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David Taylor (North-West Leicestershire): Surely the hon. Gentleman is aware that there is relief without limit for the conveyancing and leasing of non-residential property in disadvantaged areas. Could the Treasury not tackle the problems in his constituency and elsewhere by broadening the definition of those areas?
Mr. Simmonds: The hon. Gentleman made an interesting intervention, but he may not understand a point made by both the hon. Member for Yeovil (Mr. Laws) and myself. A change would not necessarily help because the definition would still be based on the affluence or otherwise of the residential population, not commercial activity in those areas. It is ludicrous, for example, that an enormously affluent and successful business environment such as Canary wharf should be completely exempt. Meadowhall shopping centre just outside Sheffield is also exempt, adding £50 million to its value. I think that it equates to 1p for the net asset value of the company that owns it.
Mr. Laws: The hon. Gentleman is making an effective point. Does he agree that the Government define many major city centres as deprived, so all the businesses in the area, even those selling to affluent shoppers, are exempt? In many other parts of the country, businesses are bearing a burden that they can ill afford to bear.
Mr. Simmonds: The hon. Gentleman made a good point, and he is right. My understanding is that in Birmingham, Manchester and Leeds the whole city centre is exempt, which is not right, as other commercially disadvantaged areas will be hit by the proposals.
There are two remaining issues that I would like the Financial Secretary to deal with today, or respond in writing if she does not have the facts at her fingertips. What happens if there is a 10-year lease with a three-year break clause? Is the stamp duty based on the length of lease up to the break clause, or on the entire lease? That would make a significant difference to the sums involved. I should like to have a much more detailed conversation about turnover leases, because I am not sure that the Financial Secretary understands how they operate, given her answer to my intervention, but I shall not ask about that now. However, what happens when a tenant takes a five-year lease in a shopping centre, trades for only one year, and then the shopping centre
shuts? Do they get their money back? Is there a rebate system, or is it a case of the Government taking their whack, and it is just tough for the tenant? Such situations can arise in deprived areas.In conclusion, the orders make provision for a minimum eightfold increase, and will damage flexibility in the marketplace. They may lead to lower investment, reduced margins and job losses. Furthermore, the Government have ignored the consultation process. The regulations will have an unnecessary and negative impact on a vital area of the economy merely to correct the Chancellor's financial and fiscal irresponsibility. I very much hope, therefore, that the Government will reconsider their proposals.
5.8 pm
Ruth Kelly: With the leave of the House, Mr. Deputy Speaker, I shall wind up our debate on the regulations. It is worth reminding hon. Members why we introduced the reforms in the first place and on what basis we did so. The reform of stamp duty land tax is a wholesale reform of tax on land transactions, and is not something that hon. Members should shy away from. It is a long overdue tax reform, which was welcomed in discussions of the Finance Act 2003 as a much-needed measure to modernise the system.
Mr. Laws: Do any professional or business bodies welcome the proposals as they stand?
Ruth Kelly: I am putting these lease duty proposals in the context of the broader package to reform stamp duty—an absolutely essential, but complex, tax reform that previous Administrations long shied away from. Reforming tax on leases, specifically on their rental element, is an integral part of that root and branch reform.
The right hon. Member for Charnwood (Mr. Dorrell) argued—to put it in one sentence—that he could not support an increase in the rate on leases because stamp duty is a transaction tax. I recognise his point, but the reality is that Governments of all persuasions, in many countries, have used stamp duty as a cheap and efficient way of raising revenue. Indeed, many countries have far higher levels of stamp duty than those currently operating in the UK. Given that stamp duty embraces an important quantum of revenue, it must be right to address anomalies, distortions and avoidance.
Ruth Kelly: I want to finish my point before giving way.
Stamp duty land tax does just that. It ensures that the tax is fair to all taxpayers, including those who were previously avoiding it. The charge on new leases is an integral part of that, as leases represent an interest in land.
Mr. Dorrell: The Financial Secretary seems to be arguing that although she recognises that capital transaction taxes cause distortion, because other
countries have them we should feel free to close our revenue gap by increasing the yield from precisely those taxes. Can she explain her case a little further?
