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24 Feb 2010 : Column 111WH—continued
In view of the time, I will not give the background. I am sure I do not have to explain to the Minister and other hon. Members the impact of the Government's changes in relation to furnished holiday lettings on a genuine business sector. I wrote to the Financial Secretary about the announcement in the 2009 Budget of the change to the arrangements introduced in 1983 under
the Conservatives. Those arrangements were welcome and appropriate for people who work hard to ensure that this country has a vibrant holiday letting sector.
I will give the example of one business, which is not untypical of the kind of holiday letting business that exists in my part of the country. I am talking about not single second homes that may occasionally be made available through an agent to the holiday trade, but large holiday letting businesses. I will not name the business in my constituency, although it is one of those that I have discussed with the Financial Secretary. It is a large holiday park not far from where I live which offers a whole holiday experience. Every week, 200 families use the chalets in the park and 9,000 people visit it every summer. Its facilities include a swimming pool, entertainment, catering establishments, security, cleaning, linen, and an information and reception area that opens at 8 am and closes at midnight. Other than its being made up of chalets and not contained in one building, it is similar to a hotel.
The business has asked the Inland Revenue for a decision on whether it receives a trading income or an investment income. The regulations the Government intend to introduce in April rely on the difference between investment income and trading income. The Revenue has so far refused to give that clarification. I wrote to the Financial Secretary on this issue last month and emphasised that since the publication of the HMRC technical note of 9 December 2009, which explained to businesses how the change would apply to them, there has been increasing alarm throughout the legitimate holiday letting sector, in that the rules will have a serious and detrimental impact on it. Worse than just seeking compliance with the European tax rules on furnished holiday businesses, HMRC appears to be going further and has made clear its intention to treat such businesses as investment companies rather than trading companies.
The impact of the changes will be far-reaching in areas such my constituency and the rest of Cornwall and the Isles of Scilly, where many businesses are demonstrably not investment companies because they operate as holiday parks that provide whole holiday experiences, rather than property lettings. Properties that are fundamental to purpose-built holiday complexes, such as chalets, cannot be sold separately as part of investment activity. Of course, the rules will not apply to bed and breakfasts and hotels, even though they clearly compete in the same environment. As a result of the rules, there will be no encouragement for holiday businesses to invest in improving and modernising their facilities.
I understand that the Government thought this was simply a matter of tidying up an area of regulation, but I hope the Minister realises the far-reaching impact there will be on genuine holiday letting businesses, as distinct from second homes, which I described earlier.
Mr. David Drew (Stroud) (Lab/Co-op): I apologise for missing the first few minutes of the hon. Gentleman's excellent speech-I was being lobbied by homeopaths. I do not know if he mentioned this before I arrived, but his namesake Henry George would have said that the answer to this issue was to have land value taxation in this country. I know that the Liberal Democrats are not unsympathetic to that argument. Does the hon. Gentleman agree with me that we can sort these problems out by moving to a form of land value taxation?
Andrew George: That opens up a much wider area of debate. Perhaps we should reserve some time for a further debate on that. I have much sympathy for that argument, having kept in touch with my namesake through the Henry George Foundation, which regularly debates pushing this issue.
I welcome the Government's introduction of the community infrastructure levy. When a field worth £3,000 is allowed to be turned into unfettered domestic property worth, say, £1 million an acre, that is the gift of society through creating the planning rules and of the local community through the assent of the local authority. It is not unreasonable to ask for a proportion of that money, although the impact on the agricultural sector is a separate issue. That relates to the point made by my hon. Friend the Member for Stroud (Mr. Drew)-I call him my hon. Friend deliberately.
I apologise for taking up so much time, Mr. Cummings, but this is a complex issue and I have covered a wide range of areas. I apologise to other Back Benchers who wish to contribute to the debate. I look forward to the winding-up speeches.
3.10 pm
Dr. John Pugh (Southport) (LD): It is a privilege to serve under your chairmanship, Mr. Cummings, and to be speaking so soon, although I cannot promise to go on for the required length of time.
