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Mr. Campbell-Savours: Does it not mean also that the tax will cut into the spiralling commercial rents that are the subject of many protests to Members of Parliament from small shopkeepers throughout the country who simply cannot afford to pay rents in the commercial sector? Therefore, the tax is extremely helpful in that sense.
7.45 pm
Mr. Whittingdale: I am interested to see the hon. Gentleman defending these increases--but perhaps it fits in with his earlier suggestion that the rates should continue to increase in future Budgets. Perhaps the Minister will confirm whether she also believes that it is desirable to tax the commercial property sector even more. However, the Government have not offered that justification so far.
Mr. Shaun Woodward (Witney): The hon. Member for Workington (Mr. Campbell-Savours) would like to see lower property rents, but the measure will have completely the opposite effect. The cost will force rents up because, effectively, it is an additional tax on those rents.
Mr. Whittingdale: My hon. Friend is right: stamp duty is payable on leases as well as on sales, and therefore it will have the effect of increasing costs. There will also be a corresponding effect, to which I have referred, on the overall value of commercial property. I fear that it would take a great deal of economic research by experts considerably more knowledgeable than me to work out the overall impact of the changes. However, I am sure that it could be modelled, and it would be interesting to conduct such an analysis.
In talking about the research by professional economists into the impact of these changes, it is worth drawing the Committee's attention to the Arthur Andersen report's conclusion that the public sector will be a net financial loser from a stamp duty increase. The public sector holds a large property portfolio--I said earlier that the total value of commercial property owned by the public sector is £110 billion--and it is estimated that it will suffer a capital loss of between £5 billion and £11 billion as a result of a 1 per cent. rise in stamp duty. That capital loss vastly exceeds the additional revenue. If one applies a reasonable discount rate to the future stream of revenue that will result from increasing stamp duty and
compares that with the reduction in the overall value,one can see that there is a substantial net loss to the public sector.
Mr. Leslie:
The hon. Gentleman has surely calculated the effect on Exchequer yields if his amendment were to be carried. What would the cost be?
Mr. Whittingdale:
I am not sure of the exact revenue implications because there was some dispute about that figure when we debated a similar amendment to last year's Finance Bill. I shall be interested to hear the Minister's view. However, for the reasons that I have given, I suspect that the cost might be rather less than some would suggest.
Other important aspects of this tax show why it is so damaging. We have raised these matters in previous debates about stamp duty. Stamp duty operates according to what is known colloquially as a "slab" system rather than a "slice" system. That means that, if a transaction is valued at just £1 over the threshold of £250,000 or £500,000, the higher rate of stamp duty will apply not just to the amount above the threshold but to the entire value of the transaction.
Mr. Campbell-Savours:
That is good.
Mr. Whittingdale:
The hon. Gentleman said that that is good, but it creates potential marginal rates of taxation of 3,750 per cent., which is patently absurd. The consequence of operating the system in that way is that many purchasers will seek to avoid incurring the higher rate by paying a reduced amount on the value of the property while agreeing an artificial price for items such as fixtures and fittings, thereby ensuring that the headline price that is paid is below the threshold, whereas the total amount that they are handing over is above it. That applies equally to businesses and to residential sales. There is considerable incentive to make such arrangements to avoid extra cost. By creating the differential, the Government are encouraging the continuation of that practice.
Mr. Campbell-Savours:
Is the hon. Gentleman suggesting that, to overcome that problem we should include fixtures and fittings in the price of properties?
Mr. Whittingdale:
No, I am not suggesting that at all. We should not have introduced those thresholds and we should not be increasing the rates, but one method of dealing with that problem would be to change the way in which stamp duty is levied from a slab system to a slice system. We made that suggestion in the debates on last year's Finance Bill, and in his reply, the then Paymaster General, the hon. Member for Coventry, North-West (Mr. Robinson), said that he could see the attractions of slicing rather than slabbing and that he was happy to consider our suggestion. Although we do not regret his passing from the Government, it would be a pity if his acceptance of that point was also lost. I am disappointed that the Government have made no attempt to correct the distortion that the system creates.
Mr. Gerald Bermingham (St. Helens, South):
I have been listening with interest to the hon. Gentleman's remarks. I first qualified as a solicitor in 1967--I declare
The Temporary Chairman:
Order. The hon. Gentleman's intervention is too long.
Mr. Whittingdale:
As I was explaining at the beginning of my remarks--I am sorry that the hon. Gentleman was not present--this Government have made the problem far worse by introducing three successive, huge increases in stamp duty in three Labour Budgets. That has increased the incentive for people to seek to avoid the tax in the ways that I have described.
Furthermore, it would be sensible to consider levying the duty by a different method not only because of the point about fixtures and fittings but because it is a very strange tax. One has to pay a huge amount extra just because the price of the transaction goes over the threshold. As I said earlier, that produces ridiculous marginal rates of taxation.
Mr. Derek Twigg:
If, as you say, there is a problem for householders and not only for purchasers of commercial property, and if, by some miracle, your amendment were accepted, would you vote for clause 99--
The Temporary Chairman:
Order. It is not my amendment.
Mr. Twigg:
I apologise, Mr. Butterfill. Would the hon. Gentleman then vote for clause 99?
Mr. Whittingdale:
I have already said to the hon. Gentleman that Conservative Members totally oppose the increases because they will affect householders and businesses. We realise that they will be particularly damaging to businesses, and that is the subject of our amendment, but, even if our amendment were carried, and my powers of persuasion caused the Financial Secretary to accept it, I regret that we would still vote against the clause.
As I said earlier, I welcomed the fact that our arguments for changing the way in which the tax was levied had been recognised, at least in part, by the former Paymaster General, the hon. Member for Coventry, North-West. I am sorry that our case has not been recognised in the Finance Bill. Does the Financial Secretary accept that the issue at least needs to be addressed, and will she examine the possibility of making a change? That change need cost nothing. It would be possible to devise a more progressive tax, levied according to a slice system, which was also revenue neutral.
Most transactions affected by the increase are VAT exempt, but that is not true of them all. In some cases, commercial property owners may exercise what is known
as the option to tax, whereby they choose to waive their VAT exemption and charge VAT on rents or sales. That may seem a rather curious course, but it has advantages because they are then able to recover VAT on, for example, their input costs for construction. If a company pursues that course, it may well find that, in the event of a sale, it pays stamp duty not only on the sale value but on the VAT charge as well. In such cases, stamp duty is a straightforward tax on a tax. In the case of a building that costs £1 million, the VAT charge would be £175,000. The total stamp duty paid on that transaction would be over £41,000, of which over £6,000 would be double taxation.
The same problem could well arise in the transfer of going concerns. If a business is transferred as a going concern, it is an exempt supply and no VAT is payable. However, Customs and Excise no longer gives advance clearance on the application of relief, and it is left to the parties to take a view on the VAT status of any transaction. It is not always easy to define a going concern, and there are cases where VAT is not charged, but it is subsequently demonstrated that it should have been charged. In those circumstances, the purchaser not has to pay not only VAT but the extra amount of stamp duty on the VAT charge.
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