Schedule 8 - Stamp duty land tax: charities relief

Finance Bill – in a Public Bill Committee at 11:00 am on 10th June 2003.

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Photo of Mark Prisk Mark Prisk Shadow Paymaster General 11:00 am, 10th June 2003

I beg to move amendment No. 204, in

schedule 8, page 179, line 40, leave out 'conditions are' and insert 'condition is'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following:

Amendment No. 7, in

schedule 8, page 179, line 41, leave out from beginning to end of line 4 on page 180.

Amendment No. 205, in

schedule 8, page 180, line 5, leave out 'second'.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The effect of the amendments taken together would be to remove paragraph 1(2) and to amend paragraph 1(3). Schedule 8 puts into effect the new relief provisions for charities for the new tax. The issue with which the amendment deals has drawn the widest range of representations of all those that I have received, in particular from the Charities Tax Reform Group, which represents more than 500 charities. The amendments would remove paragraph 1(2), as it is the condition detailed therein that is new and which we believe restrains tax relief on charities and creates potentially burdensome bureaucracy for them.

Paragraph 1(1) states:

''A land transaction is exempt from charge if the purchaser is a charity and the following conditions are met.''

It goes on to list a series of conditions. On the face of it, the conditions may appear reasonable, but several tax experts, legal firms and charities have highlighted the fact that implementing the measure would require all charities, large and small, to provide separate returns for each property that they own or lease, showing that they qualify under paragraph 1(2). For some properties, that will involve an annual task, but it could be much more frequent, perhaps even quarterly, for many properties. That will represent a significant bureaucratic and regulatory burden for many national and local charities, especially if they hold properties that they have yet to bring into use.

I shall give a hypothetical example. A local hospice charity has recently become the owner of a mixed-use building in a town centre. It has been left to the charity and is largely empty. It may have been an unexpected gift; nevertheless, it is welcome. Most charities, like most organisations, would take much of the next year

to consider what to do with it. It would be difficult for the charity to convert it quickly, but it would need to do that to fulfil the condition that it is used for charitable purposes or that it creates profits that go toward charitable purposes. Would the charity be liable for tax in such circumstances? The schedule suggests that it would.

The charity would also have to provide a separate return for the property. Presumably, it would have to fill in another return when the circumstances changed, as it would if it chose to lease the property. Why should hospices or other charities, whether large or small, be liable for stamp duty under the new system when they are not now? Does not the Chief Secretary accept that the legislation is actually a serious step backwards for charities? Would he also accept that the partial regulatory impact assessment is, regrettably, what was once termed economical with the actualité? It states:

''The cost of compliance is unlikely to increase significantly for mainstream charities that are proposing to use the land acquired for charitable purposes only.''

It will not increase for charities that fall within the definition in the clause, but there will be a significant burden of cost on those that do not. Why are they not mentioned?

The schedule takes the tax anti-avoidance purpose much too far. It introduces a mean-spirited condition that will create greater compliance costs for the majority of charities and unfair tax bills for many others. Will the Chief Secretary assure us about the scope of the tax avoidance that he is tackling? How much is it worth to the Treasury? How many examples can he provide? Is such avoidance truly of a scale that it merits such a clumsy and unfair restraint on charities? I hope that he is able to respond positively, because the matter is of great concern to many people outside this place.

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

The schedule and the clause enact a general relief for charities from the scope of the tax. They reflect the existing relief but modify it in some ways. At present, charities are entitled to a relief from stamp duty simply by virtue of being registered as a charity or otherwise incorporated for charitable purposes only. That is a reasonable enough arrangement if the charity entering into the transaction is a bona fide one—a household name. The Government have no intention of increasing the burden on such charities under the modernised regime.

