Schedule 4 - Stamp duty land tax: chargeable consideration

Finance Bill – in a Public Bill Committee at 6:15 pm on 3rd June 2003.

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Photo of Mark Prisk Mark Prisk Shadow Paymaster General 6:15 pm, 3rd June 2003

I beg to move amendment No. 5, in

schedule 4, page 155, line 38, leave out from beginning to end of line 3 on page 156.

We move to the substance of schedule 4. The amendment would remove paragraph 2, under which stamp duty land tax would be charged on a chargeable consideration, but a consideration that includes VAT. That is a tax on tax and is accordingly inherently unfair, in which it runs counter to the stated aims of the Government's so-called modernisation, to which the Chief Secretary is so keen to refer. Many professional and small business organisations have told me that they believe that that tax on tax is wrong in terms of business practice and in principle. How does the Chief Secretary justify maintaining that outmoded and unfair element of the old duty? It is not just a question of being a tax on tax; it is a transaction tax on a transaction tax.

We discussed earlier whether the tax is legal under the European Community's sixth directive, which requires each nation to have one transaction tax, and there is a danger that there may be a contravention of our treaty obligations. Can the Chief Secretary explain whether, given our treaty commitments both in the EU and beyond, it is legal to levy a transaction tax on an existing transaction tax? If it is, what is the legal basis for such an assertion? The Economic Secretary is as aware as I am that double taxation treaties have kept us in entertainment and employment in recent months. Here is a classic cross-question, and I hope that the Chief Secretary will be able to answer it.

I hope that the Chief Secretary will at least see some sense on this issue. I genuinely believe that this tax on tax, or transaction tax on transaction tax, is wrong. It runs counter to the Government's modernisation approach, and if we are not satisfied with his answers, I shall press the amendment to a vote.

Photo of Norman Lamb Norman Lamb Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury) 6:30 pm, 3rd June 2003

We support the amendment. It cannot possibly be justifiable to have a tax on a tax. I know that many have campaigned on that issue for many years. The Law Society suggests another way of dealing with the issue by simply changing ''include'' in line 39 in paragraph 2 to ''exclude''. That is a simpler way of making it absolutely clear that the VAT element should be excluded from the chargeable sum. In essence, we support the amendment, which seeks to remove VAT from the equation.

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

We deprecate clause 54 and think it entirely wrong that there should be double taxation.

We are talking about what is almost a constitutional impropriety. We talked earlier about retrospective taxation and we received some comfort from the Chief Secretary during discussion of the last clause. Now the Economic Secretary to the Treasury is with us. He cannot stand up and justify double taxation; it should be anathema to all of us from both sides of this House. We hope to hear that he fully concedes the fact that the clause should be deleted.

Mr. Boateng rose—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

The hon. Gentleman is going to hear from the Chief Secretary, as he has now come back.

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

The hon. Member for Torridge and West Devon will once again be disappointed. I certainly can justify double taxation, as could my hon. Friend the Economic Secretary were he fortunate enough to have drawn this particular straw.

Amendment No. 5 attempts to eliminate paragraph 2 from schedule 4, which deals with whether VAT is to be treated as a consideration. Schedule 4 is a crucial part of the stamp duty land tax. It deals with quantifying the amount to which the rate is applied to calculate the tax charge. Paragraph 1 sets out that amount—the ''chargeable consideration''—is

''any money or money's worth given . . . directly or indirectly'' for the property being acquired by the purchaser or a person connected to him. That is subject to express provisions to the contrary, which are contained in some of the 15 other paragraphs of the schedule.

One of the most important aspects of consideration to clarify is a treatment of any VAT that is or may be paid by the purchaser. Under existing stamp duty case law, it is dictated that VAT should be included as consideration. Conservative Members take exception to that. Moreover, for new leases it is assumed that VAT is charged unless the lease specifically prohibits it. By eliminating paragraph 2 altogether, amendment No. 5 would reduce clarity in the new legislation and throw us back to the case law principles whereby VAT would be treated as consideration unless prohibited from being charged.

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

If I may finish my point, as it is complex.

In paragraph 2, we are trying to clarify that VAT is included as consideration only when it is actually charged. The situation has therefore been improved by this measure. In the past, it fell to charge regardless; now, it is more limited. The amendment would throw us back on to case law, which would be unfortunate.

