Clause 109 - Withdrawal of group relief

Finance Bill – in a Public Bill Committee at 4:30 pm on 18th June 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 4:30 pm, 18th June 2002

I beg to move amendment No. 224, in page 87, line 42, at end insert—

'(9A) This section shall not apply unless the main purpose or one of the main purposes of the execution of the relevant instrument was the avoidance of taxation.'.

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

With this we may discuss the following amendments: No. 225, in clause 111, page 89, line 44, at end insert—

'(8A) This section shall not apply unless the main purpose or one of the main purposes of the execution of the relevant instrument was the avoidance of taxation.'.

No. 226, in clause 113, page 91, line 28, at end insert—

'(9A) This section shall not apply unless the main purpose or one of the main purposes of the contract or agreement mentioned in subsection (1) above was the avoidance of taxation.'.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

The clause will introduce new anti-avoidance rules into the stamp duty regime relating to stamp duty group relief under which stampable assets can be transferred within a 51 per cent. group without incurring stamp duty. Theoretically, groups can transfer an asset between group companies and then sell the shares of the company owning the shares to avoid paying the 4 per cent. stamp duty charge.

Section 27 of the Finance Act 1967 deals with a situation in which there is intent to dispose of an asset outside the 51 per cent. group after a transfer, which would deny group relief where that is the intent. The clause further tightens the rules by stating that where an asset is sold by a group within two years via the disposal of shares rather than a direct sale of the stampable asset, even if there was no intent aforesaid at the time of the transfer, the group relief on stamp is clawed back. The clause thus gives groups certainty over when they can dispose of companies within the two-year time limit, but the Confederation of British Industry and others view that limit generally as too long and taking no account of commercial situations that could arise where tax avoidance is not the aim. I repeat my point that it is hardly surprising that companies seek to avoid a stamp duty of 4 per cent.

when they pay only 0.5 per cent. on the transfer of shares. As the Government well know, they might even not pay that at some time in the future.

The Institute of Directors has commented:

''The Government's problems with the avoidance of stamp duty are largely of its own making . . . A charge of 4 per cent. on the full value of an asset, wholly unrelated to any income which might be derived from that asset . . . is exorbitant.''

It makes the point that the

''particular provision is not even targeted on avoidance cases. It will apply even when the intra-group transfer and the sale were both bona fide commercial transactions''.

The Institute notes that

''the Government considers two years to be an adequate period for the current purposes''

but says that that

''should be an adequate period for the purposes of''

section 179 of the Taxation of Chargeable Gains Act 1992. It argues for

''a shortening of the six-year period over which that section can operate.''

Another general point that has been made is that two years is too long and that if a transaction is carried out without a view to being associated with a group reorganisation, no one will wait for anything like that long.

Subsection (2)(b) provides that stamp duty is payable within 30 days of the transfer and of the transferee companies ceasing to be members of the same group, whereas paragraph 4 of schedule 34 provides that interest on late-paid stamp duty runs from 30 days following the date on which the relevant instrument was executed. A suggestion has been made that the dates of payment of duty and the date from which interest rates run should correlate.

The Chartered Institute of Taxation has commented that

''if there is to be a de-grouping charge'',

the need for a measure under section 27 of the Finance Act 1967 disappears and the exemption under section 42 of the Finance Act 1930

''at the time of the intra-group transfer should be automatic.''

It also thinks that the two-year period is too long and that the provisions are too all-embracing and should be more focused on tax avoidance.

The Chartered Institute of Taxation feels that the mischief at which the provisions on the charge of interest from 30 days are aimed

''could be far better dealt with by a simple extension to the meaning of 'arrangements''',

such as that in section 27(3) of the 1967 Act. That could be achieved, for example, by including

''wording similar to that in clause 110(6) . . . which will include any scheme, arrangement or understanding, whether or not legally enforceable within the meaning of 'arrangements'. This would reduce the threshold of the 'burden of proof' that in practice the Inland Revenue Stamp Taxes have to cross in order to show that an intra-group transfer does not qualify for group relief.''

Amendments Nos. 224, 225 and 226 would all insert a motive test into their respective clauses, following the line of argument that the business community has

pretty universally put forward, to which I have referred in the past few minutes. Only actual tax avoidance should be targeted in clause 109, to which amendment No. 224 refers, clause 111, to which amendment No. 225 refers and clause 113, to which amendment No. 226 refers. The principle here is a tax avoidance test on the stamp duty anti-avoidance provisions. In particular, in clause 113 where sub-sale relief is threatened, the addition of a tax avoidance test should ensure that the provisions do not harm transactions entered into for bona fide commercial reasons. It is unfair that a manufacturing company transferring property to a subsidiary should be caught if it did not intend to sell the subsidiary within two years or that the sub-sale should effectively be abolished.

