Clause
69
Miscellaneous
Question
proposed, That the clause stand part ofthe
Bill.
Adam
Afriyie (Windsor) (Con): I was conscious that the
Financial Secretary did not answer the question on what the expected
change in revenue to the Exchequer might be under the clause in terms
of inheritance tax and tax on lump sum
transfers.
Mr.
Timms:
The changes that we are making will ensure that
ASPs will be used as intended. Our projections on revenue to the
Exchequer were based on that assumption. All we are doing is changing
the rules to ensure that they will happen and there is no impact on
revenue.
Question
put and agreed
to.
Clause 69
ordered to stand part of the Bill.
Schedule
20
Pension
schemes etc:
miscellaneous
Mr.
Timms:
I beg to move amendment No. 136, in
schedule 20, page 232, line 25, leave
out paragraph 9 and
insert—
‘9 In section
166(2)(a) (when person becomes entitled to pension commencement lump
sum), after “paid” insert “(or, if the person dies
before becoming entitled to the pension in connection with which it was
anticipated it would be paid, immediately before
death)”.
9A In section
219(7) (multiple benefit crystallisation events occuring by reason of
payment of lump sum death benefits treated as occurring immediately
before death), insert at the end “but immediately after any
benefit crystallisation event occurring immediately before the
individual’s death by virtue of section
166(2).”
9B (1) Schedule
29 (authorised lump sums) is amended as follows.
(2) In paragraph 1(1) (conditions to be met if lump
sum is to be pension commencement lump
sum)—
(a)
for paragraph (a)
substitute—
“(a)
the member becomes entitled to it before reaching the age of
75,
(aa) the member becomes
entitled to it in connection with becoming entitled to a relevant
pension (or dies after becoming entitled to it but before becoming
entitled to the relevant pension in connection with which it was
anticipated that the member would become entitled to
it)”,
(b) in paragraph
(c), for “of three months beginning with” substitute
“beginning six months before, and ending one year
after,”, and
(c) omit
paragraph (e) (but not including the “and” at the
end).
(3) In paragraph 2
(“permitted maximum”), after sub-paragraph (5)
insert—
“(5A) But
if the member dies before becoming entitled to the relevant pension in
connection with which it was anticipated that the member would become
entitled to the lump sum, the permitted maximum is the available
portion of the member’s lump sum
allowance.”.’.
The
Chairman:
With this it will be convenient to discuss
Government amendment No.
137.
Mr.
Timms:
The tax reforms for pension
schemes and pension savings that came into effect last April remove the
complexity that had led over many years to different tax rules applying
across numerous types of pension scheme. As I have said, those changes
have been very successful. The long-term benefit is a streamlined
regime that is easier to understand and cheaper to administer, and
which was, and still is, broadly welcomed by the pensions and savings
industry.
The regime
was put together after close consultation with the industry over a
number of years. That engagement has continued since the enactment of
the FinanceAct 2004. That continuing dialogue has proved to be
very useful and has led to a number of changes in this Bill to improve
further the benefits of the new regime. All the technical improvements
to the alignment of benefits are in response to representations from
the pensions industry. The changes have been warmly welcomed. Most of
them fall into one of two categories. Some are responses to either
regulatory or tax changes elsewhere. The other group is wider in scope
and covers a number of measures to eliminate undue restrictions on the
administrative practices of schemes, and so provide greater flexibility
for scheme members and administrators. Government amendments Nos. 136
and 137 belong to that second
group.
In
response to representations, amendment No. 137, on the rules of pension
commencement lump sums, will allow lump sums to be paid up to six
months before the pension commences so long as a pension scheme is
arranging for a pension to commence. That will allow schemes and
pension members greater flexibility in arranging a pension. It will
allow savers time to take advantage of the open market option and
choose the most suitable option annuity for them, and it meets
principles underlying pensions tax relief. The amendment will apply
retrospectively to A-day to ensure that those lump sums that have been
paid remain tax-free. It has been welcomed by the pensions industry and
would ensure that tax-free lump sums can continue to be paid in a
flexible way. I commend it to the
Committee.
Rob
Marris:
My right hon. Friend referred to lump sums being
taken early and the possibility of taking advantage of the open market
option and so on. Will he clarify whether the amendment will also cover
lump sums from public sector schemes in which the open market option is
not usually taken because such schemes have final salary pensions? If
he cannot clarify that now, I shall be happy for him to write to
me.
Mr.
Timms:
I think that the answer is yes. Once the industry
made it clear to us that, in practice, the lump sum was often paid in a
different period from the one that the legislation assumes, we were
happy to make the change. Wherever that arises, this will fix
it.
Amendment
agreed
to.
Amendment
made: No. 137, in schedule 20, page 238, line 27, after
‘9’ insert ‘to
9B’.—[Mr.
Timms.]
Schedule
20, as amended
,
agreed
to.
Clause
70
Anti-avoidance
Question
proposed, That the clause stand part ofthe
Bill.
The
Chairman:
With this, it will be convenientto take
the following: Amendment No. 213, in
clause 70, page 44, line 7, leave
out from ‘a’ to ‘the’ in line 9 and
insert
‘pre-ordained
series of transactions is carried out in connection with the disposal
and acquisition, and it is undertaken in pursuance of a scheme or
arrangement the only or main purpose of which is the avoidance or
reduction of Stamp Duty Land Tax payable on the acquisition by P or to
secure or increase a repayment of Stamp Duty Land Tax in relation to
that
acquisition.’.
Amendment
No. 234, in clause 70, page 44, line 13, leave out ‘its disposal
by V’ and insert
‘the disposal referred to in
subsection (a)
above’.
Amendment
No. 214, in
clause 70, page 44, line 13, at
end insert—
‘(1A)
Transactions taking place more than three years before the acquisition
of a property by P shall be disregarded for the purposes of subsection
(1).’.
Amendment
No. 235, in
clause 70, page 44, line 40, leave
out
‘the largest amount
(or aggregate
amount)’.
Amendment
No. 236, in
clause 70, page 44, line 42, after
‘(a)’, insert ‘the largest
amount’.
Amendment
No. 237, in
clause 70, page 44, line 44, after
‘(b)’, insert ‘the aggregate
amount’.
Amendment
No. 238, in
clause 70, page 45, line 7, at
end insert—
‘(c) the
exercise of a statutory right of enfranchisement, extension or
enlargement of a leasehold
interest.’.
