Clause 45 - Contract and conveyance:

Finance Bill – in a Public Bill Committee at 12:15 pm 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 deals with the treatment of subsales and other situations in which the purchaser's rights under a contract are transferred to a third party. The basic rule is that each transfer of rights will be charged to stamp duty land tax. One result of the operation of the clause is that there will no longer be a general relief on subsales. The Government will consult on possible targeted replacements, which the Opposition will be concerned should happen.

Some practitioners have asked how the clause will operate in schedule 19 during the transitional period from stamp duty to the modernised system. I shall take this opportunity to make it clear how the clause will work. Some have suggested that if A subsold to B in 2001, B subsold to C in 2002, C subsold to D after Royal Assent, and D exercised his right to require a conveyance to himself from A after the implementation of SDLT, the act of calling for the conveyance would make B, C and D chargeable to SDLT on their contracts. I assure the Committee that that is not the intention. D would be chargeable in this case, as the conveyance gives rise to a charge even if substantial performance occurred after Royal Assent but before implementation. However, the conveyance should not bring B into the charge. It is not our intention that the charge should arise on C if the contract between B and C has been substantially performed before Royal Assent.

Some practitioners have suggested that the Bill does not make that clear, so I have asked the Inland Revenue to ensure, either by an amendment on Report or in guidance, that the provision achieves that result. With that assurance, I hope that members of the Committee will find it in their hearts to give the clause a fair wind.

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

I am grateful to the Chief Secretary for his explanation of the transitional point, but there is further confusion and uncertainty. The Law Society takes the view that, given the very wide meaning of consideration in clause 43(3)(b)(ii), it should be made clear that the reference to consideration in that paragraph excludes any amount taken into account in clause 45(3)(b)(i). I understood the Chief Secretary's point that there is no longer to be a general relief on such sales, but I believe that everyone would welcome an analysis of how the provision will apply to the purchaser under the original contract; that is, the subselling purchaser, for want of a better expression.

Generally, examples of how the clause is intended to operate in respect of assignments and subsales would be welcome. That is particularly the case, as the Law Society has stated that the example in paragraph 9 of the explanatory notes is extremely confusing because of the transposition of references to A and B and because of the incorrect figure on which tax is due from C.

For the benefit of the Committee, I ask the Chief Secretary to work through an example of very simple transactions, all of which take place in one tax year—that is not particularly relevant, but let us keep it that way. A contracts to sell Blackacre to B for £1 million. There is no completion, and B does not take possession of Blackacre. B subsells Blackacre to C for £2 million. The transaction is completed, and C takes possession and pays the £2 million consideration. I would like the Chief Secretary to tell the Committee what the stamp duty consequences will be for B and C.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

May I ask the Chief Secretary whether my understanding is correct that the intent of the clause is that forward sales, which have become an important financing method in the new housing market, will be hit by the new stamp duty tax? As he knows, the off-plan market relies on forward sales, even though, typically, the building of the property is not actually complete. Construction may not even have begun at the time of the first forward sale.

The Chief Secretary hinted that the Government were considering some other method to address the issue, but if the subsales release wipes out forward sales for the off-plan market in new properties, it would be seriously damaging economically to the development of the new housing that is wanted and needed.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am grateful to the Chief Secretary for telling us that the Government are listening to outside concerns. We look forward to perusing the amendments, but we have the greatest reservations about the clause because it will end the relief for subsales and would tax each element of such transactions. We are also concerned about the defective drafting of the clause, as with other clauses.

For those right hon. and hon. Members who are beginning to sink from trying to understand subsales, I shall regurgitate my non-practising chartered surveyor knowledge to explain the background and why subsale relief is thought to be important. As with stamp duty, it dates all the way back to 1782 and I am told that it was introduced while Pitt the elder was in charge. Today, it resides in section 58(4) and (5) of the Stamp Act 1891. That is some history for my hon. Friend the Member for Tatton and others—[Interruption.] I am not sure whether it was during the time of Pitt the elder or Pitt the toddler.

The relief limits existing stamp duty payable when the property is on-sold, as the Chief Secretary explained, whether in whole or in part, to a subpurchaser. The result is that the duty is paid only once according to the consideration paid by the subpurchaser. Various hon. Members have referred to the Inland Revenue's example, and an unfortunate mistake in the explanatory notes makes something that is difficult to understand almost impenetrable. I shall attempt to explain it, and I hope that the Committee will forgive me if I use the A, B and C method. I shall not attempt to name properties, as the hon. Member who spoke for the Liberal Democrats did.