However, a small number of people—small, but not without significance—have been abusing the system by purchasing property using little-known, poorly regulated charities as a front for purchases of land, which will be used for non-charitable purposes. Unfortunately, such charities have become the vehicles of choice for some tax avoidance. I shall give one recent example. It appears that the real purchaser of a piece of land put a little known charity in funds for the purchase price of some land. The charity then acquired the relevant land in its own name and applied for charities relief. The land was transferred to the real purchaser for a nominal

amount, attracting nominal duty. The real purchaser agreed to re-convey the land for a nominal value if the charity so requested within, say, four weeks, but we assume that that obligation was merely to forestall arguments that the transaction was not in the relevant charity's interests, and that the request never came. Other examples include the charity acting as a nominee for the true purchaser, avoidance by way of subsale, and the charity being a tenant under a new lease of the relevant land, involving a large premium and a peppercorn rent.

Such schemes amount to calculated avoidance of stamp duty. There is evidence that they are cheap and easy to set up, so they could become a lot more common if nothing is done to prevent them. The modernised regime will make some of the schemes more difficult, but new ones arise all the time. Under the current system, the Inland Revenue has no ability to look beyond the charity's registration or incorporation status to consider what it will use the property for and whether the property will be held for the benefit of another. A charity need only provide evidence of its registration or status for the relief to be automatic.

Paragraph 1 enacts two additional conditions that must be met before relief is available. I do not think that the hon. Gentleman will, on reflection, find them unreasonable. First, the purchaser must intend to hold the subject matter of the transaction for charitable purposes. That includes cases in which a charity buys a property as an investment, but the profits are applied for charitable purposes. Secondly, the transaction must not have been entered into with the intention of avoiding tax. If the two conditions are not met, the charity cannot obtain the relief. For the vast majority of charities, the conditions will be met in every case and relief will be available simply by ticking a box. That is not an onerous obligation to place on a bona fide charity.

The conditions are backed up by a clawback if the purchaser ceases to be established for charitable purposes only, or if the land is used for purposes other than charitable purposes. The clawback period is three years. That will not affect the overwhelming majority of charities with operations that are completely above board. The clawback does not prevent a charity from selling the land within three years.

Clearly, the relief for charities is an important benefit that fits in with the general tax reliefs available to them. Although conditions to the relief are being imposed for the first time, they are very light. Legitimate charities will always be able to meet the conditions and will never be affected by the clawback. However, the new powers will allow the Inland Revenue to eliminate the small minority of taxpayers who currently use charities as an avoidance route. Using that form of avoidance is particularly mean and nasty. Nevertheless, sadly it is used, and for that reason clause 68 and the schedule are necessary.

Charities are required to submit a return, but they simply have to tick a box to claim the relief. The Government are acutely aware of the importance of the charities sector. The Chancellor has taken time to

bring before Parliament a whole raft of measures to promote charitable giving and reduce the burdens on charities. The provisions do not amount to extra regulations if charities intend to use the properties for genuine charitable purposes, which they will in the vast majority of cases. Different jurisdictions have different regulatory regimes. The regimes are not always adequate when it comes to preventing abuse. We must take cognisance of that. That is not unreasonable.

The Revenue needs the ability to look into suspected schemes in more detail. Investigations are extremely unlikely to be required in the case of mainstream charities and the vast majority of smaller charities that regulate their business and go about the process properly so as to promote the charitable purposes for which they are set up.

I understand why the amendments were tabled, but I do not believe that they are helpful, for the reasons that I have given, nor that the costs of compliance will be unduly burdensome. Only charities that create and use an avoidance vehicle will face the consequences of this measure. My experience of the charitable sector is that it welcomes measures designed to prevent the abuse of that status and has an interest in ensuring that charities and charity registration are a hallmark of probity and excellence. It would expect the Revenue to bear down heavily on avoidance schemes that bring the sector into disrepute. In my experience, it is highly supportive of that activity.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon 11:15 am, 10th June 2003

I think that we all agree with what the Chief Secretary said about using charities for the purpose of artificial tax avoidance. There seems to be some uncertainty and confusion about clause 1(3), the general tax avoidance point. It would help if the Chief Secretary made it clear to the Committee that, when the Bill refers to avoiding tax, he does not mean the tax relief due to charities pursuant to the law.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I was interested in what the Chief Secretary said. I noted particularly that he felt that the existing arrangements were perfectly reasonable, which raises the question, ''Why change them?'' Unless I missed it, I did not hear a response about the specific case of the hospice charity and whether the example that I gave would be eligible for relief, but perhaps he will come back on that point.