Government
amendments Nos. 184 to
186.
Amendment
No. 239, in
clause 70, page 46, line 1, leave
out ‘and 75’ and insert
‘75, and
schedule 7, Part
1’ Government
amendments Nos. 187 to 192.
As this group of amendments
contains Government amendments, I shall ask the Chief Secretary if he
wishes to speak first, and then I shall come to the hon. Member for
Chipping Barnet. That will not preclude the Chief Secretary from
responding to anything else that is raised in the course of the
debate.
Mr.
Timms:
Thank you, Mr. Gale, for clarifying how
you intend to deal with the clause, which is the first of two that
tackle stamp duty land tax avoidance schemes. It amends the Finance Act
2003 to counter two types of scheme—those that use leaseholds
and those that use sub-sales that have been developed specifically to
avoid payment of the tax. Clause 71 is designed to counter schemes that
use partnerships as a way of avoiding tax.
The two schemes that the clause
tackles seek to avoid payment of stamp duty land tax by adding extra
stages into the sale of property by one party to another in such a way
as to remove the need to pay tax on the transaction. We have always
said that we will deal robustly with any avoidance effort along those
lines. We were first made aware of the schemes late last year. We
initially took action at the pre-Budget report by introducing
time-limited regulations that prevented those schemes. We acted quickly
because we took the view that it was unfair for those using such
schemes to benefit, while most taxpayers who paid stamp duty and land
tax could not use such complex avoidance arrangements. The regulations
have worked well, and the industry has, on the whole, been happy with
that. The clause replaces those regulations, which were introduced at
the end of last year, debated in Committee and approved by the House on
15 January.
Hon.
Members might ask why we have included the clauses. First, we hope that
they will prove to be more finely tuned instruments than the
regulations that they replace. Not only do they target more effectively
those schemes that we want to stop but, in response to representations
about the regulations, they do more to protect those who are involved
in innocent transactions whom the regulations might have caught
inadvertently. Of course the clauses, unlike the regulations,
willhave permanent effect. In introducing the regulations, we
explained that they would have effect for only18 months from
the date on which they were made. That has given us a chance to consult
the sector and I am grateful to all those who took the time to discuss
the regulations with HMRC. We have tried to accommodate their comments,
and that has made for clearer legislation.
Throughout the process, we have
been open to changes that will make it clear that legitimate
transactions will not be caught. For example, the Government amendments
are the result of further representations from the property sector.
Dealing with the avoidance of stamp duty land taxes is, in many ways,
different from dealing with avoidance in other areas of taxation. For
example, it is much harder to establish whether the main driver in a
developed scheme is avoidance of tax or not. It is also sometimes
difficult to establish who benefits from schemes, as they can be
arranged to benefit both the buyer and the purchaser. Therefore, where
we have deviated from what we have done in other areas of taxation to
prevent
avoidance, we have done so simply because we have not been able to use
the same types of legislation to prevent avoidance in this
area. We have been
happy to listen to what groups such as the Law Society have had to say
about how the clause is drafted and, where possible, we have agreed to
changes that will protect those involved in legitimate land
transactions.
11.30
am
Mrs.
Theresa Villiers (Chipping Barnet) (Con): Does the Chief
Secretary agree that a transaction caught by proposed section 75A would
include the purchase of a long leasehold where the right to enfranchise
is later taken up, because that involves a series of
steps?
Mr.
Timms:
I am not sure quite how the measure would apply in
the particular circumstance that the hon. Lady describes. Perhaps she
would like to give a little more detail about the precise type of
transaction that she envisages. The intention is to ensure that stamp
duty is paid on the full value of the transaction. Artificial
arrangements have been devised to try to avoid that; I do not imagine
that her example is one of those arrangements. However, that is
certainly the intention and I think that the effect of the clause, with
the amendments that have been tabled, will be that, in whatever
circumstances, the full value of the transaction will be captured for
stamp duty land tax
purposes.
On the
Government amendments, we have made it clear that HMRC will only be
allowed to use the retrospective taxation powers if it favours the
taxpayer. We have clarified that only property investment partnerships
are covered by the clause and that, where separate parcels of land are
sold on as part of a transaction, we will use apportionment to reduce
the amount of tax that purchasers might have to pay.
Making good anti-avoidance
legislation involves dealing with two opposing requirements. First, we
must ensure that the legislation is strong enough to stop the
avoidance. Secondly, however, we do not want to entangle law-abiding
businesses in its scope or make the overall tax structure any more
complex. That is a fine line to walk. In tabling the amendments, we
have shown that we will listen to concerns about the unexpected effects
of legitimate traders and that we will act on those. I will be happy to
give more details about each amendment, but I hope that, in these few
words, I have explained the intention behind
them.
Mrs.
Villiers:
I want to take the Chief Secretary up on his
reference to complexity. A concern that has been expressed to me is the
complexity and lack of clarityin the provisions. In
particular, how will proposed section 75A operate if more than one
transaction could count as the notional transaction? How will the
notional transaction be selected? Will it be the highest transaction,
or the first transaction?
Mr.
Timms:
Let me come back to the hon. Lady’s original
question about the purchase of a long lease with a right to
enfranchise. That kind of arrangement
will not be caught unless there is some connection between the
transactions—for example, if they are all carried out in a very
short time scale. The aim and effect of the changes is to ensure that
the full value of the transaction is caught for stamp duty land tax
purposes and that the full tax payable will be required. I think that
intention is being delivered by the
changes.
The hon. Lady
makes a fair point about complexity. The clause has to be quite
complex. Its aim is to counter schemes that involve the creation of
complex networks to avoid paying stamp duty land tax. HMRC has already
published detailed guidance on its website explaining what is and is
not affected by the clause, giving examples of how it will work. If
there are any uncertainties, it is happy to advise those who have
queries about complex transactions on a case-by-case
basis.
Mrs.
Villiers:
If the Chief Secretary cannot
answer the specific question about the possibility of multiple
transactions that could qualify as a notional transaction, can he tell
the Committee what will happen where there are multiple parties that
could fall into the category P as defined by proposed section
75A(1)?
Mr.
Timms:
There may well be some quite complex arrangements
where sensible questions could be raised. My advice would be that those
questions should be raised directly with HMRC in the light of what is
already on the website. I think that the appropriate clarification
could then be provided.
