With this Amendment we may also take Amendment No. 209, in page 36, line 31, at end insert:
'but in no event shall the amount equal to current use value, ascertained by virtue of this section and the said Schedule, exceed the amount of current use value ascertained in accordance with the provisions of the Land Commission Act 1967 and the statutory instruments made thereunder'.;
Amendment 207, in Schedule 14, page 81, line 34, leave out from beginning to end of line 47 on page 82; and Amendment 208, in page 83, line 32, leave out from beginning to end of line 50 on page 86.
As this is the first Amendment to the Clauses and Schedules dealing with the effect of betterment levy on taxation, and, in particular, with Corporation Tax and Capital Gains Tax, perhaps I might preface a detailed explanation of the Amendment with a general statement of what I believe to be the purpose of the Clause, so that I may fit the Amendment into that general purpose.
Throughout the debates on the Land Commission Bill, now the Land Commission Act, 1967, the Opposition protested against a tax upon development value of land being imposed not as a tax, but as a levy. We would have wished it to be imposed as part of the normal system of taxation, but the Government insisted upon a levy, with all the administrative problems inherent in this. In particular, there is the calculation involved, which has resulted in the utmost complexity.
One of the major complexities is that to prevent double taxation, that is to relieve the taxpayer from paying both Capital Gains Tax or Corporation Tax, as well as betterment levy upon the same sum of money. In Clause 31, we have the formula preventing that happening for the non-trader in land, by dividing up the gain made by the disposal of land into a part attributable to net development value. The Land Commission Act made it clear—as clear as anything could be in that Act—that betterment levy is to be charged on net development value, and net development value is a figure calculated by deducting current use value of property from its market value. In most cases one is able to take the purchase price as the current use value and the sale price as the market value. But current use value plus one-tenth is the base from which we start to calculate the net development value on which betterment levy is paid.
Therefore, very roughly, the effect of the Land Commission Act and Clause 1 of the Bill will be that a gain on a sale is divided into, first, the increase in current use value—the value of the property for the purpose for which it being used when purchased or sold—and, secondly, the remainder of the gain less a figure equal to one-tenth of the current use value.
The Land Commission Act went to some trouble to define "current use value". In Schedule 4, it defines it for the purpose of the several cases of chargeable acts or events on which betterment levy arises. Scattered thoughout the 100 or so pages of closely-typed print of that Act are definitions or modifications of definitions of current use value. One might have thought that, having so exhaustively described current use value when it is to be used as the base from which net development value is to be calculated, that description could have remained the same for the purpose of the Finance Bill when we use it as the top and bottom limit for Capital Gains Tax upon another part of the same gain. But in this Bill we have yet another Schedule, Schedule 14, and another eight or more closely printed pages giving yet another definition of "current use value".
I do not know whether the result is a gap between the increase in current use value and the net development value, or whether there is an overlap. I defy anyone to know from reading the two Schedules. All that I can do is to give an example of what I think might occur by taking the several Schedules of the Land Commission Act with Schedule 14 of the Bill.
Suppose that I buy some fields for £2,000. Let us say that, as fields, they are worth £1,000,but I hope to build on them, so I pay £2,000 for them. I get planning permission and then sell them for £3,000. I therefore make a gain of £1,000. Let us assume that by that time the current use value of the fields has risen, the farmland around them has become more expensive, and that, instead of £1,000 current use value, by the time that I sell them the current use value is £1,500. Therefore, there has been an increase in current use value of £500. I would pay Capital Gains Tax on £500. I pay betterment levy on the difference between the sale price and the purchase price—£1,000. I could perhaps choose to pay it on the difference between the current use value at the time that I sell and the sale price. It would be the current use value plus one-tenth, which would work out at £1,650. I should find myself paying a betterment levy on £1,350. That would not be worth it, so I choose to pay the betterment levy on £1,000—the difference between the sale price and the purchase price.
I said that I had got planning permission for the fields. I had assumed that I had done nothing about them. Suppose, however, that I had started work under that planning permission. I should then have to turn up the Schedule to the Bill and find what happens when I have planning permission on which I have started work. I find in the second part of paragraph 1(3) that if I have started work under that planning permission, the planning permission is taken into account in assessing the current use value. Therefore, for the purpose of this example, I might be paying Capital Gains Tax on the full increase in current use valu.- from the £1,000 that the fields were worth when I bought them to the whole £3,000 at which I sold them, paying capital Gains Tax on £2,000.
Then, however, I turn to the Land Commission Act to find the base from which I start to calculate net development value, and I find that the definition of "current use value" concerning planning permission and work is different. It has certain qualifications. The planning permission on which work has started is to be excluded only in certain circumstances.
I refer to Schedule 6, paragraph 7(2), of the Land Commission Act, 1967, in which the planning permission on which work has started is to be excluded from the current use value of the land only if it was begun on or after the first appointed day and notice has been given under certain Sections of the Act or the carrying out of the project was done before the first appointed day. There is, therefore, a totally different definition.
I might find, therefore, that I was paying betterment levy on the difference between the current use value at the time of the sale, disregarding the planning permission, and the selling price, which in the example I have given would be £1.350. Therefore, I would be taxed, either by betterment levy or by Capital Gains Tax, on £2,350 when I had made a gain from the transaction of only £1,000.
There may be other anomalies when one takes the two Schedules together. I have picked only on one. While there are such anomalies, however, I see no reason for producing a Schedule to the Bill to deal with current use value. Surely, if we have a definition in the Land Commission Act, we should stick to that definition and not risk the chance of there being either a gap or an overlap in the assessment of tax. In the example which I have given, there was an overlap. Accordingly, there seems to me to be a substantial possibility of double taxation.
For these reasons, in our Amendment we merely say that "current use value" under the Bill should have the same definition as "current use value" in the Land Commission Act. That would be a simple way of solving these problems, and, indeed, simple for the ordinary taxpayer to understand. The Land Commission Act was complicated enough, but to add to it a complicated Schedule such as Schedule 14 to the Bill is straining the efforts of the taxpayer too far.
We are now embarked upon the provisions relating to betterment levy, and I suspect that we are in grave danger of this developing into a private argument between the Front Bench experts, as it becomes extremely technical.