If A contracts to a buy property for £100,000 and sells that property to C for £110,000, and both contracts are completed in a single transfer of legal title from A to C, B will pay stamp duty land tax on £100,000 and C will pay it on £110,000. The contrast with the existing situation is that, under current stamp duty rules, B's purchase escapes the charge. That is a critical change.

It is also intended to apply the new charge to cases in which B assigns the benefit of contract to C, who completes the acquisition. I understand that the Revenue quoted an example involving A contracting to sell to B for £100,000 and so on. The net result would be multiple charges. There would be charges on three parties even though there were only two transactions. I am grateful to the Chartered Institute of Taxation for helping me through the maze. The feeling is that the Government are making a significant error in going down that path, because subsale relief helps to ensure that the commercial market and residential property market operate efficiently. I shall give an example so that we can all understand why that matters.

The Chief Secretary referred to sale and leaseback, which are increasingly important in modern commercial practice. They are vital for many businesses because they help those businesses to release capital, whether for new operations or investing in factories and so on. Sale and leaseback enable them to expand their businesses, but also enable many public and private organisations to outsource what they do. Subsale relief helps by limiting the total charge to the price moving from the subpurchaser. Many experts, whether in valuation, property surveying or accountancy, believe that removing that relief will jeopardise a wide range of sale and leaseback deals, because they will be hit twice: once on initial restructuring and again on any intended on-sale. That is the sort of problem that the change would cause in the commercial market.

The Committee may ask about the residential market. The Government are keen to build many new homes and, as Member of Parliament for Hertford and Stortford, I am rather anxious about the Deputy Prime Minister's proposals, but I shall not stretch your patience, Mr. Gale, by going down that path. [Interruption.] I shall not even respond to those murmurings.

Conventionally, in the process of building new houses, house builders buy land, parcel it up and sell it on, having erected a property on that land. As the clause is drafted, house builders, having lost their relief under the new tax, will want to pass on the cost of their stamp duty land tax to home buyers on top of the house sale tax liability. That will push up house prices. It will also, as my hon. Friend the Member for Arundel and South Downs pointed out, kill the market for off-plan developments. Those are important because there are many urban areas in which the ability to sell off-plan helps to bring in the capital that enables a tower block, for example, to be regenerated. The off-plan market matters; we have received representations about that from accountancy firms

and leading legal practices such as Norton Rose. It is an important issue.

The clause would fuel house price inflation and create another barrier to home ownership, particularly for first-time buyers. After all, it is often first-time buyers who buy new homes, and whom the clause will most concern. That is why the measure could prove to be perceived by the public, if they feel that they have been charged a second time, as another stealth tax—I know that the Chief Secretary does not like that phrase. I hope that he will persuade the public and the Committee that that is not so.

As a non-practising chartered surveyor, I would also say that property intermediaries, notably the commercial market, help the very important markets in question to work more efficiently. Subsale relief encourages that, and so contributes to better working of the market. There is a precedent for subsale relief in section 88(a) of the Finance Act 1986, relating to the sales of shares to stock exchange intermediaries.

What we are discussing involves a key point of principle about a 250-year-old arrangement that most people feel has worked well. Of course, there are problems and gaps, but on the whole it has worked well. Last year, the Government recognised that fact when they reversed a proposal that would ''inadvertently'' have scrapped the relief for sales of over £10 million. I love the word ''inadvertently''—it is one of the best euphemisms I have heard.

I hope that the Chief Secretary notes the point of principle; the matter will have a direct impact. The Government have to understand the need to bring back targeted reliefs—we shall come to a whole raft of targeted reliefs—to try to fill in the gaps. We understand the original motivation, but the approach may be mistaken.

Another aspect of the clause that merits consideration is the language used. The way in which the clause is set out does not, as hon. Members have said, make it clear whether the purchaser under the original contract is necessarily liable for tax. That is not simply my interpretation, but that of experts from, for example, the Chartered Institute of Taxation, the Institute of Chartered Accountants and many legal practices. I hope that the Chief Secretary will show exactly where the matter is spelled out in the clause.

This clause would delete a relief that is tried and tested. The result would be to undermine sales and lease-backs in commercial property markets; to reduce liquidity and opportunities for company re-finance; to hit out-sourcing in both public and private operations; and to add to the cost of home purchase, which would especially hurt first-time buyers and those on low incomes.