The
Chairman:
Before we debate the other group of amendments,
may I make the point that the debate is being conducted on a clause
stand part basis, so I am not putting any amendments formally at this
stage? If the Opposition Front Bench or, indeed, any other hon. Member
wishes to move any of the other remaining amendments formally, they
will need to indicate that to me at the appropriate
time.
Mrs.
Villiers:
Thank you, Mr. Gale. I join others in
welcoming you back to the Chair.
My
understanding of the reaction that the provisions have provoked among
those affected by them is very much at variance with the Chief
Secretary’s account of how they have been received. As ever, the
Opposition would support attempts to shut down abusive and artificial
tax avoidance schemes that would prevent stamp duty from being charged
on transactions. However, we are concerned about the very wide scope of
proposed section 75A. Although initially its provisions did not attract
a huge amount of attention, considerable concern has since been
expressed about their breadth.
The Chartered Institute of
Taxation
states:
“It is
disappointing to note that despite a wide-ranging discussion of this
legislation in January 2007 which identified various practical problems
with its implementation, nothing has been done to tackle the major
defects in the legislation... In our view the drafting of section
75A is fundamentally deficient in a number of respects... Most
seriously... the section is drafted in such wide and general terms
as to be almost unworkable in practice. Its general application means
that it may apply to many common commercial transactions, and it
appears to cut across many areas where existing SDLT legislation
provides reliefs including, for example, charities and reconstruction
reliefs.”
The Institute of Indirect
Taxation, the Law Society and the Stamp Taxes Practitioners Group all
seem to share the CIOT’s concern that innocent transactions
could be caught by proposed section 75A. The Law Society points
out:
“The
uncertainty which this is generating is not simply the perception of a
number of anxious professionals who cannot interpret the legislation
and want a hand from HMRC.
Seasoned conveyancing and tax
professionals have pored over this legislation and want a hand from
HMRC, not with a view to picking holes in it, but with a view to
understanding it so that they can give advice to clients as to the
consequences of undertaking real estate transactions.
The fact that these
professionals are still unclear as to the ambit of the legislation is
testament to the fact that the legislation is
unclear.”
Similarly, in a
letter to Crispin Taylor at HMRC, the Stamp Taxes Practitioners Group
stated:
“As a
matter of principle, anti-avoidance legislation should be proportionate
to the problem...The Stamp Taxes Practitioners Group consider that
s75A goes far beyond what is necessary to deal with the type of schemes
mentioned in the Technical Note issued by HMRC...and cannot on any
reasonable basis be allowed to be enacted without, at the very least,
major
revision.”
The
Government amendments to which the Chief Secretary referred help to
deal with one or two problems and drafting errors, but serious issues
remain unaddressed and unresolved. A key concern is that many
high-street conveyancers and property lawyers who do not have access to
specialist and sophisticated tax advice are unlikely to be aware of the
risk that the transactions with which they are dealing could
behit by the provisions of proposed section 75A. There is a
risk of widespread but unwitting non-compliance.At the heart
of the problem is the fact that themere linkage of
transactions through conveyancing succession might trigger those
provisions.
A number
of examples of innocent transactions that might be caught by proposed
section 75A have been canvassed with HMRC. In its briefing notes for
the Committee, the Institute of Indirect Taxation set out the following
case. In it, V owns a warehouse, which it sells to A for
£250,000, the market value reflecting the hope that planning
consent for redevelopment will be granted. However, consent is refused.
As a result, A resells the building a year later to P for its then
market value of £200,000. Proposed section 75A could bite in
that situation because a series of transactions has taken place in
relation to the property, ending in its purchase by P, and P could be
liable for stamp duty on the higher original price of £250,000
rather than the price that he paid.
HMRC has indicated that
proposed section 75A would not apply in that situation. However, the
section requires that only one person, V, disposes of property, and
that another person, P, acquires it, and that a number of transactions
have taken place in connection with the disposal and acquisition of the
property. The amount of SDLT payable in respect of those transactions
is less than would have been due on a notional direct transfer between
V and P. All those conditions would seem to be satisfied in the example
given by the IIT, so P might be landed with an unexpected bill for
extra stamp duty even though he had nothing to do with the earlier
transaction. It seems that virtually all sub-sales could be caught in
which A sells to B who then sells on immediately to C at a lower
price.
Another example of the innocent
transaction that might be at risk is one that I gave to the Chief
Secretary—a long lease that is enfranchiseable when the right is
exercised after the purchase of the lease. There is a sufficient
connection even if the purchase takes place some years later, as there
is no temporal restriction on the operation of proposed section 75A.
There is a connection between the original purchase of the lease and
the enfranchisement because if one had not purchased the original lease
one would not be able to enfranchise. That has the potential to be
caught by proposed section 75A. It is difficult to see how it could
qualify as an artificial avoidance scheme of the sort supposedly
targeted by the legislation.
Proposed section 75A does not
require the direct disposal from P to V, nor does it require that V
should have disposal to P in mind when entering the transaction chain.
All that is required is that P should end up with the interest
originally held by V, even if it arose because something else had
happened in a series of other transactions. As the Law Society points
out, wholly unrelated Vs and Ps could find themselves party to notional
transactions and thus to the application of the provisions of section
75A. There is no requirement that the transactions should constitute an
artificial scheme or that they should be motivated by a wish to avoid
tax. The mere fact that transactions occur one after the other could
turn them into a scheme under proposed section 75A. The danger is that
wholly innocent transactions could be caught simply because they
involve a series of steps.
The concern becomes even
greater when one realises that those steps could take place over
several years and still trigger the operation of proposed section 75A.
The wide scope of the provisions is reinforced when one notes that
proposed subsection (2) makes it clear that not all of the relevant
transactions need to relate to
land.
I
am told that HMRC asserts—this is in line with the response that
the Chief Secretary made to the example that I put to him—that
the words “involved in connection with”, contained in
proposed subsection (1)(b), mean that the provisions will bite only
where V and P are party to the same arrangement. However, that is not
what the Bill says. The words “in connection with” give a
very limited and uncertain protection to those carrying out day-to-day
real estate transactions. Both the Institute of Indirect Taxation and
the Stamp Taxes Practitioners Group have expressed serious concern
about the lack of clarity surrounding the phrase on which HMRC seeks to
rely to ensure that its legislation does not have an impact on innocent
transactions.
