Schedule 10 - Stamp duty land tax: miscellaneous amendments

Finance Bill – in a Public Bill Committee at 3:00 pm on 30th June 2005.

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Photo of Mark Francois Mark Francois Shadow Paymaster General 3:00 pm, 30th June 2005

I beg to move amendment No. 95, in schedule 10, page 145, line 7, after 'effect', insert

', (but not so as to make the vendor in relation to the earliest previous transaction the vendor for the purposes of paragraph 5(2)(a))'.  

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to discuss the following amendments: No. 96, in schedule 10, page 145, line 13, at end insert

'and relief has not been withdrawn by virtue of paragraphs 3 or 9 on or before the change of control in the purchaser to which this paragraph applies,'.

No. 97, in schedule 10, page 145, line 42, at end insert—

'(6) Where—

(a) there is a change of control of the purchaser; and

(b) the same circumstances that give rise to a change of control of the purchaser in relation to the relevant transaction may also give rise to a change of control of the vendor; and

(c) paragraph 4A(1) could apply in relation to an earlier transaction on which group relief has been obtained and not withdrawn (''the prior transaction'') in relation to which the vendor (under the relevant transaction) was the purchaser (under the prior transaction); paragraphs 3 and 4 shall only apply to the prior transaction if and to the extent that the market value of the property the subject of the prior transaction, exceeds the market value of the property the subject of the relevant transaction''.'.

Photo of Mark Francois Mark Francois Shadow Paymaster General

I congratulate the Economic Secretary on winning that brief naval engagement. The only drawback is that he will now have to be shot.

We have a number of amendments relating to the schedule to consider. I should give notice that part of the schedule is potentially controversial. Amendment No. 95 is a probing amendment, which deals with the issue of potential secondary liabilities as outlined in part 1 of the schedule, and deals with group relief from stamp duty land tax. The amendment concentrates on what happens when property is transferred between companies within a group, for instance as a result of a corporate reorganisation. Those transactions are usually given so-called group relief from payment of stamp duty land tax on the general rule that the transferred property then remains in the group for at least three years.

In essence, the Government's proposal in part 1 relates to a situation where a property is transferred from company A to company B within a group, is then subsequently transferred from company B to company C, again within the group, and Company C then leaves the group within the three-year period. That makes company C potentially liable for repaying the group relief, which had been given at the time of the internal transfer. I am sure that you follow all that, Mr. Cook.

The new clawback provision in new section 4A also appears to open a potential secondary liability for company A if company C fails to pay the stamp duty land tax. Our concern is that, as drafted, new section 4A(1) opens such secondary liability too far back down the chain, to A, even though A might not have been involved in the subsequent transaction between B and C. That is achieved by deeming A in the example just given to be the vendor for the relevant transaction previously having taken place further up the chain. The purpose of the amendment is to ascertain whether that was the Government's original intention. If it was, what is their rationale for the measure? Do they genuinely believe that there have been a number of attempted avoidance schemes on the basis that we are discussing? Are they using this part of the schedule to plug a loophole? We are interested to know the rationale underlying the proposal and to know about   any evidence that they can give the Committee in order to substantiate what they seek to do. I look forward to hearing the Economic Secretary's reply.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I am wondering whether those As, Bs and Cs were the same ones that I was referring to earlier. I am not quite sure, but I will do my best to respond in detail to the hon. Gentleman's reasonable points.

It would be useful if I started by explaining why we feel there is a need for these measures. Stamp duty land tax was introduced in 2003. One of the main drivers was to provide fairness between taxpayers. Residential purchasers and small businesses have never had any choice over whether to pay stamp duty. By contrast, stamp duty was effectively a voluntary tax for many commercial purchasers and lessees. Thus, as part of the process of modernising stamp duty, the Government were determined to build in an effective anti-avoidance regime. The legislation implementing stamp duty land tax thus contained a number of anti-avoidance measures.

However, we quickly became aware of new schemes and so further anti-avoidance measures were contained in the Finance Act 2004. The hon. Member for Rayleigh alluded to that. The past year has seen the emergence of yet more schemes, some of which are of great complexity. He mentioned one or two of those. Although we have no wish to further complicate the legislation, we remain determined to attack avoidance and ensure that all taxpayers pay their fair share.