At the outside of his speech, the hon. Member for Crosby (Mr. Graham Page) made an implied criticism that these provisions are lengthy and technical. However, that is inevitable. When we have to try to marry together one highly complex and technical affair like the Capital Gains Tax with another like betterment levy, it is inevitable that, if we are to get them right, the provisions themselves will be complicated and technical.
In moving his Amendment, the hon. Gentleman urged two matters—simplification and consistency. He said that if we were just to say that our basis of current use value for purposes of Capital Gains Tax is to be the same as that in the Land Commission Bill for purposes of betterment levy, that would be much simpler.
I am assured that if we had tried to legislate by reference in that way, it would have been extremely complicated, apart from the fact that there is a general dislike these days of legislation by reference. As it is desirable to get one code as coherent as one can in one place, because of certain exceptions to which I shall allude in a moment, from a drafting point of view it would have been difficult to legislate this matter by reference.
The other point which the hon. Gentleman urged was consistency. We accept his argument that, generally speaking, the basis for assessing the current use value should be the same for the two purposes, because the general object is to charge Capital Gains Tax on increases in current use value, and to charge betterment levy on increases in development value.
The result is that in framing Clause 31 and Schedule 14 we have reproduced largely the provisions of the Land Commission Act. In particular, the first three sub-paragraphs of paragraph 1 of the Schedule reproduce almost word for word the provisions of the Land Commission Act and are entirely based on it. In addition, sub-paragraph (4) imports Land Commission Act definitions necessary for defining current use value in particular cases.
There are two exceptions, and I should explain what they are and the reasons for them. The first exception is very near to the case which the hon. Gentleman put to me, though not precisely. It arises in this way. It is an extremely technical matter, and I apologise to the Committee in advance.
Paragraph 7 of Schedule 6 to the Land Commission Act sets out the assumptions which are to be made about planning permission in computing current use value to determine base value for betterment levy. Almost all of that paragraph, directly or indirectly, has been brought into the rules for determining current use value for Capital Gains Tax. Thus, sub-paragraphs (3), (4) and (5) of paragraph 7 have been applied by paragraph 1(4,b) of the Fourteenth Schedule to the Bill, and the substance of sub-paragraphs (1) and (2) have been reproduced in paragraph 1(3) of the Schedule.
However, this is without the condition contained in paragraph 7(2,b) that account is to be taken of planning permission in pursuance of which material development has been begun after the first appointed day but not completed only if it was notified to the Land Commission. This means that where land on which material development has begun is sold, and this condition as to notification has not been complied with, a low current use value based on the value of the land without planning permission will be adopted as the base value for betterment levy purposes, thus enabling the Land Commission to recover the levy which should have been charged when the development started.
This low current use value could not be adopted as the consideration for the disposal for Capital Gains Tax purposes because the vendor of land on which material development has begun is entitled, under paragraph 2 of the Fourteenth Schedule, to a deduction in computing his Capital Gains Tax liability for the increase in the current use value as a result of the development. Thus his gain cannot be ascertained properly unless the consideration for the disposal is taken to be the higher current use value reflecting the development.
It is true that the correct result could equally be achieved, at any rate, in relation to the vendor's liability, if the lower current use value were taken as the consideration and a special rule providing that the deduction for the increase in current use value under paragraph 2 of the Fourteenth Schedule should not be given in cases of this kind were to be introduced—
I have nearly finished. I shall give way when I have —but this would give the wrong result for the purchases of land because the amount treated as the consideration received by the vendor would also be the cost of acquisition to the purchaser in computing any gain on a subsequent sale by him, and the adoption of the lower current use value as his acquisition cost would lead to the artificial inflation of his gain since he would be selling the land as developed.
I am sure the Financial Secretary would agree that the argument he is presenting is immensely complicated, and that even with the Land Commission Act before him it is almost impossible for an hon. Member to follow the Bill unless he has prior knowledge of the arguments being presented. I suggest, with respect, that in a case like this, where complicated technical matters are at stake, the Committee should be given an opportunity of studying the arguments in advance, and we should not have to try to listen to them and follow our way through complicated Schedules to find out what the argument means.
It is precisely because of that difficulty that I thought it right to explain the technical matter. I appreciate that hon. Members will not want to debate the matter now, but it is on the record and hon. Members can see the explanation. This will enable them to consider it, and, subject to the agreement of the Chair, to raise the matter at a later stage. It is for this reason that I have dealt with the matter in this way, and if, on a technical matter of this kind, an hon. Member on studying the Bill considers that he ought to approach me to seek an explanation, I shall be only too happy to oblige.
The hon. Member for Crosby put to me an example which I think he will agree comes near to the point which I have been seeking to explain to the Committee, but I think that his point is misconceived, in that planning permission is taken into account in current use value only if the work is started under these provisions in the way in which I have been describing. If the work is started, an allowance in the current use value cost is given under paragraph 2 of the Fourteenth Schedule, but, as I say, this is a case in which the basis of the assessment of the current use value is not identical with that under the Land Commission Act, for the reason which I have explained.
The other case is rather simpler, and is dealt with under paragraph 1(5) of the Fourteenth Schedule. If any hon. Member wants a further explanation of that, we can perhaps deal with it when we come to the Schedule. This is why we have taken this course of setting out the definition again in accordance with the definition in the Land Commission Act, but with those exceptions which I have mentioned.
I think that what I have said covers Amendments Nos. 209 and 206. We are also discussing Amendment No. 208, and the Amendment would not be acceptable at all in the light of what I have said because it would omit from the Schedule important paragraphs for extending the provisions for applying current use value rules in cases of part-disposal of land with development value, paragraphs dealing with disposals by way of grant on a lease, and provisions dealing with certain minor cases where current use value is to be substituted for market value, and cases where market value is to be taken into account notwithstanding the provisions of the principal Section.
The other Amendment is Amendment No. 207. I am not sure what its proposers had in mind, but without it, in cases where material development within Case C of the Land Commission Act takes place, and the land is subsequently disposed of, the result will be a charge to Capital Gains Tax on the development value which had already been charged on the betterment levy. For these reasons, I must advise the Committee to reject the Amendment.