11.45
am
Leaving aside
the infelicitous nature of the term “involved in connection
with”, considerable ambiguity is attached to the phrase. The
question that is difficult to answer is how substantial a link is
needed for HMRC to be able to show that proposed paragraph (b) is
satisfied and the required connection is established between the
transactions and the acquisition by
P.
The words
“in connection with” have been interpreted in different
ways by the courts. Mr. Justice Nourse in Emery v.
IRC thought that it meant a “definite causal link”.
In Johnson and Johnson, Lord Justice Somerville thought it meant merely
“having to
do with”. In one of the more recent cases, in HMRC v.
Barclays Bank, Lady Justice Arden took a wide interpretation of the
term and also emphasised that it could mean different things in
different contexts, and that it had to be read in
context.
The phrase
“in connection with” provides an inadequate safeguard
because it does not require the deliberate and consequential link
between the transactions, which groups such as the Institute for
Indirect Taxation believe is vital if proposed section 75A is not to
hit a range of innocent transactions. The Stamp Taxes Practitioners
Group points out that the
term
“is seemingly
capable of including... a merely causal or historic
interpretation—without a time limit, motive connection or even
knowledge of the other parts of the
‘scheme’.”
The
inclusion of “involved in” seems to offer no effective
additional
protection.
We need
something stronger than just the words “involved in connection
with” to separate artificial avoidance schemes that should be
restricted from normal, everyday transactions, which should not. That
is why I tabled amendment No. 213. As well as introducing a purpose
test, it would require amuch closer link between the
transactions in issuethan is required by the original drafting
of proposed section 75A. The purpose test that the amendment would
introduce is similar to those that we have already discussed. They are
not without their problems, but they have become a regular feature of
our tax law. The Government propose to use purpose tests twice in the
Bill in other contexts in relation to their targeted anti-avoidance
rule on capital losses and in relation to sideways loss relief in
schedule 4.
The
amendment takes on board the discussion that we had in relation to
capital losses and the TAAR rule, and proposes to cover not just those
schemes motivated by a wish to avoid or reduce tax, but those aimed at
securing or increasing a tax repayment. I am seeking to insert not only
a requirement of a real connection between the different transactions,
but an element of deliberation in carrying out a sequence of
transactions.
The
amendment would remove the risk that the mere fact of a number of
transactions taking place sequentially in relation to the property
would trigger the operation of proposed section 75A, even where such
transactions were years apart and had nothing to do with stamp duty,
stamp duty land tax, or a holding tax. The amendment would introduce a
concept of a pre-ordained series of transactions that amount to a
scheme or an arrangement. Both those ideas draw on case law. The
concept of a pre-ordained series of transactions was considered in a
line of cases running from Ramsey v. IRC and Furniss v.
Dawson. It requires such a clear and well established link between
the transactions that they are, in effect, a single composite
transaction. That type of close link is missing in proposed section
75A.
Adam
Afriyie:
It occurs to me that if a scheme were designed to
avoid stamp duty land tax and for whatever reason it fell apart halfway
through, the individual who ended up buying the property but who had no
connection whatever with the scheme would also be caught by the
provisions.
Mrs.
Villiers:
There is a risk that that might happen. I
understand that there have been troubling examples of artificial
avoidance schemes that have fallen outside
the scope of proposed section 75A. Not only has it the potential to hit
innocent transactions, but it is not effective in catching all the
non-innocent ones.
The term “scheme or
arrangement”, which is also utilised in the amendment, is
familiar from case law. It echoes the wording used in a number of
contexts in our tax law, such as sections 137, 139 and 140B of the
Taxation of Capital Gains Act
1992.
In
the view of the IIT, introducing the term “scheme or
arrangement”—a phrase that it describes as commonly used
and well understood—creates the consequential link that is
needed and remedies the problems that occur when reliance is placed
solely on the “in connection with” test. Confining the
operation of proposed section 75A to instances in which that type of
scheme or arrangement is entered into with the main purpose of avoiding
tax, rather than for a bona fide commercial reason, would be a much
more effective way to tackle the avoidance that concerns HMRC without
imposing collateral damage on a range of transactions that have nothing
to do with avoiding tax, and, critically, without imposing significant
uncertainty and cost on those buying and selling property. The general
approach taken in the amendment is broadly in line with
representationsmade by the Institute of Indirect Taxation, the
Law Society, the CIOT and the Stamp Taxes Practitioners
Group.
Amendment No.
214 would also help to deal with the problems that I have outlined, in
particular the issues connected with the absence of any time limit for
the operation of the provision. It would provide that transactions
taking place more than three years before the acquisition by P should
be disregarded for the purposes of proposed section 75A. That would put
a temporal limit on the scope of the operation of proposed subsection
(1) which would significantly clarify the legislation, otherwise HMRC
could in theory look back many years at transactions that happen to
have been carried out in relation to a particular item of property.
Like amendment No. 213, it would answer the very serious concerns
raised by the representative groups to which I have referred.
In responding to calls for the
scope of proposed section 75A to be tightened and for a motive test to
be inserted, HMRC have responded that that is not necessary because
uncertainties can be ironed out using the code of practice 10 clearance
procedure. It is welcome that HMRC has indicated that access to the
procedure will be extended indefinitely instead of being restricted to
the early years of new legislation, as would normally be the
case.
However, access
to the procedure does not provide all the answers to the problems that
I have outlined. For a start, it does not amount to the full clearance
procedure for which organisations such as the CIOT and the IIT have
called. The Law Society points out that if the Government want to
introduce a mini-general anti-avoidance rule for SDLT in proposed
section 75A, they need to have HMRC officials able and willing to
provide the necessary clearances within a commercially acceptable
timetable. An adjudicator under the COP10 procedure can give guidance
only on what transactions are caught by proposed section 75A. He cannot
disapply it to a transaction—even a wholly innocent
one—if the law says that it applies.
The Law Society put the position
best in relation to the limitations of the COP10 procedure. It said
that
“HMRC will have to
take a view as to the “innocence” or otherwise of a
transaction in deciding whether the legislation should apply. COP10
rulings are not given on what the legislation intends to hit; they are
an interpretative provision, where a matter of tax law is unclear,
allowing the taxpayer to receive clarity as to how the legislation, as
it is laid down, should be applied to a particular set of facts. Our
experience is that the complex transactions unit takes a very
legalistic view towards legislation, and we have no doubt that
transactions which are innocent will get negative COP10 rulings because
on the face of the legislation, it applies to them when it was never
intended to.”
