Clause 87

Part of Orders of the Day — Finance Bill – in the House of Commons at 6:30 pm on 8th May 1985.

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Photo of Mr Terry Davis Mr Terry Davis , Birmingham, Hodge Hill 6:30 pm, 8th May 1985

For three hours, we have been debating provisions which give away £155 million to people with some of the highest incomes in the nation. As we come to clause 87, we debate provisions which give away more money—another £50 million—to people who are very well off.

We are debating what is called development land tax, which was introduced some years ago as a tax on the development value of land. In effect, it is a tax on the increased value of land, usually agricultural land, resulting from planning permission being granted by a local authority.

I hope that the whole Committee will agree that such an increase is a windfall gain—a gratuitous gain. The land has increased in value as a result of planning permission. That increase has been created by the community, and we oppose the abolition of development land tax because the Labour party believes that part of that increase should be returned to the community.

The tax was originally introduced by the then Labour Government in 1976. It accompanied the Community Land Act of the previous year. That Act was repealed by the Conservatives on their return to office.

It can be argued, therefore, that the raison d'etre for development land tax was removed by the abolition of the Community Land Act. However, our case is that the development land tax is justified in its own right. We believe it right that society should insist that part of this windfall gain should be used for the benefit of society and that the money should be recovered through a special tax.

There have always been exemptions from development land tax. When the tax was introduced by the Labour Government, there was an exemption for local authorities and similar bodies. Charities were also exempt; the exemption in that case applied to land which they already owned on 12 September 1974. That ensured that they would not pay tax if the land was developed after that date. It is interesting to reflect—in view of yesterday's debate in Committee about charities and the extension of VAT to newspaper advertisements—that when Labour Members argued yesterday for an exemption from VAT on those advertisements to be given to charities, the Conservatives resisted our pleas. Conservative Members did not take that attitude in 1976 when development land tax was introduced. They then claimed to be friends of charities and pressed the Labour Government to extend the exemption to charities which acquired land after that date, so enabling them to develop it and make a tax-free development gain. In considering this issue, we are entitled to contrast the words of Conservative spokesmen some years ago on the introduction of development land tax and the dogmatic and doctrinaire attitude—they would describe it as fiscal neutrality—which prevailed in the Government's arguments yesterday.

There has always been another exemption from development land tax. That applied to a person building a house for his or her own use. The increase in value in that instance, resulting from the granting of planning permission, has always been exempt from the tax.

Similarly, exemption has always existed for industrialists who develop land for their own use. Under the scheme introduced by the then Labour Government, payment of the tax was deferred until the property developed by the industrialist was eventually sold, if it should ever be sold. No tax arose at the time of development because the Labour Government wished to encourage industrialists to build factories and expand industry.

The Labour Government gave another exemption. From the beginning, the first £10,000 profit made from the increased value of the land as a result of planning permission was exempt. An individual, company or trust could profit to the tune of £10,000 a year as the result of planning permission being given for land which was to be developed, and was not taxed on this profit.

That exemption of £10,000—call it a tax allowance—applied from 1976. When the Conservatives came to power in 1979 they increased that exemption to £50,000, and at the same time they reduced the rate of tax from 80 to 60 per cent. Those changes cost the Revenue £10 million in a full year.

Two years later the Conservatives extended to commercial developments the deferment applying to industrialists. In other words, if a person built an office block in a city, the tax did not apply until the office block was eventually sold by the developer, provided that the developer had been using it for his own purposes. I have not been able to ascertain the cost of that minor change. I accept that it was probably quite small. I mention it only so that we may have a full picture of the way in which the Government have gradually cut the revenue from this tax on windfall gains.

In 1984, the deferment became an exemption for industrialists and commercial developers. In that year, the Conservatives—fresh from the election victory of the year before—decided that, if a property had not been sold within 12 years, deferment would become exemption, and the developer would not be liable for development land tax. We were told that the change cost the Revenue £4 million. In the same Finance Bill, the Government increased the threshold from £50,000 a year to £75,000 a year, at a cost to the Revenue of another £9 million.

Finally, this year, the Chancellor announced that he intended to abolish this tax and that the measure would cost £50 million in a full year to the Revenue.

We have seen a series of changes and slices in this tax. It reminds me very much of the way in which, some years ago, Russian foreign policy was described as "slicing the salami". We are told that the final act of abolition will cost £50 million. The true cost of Conservative policy on development land tax has been at least £73 million in a full year.

I emphasise that this abolition of development land tax does not mean that the person who benefits from the windfall gain resulting from planning permission will not pay any tax on the gain. Of course, that person will still be liable to pay capital gains tax, which is levied at 30 per cent. The figures that I have cited—£50 million for the cost of abolition and £73 million for the total cost of what the Government have done—are net figures after allowing for the offset effect of capital gains tax.

