Clause 159 - Taper relief: assets qualifying as business assets

Finance Bill – in a Public Bill Committee at 9:45 am on 17th June 2003.

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Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury 9:45 am, 17th June 2003

I beg to move amendment No. 247, in

clause 159, page 96, line 45, leave out 'or an eligible beneficiary'.

The clause is a welcome relaxation of the definition of business assets for the purpose of taper relief and yet another example of what I and the Chartered Institute of Taxation believe is the success of the co-operation between the Inland Revenue and the professional bodies on the CGT review group. However, the institute says that the resulting legislation is ''appallingly complex''. Saying that it is a success and appallingly complex sounds almost like an oxymoron. Surely the provisions could be made much simpler by providing that any asset used in a trade is a business asset, subject to exceptions. The institute suggests that the exceptions would apply in a limited number of situations in which the trader is a quoted company and that, as the exceptions would be so limited, thought should be given to providing that all assets used in a trade are business assets. The Paymaster General may have a view on where the de

minimis rule would cut off or may want to reflect on that.

Different implementation dates of definitions of business assets have led to the need for complex apportionment and to anomalous tax charges. The institute suggests that all current definitions of business assets should apply from the introduction of taper relief. If that is unacceptable, the institute suggests as an alternative that they should apply from 6 April 2000.

The Law Society has also considered the matter carefully and has come up with some amendments. We are discussing amendments Nos. 247 and 248 separately. Amendment No. 247 would simplify the interpretation of sub-paragraph (3)(a) in subsection (3) of the clause, which introduces new sub-paragraph 5(3) of schedule A1 of the Taxation of Chargeable Gains Act 1992. The Law Society suggests that sub-paragraph (3)(a) is wrong in referring to an ''eligible beneficiary''. As a matter of syntax, that could have one of two meanings. First, the reference could be to a trade carried on by an eligible beneficiary, but that is probably not the natural interpretation because it spans the paragraph break, but that would be covered by the new sub-paragraph (1A). Secondly, the reference could be to a company that is a qualifying company by reference to an eligible beneficiary. That is probably what is meant, but does not fit with paragraph 6 of schedule A1 because, even when the relevant conditions focus on an office or employment of an eligible beneficiary, the company still qualifies

''by reference to the trustees''.

For that, reference must be made to paragraphs 6(2) and 6(2A).

The meaning of the provision could be clarified simply by omitting the words ''or an eligible beneficiary''. I like to believe that our generosity in providing the opportunity for the Paymaster General to accept the amendment will enable that clarification to be forthcoming.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 10:00 am, 17th June 2003

The rules defining business assets other than shares for taper relief purposes have been rewritten with effect from 6 April 2004. Everything that is currently a business asset will remain so, but some assets used for trading purposes which do not currently qualify will begin to do so from that date. Unfortunately, I must disappoint the hon. Gentleman.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Yes. Life is tough. However, when the hon. Gentleman hears my explanation, he may decide that his amendment is a probing amendment.

The amendment would delete the reference to ''an eligible beneficiary'' in the revised version of paragraph 5 of schedule A1 to the Taxation of Chargeable Gains Act 1992. The reason for the amendment seems to be to delete what are considered to be unnecessary words that may give rise to confusion on the assumption that all companies that qualify by reference to an eligible beneficiary of a settlement are also qualifying companies by reference

to the trustees. Separate provision is made for those in the revised paragraph.

That assumption is not accurate. For example, a listed trading company that is a qualifying company by reference to a beneficiary solely because it is able to exercise 5 per cent. or more of its voting rights is not a qualifying company by reference to the trustees on account of the beneficial interest in it. If the amendment were to succeed, certain assets owned by trustees but used by companies for the purpose of their trade would cease to be business assets from 6 April 2004. Instead of extending the business asset taper relief, the amendment would curtail it. I am reasonably confident that that is not the objective that the hon. Member for Eddisbury is seeking to achieve. None the less, if he presses the amendment to a vote, I shall ask my hon. Friends to oppose it.

The hon. Gentleman raised two further points about backdating and apportionment. The purpose of the clause is to change the behaviour of landlords when they consider letting in future. The clause benefits landlords who have already let a property to unincorporated traders, but in such cases the taxpayer obtains no change in behaviour from the relief, so the costs are dead weight. We need to maximise the value for money of tax reliefs. However, we always consider whether there are reasons for backdating a change in definitions. For example, in the Finance Act 2001, we extended business asset taper relief to shares held by certain employees of non-trading companies, because savings in compliance cost justified the backdating. The cost of backdating the clause outweighs the benefits so has not been considered.