In direct answer to the hon. Gentleman's question, I should emphasise that all the measures introduced under the schedule are in response to actual schemes about which Her Majesty's Revenue and Customs have been made aware. None are in response to hypothetical schemes. I hope that that gives further reassurance.

Before I turn to amendments Nos. 95 to 97, I shall quote from an article written by Robert Kent, tax partner at Freshfields Bruckhaus Deringer, in response to a question about making stamp duty land tax savings on future transactions. The article was published on 20 May and commented on the original proposals included in the Budget earlier this year, most of which are retained in this Bill. He wrote:

''In this year's Budget, the Chancellor closed almost all the loopholes used to avoid Stamp Duty on commercial property transactions.''

In many ways, that is a ringing testament to the Government's efforts to provide an equitable regime for all by closing loopholes to ensure a fair contribution. That is why the Committee should support the measures.

Amendments Nos. 95 to 97 affect paragraph 6, which extends the circumstances in which stamp duty land tax group relief can be clawed back. The Government's intention has been clear ever since the clawback provisions were introduced in 2002. If group relief is claimed, and the transferee company leaves the group within three years, the relief should be clawed back. In the absence of such a provision, groups would   be free to wrap a property in a company and sell the shares shortly afterwards without incurring any liability for stamp duty land tax.

Although the Government's intention was clear, schemes aimed at frustrating it began to emerge almost as soon as the clawback provisions were published. The schemes work by interposing within the group transfers that have no commercial purpose but that stop the eventual clawback of group relief. Hence the need for paragraph 6, which in effect causes the transfers to be disregarded, and which means that it is the relationship between the earliest transferor and the ultimate transferee in a three-year period that is considered. If, at the end of that period, those two companies are no longer in the same group, then unless stamp duty land tax has been paid on one of the intermediate transactions, the relief is clawed back.

Amendment No. 95 does not affect the circumstances in which group relief is clawed back, but it does affect which companies are liable to pay the tax. At present, once group relief is withdrawn, the tax can be recovered from the company that originally claimed it, connected companies, or the transferor company. That reflects the fact that if payment has been made for the property the transferor company may still be in possession of the money, whereas the transferee may have been liquidated.

As a result of the changes made by paragraph 6, there will be a right of recovery against the earliest transferor in the three-year period before the ultimate transferee leaves the group. Amendment No. 95 would remove that right of recovery, as I am sure the hon. Member for Rayleigh now understands and accepts.

It is worth pointing out that, where there are successive transfers, the earliest transferor may be the only company carrying on a genuine business, with the other companies being inserted for tax reasons and being quickly eliminated. It therefore seems entirely right that HMRC should be able to recover tax from that company. Hon. Members should bear in mind that in most cases paragraph 6 will only affect contrived avoidance schemes.

Amendment No. 96 would prevent paragraph 6 from applying where there had been a previous clawback of group relief, reconstruction relief or acquisition relief. The hon. Gentleman suggests that that would avoid a double clawback of group relief. I should say, first, that the possibility of a double or multiple clawback exists under the current legislation; it is not created by this measure. However, both under current legislation and in this measure, it is generally possible to arrange matters so that there is no multiple clawback.

Indeed, amendment No. 96 would create new avoidance opportunities, since any previous clawback would prevent paragraph 6 from ever applying, even if the tax related to only part of the property or to a derived interest such as a lease. Although I have some sympathy with the hon. Gentleman's desire to avoid a multiple clawback, the Government have to ensure that we do not create new avoidance opportunities. I feel unable, therefore, to agree to the amendment.  

Amendment No. 97 is also aimed at preventing multiple clawbacks. It seems that it is intended to apply when the ultimate transferee leaves the group at the same time as an intermediate transferee. In that situation, the ultimate transferee would still suffer a clawback, but the intermediate transferee would suffer one only if not all the property had been transferred to the ultimate transferee.

Although that is an ingenious idea, it would be very difficult for such a provision to work in practice. It would also be difficult to know exactly when the amendment applied, as it refers to circumstances that may—I emphasise, may—give rise to a change of control. How would one know what circumstances may give rise to a change of control? The best way to ensure that multiple clawbacks do not occur, as under existing legislation, is to keep the number of successive transfers and changes of control to a minimum.

As with all new legislation, we shall keep the provisions under review, and I shall consider any representations made if, for example, multiple clawbacks were somehow to become a common occurrence. Having said all that and tried to respond in detail to the hon. Gentleman's amendments, I hope that he will withdraw them.