The Committee is grateful to the Financial Secretary for his explanation of this rather technical point. I am grateful to him for so aptly summarising what I had sought to do in the Amendment, namely, to simplify and to be consistent. For the record, I point out that the hon. and learned Gentleman did not deal with sub-paragraph (2,a) of the Schedule. He dealt with sub-paragraph (2,b). There is a possibility of the same sort of thing arising under subparagraph (2,a), and in connection with Amendment No. 208, which sought to remove from the Schedule any new rules relating to current use value, there is some difficulty in applying rules concerning part disposals under the Finance Bill, which differ from those under the Land Commission Act.
This is a subject which one cannot take in by listening as well as by reading. The Financial Secretary has said that if there is any difficulty we may return to the question at a later stage. From what he told the Committee I am sure that he is not able to give a firm undertaking that no double taxation will arise out of the inter-relation of the Schedules of the Land Commission Act and this Schedule. I am sure that in the examples which he and I gave—which were very near each other—there will be double taxation. There will be Capital Gains Tax and betterment levy on the same sum or part of the same sum.
I shall study carefully what the hon. and learned Gentleman has said in order to see whether we can gain any assurance that double taxation will be avoided. At the moment I cannot think that it will be.
I will study what the hon. Member has said about sub-paragraph (2,a) and if there is anything further I should add I will let him know.
On his last point, I can give him an unequivocal assurance that in our view there will be no overlap or double taxation.
I am much obliged, Sir Eric.
The Amendment seeks to remove words which set a time within which the taxpayer must elect whether he will take the formula under Clause 31(1) for the assessment of Capital Gains Tax or choose to have Capital Gains Tax assessed on the whole of his gain. Subsection (3), to which this is an Amendment, allows the taxpayer to choose. The principle of the Clause is to divide a gain on disposal of property between an increase in current use value and the net development value, and to charge Capital Gains Tax on the former and betterment levy on the latter.
However, if the taxpayer has losses to take into account against a capital gain, it may be worth his while to be assessed for Capital Gains Tax on the whole gain and also, perhaps, to pay betterment levy on such part of it as is attributable to net development value. The question is, how soon will he know what choice to make? How soon, for example, will the increase in the current use value be settled by the Inland Revenue? I understand that this is the first Department to which this transaction will go and which will issue some sort of certificate on that increase.
Then, how soon will he know the net development value on which he has to pay betterment levy? That is to be decided by the Land Commission. He ought not to be set a time limit for his election when those who have to settle these figures for him have no time limit under six years. The taxpayer is required to choose "blind", and the pur- pose of Amendment No. 186 is to remove that time limit.
If there is to be a time limit, on the other hand, it should not date, as do those in the Bill, from the date of disposal of the property, which might be any date in the year of assessment or the fiscal year. It has no relationship to the end of a tax year and it is inconvenient for the taxpayer to remember the date on which disposal took place and the fact that he must choose within a certain time from that date.
The Government appear to have seen that it would be inconvenient, having regard to Amendments Nos. 151 and 152 in the name of the Chancellor, in which they provide that the election must be within the year of disposal. Surely that is either cynical and callous or a very good joke. How on earth can a man decide within a year of assessment in which a disposal took place whether he should make this choice or not? That sort of Amendment says, in effect, "You make your choice and we will then work out the figures so as to get the most out of you."
As opposed to that, our Amendment No. 187 gives the taxpayer three years to decide. It provides that he shall make his election within the third year from the year of the disposal. This is not unreasonable, considering that the Land Commission has six years to work out these figures and the Inland Revenue, on Capital Gains Tax, has, I believe, no limit at all.
Here is a simple example of what may happen. I purchase some vacant land for £10,000 because I hope to build 50 houses on it. As vacant land it is worth only £2,000. I obtain planning permission not for the 50 houses I want to build but for 25, so I sell the land at a loss, at £9,000 instead of the £10,000 which I paid for it. Between that purchase and sale, farm land round about has gone up in value, and the vacant land which I bought has increased in current use value from £2,000 to £3,000.
If I take the formula in Clause 31(1), taking the difference between current use values when I purchased and when I sold, that is, the difference between £2,000 and £3,000, I shall pay Capital Gains Tax on £1,000. But for the purpose of betterment levy the sale price was £9,000, the purchase price having been £10,000, so I have made a loss on the transaction and I have no betterment levy to pay. That is what happens if I elect under Clause 31(1).
If I elect to disregard Clause 31(1) and I say that I want my Capital Gains Tax assessed on the whole transaction, not just on the difference between current use values, then, instead of paying Capital Gains Tax on £1,000, I have a loss, a capital loss of £500, perhaps, to take into account against another capital gain which I may have made.
That is all perfectly straightforward. [Laughter.] I have not complicated it. The only complication is the sale price. I sold for £9,000 at a loss, after paying £10,000 for the land, but that sale price may need to be calculated not just on the figure paid by me but by reference to several other matters in the Schedules to the Land Commission Act. It may have to be calculated by reference to expenditure on improvements during the time when I had the property.
It may have to be calculated by reference to the effect of other chargeable acts or events under other Cases in the Land Commission Act, the release of restrictive covenants, the purchase of an easement of access to the land, or something like that. It may have to be calculated by reference to part disposals of the land, part disposals either geographically or in title, a long lease having been granted, perhaps. It may have to be calculated by reference to death and Estate Duty.
All those matters have to be determined eventually by the Land Commission. I can state what I think ought to be the calculation of the sale price, but I have to notify the transaction to the Land Commission and the Land Commission has six years to decide whether I am right or wrong in saying that I can take account of these improvements, that easement, those restrictive covenants, and so on.
When there is all that to be done, it is ridiculous to ask the taxpayer to make his election within the year of disposal. He will never get a decision within that time from the Land Commission, and, in the circumstances, he should be given a longer time. Perhaps—I thought of this after putting the Amendment down —it might be right to say that he could make his election within a certain period from the assessment by the Land Commission, or something of that sort. At least, he should be given longer, and the period of three years which we propose seems not unreasonable, having regard to the time which both the Inland Revenue and the Land Commission are allowed by statute to take in assessing these figures.