I am sure that the Chief Secretary will respond constructively, because after the consultations were aborted in January, the half offer of new talks to deal with certain provisions—mentioned in the explanatory notes and which I believe began on 22 May—was regarded with the greatest of scepticism among many professional bodies. We will, of course, listen with

some care to what the Chief Secretary has to say , but we regard the proposal for the abolition of subsale relief as misguided, and we may vote against the clause.

Photo of George Osborne George Osborne Opposition Whip (Commons), Shadow Minister (Treasury) 12:30 pm, 3rd June 2003

As my hon. Friend has just eloquently explained, clause 45 gets to the nub of whether stamp duty land tax is, as the Government claim, a device for stopping tax avoidance, or a new stealth tax. They propose to abolish a tax relief that has existed for more than 200 years. That is a major step, and, as my hon. Friend pointed out, an extraordinary one given that they mistakenly abolished part of the relief in last year's Finance Bill only to reinstate it. Now, they propose to abolish it again, and there has been general confusion as a result.

I have tried to make sense of the explanatory notes. They seem to state that the Government intend to impose a tax on multiple charges in a way that they have not done before. The explanatory notes cite an example: A contracts to sell to B for £100,000. B pays a deposit of £10,000. B then assigns the benefit of that contract to C for £20,000—partly to reflect the deposit paid and partly to make a profit of £10,000. C then completes the acquisition and pays A the balance of the £90,000 due under the contract.

That is the kind of transaction that one sees all the time in the commercial property market. The Government propose to impose tax on the £100,000 consideration under the contract, on the £20,000 consideration payable by C for the purchase of the benefits of the contract, and finally on the £90,000 consideration remaining payable by C under the contract. In effect, they are imposing three taxes on only two transactions; the first is the original sale of the property for £100,000, the second is the sale of the benefit for £20,000. That confirms my suspicion that the entire stamp duty land tax, which has been presented as a means of modernising stamp duty and preventing tax avoidance, is in fact a new Government tax.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

As always, my hon. Friend is prescient. His suspicion is that the provision is about generating more tax. The Chief Secretary, in an earlier debate, highlighted the fact that additional tax revenue, over and above tax avoidance, will total £190 million. Does my hon. Friend share my concern that the cat is out of the bag and that we can see the proposal for what it is?

Photo of George Osborne George Osborne Opposition Whip (Commons), Shadow Minister (Treasury)

I very much share that concern. The Government intend to raise very large sums of money as a result of the new tax. The taxes will bear down on businesses and, as hon. Members know, taxes on businesses are also taxes on jobs, investment and so on. The nub of the argument is whether the clause is about preventing tax avoidance, as the Government say, or is a new form of taxation. I cannot see how the Government can plausibly claim that the abolition of a tax relief that has existed for more than two centuries is simply a measure to prevent tax avoidance.

Photo of John Baron John Baron Conservative, Billericay

I, too, add my concerns about the clause and particularly the ambiguity of certain aspects. I can only agree with the hon. Member for Torridge and West Devon, who quoted one or two instances of how badly worded is

the example in paragraph 9. I put it to the Chief Secretary again that it appears, if one looks carefully at the example, that the references to A and B after the first line and the amount of tax due by C are incorrect. I would appreciate it if the Chief Secretary would comments in order to guide the Committee.

It is alarming that there appear to be two stamp duty land tax charges when one conveyance completes two contracts. In certain circumstances, it appears that that can lead to the same consideration being taxed more than once. I refer again to the example in the explanatory notes on clause 45. When consideration is outstanding on the first transaction, stamp duty will be charged on the full amount of the consideration payable on the first transaction by the original purchaser, and on any unpaid consideration from that transaction, together with the amount payable on the second transaction. In the example in the explanatory notes, the £90,000 appears to be taxed twice. Does the Chief Secretary agree that that is the case? If he does, I suggest that the claims made by my hon. Friend the Member for Tatton and others that this is another stealth tax are valid.