We hope that the Government will see the light, although we doubt that they will. Although the two-year rule brings a defined clarity, it will also bring unfairness and problems, particularly for manufacturing businesses needing to restructure. As a result of necessary sales, companies may fall outside the two-year rule, potentially triggering large stamp duty bills which they may not be able to afford. In such circumstances and in a rather difficult economic climate, the next thing that we will hear is that the Government are putting up money to rescue manufacturing companies caught by the measure. The anti-avoidance principle should be seriously considered.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 4:45 pm, 18th June 2002

Good afternoon, Mr. Gale. The Government are concerned about the growing avoidance of stamp duty by a minority at the expense of the majority of taxpayers. In particular, some companies are determined not to pay their full share of duty and structure property transactions in increasingly artificial ways to achieve that. Such activity represents a significant threat to the tax base.

To stop that abuse, the Chancellor announced on Budget day a package of measures to tackle avoidance of stamp duty in commercial property transactions, and he also launched a major reform to modernise stamp duty on land and buildings in the United Kingdom. The package of measures will ensure that stamp duty is payable if a transfer artificially rests on contract, discourage the use of companies set up specifically to avoid stamp duty on UK property and stop the increasing exploitation of the existing stamp duty reliefs for company reorganisations. Those interim measures, ahead of the modernisation of stamp duty, will discourage a range of techniques currently used to avoid stamp duty on high-value property deals. Legislation will be included in the Finance Bill 2003 to reform stamp duty.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I am sorry to catch the Financial Secretary in mid-drift as she is espousing the clause. She referred to companies that are apparently not paying their share and to the modernisation of stamp duty. I am intrigued and would like some idea as to what she considers the correct or fair share that companies should pay in a tax that has, at least in its

extent, become a considerably bigger burden on business in the past three or four years and how she envisages modernisation of the tax in the years ahead.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I apologise to the hon. Gentleman and to the Committee for the fact that I was unable to be present this morning when the Opposition's new clause was debated. I understand that several points on the overall level of stamp duty were raised.

I recently held meetings with the British Property Federation, for example, and made clear our support for the commercial property sector as a factor of production that contributes to the United Kingdom economy. It is right that we recognise its economic contribution to the economy, but it is completely unfair that we have a distortive tax that some players in the commercial property market pay and others avoid completely. We must have a level playing field and not discriminate against some companies in favour of others.

Clearly, we have set in train a major reform of stamp duty, which must first put all companies on the same basis and ensure that everyone pays a similar share of tax on stamp duty transactions. When we modernise stamp duty in the Finance Bill next year and set out a comprehensive reform strategy, we shall consider all the different interrelationships and so on. However, in the interim period we must ensure that we have a comprehensive plan to tackle stamp duty avoidance. It is completely unfair that some companies do not pay their share of tax while others pay the full rate.

The reform that we will include in next year's Finance Bill will build on the 2002 measures to tackle stamp duty avoidance, support the Government's e-business agenda and update the framework of stamp duty, bringing it into line with more modern taxes. The main reforms are set out in a consultative document published on Budget day, which seeks views on the detail of the modernised regime.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I hope that the thrust of the Financial Secretary's comments will be that it is fair enough to penalise artificial schemes for avoidance. However, there may be bona fide arrangements in place and, due to normal commercial eventualities, a charge to recover an additional charge to stamp duty on the director of a transferee company. When such entirely innocent events have occurred, that person should not fall within the charge.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I will take the hon. Gentleman's comments as support for the Opposition amendments that have been tabled to introduce a motive test into the arrangements. I will come to those in due course. I have said that we are undertaking a comprehensive reform of the stamp duty regime, which we will implement shortly. In the interim period it is extremely important that we have comprehensive and effective anti-avoidance measures in place. I shall deal with the specific practicalities of introducing a motive test in that interim period in due course.

Clause 109 aims to discourage companies from using corporate vehicles to avoid the property rate of

stamp duty. It is widely recognised that companies have been abusing the rules for stamp duty group relief by transferring UK land and buildings into special-purpose vehicles in order to sell the shares in that vehicle rather than the land and buildings direct. As the hon. Member for Arundel and South Downs pointed out, that has the effect that the sale of the land and buildings is charged at the stamp duty on shares rate of 0.5 per cent. or at nil if the special-purpose vehicle is incorporated outside the UK.

Such practice is a clear abuse of the spirit of the stamp duty group relief rules. They are not designed to provide relief where the intention is the sale of an asset outside the group rather than an intra-group transfer. There are already anti-avoidance rules within the stamp duty legislation that aim to prevent group relief from being claimed where there is an arrangement in place for the transferee company to leave the group. However, because companies are circumventing the existing rules, they are proving ineffective in combating widespread avoidance of the group relief provisions.

As a result of avoidance activity, the clause introduces a time limit into the legislation. From Budget day, that has the effect of clawing back the group relief already granted when UK land and buildings have been transferred intra-group, and the transferee company leaves the group within two years of that transfer.

