2 Developments since the Land Reform
in Scotland: Interim Report
The
work of the Committee
Information on land values
5. One issue raised during our initial evidence sessions
was the paucity of reliable, publicly available data on the value
of land. Professor Paul Cheshire of the London School of Economics
told us that: "It is absolutely amazing that a modern, allegedly
civilised, country does not have any public data on land prices
or land ownership."[4]
6. We were concerned to hear that the Valuation Office
Agency (an executive agency of HM Revenue and Customs) had stopped
collecting and publishing land price indices in 2011 and our interim
report recommended that this publication resume. When we asked
HMRC why the 2011 decision to cease publication had been taken,
they were unable to answer.[5]
They subsequently told us that an internal review of the data
used to produce the land price indices:
drew out some limitations in the effectiveness
and general application of the data, particularly around the small
number of data points on which the indices were based. In addition
there had been declining demand from the users of publication
and as a consequence funding was withdrawn from a number of Departments.
[…] It is worth clarifying that that report was not designed
or intended to provide representative land prices.[6]
7. We are disappointed that Valuation Office Agency,
having identified problems with the effectiveness and application
of the data underpinning the land price indices, chose to cease
publication rather than tackle these issues. We repeat out recommendation
that publication of the indices resume in order to allow informed
debate about public policy on land and land ownership.
CONDITIONAL EXEMPTION TAX INCENTIVE
SCHEME
8. The Conditional Exemption Tax Incentive scheme
allows some assets to be exempt from Inheritance Tax or Capital
Gains Tax when they pass to a new owner.[7]
There are four categories of asset to which exemption can apply:
· buildings,
estates or parklands of outstanding historical or architectural
interest,
· land
of outstanding natural beauty and spectacular views,
· land
of outstanding scientific interest including special areas for
the conservation of wildlife, plants and trees, or
· objects
with national scientific, historic or artistic interest, either
in their own right or due to a connection with historical buildings.
9. In order for land owners to be granted an exemption
under the scheme they must undertake to preserve and manage land
and allow public access. Mike Crabtree, Specialist, Personal Tax
Directorate, HMRC, told us that:
Conditional exemption is there, effectively,
to preserve and protect the UK's heritage assets for the benefit
of the public and to stop estates having to sell them to pay inheritance
tax bills.[8]
10. There are currently 62 such schemes operating
across Scotland covering land, buildings and building contents.[9]
The UK-wide estimate of the amount of tax forgone as part of the
Conditional Exemption scheme is £60 million for financial
year 2014-15.[10] If
a grant or public subsidy were given for similar heritage work,
the amount of the subsidy, and any reporting on the satisfactory
discharge of the undertaking, would normally be publicly available.
11. In our interim report we questioned why the amount
of tax being forgone could not be made available in order to allow
the value for money of the exemptions to be assessed.[11]
HMRC told us that the amount of each individual exemption could
not be made public because the amount "would be part of someone's
inheritance tax bill, and for that reason it would be considered
taxpayer confidential."[12]
However, HMRC themselves told us that although there is a public
register of the assets this does not necessarily mean that owners
are identified.[13]
12. The justification for the tax forgone as a result
of the Conditional Exemption scheme is that there is significant
public interest in ensuring access to, and preservation of, the
land to which exemptions are granted. In Scotland, however, right
of access to most land is guaranteed by the Land Reform (Scotland)
Act 2003. As such, an undertaking by landowners in Scotland to
allow access has no value to the public as such access is within
their existing rights. The key question for the Conditional Exemption
scheme, as applied to land in Scotland, is whether the undertaking
of a land owner to maintain their own land is sufficient justification
for totally exempting that land from Inheritance or Capital Gains
Tax.
13. Those benefiting
from the Conditional Exception scheme do so to enable the preservation
of UK heritage assets. These assets are listed and owners must
allow public access but information on how much revenue is forgone
as a result of each of the tax exemptions is not made public.
It is difficult to see how a meaningful consideration of the efficacy
and value for money of these exemptions can take place without
greater transparency.
14. We recommend that the incoming Government
brings forward proposals to improve the provision of information
on the Conditional Exemption scheme and its costs to the public
and to consider its value for money as this is not proven at present.