Photo of Mark Francois Mark Francois Shadow Paymaster General 3:15 pm, 30th June 2005

I thank the Economic Secretary for his kind compliment about Conservative ingenuity—that was good of him. I am grateful for his reassurances on multiple clawbacks. He will understand that we were seeking to tease out the Government's thinking on a theoretical possibility. We have succeeded in doing that, and I am grateful for what he had to say.

Amendment No. 95 was our principal amendment. You will recall, Mr. Cook, that we wanted to know whether the Government were legislating on the basis of real attempted avoidance schemes. The Minister stated categorically that this measure has been brought in as a result of schemes that the Government judge to have been genuine attempts at avoidance and that the Treasury is, in effect, seeking to plug a loophole. I am prepared to take the Economic Secretary at his word. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Francois Mark Francois Shadow Paymaster General

I beg to move amendment No. 98, in schedule 10, page 146, line 6, leave out

'that does not consist wholly or mainly of dealing in chargeable interests'.

The amendment deals with the qualifications for acquisition relief. It is a probing amendment that seeks to clarify situations in which companies—potentially including certain joint venture companies—may continue to qualify for acquisition relief in property transactions. Paragraph 8 of schedule 10, which deals with reconstruction and acquisition reliefs, seeks to limit situations in which companies may continue to qualify for acquisition relief on certain transactions. Specifically, the proposed new sub-paragraph (5A) seeks to exclude from such relief those companies carrying on a trade that consists

''wholly or mainly of dealing in chargeable interests.''

That is legalistic language; in practice, it means that this could not only relate to removing relief from property investment companies—we believe that that is what the Government originally intended to do, and we followed their thinking—but have the practical effect of removing the relief from active property developers who are not only trading in land per se, but seeking to develop property, potentially including specially created joint venture vehicles such as those established to facilitate the redevelopment of a housing estate. There is some controversy about that, so we seek to clarify the issue.

I cite Mr. Sean Finn, a partner in the international tax group Lovells. He wrote an article that appeared on the Legal Week website on 9 June 2005. It commented on this provision in the following terms:

''The 2005 rules will require that, for the relief to apply, the relevant undertaking must have as its main activity the carrying on of a trade which does not consist wholly or mainly of dealing in land or interests in land. This measure will greatly reduce the availability of this relief for property transactions.''

As that could have implications for future housing development, will the Minister say what discussions the Treasury has had about it with the Office of the Deputy Prime Minister? One thing that we certainly know about the Deputy Prime Minister is that he is interesting in housing, even if I do not always agree with his philosophy on that issue. Where exactly does the line to which paragraph 8 is intended to apply fall? Where should it be drawn between property investment companies and active property developers and special purpose development vehicles?

Amendment No. 98 would delete the final words of proposed sub-paragraph (5A), so that active property developers and joint ventures might continue to enjoy acquisition relief. Some finely balanced schemes might conceivably have an important bearing on whether or not the scheme can proceed.

However, the amendment would not prevent the amended paragraph 8 from still being applicable to property investment companies, which, as I say, is what we believe the Government originally intended. We want to tease out the Government's thinking and to understand their rationale for the precise wording that they have chosen to employ under that part of the schedule. It looks as though it has been deliberately crafted. We want to understand where they think the line should fall and how precisely the measure should operate in practice. I genuinely look forward to hearing what the Minister has to say.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The hon. Gentleman seeks to tease out my thinking, but five minutes ago he wanted to shoot me. He has changed his position somewhat in that short time, but I shall deal seriously with the issues that he raised. Acquisition relief is a partial relief from stamp duty land tax. It allows a person to buy a business that has property assets at a lower SDLT charge than buying the assets themselves would incur. The charge is at ½ per cent. rather than the usual 4 per cent. The rationale for that is that a 4 per cent. duty would raise a barrier to the purchase of businesses.  

Paragraph 8 of schedule 10 restricts the availability of acquisition relief so that the definition of the undertaking must be a trade, not an investment business, and must not be a property-dealing trade. The amendment would remove the restriction on the definition of trade, allowing acquisition of property transferred as part of a property-dealing trade to be taxed at ½ per cent. rather than 4 per cent. It would therefore make the clause ineffective as it would be relatively easy to show a trade of dealing in property when the actual motive is the holding of property for investment purposes.