I appreciate the strength of feeling behind the principle that VAT should never form part of consideration. However, that would have a cost, which is unlikely to trouble the hon. Members who speak for the Liberal Democrat cause, but should trouble those who speak for the Conservative cause, especially as they are seeking to cover the remnants after the 20 per cent. has been cut. They should be concerned about where the money is coming from, as the cost would be about £80 million for a full year. That would be the price if we accepted the principle being espoused by Opposition Members. Such an amount is better spent elsewhere on specific subsale relief or disadvantaged areas, for example.

It is a matter of achieving the right balance. I suspect that we shall not agree across the divide in Committee about whether we have achieved it. We believe that we have found the right balance by eliminating the inclusion of theoretical VAT charges from consideration, but including it when they are actually paid. I urge the Committee to reject amendment No. 5, which would restore the existing position. I do not want to go on about such matters at great length, but I am not aware that any attempt was made by the Conservative party to challenge the existing position when it had the power to do so. I exempt those who are part of the Liberal Democrat cause from that charge, but it is true of the Conservative party.

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

I appreciate that the provision gets in the money, but does the Chief Secretary have any difficulty about the principle of taxing someone on the tax that that person has paid?

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

No.

I shall now move on to the charge about the European Community sixth Council directive. I will not go on about it, but it is important that we settle the matter once and for all. The EC sixth directive prohibits turnover taxes that exhibit the same characteristics as VAT. The European Court of Justice has stated repeatedly that the essential characteristics of VAT are that it applies generally to transactions relating to goods and services; that it is proportional to the price of those goods and services; that it is charged at each stage of the production and distribution process and that it is imposed on the added value of goods and services since the tax payable on a transaction is calculated after deducting the tax paid on the previous transaction.

Of those essential characteristics, the only one that is present in the new stamp duty structure is that the tax is proportional to the consideration paid. That is true in the case of leases with rent based on turnover, payable over the term of the lease. The Government's legal advice is that, for a tax to be prohibited of turnover tax, all the essential characteristics—not just one—must be present and that, accordingly, we do not fall foul of the sixth VAT directive. I hope that, in the light of my explanation, I have dealt with the directive. I accept that we have a disagreement in principle in Committee.

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

I want to make a small, but important, point. The Chief Secretary used the words, ''unless the lease specifically prohibits it''. I am sure that he is aware that it often happens in practice that such action can take place by side letter. I hope that he agrees that, if there is a prohibition by side letter, it should be just as compelling as if it were in the main body of the lease.

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

I refer to the broad point of principle. Let us consider the substance not the form. I accept that there is a disagreement in principle in Committee. We had sought to achieve the right balance and I hope that the hon. Member for Hertford and Stortford will not press the amendment to a Division.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am grateful to the Chief Secretary and the Economic Secretary for responding to such concerns. I shall start with the transaction tax on tax. I fully understand the Chief Secretary's argument, but he must appreciate that many taxation experts believe that there is a genuine conflict here. In his absence, I referred to the wider international taxation regime and, in particular, to double taxation treaties and whether there is relevance there. If there is a particular aspect to that, I should be happy to allow the Chief Secretary to intervene. I see that he does not wish to do so.

The substantive point is one of principle. The Chief Secretary has said that the new arrangements introduce a provision that will enable some people not to face the burden of VAT. Yet from talking to all the small business organisations, the taxation experts and those in the property professions it becomes clear that, as a result of this paragraph, the majority will find themselves paying tax on tax. It is an important

principle that we believe is wrong. Given that throughout our debates on this tax the Chief Secretary has spoken about the need for a modern tax and fairness, this paragraph contradicts the Government's claimed goals. I therefore do not intend to seek to withdraw the amendment and we shall take it to the vote.

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

I hear what the hon. Gentleman says. Let me give him the assurance that he seeks. We do not believe that the paragraph causes us to fall foul of any of our international obligations, so let us get that one out of the way. This is a reforming measure. We believe that the current law is unsatisfactory. The hon. Member for Torridge and West Devon says, ''Unless the lease specifically prohibits it'' and then makes a reference to side letters. Such an approach is unsatisfactory. Paragraph 2 makes it clear that treatment is linked, and must be linked, to an election to Customs and Excise. It is not a question of relying on side letters.

