Finance Bill

[back to previous text]

Mr. Francois: The Minister is right. This is a complex matter, because it applies not only to property law and leasing, but to trust law as well, and it gets rather complicated in cross-cutting. The Minister's understanding of the matter is similar to mine—[Laughter.] On that basis I am delighted to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Francois: I beg to move amendment No. 101, in schedule 10, page 149, line 23, leave out paragraph 15.

As drafted, paragraph 15 relates to the taxation of payments in certain contingent transactions, principally those related to leases on land where the eventual price for the transaction may depend on a variable, such as whether planning permission is eventually granted on the plot of land being transferred and where an estimate of the value of that transaction—usually referred to in such cases as the relevant transaction—has had to be included for the purpose of calculating the stamp duty land tax to be paid on the deal or transaction in question. So in a sense people have to guess.

The paragraph currently appears to mean, first, that if the contingency is not subsequently met—for example, if the contingency was that planning permission would be granted and it turned out that although the land had been leased it was not granted—the value is affected accordingly; and, secondly, an amount is repaid where a deposit or loan relating to that transaction and the repayment does not cause the stamp duty land tax subsequently to be reduced in relation to the repaid amount. In other words, the party that paid the estimated amount of stamp duty land tax on the relevant transaction does not get a refund if the estimate is eventually proved to have been too high. Can the Minister explain the Government's rationale behind that?

Mr. Lewis: Schedule 10 deals with cases where the purchase price of a property is dressed up as a loan or deposit on the grant of a lease. We have seen examples
Column Number: 295
of such avoidance on time share and similar arrangements where a long lease is granted at a low rent and what is really the purchase price is described as a loan or deposit repayable when the lease comes to an end. When the lease comes to an end—normally because the lessee moves out and a new one moves in—the deposit is repaid. The general rule for other purchases of property is that people pay stamp duty land tax when they acquire property and that is the end of the matter: there is no question of a refund of tax when they sell the property, even if they do so a very short time after purchasing it. There is no reason why the rules should be different just because the transaction is structured as a long lease.

Hon. Members will be aware of the concern, which was expressed when this measure was first announced, that genuine deposits as security for rents, such as those that the hon. Gentleman is concerned about, would be caught. Following representations we modified the provision so that genuine rent deposits will not be caught: the only ones that will be caught are the so-called deposits that are out of all proportion to rent and therefore are really in the nature of a premium.

The amendment would delete paragraph 15, which provides that where a deposit or loan that is caught by the measure is repaid there is no repayment of stamp duty land tax. As I said a moment ago, there is no reason why people who move out of property should be refunded tax just because they structure that transaction in a particular way. On that basis I ask the hon. Gentleman to withdraw his amendment.

Mr. Francois: The Minister has given us some reassurance and he has clarified for the Committee exactly how the measure is designed to work in practice. He gave one or two qualifications in his explanation, which will be of value to those who take close interest in such matters. On that basis, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Francois: I beg to move amendment No. 146, in schedule 10, page 151, line 1, leave out paragraph 19.

The Chairman: With this it will be convenient to discuss the following amendments: No. 102, in schedule 10, page 151, line 9, after 'duty', insert

    'stamp duty reserve tax and stamp duty land tax.'.

No. 147, in schedule 10, page 151, line 9, leave out

    'income tax, corporation tax, capital gains tax or tax under this Part'.

No. 103, in schedule 10, page 151, line 9, leave out

    'corporation tax, capital gains tax or tax under this Part'.

Mr. Francois: The amendments would delete or amend paragraph 19, which deals with group relief avoidance arrangements, and which forms the most controversial part of the whole schedule, and thus of part 3 of the Bill itself.

The principal complaint about paragraph 19 is that it is very broadly drafted. It seeks to withdraw group relief on transactions that are not
Column Number: 296

    ''effected for bona fide . . . reasons'',

but without seeking to define what those reasons are. Moreover, the paragraph also pertains to any such arrangements relating to alleged avoidance of not just stamp duty land tax but income tax, corporation tax and capital gains tax. Thus there is potential liability for four different taxes in one paragraph. The real danger is that the paragraph is so broadly drafted that it might catch transactions that are perfectly normal in the course of business. Such transactions might then be adjudged non-bona fide by HMRC and an important relief may be suddenly threatened as a result. The Chartered Institute of Taxation, in its briefing note on the paragraph, states:

    ''This appears to be a catch-all provision that will catch innocent transactions as well as objectionable ones.''

The practical effect of the paragraph's essentially scattergun approach could be to make UK companies extremely defensive about property transactions, for example when considering a potential reorganisation that would make good commercial sense.

It is worth making the point that, as the pace of global business seems to be accelerating all the time, it is more and more frequent for companies—and not just large ones—to want to reorganise in order to remain as lean and fit as possible. That is a challenge with which British business is grappling day in, day out, and the danger of the measure is that it could make that process more difficult in cases where, for very good commercial reasons, it absolutely has to take place. That point was made by the Confederation of British Industry in its briefing note on the paragraph. It said:

    ''This provision has been introduced without real explanation as to why it is required in addition to the wide range of other measures which already restrict the availability of SDLT group relief, and claw back the relief within a three year period. Some of these measures are being strengthened in this Finance Bill, but it is not clear why additional tests are required.''