15. Where part of the undertaking given by land
owners, such as public access, is already required by law a partial,
rather than total, exemption may be more appropriate. We recommend
that, if the value for money of the Conditional Exemption scheme
as a whole is proven and the scheme is retained, the incoming
Government brings forward proposals to introduce graduated exemptions
that reflect the unique benefits that tax payers are gaining from
the scheme.
AGRICULTURAL LAND
16. In our interim report we called for further evidence
in relation to the case for the retention of two reliefs. These
were the retention of a distinct Agricultural Property Relief
from inheritance tax separate from Business Property Relief[14]
and the retention of the specific exemption of agricultural property
and sporting land from non-domestic or business rates.[15]
The Scottish Government are proposing to end the non-domestic
(business) rate exemption for shootings and deer forests as part
of the Land Reform Bill that they propose to bring forward in
2015. There are no proposals to remove the exemption from non-domestic
rates for agricultural land and property.
17. During the initial inquiry, we took evidence
from the Institute for Fiscal Studies which questioned the continuing
justification for Agricultural Property Relief from non-domestic
rates or inheritance tax, saying:
If you want to subsidise farming, there is still
the question of what is the best way to do that. It is not obvious
to me that a tax break that is, in effect, proportional to the
rental value of the property occupied, is actually the right way
that we want to subsidise farming.[16]
18. James Robertson, Institute of Chartered Accountants
Scotland, suggested that the importance of a specific Agricultural
Property Relief, as distinct from Business Property Relief, was
that:
an agricultural landlord is the only form of
landlord where you get an inheritance tax relief for letting your
property. If you remove agricultural relief, one
of the unintended consequences might be yet another incentive
for somebody not to let agricultural land.[17]
He also noted that for someone farming their own
land, Agricultural Property Relief would allow them to claim inheritance
tax relief on the farmhouse as well as the farm land, while Business
Property Relief would cover only the land.[18]
19. When asked about Agricultural Property Relief
from inheritance tax, Adrian Cooper, Specialist, Personal Tax
Directorate, HMRC, told us that he was not aware of any "formal
review" of whether Agricultural Property Relief was meeting
its policy objectives.[19]
He also told us that, despite viewing the prevention of the breakup
of family farms as the key policy driver behind the relief, HMRC
"do not keep formal statistics" on the extent to this
breakup is happening or not happening.[20]
20. The tax
system can be used as a policy lever. In the case of agricultural
land, the available tax reliefs seem to be intended to encourage
productive use of farmland and prevent the break-up of family
farms. However, due to a lack of oversight by the Treasury and
HMRC, it is not clear to what extent either Agricultural Property
Relief or exemption from non-domestic rates are having the desired
impact and whether there are any unintended consequences arising
from the reliefs available to agricultural landowners.
21. We urge the incoming Government to set out
the rationale for Agricultural Property Relief and undertake a
review of whether the relief is achieving its purpose. At present
the case for its retention is not proven.
Tax reliefs and the cost of land
22. The Scottish Land Fund is a Scottish Government
Scheme to encourage community ownership of land. The original
scheme ran until 2006. The second Scottish Land Fund scheme, run
by the Big Lottery Fund and Highlands and Islands Enterprise,
was launched in 2012 with the aim to "support rural communities
to become more resilient and sustainable through the ownership
and management of land and land assets."[21]
23. It has been suggested that the current system
of tax reliefs undermines efforts to increase community ownership
by inflating the price of land and making it more expensive for
community groups to purchase. Tax by Design, the final
report of a 2010 review of the tax system by the Institute for
Fiscal Studies, argued that:
The UK is unusual in offering unlimited 100%
relief on business assets—this is not available in France,
Germany, or the US. These reliefs create just the sort of non-neutrality
the tax system ought to try to avoid, pushing up the price of
agricultural land[...]we see no real merit in granting special
treatment to preserve the wealth of a particular occupational
group.[22]
24. In oral evidence, Professor Cheshire of the London
School of Economics told us that:
The money you are giving communities to buy the
land is to compensate people for money you are already giving
them through the tax break. It is a problem of policy failure
rather than of market failure. [23]
25. When giving oral evidence, HMRC seemed unclear
about the impact of tax reliefs on land value. Adrian Cooper told
us that "we have seen no evidence within HMRC that the reliefs
create speculative bubbles".[24]
However, his colleague Mike Crabtree accepted that there would
be some impact on land value, saying that:
I could not give you a measure of how much tax
reliefs impact on property values. I am sure there is an impact,
but it is in the mix with so many other factors that will affect
land and
property prices that it might be difficult to isolate.[25]
26. We
are disappointed that the attitude of HMRC to the question of
whether or not tax reliefs push up the price of agricultural land
can best be summarised as 'don't know, don't care'. It is important
for both the UK and Scottish Governments to consider whether parts
of the tax system are pushing up land prices and undermining a
commitment to increasing community land ownership.
