Clause 44 - Contract and conveyance

Finance Bill – in a Public Bill Committee at 11:45 am on 3rd June 2003.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

The clause relates to contracts for land transactions. If such a contract is ''substantially performed'' before it is formally completed, stamp duty land tax will be payable at the time of substantial performance.

An example of a contract being ''substantially performed'' before it is formally completed is when the purchaser has paid substantially the whole of the contractual price, when the purchaser obtains the keys to the door and is entitled to occupy the property, however that is documented, or when the purchaser of a building that is let becomes entitled to receive rent. In such cases the clause ensures that a transaction is charged to stamp duty land tax only once.

The clause is also designed to prevent avoidance or postponement of tax by the technique of resting on contract. The clause applies even if the contract is conditional. If the condition is not satisfied, the stamp duty land tax paid can be reclaimed. Reclaim is also possible if the contract is rescinded or annulled.

The context is anti-avoidance and the provision seeks to ensure that revenue yield is not adversely affected. In a previous debate, a number of right hon. and hon. Gentlemen referred to revenue yield. I can tell the hon. Member for Arundel and South Downs that the fullest breakdown of revenue yield is available in table A2.1 of the Red Book. In the first full year, 2004–05, anti-avoidance measures will yield £210 million and lease duty will yield £190 million. Part of that yield is offset by the increased zero rate threshold for commercial property and the changes to the treatment of VAT in consideration, which I shall not go into now, but I have no doubt that we shall return to that at some length during our deliberations.

A question was asked about the charge on special purpose companies. To put the matter into context, I shall make the position clear for the avoidance of doubt, because I know that it concerns the right hon. Member for Fylde. The Government recognise the property industry's concern about a charge on special purpose companies. However, we are determined to take tough action against avoidance. Even the industry admits that avoidance is widespread and that cannot be right, so the Government are tackling the problem of avoidance using special purpose vehicles by building on the success of the anti-avoidance rules introduced in 2002. Some of us spent a lot of time listening to my right hon. Friend the Paymaster General and the hon. Member for Arundel and South Downs, and we all know the care that has gone into that process and the introduction of the anti-avoidance rules. The Revenue will continue to monitor the area carefully, precisely in

order to deal with the sort of SPVs that have led, I fear, to abuses in the past.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General 12:00 pm, 3rd June 2003

I am grateful to the Chief Secretary for his opening remarks. As he said, the tax is on transactions. The stamp duty land tax does not ordinarily need a document, or an instrument, but the clause provides for those transactions when a contract or conveyance exists. The Chief Secretary said in his opening remarks that central to the proposals is the need to strengthen anti-tax-avoidance measures. He will know that we strongly support the Revenue and the Government where they seek to tackle illegal tax evasion or to challenge unreasonable actions that seek to enable someone to avoid their fair tax liabilities.

The clause and its vague language undermine the whole process of minimising tax avoidance. In short, without clarity of language and clear definitions, such tax laws leave new loopholes. For example, let us consider subsection (4), which states:

''A contract is 'substantially performed' when—

(a) the purchaser takes possession of the whole, or substantially the whole, of the subject-matter of the contract, or

(b) a substantial amount of the consideration is paid or provided.''

What does that mean in the real world? How does the Chief Secretary define ''takes possession of''? In enforcing that provision, what evidence will the Revenue require as to what possession is. May I give an example? If someone takes possession of a shop or office to fit it out, does that trigger a tax liability? On the face of it, the clause means that every shop, club, bar and restaurant would be subject to a stamp duty land tax when fitted out. Is that the Government's intention? If not, how will the Chief Secretary seek to determine ''takes possession of''? The language used in subsection (4)(b) is equally woolly. What constitutes ''substantial''? Is it a fifth, 25 per cent., a third, 50 per cent., or does it have to be 51 per cent.? Who will determine that definition and when?