The hon. Member for Crosby (Mr. Graham Page) has correctly explained how the Amendments relate to the election in the Clause. That is the election that enables the Capital Gains Tax charged on disposal to be computed by reference to the full acquisition cost and the sale price of the land, and not by reference to current use value. The provision is designed to benefit the owner of land which has a declining development value. There may have been an increase in the current use value and it might be unfair to him to be made subject to Capital Gains Tax on that if there had been an overall loss owing to a decline in the development value.
A number of Amendments is before us. First, there is Amendment No. 186, which proposes that there should be no time limit for his exercising this election. We think that that would be quite impracticable; there must be some limit. We then have the revised limits proposed in the Government Amendments, Nos. 151 and 152. Thirdly, we have the further period suggested in Amendment No. 187.
Perhaps it would be simplest if I explained, first, the reason for the Government Amendments. I think that the hon. Gentleman has misunderstood their effect. It is not that the election will have to he made by the end of the year in which the disposal is made but, borrowing the terms of Amendment 187, it would be made before the end of the second fiscal year following the year in which the disposal takes place. That is because the assessment would be made on a preceding year basis.
After the Bill was published we received representations, from the C.B.I., in particular, that it would be convenient to accountants and other professional advisers if the time limit for the election were the end of the second fiscal year following that in which the disposal takes place. That was for the various reasons which have been expounded very fully by the hon. Gentleman and I need not recapitulate. We put down the Amendments to achieve that effect.
That may be what it has suggested to the hon. Gentleman, but I am advised that in the discussions which took place with the Inland Revenue it asked for what I have outlined. Our Amendment was framed to meet that request. It may be that it, or in any event others and some hon. Members opposite, would prefer a longer period. I do not suggest that there is any magic about the period which we have chosen. What we want to do is to meet the general convenience of all concerned.
There are obviously advantages in concentrating people's minds, as it were, and urging them to get on with it and to make their election as early as is reasonable, but we do not want to make difficulties. The Board has power under the subsection to allow further time in particular cases. That is intended particularly to meet the kind of case to which the hon. Gentleman referred, namely, where the taxpayer is not in a position to decide whether or not to elect because the betterment levy consequences of the disposal have not yet been settled. In those cases the Board could and would grant an extension of time.
If the hon. Gentleman would not press his Amendment at this stage, and would allow the Government Amendment to be passed, we could both consider the matter further in the light of what he has said. Having considered that and now realising the true effect of the Government Amendment, and bearing in mind the power to extend the time given under the Clause, he might come to the conclusion that the period of time we have suggested in our Amendments is satisfactory. If, at the end, he is of a different opinion, perhaps we could return to the matter on Report.
I return the compliment to the hon. and learned Gentle- man and say that if he would accept my Amendment we could think about it again at a later stage. But he has been so courteous. I realise now, from his explanation, that the Government Amendment takes the taxpayer to the second year. We seem to be very near on this; I am pleading for the third year. There is no reason to harass the taxpayer over this. It is a very complicated matter, and he and his accountants will have a great deal of trouble in working this out. I should not have thought that the Inland Revenue would want to harass him.
On the assurance which the Financial Secretary has given us, that if we let him have his Amendment we can continue to think about it with a possibility of coming back to this at a later stage, I beg to ask leave to withdraw the Amendment.
I beg to move Amendment No. 185, in page 37, line 1, after 'that' to insert:
'the amount upon which betterment levy is chargeable is a sum allowable as a deduction in the computation of the profits or gains arising or accruing to any person or company charged to income tax or corporation tax (as the case may be) as a developer of or trader or dealer in land but otherwise'.
I am obliged to you, Sir Eric, for saying that we may also discuss Amendment No. 191. This, I very much regret to say, omits a small Amendment which I thought I had tabled, but it was on a slip of paper and must have got lost.
Perhaps I might say, by way of a point of order, Sir Eric, that Amendment No. 191 would mean what it is intended to mean only if the word "not" in the second line in page 37 were also omitted. It is intended that the provision should then read:
It is hereby declared that a payment of betterment levy is a sum allowable as a deduction for the purposes of a charge to tax under Case I or Case VII of Schedule D but not otherwise.
Returning to Amendment No. 185, perhaps I might refer to the booklet entitled "A guide for builders and developers on betterment levy". The Minister of State, Housing and Local Government, knows that I have been rather rude about these little pamphlets from time to time, but in this case I compliment the authors upon summing up very well on the last page the relationship between betterment levy and other taxes.
The question on the last page of the pamphlet is:
What provision is being made to take account of levy paid in calculating in Corporation and Capital Gains Tax and vice versa?
The answer is:
It is intended that provision will be made in the 1967 Finance Bill that when the levy comes into operation Capital Gains Tax for the purpose of Corporation Tax and Capital Gains Tax on long-term gains will be limited to changes in the current use value of land, and any changes in development value will be left wholly to betterment levy. In the case of short-term gains of individuals which are taxable as income the amount of levy paid will be allowable as an expense.
Then comes this sentence:
The position will be the same in the case of property dealers when the profits on realisation of development value are taxable as income.
So the summary there is that there will not be double taxation on a non-trader dealing with land; there will be double taxation on a man who has to pay short-term capital gains; and there will be double taxation on the dealer in land; he will pay betterment levy and Income Tax, or, in the case of a company, Corporation Tax, on the gain which he makes.
One whose business it is to buy and sell land or to develop and dispose of land is treated for ordinary tax purposes as any other trader. The land or the bricks and mortar are his stock-in-trade in the same way as tins of food are a grocer's stock- in-trade. Therefore, he is taxed on his dealings with them in buying and selling. He will be paying tax not only on any increase in the current use value of the land; he will be paying Income Tax on the whole of his gain, subject, of course, to deductions which he is allowed to make for the expenses of his business; he will pay that Income Tax on the whole of his gain.
That gain will include the sum of net development value, and on that sum of net development value he will be paying betterment levy as well as Income Tax. He will suffer Income Tax and betterment levy on the same sum of money, which is a form of double taxation, which will be a deterrent to developers.
