Clause 55 - Amount of tax chargeable: general

Finance Bill – in a Public Bill Committee at 10:45 am on 5th June 2003.

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

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

This clause is important and sets the amount of tax chargeable. I welcome the recognition that residential and non-residential markets are different. The old stamp duty lumps the two markets together with similar thresholds and rates, and it is fair to say that that fails to recognise the different characteristics and, for that matter, the different motives of vendors and purchasers involved in each market. The new tax distinguishes between the two and will operate different thresholds. I want to put on record our support for that. Sadly, however, that is where the good news ends.

Part of the Government's modernisation agenda was to reflect modern commercial practice and, above all, we were told that the new tax would be based on fairness. It was reasonable to expect that the single most antiquated and unfair aspect of the old duty would be removed. What a great opportunity for the Government to sweep away what has become known as the slab effect. I shall explain that for the benefit of those who do not know what it means.

The slab effect means that a single rate applies to the whole purchase price. Thus, a couple buying a home in London for £250,000 would be liable for 1 per cent. tax, which would be £2,500. If the price were £1 more, the tax would be £7,500—a threefold increase in the tax burden. That iniquity is repeated at each threshold: £60,000, £250,000 and £500,000. The slab effect is grossly unfair and creates significant distortions in the marketplace. The hon. Member for Wolverhampton, South-West (Rob Marris) seems to agree. Such jumps in tax liability encourage tax avoidance. The Committee will be familiar with stories of people who have transferred curtains and carpets for large amounts of money unrelated to their genuine value. The danger is that retaining the slab effect generates tax avoidance.

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

My hon. Friend makes an important point about the distortions that arise in the housing market. The whole country saw how that happened with some flats in Bristol last year. Does my hon. Friend agree that many of the distortions have arisen because of the big increase in stamp duty since the Government came to power? Much of the avoidance of stamp duty that the Government have tried to cut out would not have happened if they had not increased stamp duty from 1 per cent. four years ago to 4 per cent. today for the highest rate. They continue to set that rate in stone.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am grateful to my hon. Friend for that point. He is right. We have seen four increases in

stamp duty in six years. There has been a rise of £718 million, or thereabouts, in tax revenue or stamp duty, and now the figure is about £4 billion from this tax, on which the Government rely. That is a significant increase. Whatever the Chief Secretary may feel, it has naturally helped to drive and encourage much of the tax avoidance that he bemoans.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

Does the hon. Gentleman accept that at least the changes have had some beneficial effect in damping down an over-exuberant property market?

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I do not share that view. One of the worries is that, while it is perfectly reasonable for changes to be made, if they are made in a way that the vast majority regard as grossly unfair—I referred earlier to the trebling of tax simply by paying £1 more on a certain purchase—that merely encourages more avoidance activity. Governments must get the balance right, and in this instance I believe that the Government have got it wrong. I shall give way out of equity.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I note that the hon. Gentleman has not tabled an amendment to the clause. Why not?

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

We are now an hour and a half into this debate and, much as I would be tempted to add another element, I am keen, as the hon. Gentleman will know, to make quick progress.

The Chief Secretary has spoken of his genuine commitment to tackling tax avoidance, so why does he leave the single most important promoter of tax avoidance in the new measure? If any members of the Committee are in any doubt about the slab effect—it appears that one or two might be—I draw their attention to the view of the Council of Mortgage Lenders, which has considered this matter in great detail and recently published an excellent study on it entitled ''Residential stamp duty: time for a change''. That is a phrase that I hope we will come back to in the next couple of years.

The Council of Mortgage Lenders says that the slab effect—the single rate—reduces efficiency in the economy by distorting relative house prices and by influencing the mobility of labour. It says that it creates incentives for tax avoidance, that, due to fiscal drag, it is not transparent, that it has distributional effects between locations and household types and that it acts in contradiction to a number of other taxes and the Government's goal of modernisation. Therefore, it is clear that the slab effect is antiquated, unfair and promotes tax avoidance, so what reason can there be for writing it back into the new tax in the clause?

I hope that the Chief Secretary will be able to answer those points, because, by retaining a deeply unfair rate structure, he undermines every other statement that he makes when claiming to reform and modernise the old duty.

