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Ruth Kelly: Whether it is exempt would depend on the terms of the original lease and how it was drawn up. I am willing to consider any example that the hon. Gentleman sends me and reply appropriately.
Mr. Adrian Flook (Taunton): Taunton has the same problem as the constituency of my hon. Friend the Member for Bridgwater (Mr. Liddell-Grainger) because much of it is also Crown Estate land. Has the Crown Estate advised the Treasury on the impact that the measures will have on most of its leases?
Ruth Kelly: We have treated the Crown Estate in the same way as it was treated under the old stamp duty regime and it is content with the proposals.
Paragraph 8 introduces schedule 17A, which relates to leases. As that is a distinct matter, I shall deal with the remaining paragraphs first. Paragraph 9 clarifies that the £5 fixed stamp duty is abolished for duplicates and counterparts of land transactions within the scope of the stamp duty land tax. Paragraphs 10 and 11 make minor changes to the transitional provisions in response to representations.
On schedule 17A, hon. Members will know that we had extensive consultation on the treatment of leases, much of which related to the charging structure, the subject of the other set of regulations. We also received many comments on technical aspects. The provisions address those concerns, although some are also intended to counter avoidance. The first issue is the treatment of leases if either the length cannot be ascertained at the start of the term of the lease or the lease continues beyond its stated end date. That often happens with both business and residential tenancies for a number of reasons, including statutory provisions giving security of tenure and, in Scotland, the doctrine known as tacit relocation. We consider it right that tax should be charged by reference to what turns out to be the actual length of the lease. Not to do so would permit avoidance by the grant of a very short lease when all parties know that the tenant will stay in occupation and pay rent for a much longer time.
Paragraphs 3 and 4 of schedule 17A therefore provide that for tax purposes a lease can grow beyond its stated term, one year at a time, and that additional tax may be payable as a result. The additional tax becomes due as the lease grows and interest on the additional tax is not backdated to the start of the lease. That is unlikely to be
of concern to most residential tenants, for whom periodic tenancies are most common, since 93 per cent. of residential leases are not chargeable to tax. Paragraph 5 applies the same treatment if a number of successive leases are granted as part of a single arrangement. Paragraphs 6, 10, 13, 16 and 18 reproduce existing provisions in the Finance Act 2003 for convenience, so that all material on leases is brought together.Paragraphs 7 and 8 deal with leases with uncertain rent, such as those under which rent varies with turnover; the intention is to give certainty and reduce the compliance burden on tenants. They provide for an initial return by the tenant on the basis of his or her best estimate of the rent that is to be payable while ignoring any changes that might take place more than five years after the start of that lease. After five years, or at any earlier time when uncertainties are resolved, the tenant makes a further return in the light of what he or she now knows the rent to have been, again ignoring any changes that might take place more than five years after the start of the lease. Any additional tax due is then payable or tax overpaid is repaid. Those provisions replace the provisions on rent reviews in the Finance Act 2003.
Mr. Simmonds: If a lease is purely a turnover lease and there is no base rent for the first five years of that term, does that mean that no stamp duty will be paid because it comes under the £150,000 threshold?
Ruth Kelly: It will depend on whether the best estimate comes under the £150,000 threshold. As I outlined, an estimate has to be made of what rent is payable. I am sure the hon. Gentleman will reach the same conclusion when he studies the provisions.
Paragraph 9 gives relief when a lease is surrendered and replaced by a new lease. That often happens when landlords and tenants want certainty for the future or when renegotiations take place. The paragraph provides that rent that has already been taken into account in calculating the net present value of the surrendered lease is not taken into account again in calculating the net present value of the new lease.
Paragraph 11 is designed to counter avoidance. Without it, a lease could be granted in circumstances where no tax is payable, such as within a group, and then assigned for a nominal amount to a third party. The assignment would normally be chargeable only on the consideration given. The paragraph ensures that in those circumstances tax is chargeable as if there were the grant of a new lease.
Paragraph 12 deals with situations where a lease is assigned and there is an obligation to make a further return. It specifies that the assignee is responsible for that obligation. That is necessary because often assignors are impossible to trace, or are companies in liquidation.
