Question (this day) again proposed, That the clause stand part of the Bill.

I will pick up immediately where I left off before lunch. The Government further state in their “Summary of impacts”:

“Only a small number of businesses, some of which are likely to be small businesses, are estimated to routinely work on the installation of ESM; these are expected to incur small costs from familiarisation with the new guidance and additional bookkeeping. A further 100,000 businesses who provide construction services may incur very minimal familiarisation costs.”

If the Minister were to clarify what those small costs on average will be, that would help put the impact statement in context for the Committee. I ask because the charitable sector is concerned that this measure will in reality have more than a small impact on them, especially when taken in conjunction with other factors that are impacting on the sector. Many in the sector have argued that the VAT system currently poses one of the biggest challenges for the UK charity sector.

As many Committee members know, VAT is underpinned by the premise that the cost of a service or product is ultimately borne by the final consumer, yet charities operate outside that underlying principle, as they rarely charge for the goods or services that they provide. The result is that charities face an unlevel playing field in many respects when it comes to VAT. The irrecoverable VAT is estimated to cost the sector £500 million a year and the costs of any VAT rises are borne by the charities themselves, which further exacerbates the problem.

The VAT reliefs available to charities are therefore extremely important in going some way, in certain areas, towards correcting what many believe to be an unjust structural inconsistency. Zero and reduced rates are extremely valuable to charities, allowing them to undertake activities that are valuable to society and that would otherwise not be affordable. Many in the charitable sector are increasingly concerned about the gradual chipping away at many of those reduced rates, such as the VAT on supplies of research between eligible bodies and VAT on listed buildings. The removal proposed in this measure adds to that list.

Given that these are already difficult times for the charitable sector, will the Minister tell us what assessment has been made of the cumulative impact on charities of the removal of various reduced rates, including this  one? What commitment can he give the charitable sector that the Government will fight to retain reduced rates for charities and do whatever they can to maintain Government support for the sector, given the Prime Minister’s very open support for the charitable sector and his stated belief in the big society, which obviously requires that level of commitment from the Government in order to be sustained in these difficult economic times?

It is a pleasure to welcome you back to the Chair after lunch, Mr Amess. Clause 191 removes the reduced rate of 5% VAT applied to the installation, including supply, of energy-saving materials in buildings used solely for a “relevant charitable purpose”. This change follows legal action taken by the European Commission. The reduced rate for the installation of such materials in residential accommodation is left unchanged.

Let me briefly provide hon. Members with some background to the clause. The UK currently applies a reduced rate of VAT to the installation, including supply, of energy-saving materials in buildings used solely for a relevant charitable purpose and in residential accommodation. The reduced rate of 5% VAT applies only where the installation of the materials is carried out in isolation or together with other works necessary to aid that installation—for example, cutting a loft hatch in a ceiling to install loft insulation. Any energy-saving materials installed as part of wider works—for example, a new extension—are already subject to VAT at 20%.

The European Commission considers that the reduced rate has no legal basis, and it has taken legal action against the UK. The Government do not agree with all the arguments put forward by the Commission, but we have accepted that in applying the reduced rate for relevant charitable buildings we are applying the provisions too widely. Consequently, at Budget 2012, we announced our intention to withdraw the reduced rate from relevant charitable buildings as part of the 2013 Finance Bill. We will, however, continue to defend the reduced rate for the installation of energy-saving materials in residential accommodation. The Commission has now referred the case to the European Court of Justice.

The clause removes the reduced rate of 5% VAT applied to the installation, including supply, of energy-saving materials in buildings used solely for a relevant charitable purpose. Only charities that use buildings for a non-business charitable purpose or as a village hall or similar will be affected by the change, which means that the installation of energy-saving materials in such buildings will become liable to VAT at the standard rate of 20%, whereas in the past they might have been eligible for the reduced rate of 5%.

The change will not affect projects in those buildings where energy-saving materials are installed as part of wider building works, such as an extension, because they are already subject to the standard rate of VAT. Nor will it affect charities that use their buildings for business purposes, if those are not relevant charitable buildings. The reduced rate for the use of energy-saving materials in residential accommodation such as dwellings, old people’s homes, children’s homes, hospices and so on is not affected by the amendment.

The listed places of worship grant scheme may cover the cost of VAT incurred on repairs and alterations to listed places of worship, including the installation of energy-saving materials. Thus, the overall financial burden on listed places of worship should not be increased by the measure.

Of the issues raised by the hon. Lady, one mentioned before lunch was the state of play with regard to defending the UK’s position in Europe on energy-saving materials. As she rightly points out, I cannot or will not disclose legal advice, but I can say that last summer the UK received from the European Commission the reasoned opinion that the provision for the reduced rate on energy-saving materials was ultra vires to EU law. We responded in August last year and heard nothing until February this year, when the Commission advised that it was proceeding with the infraction despite the UK withdrawing the reduced rate from relevant charitable buildings, and that it had referred the matter to the European Court of Justice. We have yet to hear from the ECJ, but the next step will be a written submission to the Court, when so requested.

On the impact on charities of the specific measure, not all charities will be affected; only those charities that use their buildings solely for a non-business purpose, or as a village hall or similar, will be affected. The only projects affected will be those where works are supplied in isolation or with other works that aid that installation, such as cutting a loft hatch in a ceiling to install loft insulation. As a consequence of the change, therefore, the 20% rate would apply. Energy-saving materials installed as part of wider works to the buildings, such as a new extension, are already subject to the 20% rate of VAT.

Projects to install energy-saving materials in residential accommodation will not be affected by the clause, so there will be no impact for charities that create residential accommodation, such as old people’s homes, children’s homes or hospices. Furthermore, affected bodies will have had 16 months between announcement and implementation of the withdrawal to prepare for the change.

The hon. Lady sought to press me on assessment of the impact on charities of the removal of the reduced rate. Overall, it is estimated that the impact of the measure will be negligible, which for these purposes means less than £5 million. Details were set out in the tax information impact note published in the 2012 autumn statement. It is worth pointing out that the cost to businesses that install energy-saving materials will be limited to the costs associated with the time taken to familiarise themselves with amended legislation. That is the extent of it.

The Government are committed to supporting the charitable sector and the hon. Lady will be aware of the size of support through the gift aid system, for example, which is considerable. We will continue to provide support in that way and others.

The Government have accepted that we must withdraw the reduced rate of VAT that currently applies to the supply and installation of energy-saving materials in relevant charity buildings. The clause gives effect to that decision, and I hope that it will stand part of the Bill.

Question put and agreed to.

Clause 191 accordingly ordered to stand part of the Bill.