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Retrospection is an important point. Corporation tax and the accompanying allowances are set annually. It is not legally retrospective to reduce or remove an annual tax allowance. That is a legal point, but it is important to underline it. We will withdraw the allowances in a phased manner between 2008 and 2011 to give businesses certainty and time to plan for their eventual withdrawal. One of the objectives of the exercise is simplification. Industrial buildings allowances have been recognised, not least in the work of KPMG, as a significant compliance burden. To leave those allowances in place for up to 25 years, for example, would have resulted in the retention of that burden throughout that period. I do not agree that the measure is retrospective, and the changes that we have made will certainly contribute to simplification.
Clause 35 is integral to those reforms, as it paves the way for the gradual withdrawal of industrial and agricultural buildings allowances over a four-year period. Those allowances were first introduced over 60 years ago, replacing the old mills and factories allowance in the 1940s. The needs of the economy have changed dramatically since then, and the old allowances do not reflect the reality of modern business. I simply put this point to the House: there is no good economic case for a subsidy for some buildings but not for others. The time has come to grasp the nettle and take a much more rational approach.
We did not want to withdraw the allowances overnight, however outdated they are. Instead, we have given a years notice of their withdrawal and then, as I said, the allowances will not be withdrawn straight away. From April 2008 the writing-down allowances will be gradually reduced by 1 percentage point per year until 2011, so there will be time to plan and adjust to the changes.
Clause 35 removes, with effect from 21 March this year, balancing adjustments and the recalculation of writing-down allowances when a qualifying building changes hands or ceases to qualify for the allowances. It is designed to prevent manoeuvres which would have allowed some businesses to accelerate allowances in an unfair way. Our intention is that the withdrawal of the allowances should be fair and orderly. The House will, I think, share that intention. The amendment would delete the clause.
Ninety-five per cent. of the benefit of the allowances go to large businesses, and 50 per cent. of the total amount of industrial buildings allowances goes to the 100 largest companies in the country. Those companies will gain from the reduction in the main rate of corporation tax. On small businesses, I repeat what I said in Committee: for small businesses, as separately for large businesses, each package is fiscally neutral in each of the years set out in the scorecard in the Red Book.
The real impact of the amendment to remove clause 35 would be to permit forestalling and other activities so that some businesses could gain an unfair advantage. There would also be a huge cost to the Exchequeraround £300 million. We pre-announced that the allowances will be phased out. Removing the clause would create a huge risk in property transactions between the Budget day announcement and the main provisions in the Finance Bill next year. It would scupper the ambition to withdraw the allowances in a
fair and orderly way, so I hope that the hon. Member for Falmouth and Camborne will decide not to press the amendment to a Division.
Julia Goldsworthy: The Chief Secretary continually referred to the package of measures as a whole and the positive impact that that would have on many businesses, but that is cold comfort to the many farmers who, as we learned this evening, will be adversely affected by the changes. The Minister may talk about annual investment allowances that will be available for decisions in future, but the changes will affect decisions that have already been made. Businesses will not have the relief going forward.
I understand the legal definitions of retrospectivity, but those decisions were made in anticipation of a certain tax environment. That has suddenly changed. What confidence can people have in any new allowance systems that are set up, after those under discussion have been changed without notice? The clause will reduce confidence in any future decisions that they may make. Research and development tax credits were mentioned, but these are the kind of businesses that would not consider using them. Questions have been raised about whether the availability of R and D tax credits affects the decision to invest, or whether that is investigated after the decision has been made.
The debate has been worthwhile and given us the benefit of expertise, particularly in relation to tenant farming, which we did not explore in detail in Committee. It demonstrates a lack of understanding in the Treasury about how these issues will affect vulnerable groups. The contributions of the hon. Members for Stroud (Mr. Drew), for South-East Cambridgeshire (Mr. Paice) and for Hexham (Mr. Atkinson) highlighted the different ways in which the changes will be felt. They will have a devastating impact on businesses.
I shall withdraw the amendment, but with a heavy heart. As I said at the outset, there is a need to review the allowances system. More work should be done to understand its impact on various sectors. I hope the Minister will initiate work to identify those that will be most adversely affected. The changes may be revenue-neutral as a whole, but for some sectors they will be a devastating blow. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Julia Goldsworthy: I beg to move amendment No. 37, page 47, line 21, leave out lines 21 to 25.
Amendment No. 37 relates to anti-avoidance measures in this years Finance Bill. Like the amendments discussed earlier this afternoon, it is a probing amendment. It focuses on proposed new section 75C, which is a stamp duty land tax anti-avoidance provision that refers to Treasury provisions to make exceptions to its application. My question is whether there are further areas in which avoidance may be taking place.
