House of Commons Hansard Debates for 28 Apr 1999 (pt 41)

Mr. Twigg: I expected better than that from the hon. Gentleman. Companies have to make commercial and business decisions. The hon. Gentleman's intervention does not take us any further than the contribution of the

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hon. Member for Maldon and East Chelmsford from the Opposition Front Bench. The hon. Gentleman made a nonsensical point.

Mr. Woodward: It is crucial.

Mr. Twigg: I have talked to business men in my locality and they appear not to rate this issue as one of the greatest importance. It could be that Halton is somewhat different from other areas. I do not know. However, I have talked to many small business men and it seems that the general thrust of policies--

Mr. Woodward: They do not understand.

Mr. Twigg: That is interesting. The hon. Gentleman says that business men in my constituency do not understand.

Mr. Bermingham: First, does my hon. Friend agree that there have been major suits of negligence against major accountancy firms over the past few years, thus leading most of us to accept that they do not always get things right? Secondly, as someone who, on behalf of clients or others, has bought and sold shares for the past 30 years or so, I have always paid stamp duty personally or for clients. I have never experienced an objection to stamp duty and I have not seen all the City of London business transferred to Zurich or anywhere else. My hon. Friend may just agree with me.

Mr. Twigg: My hon. Friend makes an interesting and telling point. It is clear that the Opposition decided not to deal with it. I am grateful to my hon. Friend.

We have not been told how, if the amendment were carried, the gap in the Budget would be filled. That is normally the position. The Opposition like to oppose, but they have nothing to put in the place of Government policies. Basically, they are playing games. That was made clear when the hon. Member for Maldon and East Chelmsford talked about what would happen if the amendment were agreed to. Opposition Members are in an almost incredible situation.

Mr. Gibb: Will the hon. Gentleman give way?

Mr. Twigg: I shall give way for the last time, because I am sure that the Committee would like me to make progress.

Mr. Gibb: At the general election, did the hon. Gentleman stand on a platform of no increases in taxation? Is the Government proposal not an increase in taxation?

Mr. Twigg: The hon. Gentleman is becoming rather robotic on this issue. He is not getting an answer to his question because its basis is incorrect. I am sorry that he cannot think more widely on this issue. He seems to be transfixed.

A wide range of measures are set out in the Budget, which the Government put forward to help and promote business. We have heard nothing this evening about many of them. Many measures have been welcomed by business and the Opposition have taken up the issue of stamp duty

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because they think that they can have some fun with it. The fact is that, generally, business welcomes the Budget. I am confident that what the Government have set out in the Bill will be in the country's best interests.

8.15 pm

Mr. Nick St. Aubyn (Guildford): I fully support the amendment. I suggest to the hon. Member for Halton(Mr. Twigg) that there may be revenue-neutral effects from reducing the rate of duty on commercial property. The report cited by my right hon. and hon. Friends makes it clear that, such is the devastating effect of rises in stamp duty, they damage the value of commercial property owned by pension funds and other forms of saving for people throughout the country, and the value of the Government's property holdings. Based on their figures, a 0.5 per cent. increase in stamp duty reduces the value of the Government's holdings of commercial property by £2.5 billion, whereas the revenue to be raised fromthe increment in stamp duty will be not more than £100 million a year. In plain language, it will take the Government 25 years to recover the loss in the capital value of their stock of commercial property if they go ahead with the proposed measures.

This is not merely a mathematical exercise. We know that account has been taken of all the property holdings of Government Departments and that there is an on-going programme to rationalise Government property holdings. Properties are being sold by the Government year after year. Because of savage increases in stamp duty, there will be far less money coming in.

Through the amendment, we are protecting public finances. I draw the attention of the hon. Member for Halton to the code for fiscal stability. One of its purposes is to improve the public financial balance sheet. However, we are seeing an attack on the strength and probity of that balance sheet. At the same time, as my hon. Friendthe Member for Maldon and East Chelmsford (Mr. Whittingdale) has already mentioned, increases in stamp duty, far from creating a more stable environment, create a more volatile one. That is in direct conflict with the code for fiscal stability.

According to the research that has been carried out, there is a 50 per cent. increase in the volatility of property prices as a result of the increases in stamp duty. That is a major increase. Why does it happen? If the transaction costs of buying and selling property increase, the incidence of such transactions will decrease. Where there are property transactions, there will be much greater increases in prices. That is shown clearly by research, and it stands to reason. As we have found in so many markets--securities and elsewhere--if transaction costs are reduced, the volume of transactions increases, and vice versa.

There is another reason why there may be revenue-neutral consequences that relate to tax avoidance and the use of offshore vehicles. We should not be surprised if, as a result of this latest rise in stamp duty, and if there are further rises in the pipeline, commercial property is dealt with increasingly through derivative instruments. If that route is taken, there will be no stamp duty take for the Government. Again, their revenue will decrease.

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There will be an impact on business. When we talk about the cost of buying and selling property, we are always talking about a business cost. I know that we are focusing deliberately on commercial property, but business will feel the effect of the increases in stamp duty on homes. Whenever a senior and important executive in a company has moved home, the cost of that move has been radically increased by the rises in stamp duty over the past few years.

