The Financial Secretary to the Treasury (Ruth Kelly): Good afternoon, Mr. Gale. The Government are concerned about the growing avoidance of stamp duty by a minority at the expense of the majority of taxpayers. In particular, some companies are determined not to pay their full share of duty and structure property transactions in increasingly artificial ways to achieve that. Such activity represents a significant threat to the tax base.
To stop that abuse, the Chancellor announced on Budget day a package of measures to tackle avoidance of stamp duty in commercial property transactions, and he also launched a major reform to modernise stamp duty on land and buildings in the United Kingdom. The package of measures will ensure that stamp duty is payable if a transfer artificially rests on contract, discourage the use of companies set up specifically to avoid stamp duty on UK property and stop the increasing exploitation of the existing stamp duty reliefs for company reorganisations. Those interim measures, ahead of the modernisation of stamp duty, will discourage a range of techniques currently used to avoid stamp duty on high-value property deals. Legislation will be included in the Finance Bill 2003 to reform stamp duty.
Mr. Mark Field (Cities of London and Westminster): I am sorry to catch the Financial Secretary in mid-drift as she is espousing the clause. She referred to companies that are apparently not paying their share and to the modernisation of stamp duty. I am intrigued and would like some idea as to what she considers the correct or fair share that companies should pay in a tax that has, at least in its
Column Number: 450extent, become a considerably bigger burden on business in the past three or four years and how she envisages modernisation of the tax in the years ahead.
Ruth Kelly: I apologise to the hon. Gentleman and to the Committee for the fact that I was unable to be present this morning when the Opposition's new clause was debated. I understand that several points on the overall level of stamp duty were raised.
I recently held meetings with the British Property Federation, for example, and made clear our support for the commercial property sector as a factor of production that contributes to the United Kingdom economy. It is right that we recognise its economic contribution to the economy, but it is completely unfair that we have a distortive tax that some players in the commercial property market pay and others avoid completely. We must have a level playing field and not discriminate against some companies in favour of others.
Clearly, we have set in train a major reform of stamp duty, which must first put all companies on the same basis and ensure that everyone pays a similar share of tax on stamp duty transactions. When we modernise stamp duty in the Finance Bill next year and set out a comprehensive reform strategy, we shall consider all the different interrelationships and so on. However, in the interim period we must ensure that we have a comprehensive plan to tackle stamp duty avoidance. It is completely unfair that some companies do not pay their share of tax while others pay the full rate.
The reform that we will include in next year's Finance Bill will build on the 2002 measures to tackle stamp duty avoidance, support the Government's e-business agenda and update the framework of stamp duty, bringing it into line with more modern taxes. The main reforms are set out in a consultative document published on Budget day, which seeks views on the detail of the modernised regime.
Mr. John Burnett (Torridge and West Devon): I hope that the thrust of the Financial Secretary's comments will be that it is fair enough to penalise artificial schemes for avoidance. However, there may be bona fide arrangements in place and, due to normal commercial eventualities, a charge to recover an additional charge to stamp duty on the director of a transferee company. When such entirely innocent events have occurred, that person should not fall within the charge.
Ruth Kelly: I will take the hon. Gentleman's comments as support for the Opposition amendments that have been tabled to introduce a motive test into the arrangements. I will come to those in due course. I have said that we are undertaking a comprehensive reform of the stamp duty regime, which we will implement shortly. In the interim period it is extremely important that we have comprehensive and effective anti-avoidance measures in place. I shall deal with the specific practicalities of introducing a motive test in that interim period in due course.
Clause 109 aims to discourage companies from using corporate vehicles to avoid the property rate of
Column Number: 451stamp duty. It is widely recognised that companies have been abusing the rules for stamp duty group relief by transferring UK land and buildings into special-purpose vehicles in order to sell the shares in that vehicle rather than the land and buildings direct. As the hon. Member for Arundel and South Downs pointed out, that has the effect that the sale of the land and buildings is charged at the stamp duty on shares rate of 0.5 per cent. or at nil if the special-purpose vehicle is incorporated outside the UK.