I think that that is ironical. I am very glad we have on the Front Bench representatives of the Ministry of Housing and Local Government. A tax of this sort will be a deterrent on the developer of residential property, the very person, I would have thought, whom the Government would wish to encourage. He will be penalised, but the casual one-deal amateur gets away with it, without double taxation. Is this really Government policy? It seems to me quite ridiculous that the man who is running the business and developing land, putting houses on it, is to be charged something like 16s. 3d. in the £ in taxation—when we combine betterment levy with Income Tax which he has to pay.
Therefore, we have produced Amendment No. 185 which will remove from tax the whole of the money on which betterment levy is charged; that is to say, the whole of the net development value on the whole of the property. Because the trader would be paying ordinary tax on that, paying Income Tax on that sum, it is unfair that he should have to bring that sum into account again as subject to betterment levy.
That, I think, is the fair way, the only fair way, of dealing with the matter, but apparently the Government are not even prepared to allow the trader to set off what he pays in betterment levy—not, as we would wish in this first Amendment, the whole of the amount of betterment levy as assessed; they will not allow that; but they will not, as far as I can read the Bill and other Statutes, allow him even to deduct what he pays in betterment levy from his profits in his business.
Betterment levy should surely not be payable at all upon the money which has been taxed. This principle is recognised in Clause 31 and in the Land Commission Act. Betterment levy is not assessed upon current use value. Capital Gains Tax is not assessed upon net development value. That applies to everyone except the trader.
Many times over the past years Government spokesmen have sought to justify the betterment levy and the Land Commission by quoting cases of huge profits from the purchase and then the sale of property. These cases have been quoted as tax-free gains. In fact, the most startling cases quoted have been those which wer not tax free at all—transactions by dealers in lands, by developers —and the gain has been fully taxed as profits. Thereby, the Exchequer and, through it, the community, have done well out of the taxation of these profits.
Perhaps to make that plain does not suit the Government politically so the betterment levy is held up as the great instrument of taking back for the community the value supposed to have been created by the community in the land. In fact, that value has been taken back over the past years by Capital Gains Tax, Corporation Tax and Income Tax on the trader in land. This has been the major factor in taking back the value created by the community. It is true that the Bill boosts, as it were, the betterment levy as being a great instrument for this. Capital Gains Tax is made to apply only to an increase in current use value. But that does not apply to the trading man.
The betterment levy is not to be reduced in any way by payment of ordinary Income Tax by the man who deals and trades in property. This is grossly unfair on just the man whom we want to encourage and not penalise in his business. It is not only unfair on him, but crass folly from the point of view of the policy of encouraging the development of resident property and the provision of homes for the people.
The hon. Member for Crosby (Mr. Graham Page) has made it clear that the purpose of the Amendment is that the betterment levy should be treated in the same way for the purpose of taxing trading profits as is proposed for the purpose of the long-term Capital Gains Tax. The result would be that, in measuring the liability to Income Tax or Corporation Tax of a dealer in land or in the development of land, increases in development value would be excluded and left wholly to the betterment levy, so that only current use value would be taken into account in reckoning liability to tax on trading profits.
If we were to accept the Amendment, we would be ignoring the distinction, which exists in many other ways, between the taxing of a person who realises a capital gain and the taxing of the income of a person who deals in land and part of whose profits may be the result of a capital gain realised in the course of that dealing. When we originally decided to impose a betterment levy on development value we saw that the right relationship between the levy and the long-term Capital Gains Tax was to exclude development value from capital gains for the purpose of Capital Gains Tax. We said that from the outset.
While betterment levy can fairly be treated as a substitute for tax on capital gains, it in no way corresponds to tax on income and could not be treated as such. Accordingly, we adopted the approach that the right relationship between betterment levy and taxes on income—that is to say, taxes on trading profits, taxes on short-term gains and income from land—would be secured by following the ordinary rules of computation on Case I, Case VII and Case VIII respectively, and allowing the taxpayer to treat any payment of betterment levy as a deductible expense. Since our proposals have been published, there have been protests at this decision, in particular from the building industry, but it does not follow that the solution which is right in the capital gains context is right in the context of tax on incomes.
The land of a builder or developer or dealer in land is in effect his stock in trade, and the realistic way of looking at betterment levy is as a factor in the cost of acquiring his stock in trade. As such, it is essentially akin to other national and local imposts, such as Purchase Tax, or local rates, which have always been an allowable deduction in computing trade profits.
If hon. Members opposite do not like that example, I would give them one which is perhaps rather nearer and closer in a provision which they introduced when they were in power. That was the levy on advertising revenue of commercial television companies which was dealt with in the same way. That has now been replaced under Section 13 of the Television Act, 1964, by what is called the additional payment on top of their rental charge which is based on their advertising revenue. The yield of this additional payment comes, like betterment levy, into the Exchequer; but, for the purpose of calculating the taxable profits of the television operators, the method adopted in relation to these additional payments is the same as that which we now propose for betterment levy. In both cases, what the Revenue regards as the normal tax rules have been followed.
There is a further consideration. The developer in many cases acquires land which already has planning permission on which betterment levy will have been paid in full or in substantial measure. To the extent that the purchase price includes the levy element, the dealer is automatically allowed a deduction for it in computing his profits, so it would be consistent and logical to treat also as an expense of the trade any levy which the dealer himself has to bear if it falls to him to secure the planning permission after acquiring the land or if the existing permission has to be varied. That is how development charges incurred under the 1947 Act were treated for tax purposes.
The National Federation of Building Trades Employers says that some 13 per cent. of land held by builders and developers at any given time is without planing permission. In this settings, it would be highly anomalous if the builder who buys land without planning permission were virtually exempt from levy in that the Amendment would give full credit for it against his tax, whereas the builder who buys land on which planning permission has been given and levy paid suffers a levy as an element in cost.
So much for Amendment No. 185. The hon. Member for Crosby is proposing to hand in, if he has not already done so, a manuscript Amendment relating to Amendment No. 191. I hope that I have grasped correctly the effect of the Amendment, subject to the addition which he is making to it. I understand that he wants to declare that the levy is an allowable deduction in taxing under Case I—that is, in the case of trades—and under Case VII—the short-term capital gains—while maintaining the position that it is not an allowable deduction for Capital Gains Tax purposes.