We broadly welcome clause 70, which permanently implements regulations that were approved by the House of Commons in Januaryuntil that point, the regulations were valid for only 18 months. We note that those provisions are different from the initial regulations, because they make it clearer how the legislation relates to relief in areas in which anti-avoidance measures should not apply. However, I want to draw the Chief Secretarys attention to a particularly topical areaspecial purpose vehicles.
I have spoken to people involved in commercial property transactions, and it seems that there has been a clampdown on special purpose vehicles, but there has also been considerable growth in their use for residential properties. On 19 June, The Times stated:
Figures from Savills, the estate agent which specialises in properties at the top end of the market, show that some 68 per cent. of properties selling for more than £5 million last year went to foreign buyers.
Part of the problem with SPVs is the fact that people pay a lower rate of stamp duty by buying a residential property through an offshore company. The article continued:
As a case study, The Times examined the Land Registry records for properties on the west side of Cadogan Square...Of 13 properties looked at, five were held by offshore companies...A further three were registered to companies not listed at Companies House.
In a similar vein, the Daily Mail reported:
Latest Land Registry figures show that a total of 827 homes sold for between £500,000 and £1 million in February. A further 207 sold for between £1 million and £2 million...On Bishops Avenue in Barnet, one of Londons most exclusive addresses, almost 40 per cent. of the 83 houses are owned by companies or trusts.
That means that the properties are liable for a stamp duty rate of 0.5 per cent. rather than 4 per cent.
The concern is that non-domiciles or people who want to invest in a second home or country estate are using that vehicle, which provides an opportunity to secure massive benefits. Of course, if the property is that persons primary residence, they would be liable for capital gains tax if they were to purchase and sell in that way. The vehicle is being portrayed as the standard way to buy a high value residential property that is not a primary residence.
After looking on the internet for a few minutes, I found a companyI will spare its blusheswhich is specifically advertising ways to minimise tax in buying residential properties. It uses the peg of the 2012 Olympics in London to highlight the impact of the Olympics on residential property prices and provides information on how property prices increased in Barcelona, Atlanta, Sydney and Athens. It states that with the correct structure in place, it is possible for an offshore company owner to live in the property on a full-time basis or enjoy occasional use of the property when travelling to the UK without removing the associated tax benefits of offshore ownership. It also states:
The most straightforward way of holding your investment property is through a private limited liability company,
which it recommends should be an offshore company. It is clearly standard practice for many conveyancing solicitors dealing with high value properties to recommend this as a way of minimising stamp duty
payments. Does the Minister think that that should be looked into? Many of the candidates in the deputy leadership election singled it out as an area where there does not appear to be a level playing field. It offers significant savings for those able to understand how these vehicles work and to employ specialists to advise them and for those buying very high value properties, whereas those buying properties at lower prices are paying proportionately much higher rates of stamp duty.
Rob Marris (Wolverhampton, South-West) (Lab): I have been listening to the hon. Ladys remarks and cannot square them with the amendment, which as I understand itI may well be misreading itwould remove two subsections giving the Treasury the power, by order, to disapply certain anti-avoidance measures. Can she help me on that?
Julia Goldsworthy: The hon. Gentleman is right to say that the amendment applies to that specific part of the Bill. My point is that the Treasury should perhaps be looking to extend the provision further instead of disapplying it.
Does the Treasury intend to respond to the concerns raised by deputy leadership candidates, and does it have any estimate of the extent to which SPVs are being used to minimise stamp duty land tax? I hope that it will look into that issue and perhaps address it in next years Finance Bill.
Mrs. Villiers: I should like to deal first with the substance of amendment No. 37. I welcome the opportunity to look again at the anti-avoidance provisions in clause 70, which the amendment seeks to change, as the hon. Member for Wolverhampton, South-West (Rob Marris) pointed out. I will address the points made by the hon. Member for Falmouth and Camborne (Julia Goldsworthy) in due course.
I am concerned about the amendment because it would remove subsection (11) of new section 75C, which contains one of the few safeguards in the new anti-avoidance regime and as such is an important provision. It is not without its problems, but it is better to keep it in than take it out, as there will be cases where it is important for the Treasury to ensure that new section 75A is disapplied in the way provided for by new section 75C(11). That is because, as I pointed out in Committee, new section 75A is very wide-ranging, as well as controversial. Subsection (11) will provide a bit of a safety valve if the fears that I expressed in Committee materialise in the operation of the section.
The drafting of new section 75A and the anti-avoidance provisions in clause 70 have been described by the Chartered Institute of Taxation as fundamentally deficient and so wide as to render the provision almost unworkable. Similar concerns have been expressed by the Law Society, the Institute of Indirect Taxation and the CIOTs stamp taxes practitioners group. I am advised that the impact of the provisions is so wide-ranging that checks will probably have to be carried out in virtually all property
transactions. That will cause serious conveyancing headaches and give home buyers yet another problem to worry about.