Apportionment is needed because the two tapers, business and non-business, are required to distinguish productive from passive investment. The Inland Revenue has clearly set out the rules that underpin apportionment in the leaflets and help sheets that accompany self-assessment tax returns.

I do not understand why there is confusion over the meaning of the legislation. It refers to a company that is

''a qualifying company by reference to the trustees of the settlement or an eligible beneficiary''.

The phrase ''by reference to'' must necessarily relate to the words that follow it, so a company is a qualifying company by reference to the trustees or by reference to an eligible beneficiary. Eligible beneficiaries carrying on a trade are covered elsewhere in the clause. With that rather full explanation, I hope that the hon. Gentleman will be able to suppress his disappointment that I cannot accept the amendment, and will consider withdrawing it. If he does not, I shall ask my hon. Friends to oppose it.

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

Well, suppression may be the order of the day—we shall have to find out. I am grateful to the Paymaster General, who gave a fairly full explanation of the points raised. In particular, I am grateful for her clear statement on what is intended by the wording,

''a qualifying company by reference to . . . an eligible beneficiary''

Her confirmation that ''by reference to'' is to be interpreted according to the words that immediately follow it is important to have on the record.

On the basic assumptions, I am grateful for the various representations that have been received from the professional bodies on the matter, not least the Chartered Institute of Taxation and the Law Society. They will be able to test whether their assumptions in advising us are as laid out by the Paymaster General, particularly in relation to the 5 per cent. issue and to the trustees. The last thing that we intend is to curtail rather than extend a benefit. On that basis, and given the clarifications that have been forthcoming, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 248, in

clause 159, page 97, line 41, leave out '6th April 2004' and insert '9th April 2003'.

I fear that the Paymaster General may have addressed the issue raised by the amendment in her previous comments. I therefore rise with disappointment etched on my features, knowing her view already. This now seems an even more thankless task than usual. Nevertheless, I think that it would be right to make my point, given that not only the Law Society but the Institute of Chartered Accountants in England and Wales and the Law Society of Scotland have identified it. The amendment would change the commencement date.

Clause 159(5) states that the clause's provisions will not come into effect until 6 April 2004. Despite the Paymaster General's already well-flagged position, it seems unduly grudging to bring in this change in status only a year ahead, given the apportionment provisions that will apply where a property switches from non-business to business status at 6 April 2004. This deferral risks distorting investment decisions in the run up to that date. Intending investors will be anxious to avoid the risk of having to undertake complex computations following disposals in future as a result of a short period of non-business use prior to 6 April 2004. According to the Law Society, there is no reason why the provisions could not commence from Budget day—9 April—this year.

I note that the Paymaster General's flagged response is that the costs and benefits do not lead her to believe that the date can be brought forward. Perhaps on this occasion, however, she may wish to reflect on the potential distorting effect of the measure, which might be counterproductive for the marketplace and the Revenue. The amendment has been supported by others, who feel that the position is unnecessarily grudging. Anticipating what the reply will be, it is nonetheless with genuine intent that I move the amendment.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I am sure that the Paymaster General can deal with the matter without repetition.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

When I referred briefly in the previous debate to the question of dead-weight cost, I did not refer to how much that would be. Perhaps I should do so now. The hon. Gentleman's amendment would bring forward the commencement date of the provision, which would entail significant cost to the Exchequer: some £35 million over five years. Most

importantly, there would be no payback or benefit. The Committee has discussed the point concerning benefits over and over again, and hon. Members have pressed Ministers on it.

The clause will encourage landlords to plan for the future. The hon. Gentleman said that to delay the process would be unduly grudging. We would like landlords to let their properties to unincorporated as well as incorporated traders. By announcing the measure now, landlords can let their properties to unincorporated traders, safe in the knowledge that when they finally sell their property it will qualify as a business asset from 6 April 2004.

The hon. Gentleman touched on an important point, which was the question of distortion in the market. Frankly, I would expect landlords with vacant properties, particularly in the current state of the property market, to prefer to let them sooner rather than later to ensure that they have an income stream for this year. By announcing the measure for next year, they can be assured that their property will be treated as a business asset for letting during the period from 6 April 2004. Where landlords earned from their assets for a longer time after 2003, any period of non-business use in 2003–04 will have only a small effect on the amount of the taper relief when they come to sell. I would expect prospective property investors to take many factors into account before they buy a property, not just their capital gains tax position.