I hope that the Chief Secretary realises that that lack of clarity leaves considerable uncertainty in the minds of potential taxpayers in relation to the problems of ensuring that they comply with the legislation. I hope that he will provide the clarity that is sadly lacking in the clause. For example, if a 20 per cent. payment of the purchase price, or the rent, is paid over by a new occupier will that constitute ''a substantial amount''? Equally, does ''substantial amount'' relate to the sum rather than the percentage? If the 20 per cent. were £100,000, would that be ''substantial''? I hope that the Chief Secretary will be able to clarify that, or, if he is not, that he will ensure that the clause is redrafted prior to enactment to ensure that it is more effective.

Many professionals have a separate concern about the clause. It would appear to be based on section 115 of the Finance Act 2002, yet it seems to have been drawn up with a far wider remit than that Act. Will the Chief Secretary explain why there is that differential, despite the apparent link?

Vague language in tax law is the enemy of the Revenue and the law-abiding majority. The Conservatives believe that the clause, among others, fails to provide the clarity and cohesion expected of principal clauses relating to a new tax. I hope that the Chief Secretary will be able to explain how he intends to correct the deficiency.

Photo of Norman Lamb Norman Lamb Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury)

We share the concerns about the apparent vagueness of the clause, especially in subsection (4), which has been brought to hon. Members' attention by, among others, the Institute of Indirect Taxation. The hon. Member for Hertford and Stortford has already referred to ''substantial'' and to the concept of taking possession. Will the Chief Secretary confirm that clear guidance will be provided to show how the Revenue will interpret this subsection in particular?

Secondly, in a submission to the Treasury the Institute of Indirect Taxation, says:

''We are concerned that this provision could create a trap for a prospective purchaser of a property who is permitted, following exchange of contracts but before completion, to enter the property as licensee . . . to carry out works.''

That could be in a residential setting or in the business setting referred to by the hon. Gentleman. The institute refers specifically to the ''Standard Conditions of Sale (Third Edition)'', which is often incorporated into contracts for sales of property. It says that it appears as if, under the clause, a purchaser who enters into the property under a contract which incorporates the standard conditions of sale would trigger a tax at that point under the new regime, unless condition 5.2.2(e) is specifically excluded. Will the Chief Secretary deal specifically with that?

Thirdly, the hon. Member for Hertford and Stortford referred to section 115 of the Finance Act 2002, on which the clause appears to be based, although its scope is significantly wider. Will the Chief Secretary outline the areas in which the clause will affect a liability that was not covered by the original section 115? It is important to have clarity on these matters, and I should be grateful if he could deal with those concerns.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am disappointed that the clause does not seem to be the subject of the clear drafting principles established by the tax law rewrite exercise, because it is a difficult part of the Bill to read as a non-expert. How does the provision operate if, for example, somebody causes a warehouse to be built and, when it is built, they put it on the market and wait for somebody to come along and lease the space therein? Subsection (5) states:

''For the purposes of subsection (4)(a)''—

this relates to the ''substantially performed'' point—

''a purchaser takes possession if he receives, or becomes entitled to receive rents and profits''.

If the building has been built but not leased, one does not know whether one is entitled to receive the rent or profit yet, because there is no agreement that says that one is entitled to receive it.

I then looked for further guidance at subsection (6)(b), which contains the phrase:

''if the only consideration is rent, when the first payment of rent is made''.

However, under some lease arrangements there is a postponement of the period—a free bit—when one can occupy the premises rent free. I will not use the word ''ignorant'', because my points come not from a representative body but from somebody who is not a detailed property man. Surely the clause could have been written more clearly and made easier to understand, so that the lay person reading it could follow what happens in the real world. I refer the Chief Secretary back to the clarity of language in the Capital Allowances Bill, the first tax rewrite Bill. One could read that like a novel. It did not have much of a novel's quality to it, but one could start at the beginning and know what the capital allowance was, read one's way through, and understand where one was at the end.

