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Standing Committee F
Tuesday 18 June 2002
[Mr. Roger Gale in the Chair]
(Except clauses 14, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)
Land in disadvantaged areas
Question proposed [this day]: That the clause stand part of the Bill.
Question again proposed.
The Chairman: I remind the Committee that with this we are taking new clause 16—Rate of stamp duty on commercial property—
'.—(1) In Schedule 13 to the Finance Act 1999 (instruments chargeable and rates of duty) after paragraph 3 of that Schedule insert a new paragraph 3A—
''3A In the case of a conveyance or transfer of land which is not residential property within the meaning of section 92A of the Finance Act 2001 the rates of duty are as follows—
1. Where the amount or value of the consideration is £60,000 or under and the instrument is certified at £60,0000Nil
2. Where the amount of the consideration is £250,000 or under and the instrument is certified at £250,0001%
3. Any other case2%''
(2) This section applies to instruments executed on or after 1st August 2002.'.
Mr. Howard Flight (Arundel and South Downs): I have great pleasure in welcoming you back to the Chair, Mr. Gale.
When I was winding up the stand part debate, I felt that the Paymaster General had slightly misrepresented the gist of my points. My first point was that we are not voting against tax incentives of either nil or low stamp duty in deprived areas, but want to point out that such an approach may be positive for deprived areas but negative for their adjacent areas. Even under the terms of clause 108, things can get subjective: the Government have chosen to exempt particular areas, but other equally worthy ones, where exemption would have been in the community's interest, have not been chosen. Such fiscal fine tuning has a habit of producing contrary results. In essence, we merely urge caution.
My second main point concerns the reason for new clause 16, which could candidly have appeared in other clauses that relate to stamp duty; the clause is clearly probing. The figure of 4 per cent. stamp duty on property used by business is significant; it makes for illiquidity and can cause problems, depending on who owns the property, if businesses want to expand or contract.
Bluntly, the reason for subsequent anti-avoidance clauses is that businesses and insurance companies, which are often the owners of commercial property, feel that such a level of stamp is less than acceptable—
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hence their great efforts to avoid it. I am told by tax experts that aside from the specifics of the clauses there is a never-ending list of other possible schemes through which businesses seek to avoid stamp duty. The Government will face that problem because, although it may be an easy source of revenue for the Government, to business it is a material tax on economic activity. According to the logic of the clause, one could impose a 4 per cent. tax every time that someone buys a new piece of equipment or new machinery for a factory, but that will not happen because we have capital allowances. For some reason, business premises are seen as ''bad'' and should be out in the open, but machinery and equipment are seen as ''good.'' I do not believe that the Government have thought about the underlying economic issues; the new clause asks them to.
Historically, the Treasury and Government response has been to say that we cannot have different rates of stamp duty for private residences and property because it would be too complicated. However, clause 108 achieves just that for deprived areas. Our main plank of opposition is that the Government are saying that the housing market varies and that it is a bull and bear market so stamp duty is required to go up and down over time, but that a different economic territory exists for the stamp duty that applies to commercial property.
We will not press the new clause. We moved it to make the fundamental point that applying 4 per cent. to all premises owned by businesses is a major economic issue. It creates too convenient a milch cow, which results in major attempts, which will continue, at avoidance. Down the line, particularly in more difficult economic conditions, businesses may have problems with physical illiquidity.
We wish the whole of clause 108 luck because we want to see improvements to run-down areas in inner cities. As I said earlier, some cities have already done very well and for better or worse—this is perhaps a bad thing—virtually every MP has an interest in seeing the scheme succeed.
I began before lunch and have made one or two points, but the main point on which I should like the Paymaster General to comment is why certain areas are given exemption treatment. Why not think about accommodation for nurses, key public sector workers and other potentially more deserving cases than are currently in the specified category of exemptions in the clause?
The Paymaster General (Dawn Primarolo): Good afternoon, Mr. Gale. I shall answer the final point made by the hon. Member for Arundel and South Downs (Mr. Flight) because he has re-established many points made throughout the debate and I do not want to repeat myself. We have had a debate about the difficulty in setting a boundary. We are all agreed on the principle of helping the regeneration of disadvantaged areas, and the deprivation index is as suitable a tool as any; indeed, it is probably the best.
I acknowledged the Government's difficulty in setting the boundary line in the debate. The Revenue have regulatory powers in the clause, and as we
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monitor and analyse the use of the relief and whether it is making the contributions about which we have spoken this morning to regeneration, it is important that we have the power to fine-tune the relief.
We have the power and the process, but I acknowledge that that is not necessarily the last word. The hon. Gentleman's hon. Friends have made it clear in the course of debate that the complexity of the issue, on which we are all agreed, will make it necessary to keep an eye on it. Should it require further fine tuning we will have the ability to do that. It is not a closed book. I have taken on board all the hon. Gentleman's points, but at this point in time I thank him for his best wishes for clause 108 and note his comments on new clause 16.
Question put and agreed to.
Clause 108 ordered to stand part of the Bill.