This is the law as accepted by the Revenue so far as it concerns Case VII —the short-term gains—and the computation of the Case I profits of dealers in land, but if the Amendment is intended, as I believe it is, to go further and to allow deduction for betterment levy paid by any trader, for example, a shopkeeper owing land who obtains permission to enlarge his shop on it, bearing in mind that such a person can obtain no tax allowance for the cost of the land if he had bought it, or for the cost of erecting a building on it, unless it is an industrial building, it is clearly inappropriate that he should obtain tax deduction for one item of cost relating to the erection of his building, namely, the betterment levy.
As the hon. Gentleman will appreciate, I can only pass on the assurance from advisers that this is the Revenue's view of the effect. If he would like me to spell out the provisions, I undertake to write to him and do so. For the reasons which I have given, I must advise the Committee to reject the Amendment.
That is a most unsatisfactory answer. Whatever arguments the hon. and learned Gentleman puts forward, he cannot get round the fact that the same sum of money is being taxed twice in the hands of a man who is providing assets for the country and homes for the people. That is where this imposition of betterment levy and Income Tax on the trader in land, the developer of houses, will be such a deterrent. No argument which the hon. and learned Gentleman has put forward has got over the difficulty of double taxation on the man who is carrying out the work, and in those circum-
|Division No. 362.]||AYES||[9.53 p.m.|
|Allason, James (Hemel Hempstead)||Harrison, Col, Sir Harwood (Eye)||Page, Graham (Crosby)|
|Bell, Ronald||Hastings, Stephen||Page, John (Harrow, W.)|
|Bitten, John||Heald, Rt. Hn. Sir Lionel||Pardoe, John|
|Biggs-Davison, John||Heseltine, Michel||Pearson, Sir Frank (Clitheroe)|
|Bossom, Sir Clive||Higgins, Terence L.||Percival, Ian|
|Braine, Bernard||Hiley, Joseph||Pike, Miss Mervyn|
|Brinton, Sir Tatton||Hill, J. E. B.||Pink, R. Bonner|
|Bromley-Davenport,Lt. -Col. Sir Walter||Hirst, Geoffrey||Price, David (Eastleigh)|
|Brown, Sir Edward (Bath)||Holland, Philip||Pym, Francis|
|Bruce-Gardyne, J.||Hooson, Emlyn||Rawlinson, Rt. Hn. Sir Peter|
|Buck, Antony (Colchester)||Hordern, Peter||Renton, Rt. Hn. Sir David|
|Carr, Rt. Hn. Robert||Hornby, Richard||Ridley, Hn. Nicholas|
|Chichester-Clark, R.||Howell, David (Guildford)||Rippon, Rt. Hn. Geoffrey|
|Cooke, Robert||Hunt, John||Rodgers, Sir John (Sevenoaks)|
|Cooper-Key, Sir Neill||Iremonger, T. L.||Russell, Sir Ronald|
|Craddock, Sir Beresford (Spelthorne)||Jenkin, Patrick (Woodford)||Scott, Nicholas|
|Crowder, F. P.||Jopling, Michael||Sharpies, Richard|
|Cunningham, Sir Knox||Kaberry, Sir Donald||Shaw, Michael (Sc'b'gh & Whitby)|
|Currie, G. B. H.||King, Evelyn (Dorset, S.)||Sinclair, Sir George|
|Dance, James||Kitson, Timothy||Smith, John|
|Davidson,James(Aberdeenshire,W.)||Knight, Mrs. Jill||Steel, David (Roxburgh)|
|Dean, Paul (Somerset, N.)||Lancaster, Col. C. G.||Stoddart-Scott, Col. Sir M. (Ripton)|
|Deedes, Rt. Hn. W. F. (Ashford)||Langford-Holt, Sir John||Summers, Sir Spencer|
|Doughty, Charles||Loveys, W. H.||Taylor, Sir Charles (Eastbourne)|
|Elliott, R. W.(N'c'tle-upon-Tyne,N.)||Lubbock, Eric||Taylor,Edward M.(G'gow,Cathcart)|
|Emery, Peter||McAdden, Sir Stephen||Taylor, Frank (Moss Side)|
|Errington, Sir Eric||MacArthur, Ian||Temple, John M.|
|Farr, John||Macleod, Rt. Hn. Iain||Thatcher, Mrs. Margaret|
|Fisher, Nigel||McMaster, Stanley||Turton, Rt. Hn. R. H.|
|Fletcher-Cooke, Charles||Marten, Neil||van Straubenzee, W. R.|
|Fortescue, Tim||Maude, Angus||Vaughan-Morgan, Rt. Hn. Sir John|
|Glover, Sir Douglas||Mawby, Ray||Walker-Smith, Rt. Hn. Sir Derek|
|Glyn, Sir Richard||Maxwell-Hyslop, R. J.||Wall, Patrick|
|Goodhart, Philip||Maydon, Lt.-Cmdr, S. L. C.||Ward, Dame Irene|
|Goodhew, Victor||Mills, Stratton (Belfast, N.)||Wells, John (Maidstone)|
|Gower, Raymond||Miscampbell, Norman||Whitelaw, Rt. Hn. William|
|Grant, Anthony||Mitchell, David (Basingstoke)||Wills, Sir Gerald (Bridgwater)|
|Grieve, Percy||More, Jasper||Wilson, Geoffery (Truro)|
|Grimond, Rt. Hn. J.||Murton, Oscar||Wolrige-Gordon, Patrick|
|Gurden, Harold||Nabarro, Sir Gerald|
|Hall, John (Wycombe)||Noble, Rt. Hn. Michael|
|Hall-Davis, A. G. F.||Nott, John||TELLERS FOR THE AYES:|
|Harris, Frederic (Croydon, N.W.)||Onslow, Cranley||Mr. Reginald Eyre and|