The clause is a lawyer's paradise, and I do not think that the House, in the day and age of the rewrite Bill, should be asked to agree to clauses that are drafted with so many interactive sections that they become difficult to understand. Questions such as mine should not have to be raised, but I look forward to the Chief Secretary's explanation.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

I confess that I find aspects of what the right hon. Member for Fylde has just shared with us very attractive. In drafting legislation, it is important to ensure that it is as clear and readable as possible. Let me give the hon. Gentleman the assurance that if in the course of our deliberations we find areas in which we could be clearer and the legislation could be better drafted, we shall bear his comments in mind. However, it is a bit too much to expect that parliamentary draftsmen should be the J.K. Rowlings of fiscal legislation—[Interruption.] Nor should they be, as the hon. Member for Hertford and Stortford puts it, the J.R.R. Tolkiens. We should try to be as clear and readable as we can, and we will bear that in mind as our consideration progresses.

I take that general point, but I would like to deal with some of the specific points that have been raised. I begin with a question asked by the hon. Member for Hertford and Stortford in relation to the definition of ''substantially the whole'' used in subsections (4)(a), (6)(a) and (6)(c)(i), and the phrase

''a substantial amount of the consideration''

in subsection (6). That is clearly an area in which we have to ask whether enshrining any particular proportion in the wording of the statute would benefit anyone other than those seeking to exploit some sort of advantage. It could enable an unscrupulous minority to plan around that wording with a view to reducing the revenue take. We do not want that to happen. We shall, however, issue guidance in due course.

Part of the reason for subsection (4) is to prevent payment of a deposit from triggering a charge. That is clearly unacceptable in relation to house purchases. The guidance will indicate that

''a substantial amount of the consideration''

is equal to or greater than 90 per cent. That was the approach taken for the Finance Act 2002, and it will inform the guidance to be issued in due course. [Interruption.] It would not help anyone but the unscrupulous minority, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) indicated from a sedentary position, were we to go further than that.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General 12:15 pm, 3rd June 2003

I thank the Chief Secretary for clarifying subsection (4)(b), but my concern with subsection (4)(a) did not concern the words ''substantially the whole'', but the phrase ''takes possession of''.

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury

I am coming to that, because it was the second detailed point. The hon. Gentleman raised it in relation to the fitting out of premises, which is a perfectly reasonable consideration. Allowing someone into possession for fitting out purposes will often trigger the first payment of rent. In those circumstances, subsection (6)(b) will of course apply. In other circumstances, however, the person will continue to occupy or trade from those premises once the fitting out works are completed, in which case subsection (4) will apply. Again, the treatment of such cases will be covered by guidance to be published by the Revenue. There is nothing unusual or sinister about that: it is the traditional way in which we have proceeded in order to avoid the mischief that I mentioned.

The hon. Member for North Norfolk (Norman Lamb) made an important point about the third edition of the standard conditions of sale. It is commonly incorporated into contracts for sale of property, provided at condition 5.2.2 (e), that a purchaser who is permitted to enter property in the above circumstances is entitled to any rents and profits from any part of the property that he does not occupy. The concern is that a purchaser who enters property under a contract that incorporates the standard conditions of sale would trigger a tax point under the new regime unless condition 5.2.2 (e) was specifically excluded. The point is made that that should not be the case, especially if the property does not produce income and the purchaser does not receive any income. That is a perfectly fair point. My response, that it will be a question of fact in each case whether a contract has been substantially performed, will not come as a surprise, because how else could one proceed? I imagine that I shall say that on several occasions during our deliberations on the measure, which is all about substance, not form.

The Revenue anticipates that condition 5.2.2 (e) will typically be excluded if the purchaser does not intend to receive any income. That would seem to be the reasonable thing to do. It could be done either when the contract is drawn up or when the purchaser goes into possession of the property. If it is excluded, the problem does not arise.

I hope that my clarification of those points will enable members of the Committee to see that the clause does what it is meant to do.

Question put and agreed to.

Clause 44 ordered to stand part of the Bill.