Withdrawal of group relief
Mr. Flight: I beg to move amendment No. 224, in page 87, line 42, at end insert—
'(9A) This section shall not apply unless the main purpose or one of the main purposes of the execution of the relevant instrument was the avoidance of taxation.'.
The Chairman: With this we may discuss the following amendments: No. 225, in clause 111, page 89, line 44, at end insert—
'(8A) This section shall not apply unless the main purpose or one of the main purposes of the execution of the relevant instrument was the avoidance of taxation.'.
No. 226, in clause 113, page 91, line 28, at end insert—
'(9A) This section shall not apply unless the main purpose or one of the main purposes of the contract or agreement mentioned in subsection (1) above was the avoidance of taxation.'.
Mr. Flight: The clause will introduce new anti-avoidance rules into the stamp duty regime relating to stamp duty group relief under which stampable assets can be transferred within a 51 per cent. group without incurring stamp duty. Theoretically, groups can transfer an asset between group companies and then sell the shares of the company owning the shares to avoid paying the 4 per cent. stamp duty charge.
Section 27 of the Finance Act 1967 deals with a situation in which there is intent to dispose of an asset outside the 51 per cent. group after a transfer, which would deny group relief where that is the intent. The clause further tightens the rules by stating that where an asset is sold by a group within two years via the disposal of shares rather than a direct sale of the stampable asset, even if there was no intent aforesaid at the time of the transfer, the group relief on stamp is clawed back. The clause thus gives groups certainty over when they can dispose of companies within the two-year time limit, but the Confederation of British Industry and others view that limit generally as too long and taking no account of commercial situations that could arise where tax avoidance is not the aim. I repeat my point that it is hardly surprising that companies seek to avoid a stamp duty of 4 per cent.
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when they pay only 0.5 per cent. on the transfer of shares. As the Government well know, they might even not pay that at some time in the future.
The Institute of Directors has commented:
''The Government's problems with the avoidance of stamp duty are largely of its own making . . . A charge of 4 per cent. on the full value of an asset, wholly unrelated to any income which might be derived from that asset . . . is exorbitant.''
It makes the point that the
''particular provision is not even targeted on avoidance cases. It will apply even when the intra-group transfer and the sale were both bona fide commercial transactions''.
The Institute notes that
''the Government considers two years to be an adequate period for the current purposes''
but says that that
''should be an adequate period for the purposes of''
section 179 of the Taxation of Chargeable Gains Act 1992. It argues for
''a shortening of the six-year period over which that section can operate.''
Another general point that has been made is that two years is too long and that if a transaction is carried out without a view to being associated with a group reorganisation, no one will wait for anything like that long.
Subsection (2)(b) provides that stamp duty is payable within 30 days of the transfer and of the transferee companies ceasing to be members of the same group, whereas paragraph 4 of schedule 34 provides that interest on late-paid stamp duty runs from 30 days following the date on which the relevant instrument was executed. A suggestion has been made that the dates of payment of duty and the date from which interest rates run should correlate.
The Chartered Institute of Taxation has commented that
''if there is to be a de-grouping charge'',
the need for a measure under section 27 of the Finance Act 1967 disappears and the exemption under section 42 of the Finance Act 1930
''at the time of the intra-group transfer should be automatic.''
It also thinks that the two-year period is too long and that the provisions are too all-embracing and should be more focused on tax avoidance.
The Chartered Institute of Taxation feels that the mischief at which the provisions on the charge of interest from 30 days are aimed
''could be far better dealt with by a simple extension to the meaning of 'arrangements''',
such as that in section 27(3) of the 1967 Act. That could be achieved, for example, by including
''wording similar to that in clause 110(6) . . . which will include any scheme, arrangement or understanding, whether or not legally enforceable within the meaning of 'arrangements'. This would reduce the threshold of the 'burden of proof' that in practice the Inland Revenue Stamp Taxes have to cross in order to show that an intra-group transfer does not qualify for group relief.''
Amendments Nos. 224, 225 and 226 would all insert a motive test into their respective clauses, following the line of argument that the business community has
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pretty universally put forward, to which I have referred in the past few minutes. Only actual tax avoidance should be targeted in clause 109, to which amendment No. 224 refers, clause 111, to which amendment No. 225 refers and clause 113, to which amendment No. 226 refers. The principle here is a tax avoidance test on the stamp duty anti-avoidance provisions. In particular, in clause 113 where sub-sale relief is threatened, the addition of a tax avoidance test should ensure that the provisions do not harm transactions entered into for bona fide commercial reasons. It is unfair that a manufacturing company transferring property to a subsidiary should be caught if it did not intend to sell the subsidiary within two years or that the sub-sale should effectively be abolished.
We hope that the Government will see the light, although we doubt that they will. Although the two-year rule brings a defined clarity, it will also bring unfairness and problems, particularly for manufacturing businesses needing to restructure. As a result of necessary sales, companies may fall outside the two-year rule, potentially triggering large stamp duty bills which they may not be able to afford. In such circumstances and in a rather difficult economic climate, the next thing that we will hear is that the Government are putting up money to rescue manufacturing companies caught by the measure. The anti-avoidance principle should be seriously considered.