For good measure, the Law Society chipped in. Its briefing note on paragraphs 19 and 20, which most members of the Committee will have seen, says that the test in paragraph 19

    ''will create uncertainty, difficulties for certain commercial transactions (e.g. on balance sheet securitisations), and costs associated with due diligence. Reliance should be on the clawback provisions introduced by the Bill to counteract perceived avoidance transactions, rather than the motive test.''

As I shall come on to say, there is a motive test inherent in the paragraph.

The British Property Federation has made similar representations. Its briefing note on the issue points out that

    ''The BPF is concerned that the measure could cause major uncertainty in a number of situations where a group reorganisation is being undertaken and properties are being moved as part of this. The risk of a 4 per cent. charge on transfers may constrain groups from undertaking transactions that would otherwise make sense to them from a commercial point of view.''

3.45 pm

Moreover, the BPF quite reasonably goes on to emphasise that HMRC already has a broad armoury of measures to prevent avoidance in this field, including the fact that intra-group transfers are
Column Number: 297
already subject to safeguards from the Revenue's point of view. The BPF lists those, first citing

    ''anti-avoidance provisions relating to the definition of a 75 per cent. corporate group (imported from the corresponding corporation tax provisions)''.

Secondly, the BPF mentions

    ''restrictions on the availability of relief if there are arrangements (at the time of the transfer) to de-group the transferee or for financing the transaction from outside the group''.

Thirdly, it states,

    ''clawback of the relief within three years if the transferee is de-grouped (and this Finance Bill further extends the circumstances under which a clawback charge is made)''.

We discussed that in relation to earlier groups of amendments. Fourthly, the BPF states that there is also

    ''a rule substituting market value for actual consideration (if greater) for transfers to connected companies''.

Given all that, the BPF states:

    ''With this array of anti-avoidance provisions in place, it is difficult to understand why Paragraph 19 is also necessary. The measure is disproportionate and should be dropped.''

We then come to the issue of motive tests, which we have debated several times in this Committee over the past two weeks. Paragraph 19 also creates what is in effect a motive test, not least by claiming that whatever transactions are under consideration must have been undertaken for ''bona fide commercial reasons''. The difficulty with motive tests of that type, particularly when they are applied across four taxes rather than just one, is that they introduce considerable uncertainty for companies about their likely tax position. Thus, they can act as a hindrance to efficient economic activity.

There is also a potential effect on real estate investment trusts. There is a practical point about how such transactions could affect the long-awaited development of REITs, which we have touched on. REITs could potentially be inhibited by the provisions in paragraph 19. Companies that seek to reorganise their holdings to enable them to become REITs—the Government have told us that they hope to get the process properly under way in a year's time, so we are not talking about a distant theoretical possibility—could find themselves being caught by the provisions in paragraph 19. That could obviate part of the advantage of creating REITs in the first place. In that sense, given what the Government said they want to do on REITs, paragraph 19 could be self-defeating. That has also been emphasised by the CBI in its briefing note, which said:

    ''A particular concern is that this may create difficulties for the new UK REIT vehicles to be introduced next year. Companies wishing to reorganise their holdings to enable them to become REITs may find it difficult to argue they are not transferring properties in order to gain REIT status and thus exemption from tax.''

Even though we do not have the REIT legislation until next year, that is a pretty powerful point, and I would like to hear what the Economic Secretary has to say about it.

The Government have suffered enough criticism over their delay in the introduction of REITs in the United Kingdom. Most comparable developed
Column Number: 298
countries around the world already have something similar; many have had the systems up and running for years. Bearing in mind that we have waited so long for them, it makes little sense to undermine, potentially, such a long-awaited development with a poorly drafted paragraph 19.

For good measure, and just in case Ministers have not fully got the point, the CBI ended its note with the following suggestion:

    ''This is a provision which could cause disproportionate commercial constraints for companies seeking to organise their affairs in an efficient manner, and so undermine the competitiveness of the UK as a place to do business. The CBI therefore calls for it to be withdrawn.''

That is a powerful case and we wait to hear why the Minister believes that this wide-ranging power still needs to be passed into law.

Amendments Nos. 102 and 103 represent the next stage down from the complete deletion of paragraph 19, in that they seek to retain its provisions but limit them to stamp duty land tax and stamp duty reserve tax, thus allowing the Government to achieve part of what they set out to do but on a narrower front pertaining only to stamp taxes, rather than the other three taxes as well. The British Property Federation has argued:

    ''It is considered that there are already many and varied safeguards within the provisions of the other taxes to prevent abuse and that accordingly, the motive test should be confined to''

stamp duty land tax. Although we Conservatives would still have some concerns even about the breadth of the surviving measure, in some respects it represents a compromise whereby the even wider measures involving the other taxes are dropped. I hope that the Minister might, at a minimum, say something positive about the alternative amendments.

I shall add one further point. On a previous group of amendments a Minister quoted with great alacrity, and with a smile on his face, a learned lawyer in this field who said that the Government had already legislated well to close most of the loopholes in this area. If that is so, and the Government believe it, why do they need paragraph 19 now?

Previous Contents Continue
House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2005
Prepared 30 June 2005