27. We recommend that the incoming Government
undertake an analysis of the impact of tax reliefs on land value
and that they include this information in their consideration
of which tax reliefs should be retained and which should be abolished.
The Administration of tax reliefs
28. Throughout our inquiry we have been hampered
by a lack of available and reliable information on the effectiveness
of land tax reliefs. Both the National Audit Office (NAO) and
the Public Accounts Committee have previously considered the subject
of tax reliefs. The NAO published two reports on the subject in
March and November 2014 and the Public Accounts Committee published
their report, Tax Reliefs, in June 2014.
29. This Public Accounts Committee report concluded
there was a strong case for both the Treasury and HMRC to monitor
reliefs, in particular those which seek to influence taxpayer's
behaviour to achieve social or economic objectives. [26]
30. The NAO stated in The Effective Management
of Tax Reliefs that:
Neither HM Treasury nor HMRC have established
a framework or principles to guide the administration of tax reliefs.
This reflects their view that tax reliefs do not have administrative
implications that differentiate them from other parts of the tax
system. It is our view that the defence of this principle, coupled
with the desire not to be more directly accountable for reliefs,
is costing the exchequer money. The departments have not identified
which tax reliefs are intended to change behaviour in order to
deliver policy objectives; and do not monitor or report their
costs and benefits in a way that would allow government, Parliament
or the public to know if such reliefs are working as intended.[27]
31. The Scottish Government's Land Reform Review
Group also identified "a lack of clarity over the public
costs and public benefits that result from the current exemptions
and reliefs for agricultural and forestry land in national and
local taxation".[28]
The Group recommended that each of the exemptions and reliefs
should be "reviewed and reformed as necessary, to ensure
that there is a clear and transparent public interest justification
for the public expenditure through revenue foregone".[29]
32. Mike Crabtree told us that it was for the Treasury
to decide on the cost and benefits of tax reliefs, although HMRC
would conduct one-off research projects on specific reliefs. When
asked about the possibility of improvements to the monitoring
of tax reliefs He told us that:
there is always a role for better monitoring
wherever possible. We want to know as much as we can about our
tax reliefs, but we have to balance what information is
needed for us to administer the tax system effectively with
what would be additional data that it might be a burden
on people to provide.[30]
33. We
are disappointed that despite the work done by the National Audit
Office and the Public Accounts Committee there still seems to
be considerable reluctance on the part of Government to accept
the need for proper oversight and scrutiny of tax reliefs and
exemptions. These reliefs mean that tax income is forgone in order
to support policy objectives and they should be open to the same
scrutiny as other government spending.
34. The Government must ensure that both new and
existing tax reliefs are properly monitored and assessed. The
case for their retention is not proven at present. The incoming
Government must ensure that those tax reliefs where value for
money and effectiveness cannot be demonstrated are abolished.
COMMON AGRICULTURAL POLICY
35. The new Common Agricultural Policy (CAP) schemes
came into effect for 2015 onwards. In our interim report we called
for further evidence on how the new schemes could support farmers
and noted that the schemes should promote "greater
equity and opportunities for farmers of all types to receive a
fair share of future subsidies".[31]
The new Basic Payments Scheme, which replaces the previous Single
Farm Payment Scheme includes a top up element for those who qualify
as a young farmer. This top up payment will be available to those
who qualify for the Basic Payments Scheme, will be 40 or under
for the entire year of the Scheme, are head of holding and have
at least a level 2 qualification in agriculture. A
second scheme for young farmers or new entrants to farming who
do not qualify for the Basic Payments Scheme will be funded by
the Scottish National Reserve[32].