|Harris, Reader (Heston)||Osborne, Sir Cyril (Louth)||Mr. Bernard Weatherill.|
|Albu, Austen||Carter-Jones, Lewis||English, Michael|
|Allaun, Frank (Salford, E.)||Castle, Rt. Hn. Barbara||Ennals, David|
|Alldritt, Walter||Coe, Denis||Ensor, David|
|Allen, Scholefield||Coleman, Donald||Evans, Albert (Islington, S.W.)|
|Armstrong, Ernest||Concannon, J. D.||Evans, Ioan L. (Birm'h'm, Yardley)|
|Atkins, Ronald (Preston, N.)||Conlan, Bernard||Faulds, Andrew|
|Atkinson, Norman (Tottenham)||Craddock, George (Bradford, S.)||Finch, Harold|
|Bagier, Gordon A. T.||Crawshaw, Richard||Fletcher, Raymond (Ilkeston)|
|Barnett, Joel||Cronin, John||Fletcher, Ted (Darlington)|
|Beamy, Alan||Dalyell, Tam||Floud, Bernard|
|Bence, Cyril||Davidson, Arthur (Accrington)||Foot, Sir Dingle (Ipswich)|
|Bidwell, Sydney||Davies, Dr. Ernest (Stretford)||Ford, Ben|
|Bishop, E. S.||Davies, Harold (Leek)||Freeson, Reginald|
|Blackburn, F.||Delargy, Hugh||Galpern, Sir Myer|
|Booth, Albert||Dempsey, James||Gordon Walker, Rt. Hn. P. C.|
|Boyden, James||Dewar, Donald||Gourlay, Harry|
|Braddock, Mrs. E. M.||Diamond, Rt. Hn. John||Gregory, Arnold|
|Bray, Dr. Jeremy||Dobson, Ray||Grey, Charles (Durham)|
|Brown,Bob(N'c'tle-upon-Tyne,W.)||Doig, Peter||Griffiths, David (Rother Valley)|
|Buchan, Norman||Dunn, James A.||Griffiths, Rt. Hn. James (Llanelly)|
|Buchanan, Richard (G'gow, Sp'burn)||Dunwoody, Mrs. Gwyneth (Exeter)||Hale, Leslie (Oldham, W.)|
|Callaghan, Rt. Hn. James||Dunwoody, Dr. John (F'th & C'b'e)||Hamilton, James (Bothwell)|
|Carmichael, Neil||Ellis, John||Hamling, William|
|Hannan, William||Mallalieu, J.P.W.(Huddersfield, E.)||Rowlands, E. (Cardiff, N.)|
|Harper, Joseph||Manuel, Archie||Shaw, Arnold (Ilford, S.)|
|Hart, Mr. Judith||Mapp, Charles||Sheldon, Robert|
|Haseldine, Norman||Marquand, David||Shore, Peter (Stepney)|
|Hazell, Bert||Millan, Bruce||Silverman, Julius (Aston)|
|Henig, Stanley||Miller, Dt. M. S.||Silverman, Sydney (Nelson)|
|Herbison, Rt. Hn. Margaret||Mitchell, R. C. (S'th'pton, Test)||Slater, Joseph|
|Hooley, Frank||Moonman, Eric||Small, William|
|Houghton, Rt. Hn. Douglas||Morgan, Elystan (Cardinganshire)||Spriggs, Leslie|
|Howarth, Harry (Wellingborough)||Morris, Alfred (Wythenshawe)||Stewart, Rt. Hn. Michael|
|Howarth, Robert (Bolton, E.)||Morris, Charles, R. (Openshaw)||Swain, Thomas|
|Hoy, James||Morris, John (Aberavon)||Swingler, Stephen|
|Huckfield, L.||Moyle, Roland||Taverne, Dick|
|Hughes, Rt. Hn. Cledwyn (Anglesey)||Mulley, Rt. Hn. Frederick||Thomson, Rt. Hn. George|
|Hynd, John||Newens, Stan||Thornton, Ernest|
|Irvine, A. J. (Edge Hill)||Noel-Baker, Rt. Hn. Philip(Derby,S.)||Tinn, James|
|Jackson, Colin (B'h'se & Spenb'gh)||Oakes, Gordon||Tomney, Frank|
|Jackson, Peter M. (High Peak)||Ogden, Eric||Tuck, Raphael|
|Johnson, James (K'ston-on-Hull, W.)||O'Malley, Brian||Urwin, T. W.|
|Jones, Dan (Burnley)||Oram, Albert E.|
|Jones, Rt. Hn. Sir Elwyn (W. Ham)||Orbach, Maurice||Wainwright, Edwin (Dearne Valley)|
|Judd, Frank||Orme, Stanley||Walker, Harold (Doncaster)|
|Kelley, Richard||Oswald, Thomas||Wallace, George|
|Kerr, Russell (Feltham)||Owen, Dr. David (Plymouth, S'tn)||Watkins, David (Cornell)|
|Leadbitter, Ted||Page, Derek (King's Lynn)||Watkins, Tudor (Brecon & Radnor)|
|Lee, John (Reading)||Pannell, Rt. Hn. Charles||Wellbeloved, James|
|Lewis, Ron (Carlisle)||Parker, John (Dagenham)||Willey, Rt. Hn. Frederick|
|Lomas, Kenneth||Pavitt, Laurence||Williams, Alan (Swansea, W.)|
|Luard, Evan||Pearson, Arthur (Pontypridd)||Williams, Alan Lee (Hornchurch)|
|Lyon, Alexander W. (York)||Pentland, Norman||Williams, Mrs. Shirley (Hitchin)|
|McCann, John||Perry, George H. (Nottingham, S.)||Williams, W. T. (Warrington)|
|MacColl, James||Prentice, Rt. Hn. R. E.||Wilson, William (Coventry, S.)|
|MacDermot, Niall||Price, Chirstopher (Perry Barr)||Winnick, David|
|Macdonald, A. H.||Price, Thomas (Westhoughton)||Winterbottom, R. E.|
|Mackenzie, Gregor (Rutherglen)||Pursey, Cmdr. Harry||Woof, Robert|
|Mackle, John||Randall, Harry||Yates, Victor|
|Maclennan, Robert||Roberts, Albert (Normanton)|
|McMillan, Tom (Glasgow, C.)||Robinson, W. 0. J. (Walth'stow, E.)||TELLERS FOR THE NOES:|
|MacPherson, Malcolm||Roebuck, Roy||Mr. Waiter Harrison and|
|Mahon, Peter (Preston, S.)||Rogers, George (Kensington, N.)||Mr. Neil McBride.|
|Mallalieu, E. L. (Brigg)||Ross, Rt. Hn. William|
I am now in a position to answer the hon. Gentleman's question. Not only will it save me writing to him, but, perhaps more important, I can get the answer on the record.