One other aspect needs clarification: is it intended that clause 45 should have a penal effect, as it appears to? Is the clause aimed at a particular mischief? The clause appears to make it clear that the chargeable consideration for the second transaction is the consideration for that transaction plus any amounts outstanding under the first transaction. It appears that the only amount that should be chargeable on the first transaction is the £10,000 deposit as consideration given, in accordance with paragraph 1 of schedule 4. I have tried to make my points clear but they are confusing, particularly to laymen. I ask the Chief Secretary to clarify those points not only for the sake of the Committee, but for the general public.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

Another clause has received a burst of comments from confounded professionals. It seems that the notes are patently wrong, or at the very least confusing. My hon. Friend the Member for Hertford and Stortford rightly raised the serious implications arising from the drafting itself and the practical implications for the property trade. The Minister himself all but admitted that the clause is poorly drafted, that amendments will have to be brought forward and that there will have to be further consultation. That sounds like a dog's dinner of a clause, as far as I am concerned. Why can we not simply withdraw the clause and bring it back when it has been thought about and consulted on? We are rambling through a whole series of provisions and no one has any idea of what they mean. I look forward to the Minister's explanation. I suggest that the clause be thought about more carefully.

The Institute of Indirect Taxation raised the point that it is in any event unclear how clause 45(3) will apply in the case of a contract for the assignment of agreement for lease. Is it intended that the consideration on which the tax will be chargeable on such an assignment will include the rents payable

under the lease that is to be granted pursuant to the agreement?

Photo of Mr Paul Boateng Mr Paul Boateng Chief Secretary, HM Treasury, The Chief Secretary to the Treasury 12:45 pm, 3rd June 2003

I am afraid that I shall disappoint the hon. Member for Huntingdon. No way will we withdraw the clause, for a very good reason, touched on by the hon. Member for Tatton, who was right in one respect, if in one respect alone. The clause is very important; we have had a good debate, and some serious points have been made. Its importance is that it goes to the heart of the Bill's philosophy. The clause has a modernising effect and is not a new tax. We want to address the reality of the transaction rather than the form of the document. The clause is a move from a document-based tax to a transaction-based tax. That is why it is necessary to bring subsale contracts in to charge. There is no intention of damaging the industry or of reducing its capacity to respond to market needs, and to do so in a way that leads to new housing opportunities not only for first-time buyers in particular but generally. There is no intention either of doing anything that would lead to house price inflation, as suggested by the hon. Member for Hertford and Stortford. We intend to ensure that we move from a document-based tax to a transaction-based tax.

Having said that—I was asked for clarification and I am happy to give it—subsales would be stampable if completed by a series of conveyances from the original owner via the subsellers to the ultimate purchaser. At the moment, the ultimate purchaser often avoids the duty by taking a conveyance directly from the original owner. The clause prevents that. We are, however, considering providing relief for subsellers who do not substantially perform the original contract. We want to ensure that we do not fall into the trap suggested by the hon. Gentleman and others, so we shall consult on other targeted reliefs. We want that dialogue with industry. The impact on the forward off-plan market is, and has to be, of concern to us.

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

May I just get under way a bit?

The housebuilding business is very important. We are aware of the structures implemented by housebuilders, and further discussion on those will be a valuable part of the forthcoming consultation on future targeted relief. I assure Opposition Members that we will take into account the points that they have made during this important and serious debate.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I wish to put it on the record that it is unsatisfactory for the Minister to refer to consultations parallel to our proceedings that may affect substantial parts of the Bill, when members of the Committee are able to debate only the Bill before us. I register our strong protest at such an approach.

Will the right hon. Gentleman clarify the point that he has just made? If a housebuilder buys a parcel of land and breaks it up, then builds on it and sells it, will he be liable for stamp duty land tax?

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

Let me go back to first principles surrounding substantial performance. That is the basis on which the test is made. We recognise that there are

issues around subsales on which the industry needs to be consulted. The hon. Gentleman and his colleagues cannot have it each and every way; I understand why they would want to, but I cannot see how they can. They chastise us for not having consulted enough, but when we have consulted they say that we should not have done so. What are we to do? We have a responsibility to safeguard the interests of the taxpayer. We are fulfilling our responsibility to modernise a 200-year-old piece of legislation and drag it, with Opposition Members kicking and screaming, into the 21st century.

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

I will come to Blackacre in a moment; the hon. Gentleman will have his reply then.

I do not think that we should be chastised, or taken to task in the way that we have been, for consulting. We will return on Report to the impact that consultation has had on the Bill, and all will become clear. In the meantime, some very valuable points have been made, and I am not disparaging that.

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

I note that the Chief Secretary is going to consult on subsale relief. The impression that I got from the start of his speech was that the Government are considering preserving the relief in certain circumstances. We have a break coming up soon and it would be interesting if, after that break, the Chief Secretary could provide some indication of what subsale relief he proposes to preserve.