The second concern relates to the starting threshold for non-residential property. As I said at the beginning, I welcome the distinction between residential and non-residential. Members of the Committee will know that the non-residential

threshold has now been set at £150,000. However, I have listened to representatives from many small businesses, of which the Chief Secretary is fond, and to their advisers, and the overwhelming view is that the threshold is too low.

The Government's partial impact regulatory assessment claims that the measure will help many small businesses, yet the London chamber of commerce has said that 95 per cent. or more of businesses in the capital will be hit, which directly contradicts the Government's own evidence. Will the Chief Secretary tell us exactly how many non-residential properties will be caught by the tax and what proportion of change that represents from the old duty? How many will be worse off?

What proportion of commercial land transactions will be liable for the new tax and how many will be worse off? Will the Chief Secretary confirm that next year, as set out in the Red Book, the Revenue intend to net an additional £350 million tax from stamp duty modernisation, rising to £450 million in the year thereafter?

Many experts in law, surveying and taxation are beginning to suspect that this new land tax has more to do with tax revenue and the Chancellor's desperate need to find some than with tax reform.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I know that my hon. Friend finds that difficult to believe, but I encourage him to realise that the Government are not always entirely honest with us about their motives. I believe that the measure has as much to do with tax revenue as with tax reform. Given that this is an antiquated, out-of-date and unfair measure, we are minded to vote against the clause, though naturally we are interested to hear what the Chief Secretary has to say.

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

I hope that the Chief Secretary will give members of the Committee an accurate description of the disparities between the present tax charged and the tax proposed in the clause. What studies have been undertaken? A regulatory impact assessment has been done. What additional revenue does the Inland Revenue estimate it will raise through the new tax? Why has the provision been included and why have the changes been proposed?

Photo of Michael Jack Michael Jack Conservative, Fylde

I want to follow the same line of inquiry as the hon. Member for Torridge and West Devon. If the Chief Secretary has been doing his job properly, he will, before agreeing that the clause should stand part of the Bill in its present form, have probed with assiduousness and thoroughness the construction of the tax under consideration. During my time in the Treasury it was always quite an entertaining voyage of discovery to ask one's officials why the numbers were those presented. I am sure that the Chief Secretary, who is a man with an inquiring mind and of considerable intellect, will have wanted to satisfy himself that the structure of the tax is the correct structure.

Therefore, my first question to the Chief Secretary is whether any alternatives were considered. If so, what were they and why were they rejected? Clearly the Bill

replicates the status quo, which is an interesting way of modernising something. I put the same question about the non-residential part in table B. For the record, I think that people would like to know how the parts of the clause were determined. A representation that I received from the British Retail Consortium makes the interesting arithmetic point that if somebody were to purchase a property worth £500,001, the stamp duty would be £20,000, but on an interest in land under the terms of a lease, the same value transaction affected by the net present value calculation would incur £5,000 lease duty. That is an interesting observation, because somebody setting up a business must decide whether they can afford the up-front charge of £20,000 or whether they should postpone the evil day and go for the £5,000 charge. That has an economic consequence for our hypothetical business, but in the real world embryo businesses may well have to make such decisions.

I appreciate that the Chief Secretary has put before the Committee the exemptions that the Government have made in respect of start-up businesses, but not everyone can take advantage of those. It is an interesting commentary, because the structure of the tax, which is largely reflected in the clause, was proposed partly in pursuit of anti-avoidance measures and to deal with people trying to manipulate the property market for their advantage. My example shows that that manipulation is questionable. One of the arguments was that if someone had a long enough lease they could walk round the effects of their tax obligations by the averaging process under the old arrangements. My example questions that assumption. I hope that the Chief Secretary will be able to oblige us with an explanation.

I am concerned about what I call the cliff-edge approach. Interestingly, although I do not personally subscribe to this approach, the Government's tapered arrangements for capital gains tax involved a ski-slope of gentle gradations over time for the reduction of capital gains tax rates. In the world of capital gains, they did not want a cliff-edge approach, but now in the world of property, they do.