We do not consider that it is right in that context that acquisition relief, which is an extremely generous relief, should be available when property ownership, or dealing in property, is the main business of the company. It should be available only when the ownership of property is ancillary to the main business of the company, such as, for example, when a retail business owns a chain of shops or when a business is carried on from a factory.

I understand that there have been worries that the concept of dealing in chargeable interests is uncertain, a point made by the hon. Gentleman. It is unclear, for example, whether a property developer or house builder will be caught. While it is ultimately a question of fact what trade a company is carrying on, I can reassure the Committee that property developers and house builders who derive most of their profits from their work, rather than from buying and selling would not be caught by the measure. Companies that want reassurance about that in relation to their specific trade can approach HMRC to seek clarification.

Photo of Mark Francois Mark Francois Shadow Paymaster General

I am grateful to the Economic Secretary for providing exactly the sort of clarification I asked for. For the avoidance of doubt and to make sure that I have understood him correctly, I believe that the active word in his response seemed to be ''most'', and, providing that the companies concerned can demonstrate that most of their profit—not turnover—is derived from their work, they will be all right. Did I understand the hon. Gentleman correctly?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

It is kind of the hon. Gentleman to both ask a question and give the answer; he is always helpful. Yes, I can assure him that it is the profit; he is right in that respect. Any company that genuinely seeks reassurance on this specific point in relation to the trade issue should approach HMRC. In light of my comments, I hope that the hon. Gentleman feels able to withdraw the amendment.

Photo of Mark Francois Mark Francois Shadow Paymaster General 3:30 pm, 30th June 2005

I certainly do. We have probed to get a clear answer from the Economic Secretary and he has given a workable definition that will allow people in the industry some certainty when they attempt to plan. I also heard him say that the Revenue would invite those with any uncertainty about the matter to enter into discussions with it. As the Economic Secretary has been more than fair, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.  

Photo of Mark Francois Mark Francois Shadow Paymaster General

I beg to move amendment No. 99, in schedule 10, page 147, line 34, at beginning insert ''Subject to sub-paragraph (5)''.

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to discuss amendment No. 100, in schedule 10, page 147, line 41, at end add—

'(5) Sub-paragraph (2) shall not apply where the grant to or by a nominee is associated with, incidental to or preparatory to, a transaction involving a securitisation company within the meaning of Section 83(2) of the Finance Act 2005.'.

Photo of Mark Francois Mark Francois Shadow Paymaster General

These are two technical amendments that focus on how the schedule will apply to certain transactions involved in securitisations. In order to make progress, I shall leave what I say at that; the amendments are very technical, so I shall simply sit down and await the Economic Secretary's reply.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

If the Committee had conducted its business on the basis that if amendments are very technical, they are not spoken to by those who move them, we would not have been here for the past two weeks. However, I thank the hon. Gentleman for being so honest, because my officials said to me when we discussed the amendments that they did not have a clue about what they were getting at and could not be of any assistance to me. Obviously they too thought that the amendments were very technical. However, I will try to address what we think are the amendment's substantive points.

Perhaps my hon. Friend the Member for Wolverhampton, South-West—no, I should not encourage him—[Laughter.] ''Think before you engage your mouth,'' as my dad used to say to me.

Paragraph 11 applies where a lease is granted to or by a nominee. The normal rule is that transactions with nominees are ignored for stamp duty land tax purposes. That reflects the intention that stamp duty land tax should be charged when beneficial ownership changes, not when someone puts their own property into the name of a nominee—please will the hon. Member for Rayleigh pay attention? Paragraph 11 disapplies that rule where the transaction is the grant of a lease. The reason for that is to counter avoidance schemes where the grant of a lease to or by a nominee is followed by the assignment of the lease to a third party. Normally, there is a charge on the rental element of a lease when it is granted. However, if transactions with nominees are ignored, that charge will not occur. That will enable leases to be granted without any charge on the rental element. Paragraph 11 therefore provides that where the transaction is the grant of a lease, the fact that a nominee is involved is ignored; in other words, there is the same charge that there would be if there were no nominee arrangements. That ensures that there will be the normal charge on the rental element. In many cases, there is a relief such as group relief, which will prevent a charge to tax from arising at all.