We have announced the measure for implementation next year. That gives landlords and property investors certainty over their ultimate capital gains tax position, should they rent their property to an unincorporated trader. I see no justification at all for bringing in the proposals of the amendment, which would create costs for the Treasury with no obvious gain to the taxpayer. I therefore urge my hon. Friends to oppose the amendment should it be pressed to a vote.

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

I have listened carefully to the Paymaster General and her position will reflect well on the record. The only point I would make relates to the amendment, and points raised on previous ones. The Paymaster General talks about a cost to the Revenue were the amendment to be accepted—in this case she cites a figure of £35 million—and she knows full well from our arguments that it is not our business to incur charges or costs to the Revenue that were not intended. On the contrary, we have continually maintained that it is right that the Revenue should seek to secure its proper dues.

I do not know whether there is a precedent for this—perhaps not—but calculations, or at least an estimation, that show how the £35 million had been arrived at would be very helpful in understanding the background to why the Paymaster General resists some amendments and why some arguments have not found favour with her.

Photo of Michael Jack Michael Jack Conservative, Fylde 10:15 am, 17th June 2003

I am grateful to my hon. Friend for pursuing that very interesting point. The Paymaster General qualified the figure by saying that it covered five years; therefore, the sum is £7 million. However,

does he agree that we have no indication as to whether the calculation took into account potential reinvestment by those whose tax liability would be lower in new economic activity that would thereby create further taxable opportunities?

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

My right hon. Friend has made an exceptionally insightful and helpful point, which demonstrates the way in which he was very well prepared when roles on the Committee were reversed. He understood how such calculations were made.

I hope that my right hon. Friend supports my position, which is that it might be helpful for the purposes of our deliberations if we were to have, at least in summary, a breakdown of the way in which the calculations work. It would help not only those who make representations to us, but those in the Opposition who seek to scrutinise the Bill, to understand it in the fullest possible way and to come up with constructive and clarification points as well as genuine criticisms.

I do not know whether the Paymaster General wishes to respond now or on a future occasion, but it would be helpful to know the basis of the calculations. We have heard several defences against amendments using the argument of the potential costs to the Revenue. Having the calculations might well be the easiest way to clarify why some representations have not found favour and why on other occasions the arguments were revisited even though there was not necessarily agreement on the calculations. I shall be prepared to withdraw the amendment on that basis, but I sense that the Paymaster General wishes to say something further.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I apologise. I have lost my voice.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

And my sense of timing. I apologise to the hon. Gentleman. I did not wish to distract him. I absolutely appreciate his point about the cost of Opposition amendments. How could he know the costs until we have seen the amendments and calculated the costs? I offered the explanation that the cost was one reason why I was not convinced by the amendment.

On implementation and costs, the hon. Gentleman will find an explanation of the costings in appendix A2 of the Red Book. However, let me say that I do not provide figures to put him at a disadvantage or to catch him out but as information for the Committee.

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

That has been a helpful exchange. I shall look at appendix A2 of the Red Book. However, I believe that the calculations are important in understanding the background to the issues and the way in which the Treasury and the Revenue react to genuinely constructive suggestions that are put forward by way of amendments. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I have received a request from the Opposition spokesman for a very brief stand part debate on the clause.

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

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

An interesting point arose somewhat late in the process and, therefore, will not get the amendment treatment. As we know, clause 159 extends taper relief to assets that were business assets under the old regime. Clearly, that is welcome. However, woodlands have been neglected. There are many who would understand that they are very important. I accept that that may come as something of a bolt from the blue, and I am most grateful for a number of representations that we have received on it.

The number of trees planted in Britain fell in 2001, the last year for which figures are available, by more than 25 per cent. to 13,900 hectares—half the level of the late 1980s. That is a pretty devastating statistic. That happened in spite of the fact that the Government made an election pledge to increase the amount of woodland in Britain. Reading that, I find a political point that I had not picked up myself. I am most grateful to those who made representations.

Only 11.6 per cent. of the UK is wooded compared to 27.9 per cent. of France and 30.7 per cent. of Germany. Adding a capital gains tax disadvantage is hardly going to help. Those who are interested in the subject—I think that there are many who have an environmental agenda—might want to look more deeply into the matter. The Forestry Commission website is very helpful.