The Chief Secretary knows as well as we do that it is wrong for people to try to evade their due tax liability, and we would always be happy to support the Government where they do so. However, as he said, a very small number of parties are involved, and our worry is that the provision will be a sledgehammer to crack a nut that will weigh down the majority of mainstream charities.

The Chief Secretary said that the change means simply ticking a box, which sounds reasonable, but I suspect that the Revenue would not be too thrilled to receive a lot of 12-page land transaction returns with nothing on them but a box ticked on page 8. Clearly the matter is more involved than that. Every return

will have to have the name of the charity, the property and the nature of the interest, so that the Revenue can register it. It will then certainly require, as the Chief Secretary said, a tick in a box to demonstrate that a charity is involved, but all the other details that go with the 12-page tax return, which is part of the process, will still have to be there. Therefore, the description of ''merely'' ticking a box is not quite accurate. I fully accept that some of the appendices to the return may not be required, but the basic information for each and every interest will still have to be included.

In the extensive information, enforcement and compliance powers that commence from clause 93, the Revenue is giving itself—I do not criticise it in general terms—significant, established and wide-ranging powers to investigate returns that it believes to be unfair or undue. Would it not be fairer for the majority of law-abiding charities if it used those powers rather than the schedule, which we believe will create a genuine burden? The very fact that charities will now all be required to fill in the forms raises the question of whether the Government trust them. The Government are rightly giving themselves significant information, enforcement and compliance powers elsewhere. Those powers will enable them to pursue the instances to which the Chief Secretary referred. We think that the examples that he gave will be able to be chased elsewhere, and on that basis, we believe that it is wrong to persist with the schedule.

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

I hear the hon. Gentleman, but I am afraid that I do not accept what he says. So far as burdens are concerned, the details required on the return are already in legal documentation and supplied by all purchasers including charities on form LA451. It is not a burden to require anyone to tick a box.

There is a mischief here, which the schedule is designed to address. I have already given the hon. Member for Torridge and West Devon, albeit from a sedentary position, the assurance that we are here talking about avoidance, not simply the claiming of a relief. I fear that the measure is necessary.

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

I am grateful to the Chief Secretary for giving way on that point, which is an important one on which people are confused. In other words, as he knows, there are many tax reliefs for charities, and this legislation enacts reliefs for stamp duty for charities, and the charity's claiming reliefs to which it is entitled under statute, is definitely not deemed to be avoidance, for the purposes of this anti-avoidance provision.

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

It is important to recognise that the definition of qualifying charitable purposes is wide. It meets the needs of charities, such as hospices, of the sort that the hon. Member for Hertford and Stortford spoke about. However, it is necessary to take steps to ensure that we bear down on this sort of avoidance. It is sad that we have come to this pass, but there is in a particular jurisdiction a concerted attempt to use charities in a way that, quite frankly, calls into question the bona fides of the sector as a whole as well as providing a vehicle for avoidance, and we have to do something about that.

Photo of Michael Jack Michael Jack Conservative, Fylde

In deciding on this schedule and its content to deal with the problem that the Chief Secretary has outlined, were discussions held with the charity commissioners on whether charitable status would be compromised by the use or promotion of such a vehicle that has the avoidance of tax as a principal purpose?

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

Certainly. In the examples that I have outlined, there is certainly an abuse of charitable status, and I would expect that to have consequences for the trustees and for the charity itself. I am glad to say that the charity commissioners in England are particularly vigilant with that device and have a regulatory framework that makes such abuse much harder. In other jurisdictions, it is easier, and there has been abuse.

Question put, That the amendment be made:—

The Committee divided: Ayes 5, Noes 16.

Division number 22 Adults Abused in Childhood — Schedule 8 - Stamp duty land tax: charities relief

Aye: 5 MPs

No: 16 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

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

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