The two-year rule applies to all intra-group transfers that include UK land and buildings. It is an interim measure to combat what can be described as the common practice of companies abusing the group relief rules to sell UK land and buildings within a corporate wrapper. By doing so, it ensures that the correct rate of stamp duty is paid on transfers of land and buildings.

Opposition amendment No. 224 to clause 109 inserts a motive test. I have already made it clear that it is not the Government's intention that the clawback of group relief should apply only when the transaction is motivated by stamp duty avoidance. The reform of stamp duty in 2003 will consider whether the withdrawal of group relief in a two-year period is still necessary. In the meantime, in light of the current abuse, the two-year time limit is necessary to prevent the sale of land and buildings outside a group from benefiting from the relief inappropriately. The same applies to amendment No. 225, which introduces an identical motive test for clause 111, which withdraws stamp duty relief for company reconstructions in similar circumstances.

Opposition amendment No. 226 inserts an identical motive test into clause 113. It is not the Government's intention that the introduction of a charge on contracts for UK land and buildings in excess of £10 million should apply only where the transaction is motivated by stamp duty avoidance. The reform of stamp duty in 2003 will include consideration of whether it should apply to all contracts. In the meantime, the clause tackles resting on contract for all large deals.

The hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs should consider the practicalities of introducing a complex motive test during the interim and ask themselves whether it would be simpler and more straightforward to have a two-year time period to tackle abuse. On those grounds, I urge the Committee to reject the amendment.

The hon. Member for Arundel and South Downs raised various points of detail, some of which will be dealt with later today. However, due to the levels of abuse currently prevalent, a strong response is needed. For some time, the specialist property press have been openly discussing avoidance techniques, which are becoming much more widespread. Our measures are interim, and we shall consider the two-year time limit in due course, when we consider fundamental reform. I deal with sub-sale relief later when we discuss clause 113, and some of the other detailed points about interest and so on that the hon. Gentleman raised. I urge the Committee to reject the amendment.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

The first point, which I made this morning, is that I hope that the Government realise that, for better or worse, taxation ultimately depends on a degree of consent. Most business organisations take the view that 4 per cent. stamp duty on commercial property—it is a substantial earner for Government, and I called it the new window tax—is unacceptable. I am told by the legal experts that a raft of anti-avoidance measures is waiting in the wings. Like so many other taxes, people will willingly pay them if they are reasonable, even though some clever accounts people will still try to avoid them. However, if they are unacceptable, it will inevitably cause the establishment of a massive avoidance industry. What the Government believe to be another wonder area to milk for tax will disappoint, and the excessive measures in that one narrow area will not have the revenue effect that the Government seek.

Our amendments are narrowly about justice. I understand that it is much easier to have a cut-off two-year rule, but the reaction to that will inevitably be that businesses will endeavour as far as possible to stay within the limit, even if it is economically against their interests, because some degree of restructuring is pressing. However, they will not do deals that would break because of the tax that they could incur. The Government will not make money out of the measures, which will have an impact that is only marginally damaging economically.

My advice to the Government is that they should think again. On a number of occasions during the past five years, they have had what appeared to be jolly good ideas for raising a lot of tax that would not get noticed—and that caused a massive crisis in the pensions area. Doing that in the property area in the present economic climate would be economically unwise. One would be right to say that if stamp duty was reduced revenue would be lost, but I repeat that I believe that the Government will be disappointed by the resulting revenue.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I cannot remember whether the hon. Gentleman was a member of the Committee that considered the Finance Bill in 1998, but he may recall

that substantial anti-avoidance provisions were included in that Bill. That was an example of the Government's being unable to catch up with wide-scale stamp duty avoidance. Two large transactions took place that year: British Petroleum and Vodafone both purchased shares in overseas companies, and both companies managed to avoid paying stamp duty. They saved themselves an enormous amount of money, notwithstanding that year's vast tranche of anti-avoidance legislation.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I thank the hon. Gentleman for that intervention. I may not have been a member of that Committee, but I was certainly aware of the Vodafone situation. It is obvious that when taxes are unacceptably high, that is what happens. It becomes a nightmare for the Government, who must constantly try to keep up by blocking tax loopholes.

I hope that the Government will have the sense in their statutory reforms to realise that stamp duty needs to be pitched at a level that is appropriate to the economic circumstances. We are not talking about housing stamp duty but, as the Governor of the Bank of England has warned, when interest rates go up, which at some stage they surely will, and the south-east housing market crashes, if stamp duty remains at 4 per cent. we shall have a dangerously illiquid market and a crisis on our hands.

I have no doubt that the Government will resort to doing what the last Conservative Government did and cut stamp duty to try to cushion the agony. It is a nice earner to have a rate of 4 per cent. when the going is good but one must be aware of the economic consequences when the going is bad.

In conclusion, we think that, for the specific purposes of clause 109, an anti-avoidance motive is justified. The Government will not give way and it is not worth putting the matter to the vote, but I hope that they will take heed of what I have said and what they will have found out for themselves from speaking to representatives of the industry and the legal profession. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 109 ordered to stand part of the Bill.