In Guildford, 7,000 of my constituents and I--I am happy to declare an interest--are directly affected by the proposed increase in stamp duty. Many of the 7,000 are senior executives. They are important people working in local firms. It is a highly competitive world and many of the businesses in my constituency are competing in Europe, the far east and America. Their local costs are a critical factor in their ability to win more business. The effect of these rises in stamp duty will be to harm their competitiveness and reduce the amount of revenue going to the Exchequer from the profits of their trade. This is, yet again, a self-defeating exercise by the Government.

We should remind ourselves that the Labour party came to power promising an end to boom and bust, but the increase in stamp duty will accentuate the danger of boom and bust. The research carried out by Scott and Currie says that

"in 1996 the value of loans that could be secured against the industrial and commercial sectors' holdings of property was below their actual borrowing."

In other words, even before the Government came to power, companies, in aggregate, were borrowing to the very limit of their borrowing powers against the value of their commercial property holdings.

If greater volatility in the value of commercial property results from these changes, there will be a greater chance that those values will fall below the level acceptable to the banks that are lending to those companies and a greater chance of some of those companies being forced into receivership or bankruptcy.

Mr. Bermingham: Is that not economic madness? Investment in property is tax deductible and allowable in a business sense and interest rates have fallen considerably since the Labour party came to power. If one is offset against the other in accountancy terms, the rise in stamp duty is a minor matter compared with the benefits of interest rate reduction and other tax reliefs since granted.

Mr. St. Aubyn: I entirely agree that economic madness is at work here. The economic madness is that every 1 per cent. increase in stamp duty leads to a loss of between 3 and 5 per cent. in the capital value of all commercial property. All other things being equal, that is its effect. If the commercial sector has borrowed against property, in aggregate, as far as is prudent, the measure will push borrowing to imprudent levels. A greater danger of boom and bust is being created.

Mr. Bermingham: If its value is pushed down, commercial property is made more readily available to more investors. That is not a loss to the investing world at large. Interest rates have tumbled and people can borrow at cheaper rates, which seems to me to be an economic gain for the long term.

Mr. St. Aubyn: I am grateful to the hon. Gentleman for pointing out that, if his Government create a busting

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economy with lots of people going under, there will be a lot of cheap properties around for others to pick up on the off-chance. That is not the sort of economy that the Government inherited or that they promised to create, but they will create such an economy if they carry on down this blind alley in which tax increases are more than offset by the damage to wealth across the country and, more importantly, by the damage to wealth creation.

We have touched on other issues. Stamp duty has an effect on goodwill and on patents, and the measure is a wholesale attack on many things that the Government say that they are in favour of. They want to create an enterprise economy and say that they support innovation, but brand names and new inventions will be taxed at a higher rate as a result of the increase in stamp duty. I cannot see how that fits in with any serious wish to achieve a more vibrant economy.

Many of the companies that will be hardest hit by the increase in stamp duty turn over between £500,000 and £5 million a year. Under the previous Conservative Government, the most significant growth in the number of companies took place in that part of the economy, which is also where the most significant increase in the vitality and job-creating power of our economy occurred.

Interestingly, it has been estimated that even a 0.5 per cent. increase in stamp duty will lead, over a few years, to the loss of more than 5,000 jobs throughout the economy; more significantly, it has an opportunity cost for the firms that have created the most jobs in recent years. The firms trading between those turnover levels are most typically dependent on bank borrowing set against their property holdings. Across the board, property can typically amount to about half the net book value of such businesses and it is an important asset that will be considered by the banks.

We all know that, in an ideal world, banks should look at the business plan, cash flow and prospects of the companies to which they lend money, but the reality is that, although banks check that the figures add up, they do not have the time or the expertise to assess how realistic those plans are. As well as trusting the judgment of the businesses and the business managers to whom they lend, they very much trust to the security of the assets against which they lend.

Taxation that damages the value of those assets way beyond the amount of tax revenue yielded damages the ability of those businesses to expand. Yet again, the economy is being led up a blind alley. Comments from Labour Members have shown that old Labour is rearing its head in an avaricious attack on wealth in this country. That is what the measure is really about. I tell Labour Members that 10 per cent. of my constituents are directly affected by it--we might as well go back to the days of surtax. They promised in the election campaign that they would not raise taxes, but they are indeed doing so, and targeting taxes in a way that will certainly affect the incentives in our economy.

It is also worth bearing it in mind that the cost of stamp duty will be spread across all businesses and all levels of society. If people who are buying large properties have to pay more in stamp duty, they will have less to spend on improvements and other work on their properties that they might want to undertake. Therefore, they will be less able to carry out those improvements and one of the ways in which there is synergy between different sectors of the economy will be lost.

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There will clearly be a knock-on effect. [Interruption.] That seems to be a matter of amusement for Labour Members, but I have calculated that, for my constituents, the increase in stamp duty is equivalent to a tax of £100 per household per year. That is the extent of the damage that will be caused by what the Government are doing.

We have already heard that property taxes in this country are the highest in Europe, but, in fact, they are among the highest in the world. Only in the economic area of north America does the level of property taxes, in aggregate, begin to match that which we now have in this country. Far from an increase in stamp duty achieving harmonisation with the rest of Europe, it will put us way out of line.