I congratulate my hon. Friend the Member for St. Ives (Andrew George) on securing the debate, although I should point out that he has seriously undersold himself. I believe that he is a legend in Cornwall, where he is seen as the scourge of the effete, opulent metropolitan elite who distort his local economy and housing market. I know from his activities in the House that he has been most assiduous in pursuing this topic. Far from being financially illiterate or challenged, he has shown a detailed, encyclopaedic knowledge, which might, in part, exceed the command of these issues shown by those on the Treasury Benches. My hon. Friend did, however, make one small error, although he can be forgiven for that because it was in connection with Liberal Democrat policy on local income tax.
My hon. Friend dealt with a very difficult subject-property taxation-and he acknowledged that it is complex. Taxation is never a popular proposition, but in the case of property taxation we are trying to use a variety of fiscal tools-council tax, the small business rate, capital gains, capital allowances, trading loss relief, roll-over benefits and so on-to bring about certain desirable effects. That is exactly what the furnished holiday lettings rules endeavoured to do; they were there to encourage greater tourism and the development of the tourism economy. That is to be approved of in most of the areas that we represent, including Southport, which is a seaside resort.
My hon. Friend wants the appropriate use of said tools to have certain clearly beneficial effects. The first is to discourage second home purchases and thereby increase the local housing supply, although he indicated that the local authority has done a fair amount through planning measures to increase local supply. The second is to encourage local rentals. I understand, although this has not been mentioned, that there is a fair drive under way to get farmers to diversify and to use their property to supplement their incomes in one way or another.
The third is to discourage non-occupancy, which means that property is not used at all, but is simply dead, vacant and locked up, despite the clear need for property in the area. That can, and in fact does, mean that home owners occasionally become holiday-letting people. Second-home owners will also become holiday-letting people, which means, paradoxically, that they will be more likely to be able to afford another home. To some extent, that shows how complex it is to use fiscal tools appropriately to achieve the right effect.
In any case, it is hard to distinguish between a metropolitan absentee, whom we might regard as bad, and a small landlord working with a short season which, unfortunately, is what people in the UK will mostly be working with. In fact, those two people may be the same person, which illustrates the complexity of the issue and the fact that tilting the rules in favour of the desirable case could also indirectly advantage the other case. A metropolitan absentee, if I can use that expression, might endeavour to rent at a price that is slightly above the commercial rent, but which does not look too bad, to secure certain benefits to make their property more affordable, essentially using tax devices that were put in place for other purposes to defray their own costs. That was discussed very effectively by my hon. Friend, who noted that clamping down on such practices was a matter of vigorous compliance. However, we would all acknowledge that compliance and catching people who are up to such tricks are complex matters, that they are not easy and that they often do not repay the energy involved.
The rental market is the one that most interests me and it is probably the one that most affects the housing economy. Treasury figures on tax and profit show that it appears to be expanding, and the figures in the debate pack indicate that profits from furnished lettings more than doubled between 1997 and 2007. What is not apparent, however, although it was discussed in the Finance Bill Committee, is what effect the Government's recent changes to the rules will have.
No Minister worth his salt would go anywhere without a proper impact assessment for any legislation that he introduced, and that is certainly true in this case. The Treasury impact assessment seems to indicate that the change to the FHL rules will not damage business and will in fact eventually increase Government tax revenues by £20 million, which is a tidy sum. On the other hand, the Tourism Alliance has a completely different take on the matter, and estimates that the Government's changes to the rules will cost £110 million and more than 2,400 jobs. That is a conservative estimate, and the alliance suggests a larger estimate if other things are factored in. I am not quite sure what its estimate is based on, but it is pretty grim when presented in those terms.
Generally, we would be happier and more comfortable about how the fiscal tools are playing out and about their effects if we knew more and if the Treasury's impact assessment was more broadly based-Treasury impact assessments can sometimes be somewhat narrow. Anything that encourages tourism and that encourages people to rent property in this country is a huge social good at the moment, and tourism is one of the few genuinely effective exports that we have. It reduces payments made outside this country and increases those made in it; it also has wholly healthy consequences for employment, benefits and taxation.
I therefore wonder whether the Treasury impact assessment on the recent change in the FHL rules is sufficiently broadly based or whether it is not in fact too narrow in its overall view of the pluses and minuses. The benefits to Cornwall, Southport and Northern Ireland of growth in the tourism market are appreciable. A more active tourism market would bring more property into use and, in doing so, presumably bring prices down. We could perhaps challenge Spain some day in terms of cheap accommodation, if not in terms of the sun.