Betterment levy is allowable as a deduction in computing the profits of a dealer in land under the ordinary Income Tax law—namely, under Section 137 of the 1952 Act—as expenditure incurred wholly and exclusively for the purposes of his trade. It is correspondingly allowed for the short-term tax because the Case VII provisions say in Section 13(1) of the 1962 Act that the chargeable gain is to be computed as if the transaction had been an adventure in the nature of trade.
I am very grateful to the Financial Secretary for that explanation. It sets our minds at rest, to some extent. But there is a matter which has not been mentioned at any length on the Amendments, although I think that it has been mentioned slightly. It is the different way in which the Clause deals with long-term and short-term capital gains.
The Clause deals with the relationship between long-term capital gains and the betterment levy, and long-term capital gains only are taken into account in the Clause. This is because the Clause refers to Part III of the 1965 Act, whereas short-term capital gains come under the Finance Act, 1962, and Part II of the 1965 Act. In respect of a gain made upon disposal of land, the double taxation as between long-term capital gains and betterment levy is avoided by silhsection (1) of the Clause.
Tax is chargeable not only on longterm gains. It is still chargeable on short-term gains. There is still the possibility of double taxation in that case. The Bill recognises that there can be double taxation in such a case by the provisions in paragraph 14 of Schedule 14. which bring certain short-term capital gains within the compass of Clause 31(1), but only those of a certain kind.
I will not detain the Committee by reciting the relevant sections, or how I come to the conclusion which I am about to state, but I am sure that the Financial Secretary will correct me if my conclusion is wrong. What it comes to is that the only short-term capital gains which come within the Clause, and, therefore, escape betterment levy as well as short-term Capital Gains Tax, are gains from land acquired between 6th April, 1964, and 5th April, 1965, and sold or leased between 6th April, 1967, and 5th April, 1968. Those seem to be the only ones which are exempt from double taxation.
Having tried to spell it out in that form, I will again give an example to illustrate my meaning. I will give up saying that I bought the land. Let us suppose this time that the hon. and learned Gentleman buys it—a large Victorian house with a large garden for £10,000, the current use value being, say, £9,000 for the house and £1,000 for the garden. He then converts the house into five flats at a cost of, say, £3,000. He gets planning permission to build another five flats in the garden. The conversion of the house creates a value of, say, £3,000 per flat. That brings us up to £15,000 for the house. The conversion not being a material development —an alteration from a dwelling-house into flats—the current use value has, therefore, been increased by £6,000.
Suppose that the hon. and learned Gentleman also gets planning permission to build in the garden and that with the planning permission the value of the garden has trebled, as well it might in a case of this sort. He then sells out at a nice profit at, say, £18,000, £15,000 for the house and £3,000 for the garden. Had he bought it in the summer of 1964, and if he were to sell it this summer, longterm Capital Gains Tax would be payable on the increase in current use value, which I have given as £6,000, less the £3,000 expenditure. He would be paying longterm Capital Gains Tax on £3,000, and betterment levy would be payable on the net development value, which on my figures would be £2,000. That represents 30 per cent. on £3,000 and 40 per cent. on £2,000—in all, if my mathematics is right, taxation of about 33 per cent. on his gain.
If that happened at some other dates than those which I have mentioned—if the conversion were carried out now and the purchase and sale were carried out after April, 1967—Income Tax would be payable on the whole of the gains. If there was a gain of £5,000, Income Tax on that is £2,062 10s. In addition, betterment levy would be payable on 40 per cent. of £2,000 of that £5,000, which comes to another £800, making a total tax of £2,862 10s. on the gain of £5,000; in other words, a tax of nearly 60 per cent.
I am sure that the hon. and learned Gentleman will find somewhere that I have not allowed for something. It may be the one-tenth at current use value, or something of that sort. However, in round figures, the short-term Capital Gains Tax payable on a transaction which occurs after April, 1967, gives rise to about double the taxation which would be involved if it occurred before that date.
Why should only a very small part of short-term capital gains be excluded from the double taxation and, otherwise, the whole of it be included? That seems to me to be a very great hardship, because the Bill recognises elsewhere that, when Capital Gains Tax is charged as a longterm tax, it does not result in double taxation. Why has short-term Capital Gains Tax on capital gains which occur after April, 1967, not been exempted in the same way as long-term capital gains?
The hon. Member for Crosby (Mr. Graham Page) correctly stated the general point at the outset of his remarks. It is that, when we are dealing with short-term capital gains, we are dealing with something which has been regarded from the outset, including when it was introduced originally by the party opposite, as income. That is what short-term capital gains are, and that is the way in which they are treated.
The distinction about which he asks is essentially that between short-term and long-term capital gains. One is regarded as being identical with income and taxed as such, whereas the other is regarded as being something different from income which should now be subject to taxation, although at a lower rate than income. It is from that that the different treatment springs.
As I explained in what I said about the Amendments which we were discussing a moment ago, we decided that the right relationship between betterment levy and taxes on income—and I itemised short-term gains as being one of the taxes on income—would be by following the ordinary rules and allowing the taxpayer to treat any payments of betterment levy as a deductible expense. That is the general rule for purposes of short-term gains.
As the hon. Gentleman pointed out, there is one set of provisions in the Bill which are of some complication and which deal, in effect, with transitional provisions. It is right to say that the transitional difficulty arises from the alteration of the period which is relevant for determining what is a short-term and what is a long-term gain.
I was unable to follow in my head the complications of the example which he gave. However, I think that the error which he made was in failing to allow the betterment levy as a deduction in arriving at a computation of the increase in income. In any event, I assure him that I will study it carefully, and I undertake to write to him setting out a full explanation in reply to the example which he gave. As for the general principle, it is as I have stated.