36. It is too
early to assess the impact of the new schemes but we welcome efforts
to encourage new entrants to farming through the Common Agricultural
Policy.
TAX PLANNING
37. Our interim report looked at land owned in offshore
jurisdictions for tax planning reasons, either by trusts or by
companies. We were concerned that such ownership arrangements
could be exploited for tax avoidance purposes.[33]
38. The report of the Land Reform Review Group also
addressed the issue of offshore ownership, noting that:
A particular topic that is raised in the context
of limiting who can own land in Scotland, is the lack of traceability
and accountability of some legal bodies based overseas that own
land here. While this issue has usually emerged in a specific
case, it is also now part of wider concerns about the traceability
and accountability of corporate bodies because of tax fraud and
tax evasion.[34]
39. On 5 February 2013 the European Commission published
its proposal for a Fourth Money Laundering Directive (4MLD). This
proposal was agreed in draft by the European Parliament on 14
March 2014. One of the updates in 4MLD for improved public access
to information on beneficial ownership.[35]
40. On 31 October 2013, the Prime Minister announced
that a central registry of companies' beneficial ownership would
be introduced and would be open to the public.[36]
In a speech to the Open Government Partnership he said:
We need to know who really owns and controls
our companies, not just who owns them legally, but who really
benefits financially from their existence. For too long a small
minority have hidden their business dealings behind a complicated
web of shell companies, and this cloak of secrecy has fuelled
all manners of questionable practice and downright illegality
[…] today I'm delighted to announce that not only is that
register going to go ahead, but it's also going to be open to
the public.[37]
41. This commitment is being taken forward as part
of the Small Business, Enterprise and Employment Bill. Part 7
of the Bill requires companies "to keep a register of people
who have significant control over the company".[38]
42. While the Small Business, Enterprise and Employment
Bill deals with ownership of companies, 4MLD also addresses beneficial
ownership through trusts. HMRC told us that
There are two key elements in relation to beneficial
ownership. One is the beneficial ownership of companies[…]
The other is a registry of beneficial ownership of trusts in which
HMRC has a clear interest.[…]For trusts, [the European directive]
will give us information relating to the trustees, the settlor
and the beneficiary or class of beneficiaries of the trust where
there is a tax consequence generated.[39]
43. While elements of the register dealing with ownership
of companies will be public, the register of trusts will not be.
HMRC told us that in part this was because "all the
international evidence suggests that avoidance and evasion is
a much bigger problem with companies than it is with trusts."[40]
However, they also argued that there was a fundamental difference
in how trusts and companies should be treated, telling us that:
Trusts are essentially private arrangements.
It would be a fundamental change in UK law
to overturn that privacy. Companies are essentially, in the main,
public entities. There is much more of a trade-off between the
formation of the company, the agreement that you make in forming
a company, and
the relief that you get for that.[41]
44. We
welcome the introduction of a publicly available register of people
with significant control of a company as the first step in unpicking
complex ownership arrangements used by some individuals and companies
to avoid their tax obligations. We are, however, disappointed
that the Government has stopped short of ensuring public access
to information on beneficial ownership of land held by trusts.
45. The incoming Government must ensure that information
on beneficial ownership through trusts is made publicly available.
The work of the Scottish Government
46. At the same time as we have been looking at the
issue of land reform, the Scottish Government have also been taking
forward work on the land reform agenda.
47. The Land Reform Review Group (LRRG) was set up
in 2012 by the Scottish Government to explore key questions of
land reform, including broadening the range of those involved
in the ownership, governance, management and use of land in Scotland.
On 23 May 2014, the LRRG published its final report, The Land
of Scotland and the Common Good. The report adopted some of
the Scottish Affairs Committee's key recommendations, particularly
in relation to the transparency of land registration and on the
abolition of tax exemptions for sporting land.[42]
48. Following the publication of The Land of Scotland
and the Common Good the Scottish Government launched a consultation
on the Future of Land Reform in Scotland. The consultation
documentation included a list of the LRRG recommendations and
the action being taken by the Scottish Government. The Scottish
Government has also committed to bring forward a Land Reform Bill
in 2015.[43]
49. We are pleased that the Scottish Government has
committed to pursue the land reform agenda. We note that they
are taking forward work in a number of areas identified by this
Committee in our interim report, notably a need for better information
on land ownership by making a commitment to have a complete, publically
available land register within 10 years.