I want to know whether the Chief Secretary and his advisers considered alternatives, because there are some in the world of law and property who would argue that some general annual low rate property tax might have been an administratively much easier alternative than the enormous complexity that we are grinding our way through in this series of clauses. There are complexities that could have been avoided with other constructs. Perhaps the Chief Secretary will tell us why the Government have decided that a replication of the structure of an old tax and the creation of a new tax, as set out in the clause, is in their judgment the best way to extract money from transactions and interests in land, rather than any alternative.

Sadly, we are not able to discuss in this Committee the formula that lies behind the calculation of the real world lease payments. The formula is complicated. I would be interested to know whether the Chief

Secretary, in determining the numbers in the clause and in calculating what the non-residential tax is supposed to be, has sat down and worked out a real world example to see whether more mortal beings can cope with the mathematics of working out their future liabilities under the numbers imposed. If we are looking for clarity and modernisation, the formula that lies behind the calculation of the real tax payable under the clause is, to say the least, an added complexity.

I want to press the Chief Secretary on a matter that other colleagues and I have raised with him: the breakdown of the £450 million extra tax that is posted as the first-year effect. I gave a breakdown of four categories earlier in the Committee's considerations, and I hoped that the Chief Secretary would be able to provide some numbers. The Committee is entitled to know on behalf of taxpayers—at the end of the day, it is their money—how the £450 million is accounted for. As I understand it, part of it is accounted for by what the Government thought was going to be the yield from tackling the special purpose vehicles constructed to avoid the effects of the clause. However, the Government have shied away from that. The Chief Secretary will know, from his discussions with Revenue officials, that they backed off because it was too complicated, but the Government posted their figure of £450 million: a number for the yield that they thought they would get. I conjecture that one of the reasons why the Government have not accepted our view that more time should be allowed before the matters are implemented is simply because, having posted £450 million as the net gain, they have to find some way of getting that money. Events have assisted them to continue with that figure, but the Committee should be told the breakdown of the tax components that are part of that commitment.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 11:00 am, 5th June 2003

May I point out to the right hon. Gentleman that the yield for this financial year of 2003–04, according to table A2, is £140 million, not £450 million?

Photo of Michael Jack Michael Jack Conservative, Fylde

I do not entirely accept that because I would need to get out my Red Book from last year to confirm my figure. If I am wrong, I apologise to the Committee, but it is a net gain in revenue none the less, and my question still applies.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I happen to have the Red Book tucked away for quiet reading. Although the hon. Member for Wolverhampton, South-West mentioned this year, my right hon. Friend the Member for Fylde is referring to the figure for next year—£350 million, which will rise to £450 million after that. Does that help?

Photo of Michael Jack Michael Jack Conservative, Fylde

My hon. Friend has done me a great service in updating my memory banks on the numbers involved. The general point is still well made that the Committee and taxpayers are owed a detailed explanation as to how those numbers are to be achieved. I look forward to the answers to each of the questions that I have posed. I am sure that the Chief Secretary with his usual courtesy and assiduousness will supply the answers.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

As my hon. Friend the Member for Hertford and Stortford said, it is important in relation to the quantification to go back to the Government's original consultation on stamp duty and look at the three criteria, which raise key questions. The first was that the Government want to help e-business, but in this case that is pretty much an irrelevance. I cannot see many people who want to sell their homes being much concerned about the effect of e-business one way or the other, so I shall avoid that.

The second question posed in the consultation document was that of modernisation, which is a key issue. It was discussed at some length by my hon. Friend. The Government's idea was to set up a modern legal framework, but that is clearly not the case in the provision. In some ways, by taking an old tax and matching different bands, we have regressed in the modernisation process. That particularly applies to the £250,000 level, where the extra £1 leads to an increase from 1 per cent. to 3 per cent., which has hit many residential property buyers and sellers very hard indeed.

Those issues having been discussed, I would like to consider the third element of the Government's consultation document more carefully, which is fairness. Is the tax being applied in a fair way? The Government are considering such factors as the ability of people to avoid the tax. Whenever the question of fairness has come up the Chief Secretary has rightly spoken about the need to do what is fair for the mass of the population—that is the phrase he has consistently used. If we look at the residential aspect of the tax, we are talking about the mass of the population. About 70 per cent. of the population own their own home, so stamp duty is relevant for the mass of the population, and perhaps more so than any other element of the Bill that we have debated so far.

