do so. We think that the test is too restrictive. Perhaps the Minister will comment on that. If an employee takes a pool car or demonstrator car home for one night, the trader will not be able to recover the input VAT. It could be contended that incidental private use of a genuine pool car or demonstrator car should be ignored in deciding whether the wholly business purpose test has been met. A new hitherto non-existent VAT block has been imposed. From 1 August 1995, a trader will usually be able to recover only 50 per cent. of the input VAT on leasing charges whereas before he could usually recover 100 per cent. I understand that to impose that restriction, the Government had to obtain a derogation from the European Union. I also understand that the derogation has been granted, but I have not so far discovered whether it has been published. To appraise statutory instrument No. 1666 and judge whether it is in line with the derogation, it is necessary to have sight of that derogation. Will the Paymaster General say whether it has been published and is available? The 50 per cent. block on VAT on leasing charges and the 100 per cent. block on input VAT on outright purchase are a rough and ready alternative to directly imposing VAT on the private use of business cars. It is arguable that a more precise regime would have been created if traders had been allowed to recover all input VAT, irrespective of whether there was an outright 5 purchase or a lease was entered into, but VAT was imposed on private use. The question arises of how to measure the value of private use, particularly where a charge is not made by the employee. It is suggested that the answer would be to use the scale figures which used to apply for schedule E purposes, or an update of those figures. The VAT position would then be consistent with that applying when an employer provides an employee with fuel for private mileage. In that situation, the trader has to account for ouput VAT calculated by reference to the fuel scale charge. Will the Paymaster General say whether he considered that scheme and, if so, why he ruled it out? To obtain the derogation I have mentioned, I understand that the United Kingdom had to agree no longer to apply VAT on charges made by traders to employees for private use of a car. That is to avoid a double input block, which would appear to be contrary to European law. Although the position from 1 August 1995 is logical—there is at most one VAT block—that raises the questions whether the United Kingdom law applying up to 31 July 1995 is in accordance with EU law. Under our current law there is arguably a double VAT block in certain circumstances, for example, on purchase of the car and if the employer makes a charge for private use. Is our current law in contravention of EU law? It is arguable that the statutory instruments will result in a distortion in the market for the provision of cars. As there is only a 50 per cent. VAT block on leasing charges while the block is usually 100 per cent. if the trader buys the car outright, in future it will be more attractive to traders to lease cars that cost less than about £20,000, rather than purchase them. It that the Government's intention? On the other land, traders should be able to circumvent the VAT disadvantage by setting up a group leasing company which purchases cars and then leases them to operating companies in the group. However, this would involve some expense and would be complicated to implement. The statutory instruments were not laid before Parliament until 30 June 1995—even if the changes were foreshadowed in November 1994—and they come into effect on 1 August. Admittedly, draft statutory instruments were published in December 1994 as part of the consultation process, but it is arguable that the final instruments should have been tabled well before 30 June to allow appraisal by interested parties and by Parliament. Why did not that happen? Incidentally, statutory instruments laid before Parliament are not generally available from HMSO for several weeks for wider scrutiny. The orders will result in a greater administrative burden on the second-hand car trade, which will generally have to operate two VAT schemes—the 6 existing margin scheme for pre-August 1995 cars and VAT on the whole price for cars on which the previous vendor obtained input tax relief on purchase or importation. I would be grateful if the Paymaster General would comment on those matters today or write to me if he requires more time.

4.41 pm

Mr. Heathcoat-Amory: If I do not manage to answer all of the hon. Lady's points, I shall write to her. She mentioned a legal challenge and asked whether our procedures and allowances were in accord with EU law and the relevant directives. That has been the subject of a number of appeals before VAT tribunals. I am pleased to say that three representative appeals were disallowed on 6 July by the VAT tribunal, which vindicates our view that the input VAT restrictions applied to cars are compatible with EU law. Those cases can, of course, be appealed and if they are we shall continue strongly to defend our position up to, if necessary, the European Court of Justice. The tribunal decisions appear to vindicate our position. The hon. Lady asked if the text of the derogation by the Council of Ministers was available and also asked about the timing of the laying of the orders. Laying had to await the derogation, which the Council approved only on 29 June. As far as I know, the derogation has not been published, but the Scrutiny Committee has been kept informed about its progress and has concluded that no matter of legal or political importance was raised by it. The Committee has waived its right to a scrutiny reserve. An advance copy of the derogation was sent to that Committee, which bases its judgment on the document. I hope that this Committee will accept that view. The orders are important, but the timing of the derogation meant that full scrutiny was not possible. The hon. Lady asked also about the 50 per cent. block on a lease. It is a 50 per cent. block and not a total allowance because the order now becomes the proxy for assessing private use. Before, there was a 100 per cent. block on the purchase of the car. When a car was purchased, none of the input tax was recoverable by the leasing company. Now, the tax becomes entirely recoverable and it is therefore appropriate to move the block to the onward lease to the individual or consuming company, but only at a 50 per cent. level. That is an approximation for business use. Some might prefer a case-by-case method of assessment, but that would involve an enormous compliance cost obligation on industry and small businesses, as well as on Customs and Excise. It has therefore been decided to have an approximate formula, which obviates the need for case-by-case scrutiny and assessment. That is common practice in the European Union. 7 The final vindication of that approach is the fact that the orders have been warmly welcomed by leasing companies and by the trade. Indeed, I am grateful for the hon. Lady's overall welcome to what we are doing this afternoon.

Question put and agreed to.

Resolved, That the Committee has considered the Value Added Tax (Input Tax) (Amendment) (No. 3) Order 1995 (S.I. 1995, No. 1666).

Value Added Tax (Supply of Services) (Amendment) Order 1995 (S.I. 1995, No. 1668)

Resolved, That the Committee has considered the Value Added Tax (Supply of Services) (Amendment) Order 1995 (S.I. 1995, No. 1668).—[Mr. Heathcoat-Amory.]

Committee rose at fourteen minutes to Five o'clock.


Thompson, Mr. Patrick(Chairman)

Booth, Mr.

Carttiss, Mr.

Heathcoat-Amory, Mr.

Lidington, Mr.

Martin, Mr. David

Primarolo, Ms

Sainsbury, Mr. Tim

Smith, Sir Dudley

Smith, Mr. Tim

Temple-Morris, Mr.

Willetts, Mr.