It is important to note that more tax will be paid by the small landowner because of the abolition of development land tax. He will have benefited in the past from an exemption of £10,000 under the Labour Government, which was increased progressively to £50,000 and then to £75,000 under the Conservative Government. The person who was exempt from tax will become in the future liable to pay capital gains tax at 30 per cent. because a similar exemption from capital gains tax amounts to only £5,900. The Government are benefiting not only the people who receive windfall gains resulting from planning permission given by local authorities but the people who make the greatest gains. They are not benefiting the people who make only small gains.

It is important to contrast the effect of the abolition of development land tax on the tax rate, because there will only be a capital gains tax of 30 per cent. on these development gains. I contrast that tax with the taxes that this Government levy on earned income. People pay income tax on their earned income at a rate of 30 per cent. increasing to 60 per cent. This year, the rate of corporation tax is 40 per cent. The tax on the windfall gains which have been wholly unearned and undeserved will only be 30 per cent.

When the Development Land Tax Bill was introduced by the Labour Government, the Conservative party opposed it. Conservative Members were, however, always careful in debates to distance themselves from any suggestion that those unearned profits should not be taxed. Indeed, on Second Reading the spokesman for the Conservative party—he is now a Minister—moved an amendment that accepted that increases of land values resulting from planning decisions should bear a special tax". and the Conservative party did not vote against the Second Reading.

6.45 pm

In an earlier debate, the Chief Secretary told the Committee that the Economic Secretary would reply to this debate on the Government's behalf. I know that the Economic Secretary took great interest in the introduction of this tax. He told the House during the debate on Development Land Tax Bill that he had some personal experience of increases in development value because of his directorship in a company that had developed a site in London for a hotel with the additional aid of a special grant. He could therefore bring his experience and expertise to the subject—I make no criticism of that—so the Economic Secretary—the hon. Member for Hertfordshire, North (Mr. Stewart)—participated in the Second Reading debate on the Development Land Tax Bill. He told the House that he regretted the fact that there was not a common approach between the Conservative and Labour parties. He accepted that there needed to be a tax on the gains made as a result of planning permission being given. He said: we accept that planning gains should attract some special tax. —[Official Report, 15 March 1976; Vol. 907, c. 954, 1035.] I emphasise the words "special tax". Those words were also used by some of the hon. Gentleman's colleagues.

When the Economic Secretary explains the Government's decision to abolish development land tax, will he explain where the "special tax" is? Where is the special tax which the Conservative spokesman when in Opposition, agreed should be levied on these windfall gains resulting from planning permission?

During the debate on the Development Land Tax Bill and elsewhere, Conservative spokesmen argued for what they described as an "infrastructure charge" to be paid by developers. Where is the infrastructure charge to be introduced by the Conservative Government on the abolition of development land tax?

Any fair-minded person reading the debates on the introduction of this tax would have expected a Conservative Government, if they abolished development land tax, to introduce a new tax. Conservatives would regard it as a tax on better lines, but it would nevertheless be a tax on those unearned profits that arise solely as a result of a line drawn on a map by someone in a planning office. In those days, when in opposition, the Conservatives did not dare to contest the need for an additional tax. They only complained about its level and the method by which it would be levied. They said that they thought that a rate of 80 per cent. was too high and argued in the House and in Committee for a rate of 60 per cent. In one sense, it follows that we cannot complain about the reduction to 60 per cent. in 1979. Anyone who looked at the debates could have expected a Conservative Government to reduce the rate from 80 per cent. to 60 per cent., but could not have expected the tax to be completely swept away without being replaced. This tax was described repeatedly by Conservative spokesmen in the House and in Committee as a special tax that was entirely justified.

The Conservative party manifesto in 1983 did not refer to the abolition of development land tax. The Chancellor has boasted of abolishing three taxes. He refers to the abolition of the national insurance surcharge, an abolition that we supported; the abolition of the investment income surcharge, a measure which we strongly opposed; and the abolition of development land tax, which we oppose equally strongly. The abolition of development land tax gives back £50 million in a full year to people who are already well off. It does not fulfil a Conservative party manifesto commitment or election pledge. The Conservative party manifesto in 1983 did not refer to the possibility of the abolition of development land tax. I understand that it was referred to in the guide issued to Conservative candidates in 1983, but they were not encouraged by the Government to expect the abolition of development land tax.

I have not read the guide but I am told that it contains the statement: The tax remains in place to control the possibility of abuse. What will happen about those abuses? The 1983 guide for Conservative candidates admitted that there were some abuses. What else does that sentence in the guide mean? What will be done to control the abuses that two years ago Conservative central office admitted were liable to take place if the tax was abolished?

The Labour party will oppose the abolition of the tax not just because it gives £50 million to people whose need is far less than that of many others in our society, but because it goes back on everything that the Conservative party said when in opposition.