We have sought to give Opposition Members the clarification and the assurances that they have requested. If they wish to press the amendment to a vote, that is a matter for them.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 17.

Division number 19 Adults Abused in Childhood — Schedule 4 - Stamp duty land tax: chargeable consideration

Aye: 9 MPs

No: 17 MPs

Ayes: A-Z by last name

Question accordingly negatived.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 6:45 pm, 3rd June 2003

Order. Before we move to the next amendment that I have selected, I give advance notice that unless I receive any other notice, if there is a Division in the Chamber I shall break for 15 minutes. However, I repeat that there will be a meeting of the Programming Sub-Committee as and when the usual channels advise me.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I beg to move amendment No. 187, in

schedule 4, page 159, line 3, leave out

'to which paragraph 10 applies'

and insert

'of construction, improvement or repair of a building or other works to enhance the value of land.'.

Thank you for that guidance, Sir Nicholas, which I am sure the Committee will appreciate.

I am particularly grateful to several lawyers, and especially to the Law Society, for their help in drafting the amendment. Its purpose is to clarify the effect of paragraph 11. It is as simple as that. It is unclear whether the reference in paragraph 11 to

''works to which paragraph 10 applies'' is intended to be a reference to the phrase

''works of construction, improvement or repair of a building or other works to enhance the value of the land'' or a reference to such works that fulfil the conditions set out in paragraph 10(2). The explanatory notes suggest that the former interpretation is the correct one. The amendment would achieve that in the Bill, and I hope that the Chief Secretary will be able to accept the amendment in that light. I should just say before hearing the rest of the Committee's concerns that I hope to consider the background to the amendment, and the wider issue of facilities management, service offices and service agreements during the stand part debate.

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

I am also grateful to the Law Society for alerting me and other Committee members to one or two unsatisfactory aspects of the clause. The view is correct that charging stamp duty land tax on the value of carrying out works or the provision of services is likely to lead to considerable practical difficulty in assessing the tax. The district valuers offices are already much engaged and extremely busy, and I wonder whether the Chief Secretary can tell us how it is proposed that that charge would be quantified.

I reiterate the point made by the hon. Member for Hertford and Stortford. Is there to be a charge on the cost of doing the work, or the value of the work itself?

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

For the avoidance of doubt, I shall clarify the purpose of paragraph 11. I hope that I can meet the concerns of the hon. Member for Hertford and Stortford. The paragraph is designed to deal with the provision of services that are not works of construction, improvement or repair of a building. Those are dealt with by paragraph 10, which may bring works into charge.

Although paragraph 10 may exclude some works from charge, that does not mean that paragraph 11 applies to such work. We cannot simply rely on the operation of paragraph 10 to bring those works covered by paragraph 11 into charge. We do not accept that the interaction of those paragraphs can be construed otherwise, and thus the amendment is unnecessary. If it were capable of the construction that the hon. Gentleman has put on it, such an amendment might be necessary, but we submit that it is not.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Chief Secretary has a distinguished legal background, and I do not share that experience. However, the concern about the potential for those paragraphs to be misconstrued or misinterpreted rests not with me, but with the Law Society—an august body. The Chief Secretary has assured us that the provision could not be interpreted in that way, so how can it be that the Law Society has done just that?

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

Far be it for me to take issue with a body of which I was once a member, before being called to the bar. Occasionally, however, even the Law Society has been known to get things wrong. [Interruption.] I hear gasps of disbelief. I am already out of there, as they say. On this occasion the Law Society is wrong. I am sure that it will not mind being wrong, that it will welcome the clarification that the intervention by the hon. Member for Hertford and Stortford enables me to make and that, being reassured, it will turn its attention to the next area in which its considerable skills will find ready opportunity for development and exploration. No doubt the hon. Gentleman will raise other issues brought up by the Law Society, which is proper. That is how we tease out the meaning of clauses, paragraphs and schedules. I hope that having been reassured about the meaning of paragraph 11 and its relationship to paragraph 10, the hon. Gentleman will at least feel able to let this one go.