The Revenue has confirmed its view in a letter that business asset taper relief is not applicable to commercial woodlands. The letter states:

''I can confirm that the legislation on taper relief does not extend business assets taper relief to commercial woodlands for capital gains tax purposes. Paragraph 22 Schedule A1 of the TGCA 1992 interprets 'trade' to mean (subject to section 241(3) which deals with furnished holiday lettings) anything which:

a. is a trade, profession or vocation, within the meaning of the Income Tax Acts and

b. is conducted on a commercial basis and with a view to the realisation of profits.''

Commercial occupation of woodlands has historically never been within the meaning of trade. Up to 14 March 1998 the person occupying woodlands managed by him on a commercial basis and with a view to the realisation of profits would have been assessable under schedule B. It was, however, possible to make an election for the profits to be assessed under schedule D instead of B. This would, however, not alter the fundamental principle that the commercial occupation of woodlands was not a trade.

The fact that the commercial occupation of woodlands is not of itself a trade explains the reason why section 158, TCGA 1992, is required to extend rollover relief to the occupation of woodlands where these are managed by the occupier on a commercial basis and with a view to the realisation of profits. Without this provision such woodlands would not be within the scope of section 152. Section 165(9) is a parallel provision in respect of hold-over relief for gifts of business acts.''

It goes on to say:

''In order for woodlands to be brought within the taper relief regime for business assets, there would have to be a specific provision extending the relief to such woodlands. As this extension is not provided for then such woodlands do not qualify for business asset taper relief.''

It is important to recognise that the world has moved on in relation to woodlands. The extension would be sensible, and it is relevant to a stand part

debate. I hope that the Paymaster General will consider the point very carefully. It has been brought forward by several people, somewhat late. Whether a clever point has been spotted, or whether it is part of a growing campaign, at least I have been able to put the matter on the record.

I do not intend to vote against the clause, but I hope that the point will elicit some interest on the part of the Paymaster General. I hope that she will be fascinated enough to look into the matter to bring the desultory percentage of woodland in this country back up to the level of the late 1980s, on the basis that we are all great environmentalists.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

That was a fascinating point, but I am completely unaware of any representations that we have received on the woodlands issue. I congratulate the hon. Gentleman on branching out into new areas so dramatically.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Indeed. The hon. Gentleman is scrutinising the legislation root and branch. Perhaps he has planted the germ of an idea—[Hon. Members: ''An acorn.''] Yes—great oaks and all that.

On the capital gains tax taper relief and property, I have to be honest and say that I have no idea from whom the hon. Gentleman has received those representations. I look forward to receiving them and, even in the complex area of taxation of woodlands, to considering whether there is a serious point buried in the undergrowth that should receive serious consideration from the Government in due course.

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

The Paymaster General has clearly twigged the point. I hope that I will not leave any stone unturned.

Photo of Michael Jack Michael Jack Conservative, Fylde

Does my hon. Friend agree that now that the enormity of what he has put before the Committee is beginning to sink it, it would also be in the interests of the Paymaster General to join with the Economic Secretary, because of the implications of what he was saying for the Government's targets on CO?2? and the consequential reference to carbon sequestration?

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

I am grateful to my right hon. Friend who is assiduous in his monitoring—

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

I was extraordinarily careful not to say deciduous. My right hon. Friend is assiduous in his monitoring of anything that relates to the internal and logical consistency of CO?2? emissions. We had the benefit of his earlier arguments on some of the motor issues.

I am glad that the Paymaster General's interest has been engaged. I will sit down before I come up with some further appalling pun.

Question put and agreed to.

Clause 159 ordered to stand part of the Bill.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

May I help the Committee? We have, if my arithmetic is correct, another four and a

half hours of debate. We have something like 57 clauses, schedules and new clauses to consider. I urge the Committee to follow the example of recent minutes, turn over a new leaf and make even faster progress where that can be done without leaving out important issues. Clearly, I will always allow a clause stand part debate if a member of the Opposition feels that that is absolutely necessary, but some of the new clauses are particularly relevant and important. I make those comments merely to help the Committee. I am here as the servant of the Committee.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

On a point of order, I understand your point, Sir Nicholas. I hope, however, that you were not urging us to ignore matters of public interest that need to be debated properly. We have objected to the artificial timetable throughout.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I made it perfectly clear that I wanted all matters of importance to be dealt with by the Committee. I was merely giving guidance from the Chair, because I believe that it is important that the Committee deals with all important matters. Some matters are clearly more important than others, but it is up to the Committee to make that decision and not up to the Chair. I can merely give guidance.

Clause 160 ordered to stand part of the Bill.