The Law
Society went on to highlight a further problem with the procedure by
saying:
“Taxpayers
are reliant on HMRC’s executive view as to what is an
‘innocent’ transaction such that two taxpayers in very
similar circumstances could be taxed differently at the whim of the
HMRC officer to whom a COP10 clearance request is
made.”
Moreover,
application for such rulings takes time and generates costs, which is a
problem. I have received representations about transactions that fell
through because it was impossible to get a COP10 ruling quickly enough.
Switching from the idea of precise and targeted legislation to a system
more similar to US-style rulings has constitutional implications that
should be properly debated. The implications for HMRC resources also
have to be considered in light of the need for the prompt turnaround of
applications.
Another
argument put forward by HMRC, which echoes some of the points made by
the Chief Secretary, is that we do not need to amend proposed section
75A because interpretive problems can be resolved using guidance. To
that end, it has published a so-called white list of transactions that
it does not believe should be covered by proposed section 75A. I am not
keenon that phrase; I prefer cleared list. However, leaving
aside what one should call it, its publication does not solve the
problems with proposed section 75A. The Stamp Taxes Practitioners Group
points out, with justification, that the white list approach is not an
effective substitute for significant revision of the legislation. It
identifies particular problems with the white list approach in this
context because of the fact that the proposed section needs to be
considered in relation to virtually all conveyancing transactions.
Relying on non-statutory guidance is difficult enough in narrow
specialist areas such as group relief and real estate investment
trusts. However, it is much more difficult in relation to legislation
that might have an impact on all conveyances and home
purchases.
Many
solicitors do not have in-house expertise or research staff who can
regularly monitor HMRC’s website for guidance. Certainly, an
average high-street solicitor is highly unlikely to have access to such
resources or expertise. It will also be very difficult to come up with
anything like a comprehensive white list. There are even more
fundamental constitutional concerns at issue,
however.
Richard
Stratton, chairman of the Law Society’s tax law committee, wrote
to the Paymaster General in March referring to the principles
articulated by the House of Lords in R v
. HMRC ex parte
Wilkinson. He pointed out
that
“however willing
HMRC is to confirm that a transaction was not caught, Wilkinson makes
it clear that a tax collecting authority cannot ignore legislation and
cannot have significant discretion in tax collection.”
As Lord Upjohn once famously
commented:
“A
taxpayer should be taxed by law not untaxed by
concession”,
and as the
IIT rightly points out:
“HMRC guidance is no
substitute for introducing a fair
law.”
The
Stamp Taxes Practitioners Group has called for a non-exhaustive white
list to be inserted into the legislation to give certainty to
practitioners and reassurance about how to comply with the law. I
welcome proposed section 75C(10), which allows the Treasury to do that
and to disapply proposed section 75A in certain cases. However, as the
CIOT has commented, that
“does not obviate the need for
proper drafting of primary legislation.”
Amendment No. 234 seeks to
amend paragraph (c) of proposed section 75A(1). That would deal with a
problem that has been raised in a number of representations, which is
that, as the clause is drafted, there is no need for the three
paragraphs in proposed subsection (1) to be read in conjunction with
one another. The amendment would clearly tie together proposed
paragraphs (a) and (c) and ensure that they are read together rather
than separately. Without that change, there would be an ambiguity about
the chargeable interest to which the word “its” in the
last line of proposed paragraph (c) refers. The amendment would ensure
that the interest referred to in proposed paragraph (c) is that which
is transferred to P and not the whole of V’s original
interest.
The concern
is about the situation in which V transfers only part of his interest.
For example, if A agreed to sell land to B for £3 million and
then B agreed to sell, via a sub-sale, one third of the land to three
purchasers, C, D and E, for £1 million each, there is a danger,
as the section is currently drafted, that proposed section 75A could
operate to impose an SDLT charge on each of the three purchasers for
the full £3 million rather than the £1 million that each
of them actually
paid.
On
amendments Nos. 235 to 237, the CIOT views proposed section 75A(5) as
being too wide. The Stamp Taxes Practitioners Group feels that it
should be more focused so that it catches only the chargeable
consideration that would have been payable for the land but
forthe insertion of the phrase “scheme
transactions”. It would be useful if the Minister could confirm
thatno double counting will be allowed under proposed
subsection (5)—in other words, that it should not be permissible
to add up receipts and payments by the same party to arrive at the
figure for the notional
consideration.
12
noon
Amendments
Nos. 235 to 237 are aimed at reducing the risk of double counting.
Subsection (5) refers to
“the largest amount (or aggregate
amount)”.
That does not give rise
to a problem so long as “or” is interpreted in the normal
way; in other words, disjunctively, so that the tax is payable on
either the largest amount or the aggregate amount. However in some
legal contexts “or” has been interpreted conjunctively to
mean “and”.
My three
amendments would help to remove the problem by moving the reference to
the amount to match the relevant paragraphs. The term “largest
amount” seems focused on paragraph (a) whereas the only relevant
context for the application of “the aggregate amount” is
the situation set out in paragraph (b). The amendments make it plain
that either (a) or (b) applies and not
both. Amendment No.
238 is a simple amendment to resolve the problem that I drew to the
Chief Secretary’s attention. It makes it clear that exercising a
statutory right of enfranchisement, extension or enlargement of a
leasehold interest cannot trigger the operation of proposed section
75A. Without this change, there is a real danger that someone who buys
a lease and later exercises a statutory right to extend it could be hit
by proposed section
75A.
Turning to
amendment No. 239 and section 75C, the Law Society expresses the
concern that the statutory carve-out for reliefs in subsection (2) of
proposed section 75C will be restrictively applied. The question here
is whether the reliefs and disregards that would be available in
relation to the actual transaction will still be available in relation
to the notional one. A key problem here is that subsection (2) applies
only to reliefs.
Many
important SDLT rules that reduce the liability of the taxpayer are not
reliefs in a technical sense. They are simply computational rules,
exemptions or disregards. If they cannot be applied to the notional
transaction under proposed section 75A, this will involve a significant
increase in the SDLT bill faced by taxpayers. It would turn section 75A
from an anti-avoidance provision into a simple tax increase.