Ruth Kelly: Is the right hon. Gentleman arguing for the abolition of all capital taxes? If so, where would he raise the revenue from?
Mr. Dorrell: All taxes distort; but in raising revenue, we should recognise that the more we raise taxes based on capital transactions, the more economic damage we do. That should be an even further incentive on the Treasury to begin to exercise some control over public expenditure.
Ruth Kelly: I am sure that we could debate this subject for hours, but this is not the appropriate forum in which to do so. It has long been accepted on both sides of the House that there is an argument for taxing transactions and interests in land. What we have done, and propose to do, is to modernise the way in which that tax regime operates.
David Taylor: Does my hon. Friend agree that the right hon.—and unjustly overlooked—Member for Charnwood (Mr. Dorrell) was wrong in one aspect of his critique of capital taxes, in that he suggested that they were innately cliff-edge taxes? That is not so if a graduated form is introduced. Might the Chancellor receive submissions to that effect?
Ruth Kelly: I have listened to my hon. Friend's comments, and I will draw them to the attention of my right hon. Friend the Chancellor.
It is only fair that the granting and transfer of leases is also subject to lease duty where transactions and transfers are subject to that tax.
Mr. Laws: Will the Minister give way?
Ruth Kelly: I want to make some progress: I shall give way in due course.
The distortions apparent in stamp duty, where the rate of duty is increased at eight and 36 years, are not a feature of stamp duty land tax. The tax is charged at a flat rate of 1 per cent. of the net present value over the relevant threshold. A business takes into account the economics of the transaction when it enters into it. Stamp duty land tax places a value on the benefit received by a business entering into a lease transaction using lease length and rental payments as determining factors. That is no different from modern valuation and accounting practice. For example, the International Accounting Board is to recommend that all leases are shown as assets on the balance sheets of companies that have them. Stamp duty land tax uses a method to calculate that value, then applies a tax rate to it.
The proposed structure for taxing lease rentals is more in line with the structure for taxing freeholds, but it acknowledges that leases are not the same as freeholds because the rate is set at a flat 1 per cent. instead of being dependent on value. That contrasts with the old stamp
duty regime, which it replaces. It determined tax rate by the term of a lease. To assist smaller businesses and start-ups, the new regime taxes only the excess value over the appropriate threshold.
Mr. Laws: I do not know whether I heard the Financial Secretary correctly earlier. Will she confirm that she gave an indication to the House that, in tackling the distortions and threshold effects in stamp duty, she will actively consider them in the residential market? The latter arise as a consequence of the application of stamp duty thresholds. Will she introduce proposals to deal with that in the next pre-Budget report?
Ruth Kelly: I shall take the hon. Gentleman's comments as an early Budget representation and convey them to my right hon. Friend the Chancellor.
In determining the form of stamp duty land tax, I have been acutely aware that the reforms are not welcomed by the whole leasing community. Conservative Members have made comments to that effect. However, the reforms will exempt far more leases from the duty than the old stamp duty regime. In my opening statement, I made it clear that 60 per cent. of all leases would be exempt from stamp duty land tax. I listened to the comments of the hon. Member for Boston and Skegness (Mr. Simmonds). Although I understand that the IPD said that 98 per cent. of the value of leases will be subject to tax—I have no reason to dispute those figures, which are consistent—it underlines my point that small leases and start-ups will be exempt from the impact of the tax. We specifically designed it to be consistent with a small business agenda.
As I said earlier, 93 per cent. of leases in the residential sector will be exempt from the tax. In the Budget, my right hon. Friend the Chancellor offered more consultation with the industry and we undertook precisely that. The process provided much valuable information on the leases that businesses take out. For example, for the first time, we had genuine data on sale and lease-back transactions. Those data informed our subsequent judgments.
The consultation was fully taken into account in the decisions on the new regime. Through the consultation process, we could preferentially target small businesses and start-ups to ensure that they were significantly less likely to face an increase in tax from the measures and that most small businesses would be exempt from the tax.
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