Paragraph 14 is designed to counter avoidance. As I said earlier, events taking place more than five years after the start of a lease are usually ignored. However, that would permit a large increase in rent five years and one day after the start of a lease to escape tax. The paragraph therefore provides that where a rent increase exceeds a certain amount, determined by a formula related to the retail price index, tax is charged as if that were the grant of a new lease.
I am grateful to the eagle-eyed people who spotted that the formula in the earlier version of the regulations contained a slight but vital error—I put my hand up to that. Hon. Members will appreciate that there is no facility for amending a statutory instrument, so the regulations had to be remade. That is why we are debating the second version instead of the original.
Mr. Prisk: I am grateful to the Financial Secretary, who informed me of the error last week. In relation to paragraph 15, will she clarify which of the three formulae in the six-step process that tenants use to work out what they have to include as an abnormal rent was incorrect?
Ruth Kelly: One number was missing from one of the formulae. I am afraid that I cannot remember the order in which the formulae are presented in the regulations, but I shall respond later to that specific question.
Paragraph 17 makes it clear that on an assignment of a lease, and except where paragraph 11 applies, the assumption by the assignee of the obligation to pay rent and observe and perform the other covenants in the lease does not count as a chargeable consideration. In other words, the assignee is charged only on what he pays to acquire the lease.
In conclusion, we have consulted business, and we have listened. We are taking further action to protect small businesses and enterprise while reducing distortions and securing a fair amount of revenue from those transactions. The regulations before us will remove 60 per cent. of all commercial transactions from the charge completely, and businesses that pay more under the proposals will pay at a flat rate of 1 per cent.—considerably less than the 4 per cent. on an equivalent purchase. The regulations remove the vast majority of residential leases from the charge.
Mr. David Laws (Yeovil): Will the Financial Secretary clarify the net effect of the Government's proposals on the Exchequer's aggregate revenue for the next two years?
Ruth Kelly: The reliefs that we are granting today will reduce the aggregate revenue that has been published in the Red Book by £20 million, which will bring first-year revenue down to £170 million from the lease duty proposals.
We have listened to business on sale and lease-back transactions, chainbreaking companies and employee relocation, and have introduced measures requested by the industry to reduce the compliance burden. I therefore commend the regulations to the House.
3.48 pm
Mr. Mark Prisk (Hertford and Stortford): May I reciprocate the Minister's remarks? I must confess that it is rather worrying to be welcomed back when I was not aware that I had been away in the first place, but she made a generous comment. In turn, may I say that all of us who served on the Committee that considered the Finance Act 2003 are pleased that she is back? It is true that we had some fun with the Chief Secretary to the Treasury in Committee, but hopefully we will get some serious answers now.
We are considering two sets of regulations. The first set seeks to amend schedule 5 to the Finance Act by revising the tax structure as it applies to business leases. The second tries to answer some of the many questions that the Government failed to address in the Act itself. I shall preface my remarks by telling the Financial Secretary that the piecemeal introduction of the new tax is wrong in principle and mistaken in practice. The Government are using section 109 of the Act to push large parts of the tax through Parliament without due consideration, and I hope that in her reply she will assure us that the Government do not intend to use that as a precedent for other tax changes.
In considering these two regulatory instruments, I suspect that the House will wish to recall the original aims of this new tax as set out by the Minister, who was then Economic Secretary, in April 2002. In the document, "Modernising Stamp Duty", she told us:
- "Our aim is to create a stamp duty that better reflects modern commercial practice".
- "The Treasury claim—that they are tackling avoidance—is a red herring. This latest tax is a bid to refill the Treasury coffers, by milking the only sector that has refused to be beaten by the burgeoning weight of tax and regulation."
I shall consider the regulations concerning schedule 5 later, but I come first—hoping to be somewhat more technical than was the Financial Secretary—to the Stamp Duty and Stamp Duty Land Tax (Variation of the Finance Act 2003) (No. 2) Regulations 2003. Unfortunately, as the Financial Secretary said, it is the second set of regulations issued by the Treasury. I am grateful to her for drawing our attention to that problem. As a result, outside organisations have had fewer than five working days in which to consider the correct regulations. Sadly, that is part of a pattern as regards this tax—from conception to consultation to legislation, the whole process has been rushed through with little time for business or Parliament to get it right.
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