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

I can do that now. I do not need a lunch break—well, I do need a lunch break actually; I think the whole Committee needs one. I do not, however, need a lunch break to say that we regard the forward off-plan market as a perfectly legitimate market and that we will make sure that it is not adversely affected by the measure. That seems palpably obvious, and that is why this has been an important debate, enabling me to clarify that in order to avoid doubt. I am surprised that there would be doubt but if there is, I am only too happy to put it to rest.

I will not allow the hon. Member for Torridge and West Devon to go to his lunch without my having addressed his point about Blackacre. In his example, where the original contract is not substantially performed within the meaning of clause 44, and where the substantial performance is affected by means of a conveyance in favour of a subpurchaser, he is concerned about why there should be any objection to general relief for subsales in cases in which clause 44 has not been satisfied in that way. He gave the example of Blackacre, and it is not our intention to place a charge on what he called, in his example, B. That is not our intention, provided that there is no substantial performance by B—and of course we would not want B to be caught by the charge. In due course, to avoid any doubt about that, we will propose some clarifying amendments on Report, but that is not our intention, provided there has been no substantial performance. That is the test, and if the hon. Gentleman believes it needs to be clearer, and if we are satisfied that clarification can be made, it will be made on Report.

Photo of John Baron John Baron Conservative, Billericay

Following the Chief Secretary's remarks about Blackacre, will he attempt to answer my question about the example given in the explanatory notes? That would help the Committee. Without going through it all again, it appears—if one follows the example—that £90,000 is taxed twice. Will the Chief Secretary answer a simple question: is the £90,000 taxed twice—yes or no—and give an explanation?

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

I say with the utmost respect to the hon. Gentleman that, if we had proceeded on a yes or no basis, we would have gone considerably beyond the clause that we are now considering five minutes before lunch. Therefore, I hope that he will excuse me if I decline to answer yes or no to his question, which I fear I shall have to revisit at some considerable length after lunch.

There is one answer that I can give in the remaining time—to a question put by the hon. Member for Huntingdon. He asked me whether the rental element of a lease will count as consideration on assignment of agreements for a lease—a question that concerned the Institute of Indirect Taxation. The answer is no—for assignments of agreements for lease or, indeed, for leases themselves. It is the consideration for the assignment that is within the charge. We will not be looking back at the rent that has been charged on grant of the lease that is subject to the level and nature of the relief. I hope that that answer has given him a degree of satisfaction.

At the outset of the debate, I made the point that we are looking at substance rather than form. It will be on examination of the substance that the susceptibility of an action to charge will be judged. It is on that basis that I will approach the example given by the hon. Member for Billericay (Mr. Baron), which I will deal with in some detail after lunch.

Before that, I will reflect on an issue that was raised in the case of Swayne v. CIR [1900] 1 QB 172. Already I see the hon. Member for Torridge and West Devon almost salivating, not so much at lunch but at the prospect of my detailed reflection on that case. That is important because it is relevant to the concern expressed by the Institute of Indirect Taxation that, under subsection (3), the consideration on which a sub-purchaser will be liable to duty will include not only the consideration that he provides for the transfer of rights but the consideration under the original contract that remains to be paid or provided. The IIT considers that that would effectively reverse the principle enshrined in the judgment in the CIR case, and would give rise to multiple liability to duty on consideration that is ultimately borne by a single party: the subpurchaser.

I assure the Committee that it is our intention that the subpurchaser will be charged SDLT on the basis of the price payable to the original seller for the sale of the land, plus any profit in excess of that that is paid to the subseller. That is on the total paid by the subpurchaser to the original seller and to the subseller. There is no intention to charge on the basis of a higher price. The Revenue is actively considering whether any amendments are necessary in order to clarify that that is how the clause should operate.

That is a happy note on which to adjourn for lunch. The clarification sought by hon. Members, who were inspired to raise such issues by the institute and have properly done so, has been provided.

Photo of John Baron John Baron Conservative, Billericay

On a slightly less happy note, I suggest that what the Chief Secretary has just said does not marry with certain sections of the explanatory notes, particularly the example that I gave earlier. I look forward to the explanation after lunch.

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

Order. Before we draw stumps, may I advise the Committee that the Programming Sub-Committee may be required to sit at 7 o'clock—

immediately after the afternoon sitting. Unfortunately, I have been unable to afford this afternoon's Chairman the courtesy of asking whether he will be able to chair that Sub-Committee. In the event that he is not, I will. Any determination reached by the Programming Sub-Committee will, of course, have to be approved by this Committee at the start of the sitting on Thursday morning.

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.