The Minister will reply that any worries about changes to the fiscal regime, particularly with regard to holiday lettings, will have to be put aside, because the Government have no option. This is an endeavour to bring British legislation into line with European legislation, and these things are dictated by the single market and by the demand for tax unification. However, as the Financial Times noted on 25 April 2009, when it looked at this issue, the Government are inconsistent in their consistency. In some cases, they can, for good reason, be tardy in bringing our regime into line with the one that exists throughout Europe.
All that makes the case for a broad review, which is precisely what the Liberal Democrats called for during the passage of the Finance Bill. However, we probably also need to look specifically at the south-west. Although we talk about fiscal effects, they are set against the background of other changes in the market, particularly in supply. In that respect, the south-west must be an extremely interesting area to study, because it has valiantly endeavoured to increase supply; it is not just relying on fiscal tools to solve its problem. As my hon. Friend highlighted, it has also tried to be creative with the council tax regime. In a sense, therefore, it has pulled most of the levers necessary to resolve the problem. It now wants to know what the Government can do to make its endeavours more successful and to help it achieve the social effects that I described and which my hon. Friend and most people in the room wish to see.
3.20 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship, Mr. Cummings. I congratulate the hon. Member for St. Ives (Andrew George) on securing the debate. When I saw the title was "Property Taxation", I thought that that could cover a multitude of areas, so I am also grateful for his kindness and courtesy in indicating what he wanted to cover. I will focus the majority of my remarks on those specific points. He set out two key aspects: first, second homes, both within his constituency and the south-west as a whole, which is an issue that he has spent considerable time focusing on since 1997, and, secondly, furnished holiday lettings.
What lies behind the second homes issue is the significant concern that local people are unable to find local homes. In the south-west as a whole, figures suggest that house prices are typically eight times the local average salary. Those numbers are particularly significant in the south-west because it is hugely popular and the sort of place where people want to buy second homes. There is no doubt that that demand has played a considerable part in the housing problems. The hon. Gentleman is right to say that the south-west is not an area where there has been no house building; there has been an expansion of supply.
It is difficult to use the tax system, and specifically the council tax system, to address that issue. I take the point that there was originally a discount, but I am not sure how effectively the council tax system could be used, and whether the hon. Gentleman was getting support from his Front-Bench colleagues on whether it could be used. Given that Liberal Democrat policy is to replace council tax with a local income tax, it was interesting to note that it is not the case, as he suggested, that that would double the income tax, but I am still not sure what the answer is.
Andrew George: I expressed my personal view on the application of additional layers of income tax, because I think that that would be perfectly fair. The party takes a different view on that, which I did not expand on in answering the right hon. Member for Oxford, East (Mr. Smith). It would apply a locally collected business rate on second homes.
Mr. Gauke: I am grateful to the hon. Gentleman for providing that clarification. The way to address the genuine concerns that he has assiduously highlighted is to do more to encourage the building of local homes for local people. In recent weeks, we have set out our proposals for local housing trusts. Individual communities could bring forward limited development in their areas outside the local planning process. If there was strong local backing, it would be possible to develop local homes that local people would want, the make-up of which could be decided locally. We anticipate that some of that housing would be held in perpetuity for local people. Therefore, although I sympathise with the hon. Gentleman's concern, I am not convinced that the tax system is the right way to address it, but we can look at the planning system.
The second area that he highlighted was furnished holiday lettings, and I have great sympathy with his concerns. As the hon. Member for Southport (Dr. Pugh) pointed out, the Liberal Democrats requested a review when the Finance Act 2009 was being considered, as did the Conservatives on the Floor of the House. The background to that is that the regime in place since 1983 treats furnished holiday lettings as trading businesses rather than property investments. The significance of that is that it gives them a favourable tax regime through the availability of capital allowances and certain loss reliefs that would not be available if the lettings were treated as property investments.