The amendment would prevent paragraph 11 applying where the grant of the lease is connected with a transaction involving a securitisation company. Securitisation companies are special purpose vehicles involved in structures where securities are issued in the market and those securities are backed by a charge on assets held by the company. Members may be aware   from announcements made as part of the 2005 Budget that the tax and accounting treatment of securitisation companies is a complex matter. My officials are engaged in discussions with practitioners about these issues, which resulted in provisions in the Finance Act 2005. My officials have not come across any examples of securitisation transactions that involve the use of nominees and leases and the issue has not been raised in discussions, which is one of the reasons why we were unclear about the purpose of the amendments. That suggests that the use of nominees and leases would be unusual, and that nominees and leases might not form part of a normal commercial securitisation. Because of that, it would be wrong at this stage to grant a specific exemption from an anti-avoidance provision. The better way to proceed is for those who have an interest in the tax and the accounting treatment of securitisations to raise that issue in discussions with my officials so that any specific tax measures can be set in wider context.

Having demystified those complex issues for all Committee members, I hope that the hon. Member for Rayleigh will consider withdrawing the amendment.

Photo of Mark Francois Mark Francois Shadow Paymaster General

The Minister is right. This is a complex matter, because it applies not only to property law and leasing, but to trust law as well, and it gets rather complicated in cross-cutting. The Minister's understanding of the matter is similar to mine—[Laughter.] On that basis I am delighted to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Francois Mark Francois Shadow Paymaster General

I beg to move amendment No. 101, in schedule 10, page 149, line 23, leave out paragraph 15.

As drafted, paragraph 15 relates to the taxation of payments in certain contingent transactions, principally those related to leases on land where the eventual price for the transaction may depend on a variable, such as whether planning permission is eventually granted on the plot of land being transferred and where an estimate of the value of that transaction—usually referred to in such cases as the relevant transaction—has had to be included for the purpose of calculating the stamp duty land tax to be paid on the deal or transaction in question. So in a sense people have to guess.

The paragraph currently appears to mean, first, that if the contingency is not subsequently met—for example, if the contingency was that planning permission would be granted and it turned out that although the land had been leased it was not granted—the value is affected accordingly; and, secondly, an amount is repaid where a deposit or loan relating to that transaction and the repayment does not cause the stamp duty land tax subsequently to be reduced in relation to the repaid amount. In other words, the party that paid the estimated amount of stamp duty land tax on the relevant transaction does not get a refund if the estimate is eventually proved to have been too high. Can the Minister explain the Government's rationale behind that?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

Schedule 10 deals with cases where the purchase price of a property is dressed up as a loan or deposit on the grant of a lease. We have seen examples   of such avoidance on time share and similar arrangements where a long lease is granted at a low rent and what is really the purchase price is described as a loan or deposit repayable when the lease comes to an end. When the lease comes to an end—normally because the lessee moves out and a new one moves in—the deposit is repaid. The general rule for other purchases of property is that people pay stamp duty land tax when they acquire property and that is the end of the matter: there is no question of a refund of tax when they sell the property, even if they do so a very short time after purchasing it. There is no reason why the rules should be different just because the transaction is structured as a long lease.

Hon. Members will be aware of the concern, which was expressed when this measure was first announced, that genuine deposits as security for rents, such as those that the hon. Gentleman is concerned about, would be caught. Following representations we modified the provision so that genuine rent deposits will not be caught: the only ones that will be caught are the so-called deposits that are out of all proportion to rent and therefore are really in the nature of a premium.

The amendment would delete paragraph 15, which provides that where a deposit or loan that is caught by the measure is repaid there is no repayment of stamp duty land tax. As I said a moment ago, there is no reason why people who move out of property should be refunded tax just because they structure that transaction in a particular way. On that basis I ask the hon. Gentleman to withdraw his amendment.

Photo of Mark Francois Mark Francois Shadow Paymaster General

The Minister has given us some reassurance and he has clarified for the Committee exactly how the measure is designed to work in practice. He gave one or two qualifications in his explanation, which will be of value to those who take close interest in such matters. On that basis, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Francois Mark Francois Shadow Paymaster General

I beg to move amendment No. 146, in schedule 10, page 151, line 1, leave out paragraph 19.

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to discuss the following amendments: No. 102, in schedule 10, page 151, line 9, after 'duty', insert

'stamp duty reserve tax and stamp duty land tax.'.