The rates are not fair because they penalise those in the south of the country where property prices are higher. It is the people in the south who are losing out to the greatest extent. It is a tax on success because it increases in its penal effect as people move up the property ladder. That is unfair, and particularly unfair on young people.

Photo of Meg Munn Meg Munn Labour/Co-operative, Sheffield, Heeley

Does the hon. Gentleman accept that when people buy property they take account of the whole cost, including legal fees and stamp duty? Stamp duty probably keeps the price of property in the south down.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I thank the hon. Lady for making that point and will give two responses. First, to say that people might not want to buy property because of stamp duty is simply to ignore human nature. People want to trade up their property, and the fact that they live in the south does not mean that they will not want to do that because of a particular rate of tax. They will want to move up and are being penalised for where they live.

Secondly, the hon. Lady reminds me of a point that I was not going to make. The Government are scrapping stamp duty on property transactions in some areas of the country, the vast majority of which

are in the north, so the impact on people who want to move is doubled.

I want to examine more closely the implication of the tax on the south. Homes in the north are, in general—my hon. Friend the Member for Tatton may disagree—significantly cheaper. Not only are they cheaper, there are tens of thousands of empty homes in the north, and that simply does not happen in the south. There is much greater elasticity of markets in the north, and I believe that we are seeing a crude attempt by the Government to discourage people from moving to the south. The hon. Member for Sheffield, Heeley (Ms Munn) touched on that in her intervention.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

Does the hon. Gentleman agree that the greatest impediment to mobility between the north and the south is the lack of social housing in the south? It was his party that did so much to destroy the social housing sector.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. We are dealing with specific taxes. That does not include social housing.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

Indeed, Mr. McWilliam. I thank you for bringing that up.

The implication of the changes is that the Government are attempting through cumulative stamp duty to persuade people to stay in the north rather than moving to the south. That is being done not by helping those in the north, but by penalising those in the south.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Has the hon. Gentleman heard of London weighting?

Photo of Michael Jack Michael Jack Conservative, Fylde

People are waiting to get into London housing.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I thank my right hon. Friend for his comment. I cannot add to it.

The Government are using stamp duty as an alternative to an effective regional policy. I could ask whether anyone can suggest that the Government have an effective regional policy, but I am not going there, Mr. McWilliam. Having failed is bad enough, but the provision is so insidious because people like my constituents in Huntingdon are suffering enormous strains because of a 10 per cent. increase in population over the past 10 years. They are suffering the implications of the Government's failed policy.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I have listened carefully to my hon. Friend's argument and the various interventions. It may help the Committee to know that my constituency has valuable properties similar to those in Tatton, but three wards in Winsford, which is socially challenged, contain only property that is now exempt from stamp duty. The interesting aspect is that the pricing of properties—this is relevant to the intervention of the hon. Member for Sheffield, Heeley—has nothing to do with the expected rate of tax to be applied. It is purely a market function. Therefore, stamp duty is unlikely to deter the rise in house prices, which was the hon. Lady's point. It is simply an add-on cost of mobility and the ability to provide for oneself.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon 11:15 am, 5th June 2003

I thank my hon. Friend for that helpful contribution, with which I absolutely agree.

If stamp duty were thought to have any effect on encouraging people to live in certain parts of the country, either by penalising those in the south or by supposedly helping those in the north through exempting the parts of the country where prices are depressed, we have now confirmed that that is not the case.

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

I shall not follow the line of argument pursued by my hon. Friend.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I do hope that the hon. Gentleman will not. The argument has been well flogged.

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

The only empty properties in my constituency are those occupied by Manchester United footballers, who are not always there. They vote in the constituency, and often vote the right way, I am glad to say, except for the manager of Manchester United, who regularly turns up with my Labour opponent and tries to get him some publicity.

Clause 55 enshrines the stamp duty tax increases of recent years, which are part of my personal memories. At the time of the 1998 Budget, I was getting married and buying a new house. I watched the Chancellor of the Exchequer from the Under Gallery, not then being a Member of the House, and I heard him increase stamp duty. I had to rush out of the Under Gallery to complete my house purchase that day in order to avoid the large increase in stamp duty that the Chancellor of the Exchequer had just announced.