Such practice is a clear abuse of the spirit of the stamp duty group relief rules. They are not designed to provide relief where the intention is the sale of an asset outside the group rather than an intra-group transfer. There are already anti-avoidance rules within the stamp duty legislation that aim to prevent group relief from being claimed where there is an arrangement in place for the transferee company to leave the group. However, because companies are circumventing the existing rules, they are proving ineffective in combating widespread avoidance of the group relief provisions.
As a result of avoidance activity, the clause introduces a time limit into the legislation. From Budget day, that has the effect of clawing back the group relief already granted when UK land and buildings have been transferred intra-group, and the transferee company leaves the group within two years of that transfer.
The two-year rule applies to all intra-group transfers that include UK land and buildings. It is an interim measure to combat what can be described as the common practice of companies abusing the group relief rules to sell UK land and buildings within a corporate wrapper. By doing so, it ensures that the correct rate of stamp duty is paid on transfers of land and buildings.
Opposition amendment No. 224 to clause 109 inserts a motive test. I have already made it clear that it is not the Government's intention that the clawback of group relief should apply only when the transaction is motivated by stamp duty avoidance. The reform of stamp duty in 2003 will consider whether the withdrawal of group relief in a two-year period is still necessary. In the meantime, in light of the current abuse, the two-year time limit is necessary to prevent the sale of land and buildings outside a group from benefiting from the relief inappropriately. The same applies to amendment No. 225, which introduces an identical motive test for clause 111, which withdraws stamp duty relief for company reconstructions in similar circumstances.
Opposition amendment No. 226 inserts an identical motive test into clause 113. It is not the Government's intention that the introduction of a charge on contracts for UK land and buildings in excess of £10 million should apply only where the transaction is motivated by stamp duty avoidance. The reform of stamp duty in 2003 will include consideration of whether it should apply to all contracts. In the meantime, the clause tackles resting on contract for all large deals.
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The hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs should consider the practicalities of introducing a complex motive test during the interim and ask themselves whether it would be simpler and more straightforward to have a two-year time period to tackle abuse. On those grounds, I urge the Committee to reject the amendment.
The hon. Member for Arundel and South Downs raised various points of detail, some of which will be dealt with later today. However, due to the levels of abuse currently prevalent, a strong response is needed. For some time, the specialist property press have been openly discussing avoidance techniques, which are becoming much more widespread. Our measures are interim, and we shall consider the two-year time limit in due course, when we consider fundamental reform. I deal with sub-sale relief later when we discuss clause 113, and some of the other detailed points about interest and so on that the hon. Gentleman raised. I urge the Committee to reject the amendment.
Mr. Flight: The first point, which I made this morning, is that I hope that the Government realise that, for better or worse, taxation ultimately depends on a degree of consent. Most business organisations take the view that 4 per cent. stamp duty on commercial property—it is a substantial earner for Government, and I called it the new window tax—is unacceptable. I am told by the legal experts that a raft of anti-avoidance measures is waiting in the wings. Like so many other taxes, people will willingly pay them if they are reasonable, even though some clever accounts people will still try to avoid them. However, if they are unacceptable, it will inevitably cause the establishment of a massive avoidance industry. What the Government believe to be another wonder area to milk for tax will disappoint, and the excessive measures in that one narrow area will not have the revenue effect that the Government seek.
Our amendments are narrowly about justice. I understand that it is much easier to have a cut-off two-year rule, but the reaction to that will inevitably be that businesses will endeavour as far as possible to stay within the limit, even if it is economically against their interests, because some degree of restructuring is pressing. However, they will not do deals that would break because of the tax that they could incur. The Government will not make money out of the measures, which will have an impact that is only marginally damaging economically.
My advice to the Government is that they should think again. On a number of occasions during the past five years, they have had what appeared to be jolly good ideas for raising a lot of tax that would not get noticed—and that caused a massive crisis in the pensions area. Doing that in the property area in the present economic climate would be economically unwise. One would be right to say that if stamp duty was reduced revenue would be lost, but I repeat that I believe that the Government will be disappointed by the resulting revenue.
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