No. 147, in schedule 10, page 151, line 9, leave out

'income tax, corporation tax, capital gains tax or tax under this Part'.

No. 103, in schedule 10, page 151, line 9, leave out

'corporation tax, capital gains tax or tax under this Part'.

Photo of Mark Francois Mark Francois Shadow Paymaster General

The amendments would delete or amend paragraph 19, which deals with group relief avoidance arrangements, and which forms the most controversial part of the whole schedule, and thus of part 3 of the Bill itself.

The principal complaint about paragraph 19 is that it is very broadly drafted. It seeks to withdraw group relief on transactions that are not  

''effected for bona fide . . . reasons'', but without seeking to define what those reasons are. Moreover, the paragraph also pertains to any such arrangements relating to alleged avoidance of not just stamp duty land tax but income tax, corporation tax and capital gains tax. Thus there is potential liability for four different taxes in one paragraph. The real danger is that the paragraph is so broadly drafted that it might catch transactions that are perfectly normal in the course of business. Such transactions might then be adjudged non-bona fide by HMRC and an important relief may be suddenly threatened as a result. The Chartered Institute of Taxation, in its briefing note on the paragraph, states:

''This appears to be a catch-all provision that will catch innocent transactions as well as objectionable ones.''

The practical effect of the paragraph's essentially scattergun approach could be to make UK companies extremely defensive about property transactions, for example when considering a potential reorganisation that would make good commercial sense.

It is worth making the point that, as the pace of global business seems to be accelerating all the time, it is more and more frequent for companies—and not just large ones—to want to reorganise in order to remain as lean and fit as possible. That is a challenge with which British business is grappling day in, day out, and the danger of the measure is that it could make that process more difficult in cases where, for very good commercial reasons, it absolutely has to take place. That point was made by the Confederation of British Industry in its briefing note on the paragraph. It said:

''This provision has been introduced without real explanation as to why it is required in addition to the wide range of other measures which already restrict the availability of SDLT group relief, and claw back the relief within a three year period. Some of these measures are being strengthened in this Finance Bill, but it is not clear why additional tests are required.''

For good measure, the Law Society chipped in. Its briefing note on paragraphs 19 and 20, which most members of the Committee will have seen, says that the test in paragraph 19

''will create uncertainty, difficulties for certain commercial transactions (e.g. on balance sheet securitisations), and costs associated with due diligence. Reliance should be on the clawback provisions introduced by the Bill to counteract perceived avoidance transactions, rather than the motive test.''

As I shall come on to say, there is a motive test inherent in the paragraph.

The British Property Federation has made similar representations. Its briefing note on the issue points out that

''The BPF is concerned that the measure could cause major uncertainty in a number of situations where a group reorganisation is being undertaken and properties are being moved as part of this. The risk of a 4 per cent. charge on transfers may constrain groups from undertaking transactions that would otherwise make sense to them from a commercial point of view.''

Moreover, the BPF quite reasonably goes on to emphasise that HMRC already has a broad armoury of measures to prevent avoidance in this field, including the fact that intra-group transfers are   already subject to safeguards from the Revenue's point of view. The BPF lists those, first citing

''anti-avoidance provisions relating to the definition of a 75 per cent. corporate group (imported from the corresponding corporation tax provisions)''.

Secondly, the BPF mentions

''restrictions on the availability of relief if there are arrangements (at the time of the transfer) to de-group the transferee or for financing the transaction from outside the group''.

Thirdly, it states,

''clawback of the relief within three years if the transferee is de-grouped (and this Finance Bill further extends the circumstances under which a clawback charge is made)''.

We discussed that in relation to earlier groups of amendments. Fourthly, the BPF states that there is also

''a rule substituting market value for actual consideration (if greater) for transfers to connected companies''.

Given all that, the BPF states:

''With this array of anti-avoidance provisions in place, it is difficult to understand why Paragraph 19 is also necessary. The measure is disproportionate and should be dropped.''

We then come to the issue of motive tests, which we have debated several times in this Committee over the past two weeks. Paragraph 19 also creates what is in effect a motive test, not least by claiming that whatever transactions are under consideration must have been undertaken for ''bona fide commercial reasons''. The difficulty with motive tests of that type, particularly when they are applied across four taxes rather than just one, is that they introduce considerable uncertainty for companies about their likely tax position. Thus, they can act as a hindrance to efficient economic activity.

