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Mr. Simmonds: As always, my hon. Friend makes a forensic case. Is he aware that with only 13 working days to go until 1 December, when the duty is supposed to be fully operational, neither set of regulations contains details about sub-sales and securitisation?
Mr. Prisk: My hon. Friend hits on a point that is of real concern to businesses.
Mr. Djanogly: Is my hon. Friend further aware that the Government say that they have to restart the consultation process on partnerships from scratch? How will they do that in 13 days?
Mr. Prisk: The root of the problem is that the tax is being made up on the hoof. On Third Reading, the Chief Secretary told us that it would take a couple of years to refine it. That is no way to make tax law. Many outside
bodies and experts in the field concur with that conclusion. Today, we have a maximum of three hours in which to consider 26 pages of detailed changes—the result of this mad rush will be bad law.I understand that even as of yesterday, the tax return forms that taxpayers will have to complete are yet to be issued, with only 12 working days to go. Can the Financial Secretary tell the House whether those forms have been published or distributed? She is nodding, so we will take that as a yes.
The regulations contain several specific issues that give considerable cause for concern. I turn first to the question of sale and lease-back arrangements. We welcome, in general, the reinstatement of relief for that common form of transaction. When I first drew attention to that oversight in Committee, the Chief Secretary seemed remarkably unaware of its significance. I am glad that the Financial Secretary saw sense and responded, but I have questions relating to the qualifying conditions in the regulations. Subsection (3)(a) of new section 57A states that the property must not be residential. How will mixed-use properties be treated? For example, how would an old mill be treated if the lease-back arrangements envisaged a part residential accommodation? Similarly, can the Financial Secretary define the phrase "same premises" under subsection (3)(c)? Does that mean the same hereditament or something else? Subsection (4) refers to market value. Does that mean open market value? If so, what valuation method is envisaged?
The Financial Secretary referred to exchanges. The amendments, which relate to residential property exchanges, follow discussions in Committee. At one point, the Government's plans bizarrely denied relief to elderly people who sought to trade down in their retirement yet exempted those who wanted to trade up to, for example, a mansion. That was a peculiarity and, to be fair to the Government, they relented after we questioned the Financial Secretary about it.
Will the Financial Secretary confirm that the meaning of "new dwelling" in schedule 6A covers the conversion of properties, including a change of use? That is unclear in the drafting. For example, would a former workhouse that was converted into flats be acceptable? That is a change of use and a conversion. The financial viability of many urban regeneration schemes will be directly affected by her answer.
Why does paragraph 8 of the same schedule specifically exclude sole traders and the self-employed from the definition of property trader? What is the ground for discriminating against unincorporated enterprises? Was it simply an oversight?
Why do the Government feel the need to set a maximum figure for expenditure on refurbishment schemes under paragraph 9? How will that be enforced without creating a new raft of bureaucracy? Are people to provide receipts or invoices? Who will check the evidence of work done and its value and ensure that the figure of £20,000 has not been exceeded?
Mr. Liddell-Grainger: My hon. Friend makes serious and interesting points. What about the position when
the purpose of a grade 2 listed building has been changed and a subsequent refurbishment is undertaken, in which the façade is VAT exempt because the building is listed? I can find nothing about listed buildings in the provisions.
Mr. Prisk: Perhaps listing is separate from the immediate regulations that we are considering, but my hon. Friend makes a good point. He draws attention to the question of whether the Government have thought through the unintended consequences.
I want to ask the Financial Secretary about value as well as practicalities. It is fair to say that many people might consider the figure of £20,000 per unit for refurbishment a reasonable cap. However, the sum could prove wholly inadequate when, for example, asbestos needs to be removed. The result could be that the most dilapidated buildings remain empty. What assessment has the Treasury made of the effect on urban regeneration projects? How will the Government ensure that the worst buildings do not continue to stand empty?
The Financial Secretary referred to paragraphs 2 and 3 of schedule 17A. Paragraph 3 deals with the extension of fixed-term leases. She claimed that the change was fair, but is it fair for tenants to face an additional tax bill because of an event beyond their control? If a building is expected to be demolished for a planned new road, a fixed-term lease might be granted. If a long delay occurs or demolition is cancelled, is it fair to tax again? Do the Government intend to tax people in those circumstances?
I have received several professional and business representations, including from the Institute of Indirect Taxation, on leases for indefinite terms. There is considerable anxiety about the bureaucracy that the regulation will create. When a tenant exercises his or her statutory right to renew, how will the new lease be treated? Will it be linked with the original lease or not? There is a significant tax difference.