The key problem is that new section 75A could catch wholly innocent transactions simply because they involve a series of steps. It requires only that one person (V) disposes of property and another person (P) acquires it, that a number of transactions have taken place in connection with the disposal and acquisition, and that the amount of stamp duty land tax payable in respect of those transactions is less than that due on a notional direct transaction between V and P. Where the conditions apply, SDLT is charged on the notional transfer between V and P. The problem is that the wording of proposed new subsection 75A(1) is so broad that even transactions linked only through conveyancing succession could trigger the operation of the proposed new section 75A and its anti-avoidance provisions.
The concern is even greater when one realises that the transactions could take place years apart yet still trigger the operation of the proposed new section, as there is no temporal limit on the operation of the anti-avoidance provisions. For example, if V sells a property to A for £300,000, and A sells it a year later to P for £250,000, proposed new section 75A could apply, thus making P liable for SDLT on £300,000 even though he had no involvement in the earlier transaction. I am told that virtually all sub-sales, in which the sale on to P happens straight away, would be caught. Getting hold of the information about earlier transactions that is needed to check whether there is any danger of triggering proposed new section 75A could add significant delays and costs to home buyers and other property purchasers.
HMRC appears to think that all problems can be solved by producing guidance, and it has responded to concerns essentially by producing a white list of transactions, which it believes will not be caught by the proposed new section. However, guidance is not a sufficient substitute for properly drafted legislation. The Bill could affect every high street solicitor and conveyancer in the country, and many of them simply will not have the expertise or resources to keep track of HMRC guidance. Relying on guidance is difficult enough in specialist matters, such as group relief and real estate investment trusts, when a relatively small, well defined body of practitioners is affected, but it gives rise to far greater problems in the context that we are considering.
There is an even more important problem, which has recurred throughout our debates on the Bill. As Lord Upjohn once famously commented:
A taxpayer should be taxed by law not untaxed by concession.
It is not acceptable for the Government to adopt excessively wide anti-avoidance legislation, which catches a range of innocent transactions, and then seek to give HMRC discretion about the taxpayers to whom to apply it. That contravenes not only the principles set out by the House of Lords in the Wilkinson case that a tax-collecting authority cannot ignore legislation and cannot have significant discretion in tax collection, but the constitutional principle that Parliament, not the Executive, has the right to determine taxation in this country.
Proposed new subsection 75C(11), which amendment 37 would delete, enables the white list of cleared transactions to be given legal force via secondary legislation. In a sense, proposed new subsection (11) is an admission that proposed new section 75A is excessively wide. I hope that it will be useful in giving statutory force to the white list in future. However, enabling exemptions for specific sorts of transactionand even for specific taxpayersis an unsatisfactory method of solving the problems of an excessively wide provision. I believe that the Chief Secretary acknowledged in Committee that specific taxpayers could be exempt. That is a strange way to draft ones tax measures. It would be better to draft a more rational and targeted anti-avoidance clause. However, deleting proposed new subsection (11) would not be helpful.
Let me deal with the issues that the hon. Member for Falmouth and Camborne raised. I listened with interest to the points that she made about the methods used to avoid paying stamp duty. If she presented detailed, costed and fully researched proposals, my colleagues and I would be happy to consider the case for change. However, I advise against rushing to judgment on the matter. The deputy leadership election in the Labour party and the row about private equity has pushed non-domiciliary tax rules up the political agenda, but we do not want the tax law equivalent of the Dangerous Dogs Act 1991. We need more empirical evidence and an opportunity for thoughtful, objective and considered reflection based on the facts.
Julia Goldsworthy: I agree with the hon. Lady that discussions in the press about private equity tend to lock on to something that is easy to define. Yet not only non-domiciliaries but anybody who wants to put a residential property into an offshore company may benefit from the mechanism. We must be clear that we are not specifically attacking non-domiciliaries but that we need to target the mechanism.
Mrs. Villiers: I am grateful to the hon. Lady for that intervention; she has made a useful point. There might well be areas in which the rules on non-domsor indeed, on the use of offshore companiescould be reformed and tightened. However, I would emphasise that, before embarking on any reform of the system, it is vital that we properly assess the impact of any change on our gross domestic product, on the City of London and on tax revenues. Carefully targeted reform of the non-dom rulesor indeed, the rules on the use of offshore companiesaimed at closing unfair loopholes is of course worth considering, and the Conservatives would be prepared to do that. It is vital, however, that any move to change those rules should not result in ill-advised or ill-thought-through legislation adopted in response to tabloid headlines.
We must ensure that we approach this issue with caution, particularly given the importance of the City of London and its attractions for mobile foreign professionals. Reforms, if they are to go ahead, must be carefully thought through and conducted only after serious and proper analysis and extensive and effective consultation, to ensure that we get this issue right.
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