The Stamp Taxes Practitioners
Group is also concerned that there is no clear mechanism provided for
crediting SDLT that has been paid in relation to transactions earlier
in the chain against the SDLT charged on the notional transaction.
Considerable uncertainty surrounds this point and any clarification
that the Chief Secretary could give would provide significant
reassurance to people who are potentially affected by these
provisions.
Amendment
No. 239 to subsection (4) of proposed section 75C would deal with the
specific problem of group relief. It is a concern that the SDLT group
relief rules have been excluded from the list carried over into section
75C and thus available to relieve liability under proposed section 75A.
Group relief plays an important function in this context and its loss
would disrupt many significant commercial transactions. Again, unless
this problem is dealt with, section 75A looks much more like a straight
tax increase than an anti-avoidance provision. If the Chief Secretary
will not accept the amendment, I hope he will at least explain why
group relief provisions on SDLT contained in part 1 of schedule 7 of
the Finance Act 2003 should not apply to notional transactions under
section 75A.
Before
concluding, I would like to flag up two general concerns about proposed
section 75A. As I said to the Chief Secretary, there could be a number
of instances where there could be more than one transaction in the same
case that could fall within the definition of a notional transaction
for the purposes of these provisions. It is not clear how section 75A
is supposed to operate in this situation. It does not surprise me that
the Chief Secretary was unable to give me an answer on that point. I
should be delighted to take him up on his invitation to address the
query to HMRC, but it is a concern that we do not have a clear
answer on that yet. In particular, how will a decision be made as to
which transaction to select as the notional one?
Another
concern is that it might not always be possible to ascertain who is P
for the purposes of new section 75A(1). In a recent article for
Taxation
Magazine, Jeremy de Souza, a lawyer for Blake
Lapthorn Tarlo Lyons, pointed out that in many cases there may be a
number of potential Ps in the conveyancing chain. He concluded by
stating of these provisions
that
“warning flags
should be flying over many property transactions from now
on.”
In
conclusion, new section 75A as drafted is simply too wide-ranging. It
will have to be considered in virtually all conveyancing transactions.
Thousands of high street legal and conveyancing practices across the
country will have to grapple with these highly complex provisions. It
is highly likely that many will be unaware of the application of the
new section and hence of the need to make an SDLT return. Even if they
are aware of the rules, it may be difficult in practice to get
holdof the information needed to ascertain
whetherlinked transactions have occurred, sufficient to
trigger section 75A. This provision could add a significant
conveyancing headache for thousands who just want to buy a new home. I
hope that the Chief Secretary will reassure me that those fears are
unfounded.
It
is particularly harsh to impose complex, unclear and hard-to-understand
tax provisions in a self-assessment system, where taxpayers themselves
have to determine whether the provisions apply. One expert told me that
these rules could leave transactions open to re-examination by Her
Majesty’s Revenue and Customs, potentially backdating 21 years.
The provisions are so unclear and uncertain that it will be difficult
for HMRC to apply them consistently. The upshot is that significant
extra costs will be imposed on the property market and on home
buyers.
To return to
Richard Stratton’s letter to the Paymaster General on behalf of
the Law Society, he wrote
that
“uncertainty
engenders costs, whether this is due to lenders increasing the cost of
borrowing ... or delay pending seeking clarification from HMRC
either informally or under Code of Practice 10
procedure.”
The Stamp Tax
Practitioners Group
said:
“This
uncertainty is causing delays in major commercial—and indeed
some everyday—transactions because, although clients acquiring
high value properties are willing to take risks based on a professional
analysis, the banks and institutions that are providing finance for
such transactions are generally not. STPG members have reported
experience, in relation to transactions in the pipeline at the time
when the Regulations were introduced, of funding offers either being
withdrawn or the funders being prepared to proceed only on the basis of
increased interest
rates.”
The
Chancellor has significantly increased the burden of stamp duty during
his term of office at No. 11. Only a few weeks ago, we had the home
information packs disaster, and I urge the Chief Secretary to think
again before he imposes further costs and uncertainties on the property
market, as a result of legislation which, I believe, contains some
serious
defects.
Mr.
Timms:
I hope that I can persuade the hon. Lady that her
amendments are unnecessary. We have seen the text of them before,
because they have been suggested
by some of those involved in the property sector. As she knows, we have
accepted quite a number of her proposals—they were in the
Government amendments that we discussed a few minutes ago. We have
rejected this particular group for good reason. Some of the amendments
would reopen the avoidance opportunities that the clause is designed to
shut
down.
Understandably,
the hon. Lady spent most time discussing amendment No. 213, which
would, as she said, replace the clause’s objective test with a
different set of tests. First, there would have to be a
“pre-ordained series of transactions”. The problem is
that it is often easy for the parties to arrange things so that the
steps are not “pre-ordained” because they might or might
not happen, so it is quite easy to avoid that test. A test of purpose
is difficult to apply to a transaction tax such as stamp duty land tax,
because the main purpose of the transaction is likely to be the
commercial one of transferring economic ownership of the property from
vendor to purchaser, so I do not think that the approach in this
amendment works. It would not give greater certainty to those not
engaged in tax avoidance
either.
In most cases
where a transaction is financed by borrowing, the lender is most
concerned to have certainty about the tax consequences, but it is
unlikely that lenders could satisfy themselves as to the purposes of
the parties to the transaction. The answer, therefore, is that
certainty can be secured through clear guidance from HMRC, both
generally and in relation to specific transactions. As I have said,
there is a firm commitment to giving that guidance.
I also hope that members of the
Committee will be reassured to note that the Government have already
responded constructively to representations made both during the
original drafting of the Bill and in relation to the Government
amendments that we discussed this morning, and we will continue to
listen carefully to representations in the future. If it still proves
to be the case that transactions that are not tax avoidance
transactions are likely to be caught, we can and will help innocent
taxpayers who are inadvertently caught. We can do that by using the
power that the hon. Member for Chipping Barnet referred to, in new
section 75C(10), which can disapply the application of new section 75A
in specific circumstances.
Mrs.
Villiers:
Is HMRC contemplating using new section 75C(10)
on an individual basis for individual taxpayers? It seems most peculiar
to draft wide-ranging legislation and then implement secondary
legislation to exempt specific
individuals.