The hon. Member for Torridge and West Devon asked how the charge under paragraph 10 will be applied in practice in relation to cost or value. I assure him that the Inland Revenue will in due course provide guidance on that matter, and, indeed, it is already liaising with those representing valuers to ensure that it has an input into the process. Value or costs refers to the amount that would have to be paid in open market. When the purchaser buys in open market that will be the cost. In other circumstances, value might be appropriate. Such matters are being explored in the course of discussions with those representing valuers, and I am sure that the outcome will be satisfactory to the profession and the taxpayer.

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

Will we in Parliament have a chance to scrutinise those deliberations?

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

I have no doubt that the House will have an opportunity to reflect on the outcome of those deliberations. That is surely what the House would want. When that might happen would, I suppose, depend on the time scale and the time taken to reflect and deliberate by those advising me and those representing valuers. I shall ensure that as soon as guidance is issued a copy will be drawn to the attention of the hon. Gentleman.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

If I may begin by referring to the last point made by the hon. Member for Torridge and West Devon, and to the answer he was seeking. If I understood and interpreted correctly what the Chief Secretary said, the answer was no. Apparently, the House will not be given the opportunity to consider the question of whether cost or value is more appropriate. That reinforces our concern. We have a scrutiny process in hand, but parallel and separate to that is a consultation process that is trying to fill in the bits the Government did not deal with when Ministers chose to close down the consultation on 21 January. I know that the Chief Secretary has not denied that during the debate. That is a concern I have registered in the past.

I am grateful that the Chief Secretary acknowledged the point underlying the amendment. Perhaps more distinguished legal minds than mine have

misinterpreted it. I am grateful that the Chief Secretary has noted that and, on that basis, and in the wish for conviviality as we possibly draw to a close at the end of the day, I am more than willing to withdraw the amendment.

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

In the spirit of conviviality, I assure the hon. Gentleman that we intend to publish as much guidance in draft as possible, so that it can be the subject of comment by representative bodies.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I beg to move amendment No. 6, in

schedule 4, page 160, leave out lines 11 to 13.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 188, in

schedule 4, page 160, line 20, leave out 'grant or surrender' and insert 'grant, surrender or assignment'.

Amendment No. 189, in

schedule 4, page 160, line 24, at end insert—

'(ab) in relation to the assignment of a lease, a premium moving from the assignor to the assignee,''.'.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The air of conviviality may grow heavy, although I suspect that that has something to do with the weather and having been in Committee for such a long time. I shall endeavour to take the amendments together should external commitments allow. I beg to move amendments Nos. 6, 188 and 189.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. I am afraid that the hon. Gentleman cannot do that. He can move amendment No. 6. I said that it would be convenient to consider amendments Nos. 188 and 189. The hon. Gentleman does not have to move them.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am most grateful to you for correcting me, Sir Nicholas.

Amendment No. 6 is intended to delete paragraph 14(b) and (c), as it relates to leases. The provision represents a departure from the existing legal situation with regard to stamp duty. A surrender and re-grant is likely to be commercially necessary when the term is to be extended or other terms varied. Stamp duty land tax will be payable on the full value of the new lease, with no credit for duty paid on the old lease. There seems no reason to impose those further charges.

Modern commercial practice, on which the Government are so keen, is moving away from where the Government seek to legislate. These days, when many businesses get to what is known as the fag end of their lease, they are quite willing voluntarily to surrender it to the landlord—perhaps with changed rent review patterns or different terms and conditions—on the understanding that a new lease will be granted. It is a voluntary relationship between two parties. The problem with paragraph 14(b) and (c) is that it would penalise such modern commercial practice. As such, it represents an unnecessary intrusion by the Government into conventional contractual arrangements between landlord and tenant.

Surely it cannot be right or fair to apply stamp duty land tax on the full value of the new lease and yet provide no recognition whatever of duty paid on the old lease. I hope that the Chief Secretary will recognise that the amendment is reasonable and accept it.

I believe that you were hoping that I might be able to consider amendments Nos. 188 and 189 as well, Sir Nicholas, and I am aware that there is much time pressure. The amendments are intended to extend the exemption for reverse premiums to the assignment of a lease. I thank a number of legal minds and the Law Society for their help with the matter. Paragraph 15 currently assumes that a reverse premium would be paid only on the grant or surrender of a lease. The paragraph, therefore, should apply to the reverse premium mentioned. I hope that the Chief Secretary will respond positively to the amendments.

Debate adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at two minutes to Seven o'clock till Thursday 5 June at five minutes to Nine o'clock.