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

I should be interested to hear a little more about that transaction. Presumably, there was a contractual completion date, which the hon. Gentleman brought forward. Did he have to pay the vendor for that privilege?

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. We have heard enough, and I would be obliged if the hon. Gentleman did not follow that line of questioning.

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

The answer to the question is that I did not. Of course, I had not expected the increase, because I believed the Labour party when it said that it would not increase taxes. Like many home owners, I was caught completely unaware by the increase. I made the mistake of believing the Labour party.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

Has the hon. Gentleman heard the expression, ''When you're in a hole, stop digging''?

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

I am not in a hole. It is a wonderful house. It is in a vale, but it is not in a hole.

You will be glad to know, Mr. McWilliam, that I have four specific questions on clause 55. First, what evidence does the Treasury have for the distorting impact of the slab effect? I would be interested to know whether the Treasury has done a study on whether there has been distortion in the housing market and whether there is, for example, a particular concentration of house prices around certain price bands to avoid the arbitrary limits set out in clause 55.

Secondly, I would be interested to know whether stamp duty has been an effective way of dampening

the housing market, as suggested by several members of the Committee. I am not sure whether it is a specific intention of the Government to use stamp duty to dampen the housing market and, if so, whether it has had that effect. I remember that the first stamp duty increases were immediately preceded by one of the biggest property booms this country has ever known.

Thirdly, I would like to know whether the Treasury accepts the point made by a number of people who have made representations to the Committee, including the Royal Institution of Chartered Surveyors, that it has led to what the Chief Secretary has called tax avoidance. Much of what we have discussed under the clause and during the entire debate on stamp duty land tax has dealt with the question of whether that avoidance has stemmed from the fourfold increase in the top rate of stamp duty.

Finally, I have a question for the Chief Secretary. As a guardian of the interests of the Inland Revenue, does he approve of prospective purchasers who buy property—for example a flat in Bristol, or property developers who buy several flats in Bristol—who use what can only be described as avoidance measures by spending large sums of money on fixtures and fittings in order to bring the price of a flat below a certain level so that they pay a lower rate of stamp duty? Is that something of which the Chief Secretary, wearing his official hat as guardian of the Inland Revenue, approves?

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

Well, well, well. This has been the most wide-ranging debate.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I have done my best.

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

We could not ask for more, Mr. McWilliam. We have had some real insights into the lifestyle of Conservative Members. We have had some intriguing personal disclosures in relation to their financial arrangements. We have traversed the vales of Tatton. I am intrigued by this vale in Tatton, within which the hon. Gentleman lives. I think that we should go there. I see very good reason, Mr. McWilliam, for you to exercise your discretion and advise us all to adjourn to his vale.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. I have no such power, although I went to Winsford once.

Photo of Mark Hendrick Mark Hendrick Labour/Co-operative, Preston

Does my right hon. Friend the Chief Secretary think that we should move to Tatton in order to lower the house prices?

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

I am sure that the presence of my hon. Friend would not have that effect. Who knows?

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

I should like to enlighten my right hon. Friend. Although the hon. Member for Tatton clearly lives in a vale, he is a frequent and most welcome visitor to Liverpool.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. That is a sore subject.

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

Among so many other worthy contenders.

This has been a very interesting debate, but I feel that I must draw it back to the substance of our discussions. Clause 55 sets out the main rate charge for stamp duty land tax—the rate that will apply for implementation. In all respects, it is the same as the existing charge under stamp duty, except that we propose to increase the zero rate threshold for commercial and mixed use property to £150,000. Listening to hon. Members opposite, one would have thought that we had visited Armageddon on an unsuspecting property market. I think the hon. Member for Hertford and Stortford used the word iniquity. If that iniquity exists, it was not ever addressed while Conservative Members had stewardship of such matters. It sits rather ill that they should traduce us, and call into question our motives in relation to a charge that they did not seek to rectify when they had the opportunity to do so.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Before I adjourn the Committee can I remind those hon. Members affected that there will be a Programming Sub-Committee at 8.50 am on Tuesday.

It being twenty-five minutes past Eleven o'clock The Chairman adjourned the Committee, without Question put, pursuant to the Standing Order.

Adjourned till Tuesday 10 June at five minutes to Nine o'clock.