The treatment of variable and turnover rents is important and my hon. Friends have referred to that. The Financial Secretary partly responded. As members of the Committee that considered the Finance Act know, the legislation failed to account for variable rents. They typically occur in the retail sector, but they also exist in the licensed and hospitality sectors. As the original legislation stands, the occupier would have to submit a new tax return every time the rent varied. That would create an unbearable compliance burden. I welcome the Government's acknowledgement of our anxieties, but I remain to be convinced that the offered solution makes business sense.
Paragraph 7 on page 13 of the regulation allows for just one return after the fifth year. Up to that point, each new rent level means a new tax return, but under these proposals, just one return would be required after the fifth year. A lot of people in business—particularly in small businesses—argue that that is illogical. After all, it is the first few years that make a difference when setting up a business, so why leave business start-ups with the greatest compliance burden?
Paragraph 14 on page 16 of the regulation deals with the treatment of so-called abnormal rents. The Financial Secretary told us that that this was an anti-tax-avoidance measure. I hope that she will not be
giving any advice on that aspect of it today. As drafted, this paragraph and paragraph 15 are misguided in purpose and hideously bureaucratic in form. Indeed, all the independent experts believe that they run counter to modern commercial practice. I say that because the regulation provides that where there is an increase in rent after the fifth year, the tenant must assess whether that increase is abnormal.I am sure that hon. Members are beginning to wonder what "abnormal" means, and the answer lies in paragraph 15 of the regulation, which sets out a two-page, three-formula, six-step definition. Believe it or not, this is what tenants are going to have to understand in order to work this out. In step 1, they will need to define the start date, which is
- "the beginning of the period by reference to which the rent assumed to be payable after the fifth year of the term of the lease is determined in accordance with paragraph 7(3)".
Then we move on to step 2, in which the tenant will need to divide
- "the period between the start date and the date on which the new rent first becomes payable"
- "the factor by which the retail prices index has increased over each period identified in step two",
- "This is a figure expressed as a decimal and determined by the formula—
(RD-RI)/RI
where—
RD is the retail prices index for the month in which the last day of the period in question falls, and
RI is the retail prices index for the month in which the first day of the period in question falls."
In step 4, tenants are asked to find
- "the relevant factor for each period identified in step two."
- "This is a figure expressed as a decimal and determined by the formula—
1+B0.05 x m/12N+r
where—
m is the number of months in the period in question . . . and
r is the increase in the retail price index over the period in question, determined under step three."
Tenants have reached step 4, and they are obviously doing very well, so they are now asked to move on to step 5. Here, they are asked to find
- "the uplift factor for the reference period",
Finally—I suspect that hon. Members will enjoy that word—we come to step 6. Here, the tenant—should they still be awake—must assess, using the third of the formulae, that the
- "rent increase will be regarded as abnormal if the new rent is greater than
R x UF
where—
R is the rent previously taxed . . . and
UF is the uplift factor for the reference period."
I have to say that this is Sir Humphrey Appleby at his worst. I recognise that some large organisations will be able to put in place the systems needed to handle this process, but hon. Members will understand, having listened to all that, that to ask small or even medium-sized businesses to try to work their way through a six-step, three-formula, two-page regulation process is entirely unreasonable. Given that the Treasury got the formula wrong, could the Minister tell us how on earth a humble taxpayer is expected to cope? Will she assure us that when businesses— not surprisingly—make reasonable errors in this form of calculation, there will be no attempt to impose fines?
There is also a wider point of principle. Is it not inherently unfair for a tenant facing a large and inflationary rent rise, for reasons outside his control, to incur a substantial liability for this tax at the same time?
Will the Minister clarify paragraph 10, on page 20, which relates to substantial performance and the implementation date? Many in the property and, indeed, the business world fear confusion over which leases will and will not be affected. Will the Minister give examples of transactions covered by the paragraph?
I have not been able to deal with the whole range of areas in which errors or ambiguities might arise. The Minister has been very reasonable so far. Will she confirm that if the regulations are found to have further defects, she will come to the House in person and explain what has happened? We do not want a written ministerial statement; people outside are very concerned and want to hear exactly what the problems are.
May I be the first to congratulate the Minister on the regulation that amends schedule 5? I thought that the quality of her spin was magnificent. Alastair Campbell would have been proud. As she explained that the tax burden would not be too onerous, it seemed that if we listened carefully enough we would hear the sound of business men dancing in the streets in unalloyed joy at the generosity of Ministers. But, as was pointed out by the hon. Member for Yeovil (Mr. Laws) and others, despite all the warm words and soothing assurances the order represents not a reduction but a fourfold increase in tax revenue, from £50 million to £230 million in a full year.
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