Mr.
Timms:
I refer the hon. Lady to what new section 75C(10)
says:
“The
Treasury may by order provide for section 75A not to apply in specified
circumstances.”
I
do not think that it would be usual for the “specified
circumstances” to apply to just one individual transaction, but
the wording does not make that impossible.
Amendment No.
214 would assist those avoiding payment of stamp duty land tax by
restricting the application of clause 70. It would disregard
transactions occurring more than three years before the ultimate
acquisition of the property by the purchaser. The intention
there is understandable, but there is no reason why purchasers should
have to make the inquiries that the amendment would spare them. As long
as they are planning to pay stamp duty land tax on their purchase in
the normal way or they qualify for a relief such as charities relief,
the anti-avoidance provisions in the clause will not apply to them.
Incidentally, the hon. Member for Chipping Barnet queried whether
charities relief and reconstruction relief would be affected. Those
reliefs are expressly preserved and are not
affected.
Mrs.
Villiers:
I am grateful to the Chief Secretary for his
clarification, which I accept entirely and very much welcome. I would
like to ask him about the three-year time limit in amendment No. 214.
His answer to my concern about enfranchisement of the leasehold
interest was that there had to be sufficient connection between the
transactions so that they happened very close together. He therefore
seems to envisage that new section 75A should apply only when
transactions are relatively close together. If that is the case, why
does he not accept the amendment, have the three-year cap and reassure
people who are very worried about this
legislation?
Mr.
Timms:
Because it is not needed. As I have said, as long
as the parties involved are planning to pay stamp duty land tax in the
normal way on their purchase or they qualify for a relief, they will
not be affected. It is only where their involvement results in a
reduction of the tax that would normally be payable that the clause
will be likely to affect them.
Mrs.
Villiers:
The issue is that people may not know that
transactions way back in history are affecting their SDLT liability, so
they may be planning to pay the SDLT that they think is due—I am
sure that they would be. The concern is that, if HMRC can look back on
a string of transactions in previous years, the party concerned will
simply not know that that affects their current
liability.
Mr.
Timms:
It may be of some reassurance to the Committee to
know that transactions that occurred before 6 December 2006, when the
regulations that preceded this clause were laid, would be disregarded
in any event, and a provision such as that set out in the amendment
would not have any effect until 2009 at the earliest. I do not think
that there is a problem that needs to be fixed
here.
I understand the
purpose of amendment No. 234, but, again, I think it is unnecessary,
because it is clear from the context that the interest referred to in
subsection (4)(b) is the same as the interest disposed of by V in
subsection (1)(a). Amendments Nos. 235, 236 and 237 do not add
anything, and would in fact reduce the effectiveness of the
anti-avoidance provisions by changing the circumstances in which the
section could be applied. They would lead to the clause not being
applied fully in circumstances where any one person gave consideration
in the form of more than one transaction, and that would allow tax to
be avoided by breaking the consideration into a series of transactions,
only the largest amount of which would be liable to stamp duty land
tax—which is precisely what we want to prevent.
Amendment No. 238 would mean
that newsection 75A would not apply to the exercise of a
statutory right of enfranchisement—the point raised with me by
the hon. Lady earlier on. That would create an opportunity for
avoidance, however, because it is not possible to rule out the exercise
of such a right as a step in new types of avoidance schemes. I want to
reassure those involved in legitimate transactions that, in most cases,
the exercise of such a right would not be one of a number of
transactions involved in connection with a disposal and acquisition, so
it would not be affected by new section
75A.
12.15
pm
Rob
Marris:
I may have misunderstood, but would not much of
the discussion be academic, as stamp duty land tax would never be
payable anyway? If we talk about leasehold enfranchisement for many
houses in the west midlands, for example, we may note that they were
sold originally on a 99-year lease, and the usual multiple was 11 times
the annual ground rent, which as I understand it would not get anywhere
near stamp duty land tax. I am not saying that no transactions would be
caught, but many of the average transactions of our constituents, using
the Leasehold ReformAct 1967, would not be caught at all
anyway, as they are below the stamp duty land tax
threshold.
Mr.
Timms:
My hon. Friend is absolutely right, and the
increases that we have made in the stamp duty land tax threshold have
helped in this
context.
Mrs.
Villiers:
The problem is that the enfranchisement cost is
unlikely to be above the SDLT threshold in many cases, but if new
section 75A bites, the cost of the original lease would have to be
taken into account, which could well take the combined cost above the
threshold, so it is relevant even where the enfranchisement cost is
below the
threshold.
Mr.
Timms:
Finally, amendment No. 239 would exclude from the
application of new section 75A any consideration paid under a
transaction that qualified for group relief. We have, I am afraid, seen
a number of avoidance schemes in the past that made use of group relief
as part of a series of transactions, so I would not at this stage want
to exclude considerations paid under a transaction that qualifies for
group relief. Again, I can reassure the Committee that if there are
specific categories of legitimate transactions involving group relief
where it is appropriate to disapply newsection 75A, we would
be prepared to consider exercising our powers under new section
75C(10). I hope that that is helpful to the hon.
Lady.
My concern is
that the Opposition amendments would allow, inadvertently I am sure,
some of the very schemes that the clause aims to end, to carry on
unchecked. Therefore, I hope that the Committee will not accept
them.
I will pick up
one or two further points made by the hon. Lady. The schemes that this
clause is designed to prevent are wholly artificial, and those using
them must expect that we will act to prevent their use, as they pose
a significant threat to Exchequer revenue. For example, before the
pre-Budget Report, Revenue and Customs was aware of two transactions
using these schemes, which alone were worth a combined total
of£850 million. We had no option other than to act as
quickly as we could to counter those schemes, hence the laying of the
regulations at the time, and the
clause. The hon. Lady
suggested that, if those involved in the transaction did not intend to
save any stamp duty land tax through the transaction, the provision
should not be applied. However, it is often difficult to establish what
the motivation in any transaction was, and there is a real danger of
leaving a gate wide open to those wishing to avoid tax.
The hon. Lady was concerned
that mere linkage through conveyancing succession would be caught by
proposed new section 75A. I assure her that that will not be the case.