There is also a potential effect on real estate investment trusts. There is a practical point about how such transactions could affect the long-awaited development of REITs, which we have touched on. REITs could potentially be inhibited by the provisions in paragraph 19. Companies that seek to reorganise their holdings to enable them to become REITs—the Government have told us that they hope to get the process properly under way in a year's time, so we are not talking about a distant theoretical possibility—could find themselves being caught by the provisions in paragraph 19. That could obviate part of the advantage of creating REITs in the first place. In that sense, given what the Government said they want to do on REITs, paragraph 19 could be self-defeating. That has also been emphasised by the CBI in its briefing note, which said:

''A particular concern is that this may create difficulties for the new UK REIT vehicles to be introduced next year. Companies wishing to reorganise their holdings to enable them to become REITs may find it difficult to argue they are not transferring properties in order to gain REIT status and thus exemption from tax.''

Even though we do not have the REIT legislation until next year, that is a pretty powerful point, and I would like to hear what the Economic Secretary has to say about it.

The Government have suffered enough criticism over their delay in the introduction of REITs in the United Kingdom. Most comparable developed   countries around the world already have something similar; many have had the systems up and running for years. Bearing in mind that we have waited so long for them, it makes little sense to undermine, potentially, such a long-awaited development with a poorly drafted paragraph 19.

For good measure, and just in case Ministers have not fully got the point, the CBI ended its note with the following suggestion:

''This is a provision which could cause disproportionate commercial constraints for companies seeking to organise their affairs in an efficient manner, and so undermine the competitiveness of the UK as a place to do business. The CBI therefore calls for it to be withdrawn.''

That is a powerful case and we wait to hear why the Minister believes that this wide-ranging power still needs to be passed into law.

Amendments Nos. 102 and 103 represent the next stage down from the complete deletion of paragraph 19, in that they seek to retain its provisions but limit them to stamp duty land tax and stamp duty reserve tax, thus allowing the Government to achieve part of what they set out to do but on a narrower front pertaining only to stamp taxes, rather than the other three taxes as well. The British Property Federation has argued:

''It is considered that there are already many and varied safeguards within the provisions of the other taxes to prevent abuse and that accordingly, the motive test should be confined to''

stamp duty land tax. Although we Conservatives would still have some concerns even about the breadth of the surviving measure, in some respects it represents a compromise whereby the even wider measures involving the other taxes are dropped. I hope that the Minister might, at a minimum, say something positive about the alternative amendments.

I shall add one further point. On a previous group of amendments a Minister quoted with great alacrity, and with a smile on his face, a learned lawyer in this field who said that the Government had already legislated well to close most of the loopholes in this area. If that is so, and the Government believe it, why do they need paragraph 19 now?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury 3:45 pm, 30th June 2005

Let me say on behalf of my hon. Friend the Member for West Bromwich, East (Mr. Watson), who cannot speak on these occasions, that the pager message does not apply to hon. Friends participating in the Committee. We cannot leave before 6 o'clock, alas!

I shall set the provision in context before turning to the amendments. In the past few years HMRC has seen a continuing stream of schemes aimed at avoiding liability to stamp duty and, since 2003, specifically liability to stamp duty land tax. It is no exaggeration to say that, for some practitioners, advising on stamp duty avoidance is one of the major parts of their work. By contrast, most residential purchasers have no option but to pay stamp duty land tax. Countering stamp duty avoidance was one of the main drivers for the introduction of stamp duty land tax in 2003. As part of the introduction of that tax a number of avoidance opportunities were blocked. Following that, however, more avoidance schemes came to light and those were countered again in the Finance Act 2004. In   the years since then, HMRC has seen even more schemes, which are blocked by measures in the earlier part of the schedule, but there is no reason to suppose that practitioners have been idle since the relevant measures were published and we expect that new schemes are being developed at this very moment.

There comes a time when any Government must say that enough is enough. I remember that being an effective strategy leading up to the 1997 general election. In relation to avoidance using group relief, the time has now come. It is time to ensure that group relief is restricted to proper commercial transactions where tax avoidance is not the, or a, main purpose. I recognise that this measure has caused genuine concern among those who are not engaged in tax avoidance, on the grounds that it will stop legitimate commercial transactions. I can reassure the Committee that we do not accept that that will be the effect of the measure, which will only stop claims to group relief where tax avoidance is the, or a, main purpose. The fact that a transaction gives rise to a tax benefit does not mean that avoidance is the main purpose.