50. We are disappointed to see that the Scottish
Government has ruled out any review of the exemption from non-domestic
rates for agricultural land.[44]
As discussed earlier in this report, it is by no means clear that
there is sufficient understanding of whether various historical
reliefs, including relief from non-domestic rates for agricultural
land, are acting as policy levers in the way they were originally
intended.
51. Tax reliefs
represent a cost to the public due to the tax income forgone.
It should be a guiding principal that both new and existing tax
reliefs should only be offered where there is a clear justification.
The case for many tax reliefs is still to be proven. The incoming
Government should ensure that those tax reliefs where a clear
and proven benefit cannot be demonstrated are abolished.
52. We reiterate our call for the UK Government
to improve the oversight of tax reliefs. The UK and Scottish Governments
should to work together on areas of shared interest, such as land
tax reliefs in order to ensure a tax system that supports the
Scottish Government's stated aim of increased community ownership
of land.
4 Q393 [Professor Cheshire] Back
5
Q1125 Back
6
HMRC (LRS0073) Back
7
HM Revenue and Customs, Tax relief for national heritage assets,
accessed 24 March 2015 Back
8
Q1135 Back
9
HMRC, (LRS0061) Back
10
HMRC, Estimated cost of minor tax allowances and reliefs, accessed
24 March 2015 Back
11
Scottish Affairs Committee, Eighth Report of Session 2013-14,
Land Reform in Scotland: Interim Report, HC 877,
para 62 Back
12
Q1142 Back
13
Q1143 [Mr Cooper] Back
14
Scottish Affairs Committee, Eighth Report of Session 2013-14,
Land Reform in Scotland: Interim Report, HC 877, para 46 Back
15
Scottish Affairs Committee, Eighth Report of Session 2013-14,
Land Reform in Scotland: Interim Report, HC 877, para 56 Back
16
Q769 [Mr Adam] Back
17
Q1213 Back
18
Q1214 Back
19
Q1055 Back
20
Q1057 Back
21
Big Lottery Fund, Scottish Land Fund, accessed 24 March 2015 Back
22
Institute for Fiscal Studies, Tax by Design, (September 2011),
p 360 Back
23
Q397 Back
24
Q1112 Back
25
Q1113 Back
26
Public Accounts Committee, Third Report of Session 2014-15, Tax reliefs,
HC 877 Back
27
National Audit Office, The effective management of tax reliefs,
HC 785, p15 Back
28
Land Reform Review Group, The Land of Scotland and the Common Good,
(May 2014), p177 Back
29
Land Reform Review Group, The Land of Scotland and the Common Good,
(May 2014), p 177 Back
30
Q1036 [Mr Crabtree] Back
31
Scottish Affairs Committee, Eighth Report of Session 2013-14,
Land Reform in Scotland: Interim Report, HC 877, para 115 Back
32
National Reserves under CAP are funds member states and regions
set aside from their direct payments budget to be used for a number
of purposes, such as allocating payment entitlements to new entrants
and young farmers or compensating farmers for specific disadvantages Back
33
Scottish Affairs Committee, Eighth Report of Session 2013-14,
Land Reform in Scotland: Interim Report, HC 877, para 116 Back
34
Land Reform Review Group, The Land of Scotland and the Common Good,
(May 2014), p 35 Back
35
Beneficial ownership is when someone enjoys all the rights of
owning something but is not nominally the actual owner. Back
36
GOV.UK, PM speech at Open Government Partnership 2013, accessed
13 January 2015 Back
37
As above Back
38
Small Business, Enterprise and Employment Bill, Part 7, [Bill
11 2014-15] Back
39
Q1172 Back
40
Q1177 Back
41
Q1176 Back
42
Land Reform Review Group, The Land of Scotland and the Common Good,
(May 2014) Back
43
Q1176 Back
44
Scottish Government, The Land Reform Review Groups Recommendations,
accessed 24 March 2015 Back
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