At the moment, the regime applies to property based in the UK. The Government's advice says that, were they to be taken to the European Court of Justice, they would have to apply exactly the same regime to properties held elsewhere within the European economic area, which would involve an additional cost. Extending it more widely would involve a cost to the Exchequer-not necessarily a huge one but certainly a cost-so they are looking at removing the regime. There are concerns that that would have a knock-on effect in particular localities.
It is better for local communities that a property is let out, rather than used as a second home. There may be an argument, although not a particularly strong one, that those properties might go on to the market for local people if they were not used as furnished holiday lettings. If that were the case, it would change the nature of the argument, but what we hear is that, largely, those properties
would simply become second homes used very occasionally by people living some distance away and adding very little to the local community. There is a legitimate concern.
Andrew George: I was attempting to emphasise that there are large numbers of purpose-built holiday chalets and other properties, with planning restrictions on their occupancy, that are clearly run within the curtilage of a holiday park. We are primarily concerned about those businesses. They may be using the business rating option to avoid the council tax option, in the manner that I described earlier, but they are clearly on the fringes of what we are talking about as they provide a holiday experience. They are trading rather than simply collecting money for the occasional letting of the property.
Mr. Gauke: The hon. Gentleman makes a good point and those cases are clear. In the one that he identified, I wondered at one point if he was going to provide the contact details as well. It sounded like a very tempting location for a holiday. I do not want to overstate the case that I was floating. Many of the properties are cottages that are likely to be bought as second homes. The likelihood is that they would not be bought by locals, but his point is fair; there are properties for which the changes are not an issue at all.
There is a lack of joined-up government on this. As I understand it, the Minister of State, Department for Culture, Media and Sport, the right hon. Member for Barking (Margaret Hodge) was first informed of the developments in the taxation regime in public and she had no idea that there was to be a change. There does not seem to have been any consultation between the Treasury and the Department for Culture, Media and Sport. Therefore, one suspects that there was no proper assessment of the impact on local communities.
Dr. Pugh: The hon. Gentleman is making the case for serious research into the effects of the change in fiscal measures very well. It strikes me that the effect may not be general but may vary from area to area depending on the attractiveness of the property, its proximity to London and so on.
Mr. Gauke: The hon. Gentleman is right, as he was in his earlier point about this being a particular issue for the south-west. Other parts of the country will clearly be affected, but one suspects that the problem is considerably concentrated in the south-west. If the Minister is able to shed any light on that in his remarks, it would be helpful.
We have raised the point in the past about whether there are other ways of dealing with the issue of the location of the properties. For example, the current rules require properties treated as furnished holiday lettings to be occupied for a minimum of 10 weeks and to be available for 20 weeks. By and large, we understand that-this was shown in the work produced by the Tourism Alliance-in the UK, those sorts of properties generally tend to be available for longer and occupied more than properties based elsewhere in the European economic area. Therefore, rather than scrapping the regime, if the minimum occupancy threshold was simply extended to more than 10 weeks-for example, to 15 or 20 weeks-the likelihood is that the Government could include most of the UK properties and exclude most of the EEA properties.
That would be a less disruptive change of regime than that proposed by the Government, which may have a knock-on effect on rural areas, as we have heard. I would be grateful if the Minister could say whether any work or research has been done on that matter and whether there are alternative approaches to dealing with the regime. The proposal depends on the numbers and the Treasury is well placed to do such research, but certainly the work produced by the Tourism Alliance suggests that such a system is a way of dealing with the matter.
Finally, very briefly, given the subject of the debate, I cannot resist highlighting the position of the Liberal Democrats on the broader issue of property taxation. I understand that the Liberal Democrats would scrap the council tax and replace it with a local income tax because the council tax is not based on ability to pay. That was certainly in their campaign at the last general election, and seems to be a move away from property tax per se. On the other hand, the policy of introducing a mansion tax on homes worth more than £2 million was announced at the last Liberal Democrat conference. That raises a few questions about how those properties will be valued, whether there will be distortions in the housing market, what would happen in relation to pensioners on low incomes and how improvements would be taken into account. The Liberal Democrats seem to be moving in favour of property taxes in that regard.
I recalled hearing a quote from the leader of the Liberal Democrats broadcast on "The Westminster Hour" on 29 November 2009, so I had a look for it. He stated that he has a
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