There must be more connection than mere succession, as is implied by
the phrase “involved in connection with” in proposed new
section 75A that she referred to. The acquisition involvement means
more than mere temporal succession. When drafting the measure, we
looked at the phrase “involved in connection with”. Our
legal advice was that the terms are not too vague, as she suggested,
and that they will not create any difficulties of interpretation. In
any case, as I have said, we will be issuing guidance to ensure that
the meaning and intent of the legislation are clear.
The hon. Lady made
the point that code of practice 10 rulings cannot disapply legislation.
Of course that is true, but a code of practice 10 application might
result in the Government exercising their disapplication power under
proposed new section 75C(10), potentially with retrospective
application. She was concerned about the speed of those rulings. HMRC
aims to turn them around within 28
days.
Adam
Afriyie:
I thank the Chief Secretary for his generosity in
giving way. Will he make it absolutely clear why there is no exemption
for long-term leaseholders who may choose to enfranchise and buy the
freehold, in cases in which that purchase exceeds the limit? Why is
that not very clearly spelled out somewhere? I sensed a slight
hesitancy in his response, even to the hon. Member for Wolverhampton,
South-West.
Mr.
Timms:
I accept that there are some good intentions behind
these amendments, and no doubt behind others, but in drafting the
legislation we must avoid opening a new opportunity, or leaving open an
opportunity, for avoidance because, sadly, there will be plenty of
people piling in to take advantage of such openings if they are
provided. That certainly applies to a number of the amendments tabled
by Opposition Members, and one can envisage other blanket exclusions
that could have the same effect. That is why we are being very cautious
about the wording we have adopted.
The hon. Lady was concerned
about double counting under proposed new section 75A(5). Subsection (5)
will add up the amount paid by any one person or received by the
vendor. It is aimed at identifying the true purchase price, which might
be artificially split up, and ensuring that the full amount
of tax is payable. She was also concerned that there was no clear
mechanism to credit to the notional transaction stamp duty land tax
paid earlier in the chain. Proposed new section 75C(9) contains
precisely such a mechanism, so that issue is
addressed. Finally,
in contrast with the concerns expressed by Opposition Members, let me
refer to some of the comments made when the regulations that precede
the clause, which I think have worked well, were made. Sue Taylor, head
of real estate tax at Eversheds, said that
this
“will catch most of
the planning in current use....It is a serious bit of
legislation”.
Craig
Leslie, head of stamp taxes at PricewaterhouseCoopers
said:
“HMRC are
making very good use of all the planning information they
receive”.
Patrick Cannon,
a leading barrister in the area, said
that
“this is a well
aimed measure”,
as indeed
it is. I hope, on that basis, that the Committee will support my
amendments, but not accept those tabled by Opposition
Members.
Mrs.
Villiers:
The Chief Secretary may
believe that the provision is designed to target a few wholly
artificial schemes, but the reality is that the Government have not
succeeded in focusing in on that target, and they are going to hit
other innocent transactions as well.
I am grateful to the Chief
Secretary for confirming on the record that mere linkage through
conveyancing succession does not satisfy proposed new section 75A. That
is very welcome. I am not sure whether it is consistent with what the
statute states, but at least we have it on the record for the purposes
of interpretation by the
courts.
I continue to
be concerned by the approach that the Chief Secretary seems to have
confirmed today, which is that the intention is to create a broadly
worded provision that can, if necessary, be disapplied in certain
circumstances if it operates in an unintended way and applies to
innocent transactions. That raises some constitutional concerns about
the legislation.
I am
also grateful for the Chief Secretary’s reassurance on the
operation of proposed newsection 75C(9) and credit for earlier
stamp duty land tax paid. Given that relevant transactions can also
include share transactions, it would be useful to clarify whether
previous tax paid in relation to stamp duty on shares can also be taken
into account, but proposed new section 75C(9) provides useful
reassurance on the point that I
made.
I have listened
to the Chief Secretary’s concerns about the purpose test that I
have proposed. I will not press that issue to a vote because I wish to
reflect further on the appropriate wording and approach of that measure
in the light of what he said. There is no excuse, however, for turning
down the three-year restriction proposed in amendment No. 214. I would
like to press that amendment to the
vote.
Amendment
proposed: No. 214, in clause 70, page 44, line 13, at end
insert—
‘(1A) Transactions
taking place more than three years before the acquisition of a property
by P shall be disregarded for the purposes of subsection
(1).’.—[Mrs.
Villiers.]
Question put, That the
amendment be
made:—
The
Committee divided: Ayes 9, Noes
15.
Division
No.
9
]
Question
accordingly negatived.
Amendments
made: No. 184, in clause 70, page 45, line 20, leave out
‘(but subject to subsection
(2))’.
No. 185,
in
clause 70, page 45, line 29, at
end insert—
‘(3A) In
subsection (3)—
(a)
paragraph (a) is subject to subsection (2)(a) to
(c),
(b) paragraph (b) is
subject to subsection (2)(a) and (c),
and
(c) paragraph (c) is
subject to subsection (2)(a) to
(c).’.
No.
186, in
clause 70, page 45, line 31, at
end insert—
‘(5) In this
section a reference to the transfer of a chargeable interest from V to
P includes a reference to a disposal by V of an interest acquired by
P.’.
No.
187, in
clause 70, page 46, line 2, at
end insert—
‘(4A) In the
application of section 75A(5) an amount given or received partly in
respect of the chargeable interest acquired byP and partly in
respect of another chargeable interest shall be subjected to just and
reasonable
apportionment.’.
No.
188, in
clause 70, page 46, line 7, after
first ‘a’ insert
‘property-investment’.
No.
189, in
clause 70, page 46, line 7, after
‘partnership’ insert
‘(within the meaning of paragraph
14 of Schedule
15)’.
No. 190,
in
clause 70, page 46, line 21, at
end insert
‘and may make
provision with retrospective
effect.”’.
No.
191, in
clause 70, page 46, line 25, after
‘But’
insert—
‘(a)
’.
No.
192, in
clause 70, page 46, line 28, at
end insert—
‘,
and
(b) a provision of
new section 75C (inserted by subsection (1) above) shall not have
effect where the disposal mentioned in new section 75A(1)(a) took place
before the day on which this Act is passed, if or in so far as the
provision would make a person liable for a higher amount of tax than
would have been charged in accordance with those
regulations.’.—[Mr.
Timms.]
Question
pu
t and agreed
to.
Clause 70,
as amended, ordered to stand part ofthe
Bill.
| 