I was asked earlier for the definition of the term ''bona fide''. Successive Governments have used that term and most Committee members, and practitioners, understand its meaning to be ''genuine'', which is a pretty straightforward understanding.

The fact that a transaction gives rise to a tax benefit does not mean that avoidance is its main purpose. To take a specific example, a group may transfer a property into a special purpose vehicle so that after three years, the shares in that vehicle can be sold free of stamp duty and land tax. That is not tax avoidance, because the legislation specifically permits such transactions. On the other hand, if the property were transferred into the special purpose vehicle as part of arrangements whereby the property could leave the group in less than three years, that might be tax avoidance because it would go against the intention of Parliament.

Having given that example, I move on to the amendments. Amendment No. 146 would delete paragraph 19.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I thank the Minister for that excellent example. I appreciate that he is not here to give tax advice. However, I am curious about how the Minister would address the issue raised by my hon. Friend the Member for Rayleigh: companies wishing to reorganise their holdings to enable them to become REITs may find it difficult to argue that they are not transferring properties to gain REIT status and thus exemption from tax.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I shall address the REITs question later. It is an important issue.

As I said, amendment No. 146 would delete paragraph 19. I hope that I have given enough reasons as to why that provision is reasonable and proportionate, and that there is therefore nothing to add on that amendment.  

Photo of Mark Francois Mark Francois Shadow Paymaster General

I have listened to what the Minister said, but I am not sure that he has addressed the point. If the provision is as innocuous as he says, why are the Chartered Institute of Taxation, the Law Society, the British Property Federation and the CBI all dead against it?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I cannot speak for any one of those organisations, or for them as a collection of organisations. All I can say is that we have considered the reservations, objections and concerns that have been articulated by interest groups. Having considered those seriously, we have come to the conclusion that the measures are necessary and in some ways overdue, and that there has been clear evidence of organisations and individuals seeking to get round Parliament's intentions and avoid appropriate responsibility.

If the hon. Gentleman insists on pressing the matter to a Division, we shall have to engage on an enemy-by-enemy basis. However, we have not taken this decision lightly; it has come after a great deal of consideration and with a sensitivity about not wanting to catch practitioners or companies that are behaving in a genuine way. We do not seek to do that.

Amendments Nos. 102 and 103 would restrict the definition of tax by leaving out capital gains tax and corporation tax. However, it seems from amendment No. 147 that the Opposition now want to go further and leave out income tax as well. In other words, the hon. Gentleman is arguing that it is quite acceptable for group relief—a generous relief from stamp duty land tax—to be available when a transaction forms part of a scheme to avoid income tax, capital gains tax or corporation tax, or all three taxes.

Surely the hon. Gentleman accepts that the Government cannot condone tax avoidance by allowing stamp duty land tax group relief on avoidance transactions. I do not believe that that would be acceptable to any member of this Committee. Again, the amendments may be prompted—I am sure that they are—by concerns that the measure in its current form will cause uncertainty and stop legitimate commercial transactions. I do not believe that that will be so. I do not know whether the hon. Gentleman is aware of it, but the example that has been cited is when property is transferred within a group to match chargeable gains with allowable losses or to match rental income with losses from rented property. For many years, we have accepted that that is not tax avoidance, provided that both gains and losses arise from genuine economic activity and have not been artificially contrived.

I can give another example of securitisation. In a simple terms, a securitisation is a structure whereby securities are issued in the market and backed by a charge on assets held by the company. As the Government made clear when announcing this year's Budget, we are keen to encourage securitisation and to work with the industry on the complex tax and accounting issues involved. Members of the Committee will be aware of the provisions in section   83 of the Finance Act 2005, which were aimed specifically to assist those involved in securitisation. It has been suggested that the measure would stop or substantially increase the cost of securitisation but we do not accept that that would be the case. Obviously, a normal commercial securitisation does not have tax avoidance as its main purpose or one of its main purposes. The types of transaction typically undertaken by the companies affected by section 83 do not have tax avoidance as their main purpose. The types of transaction that my officials are discussing with the agency do not have tax avoidance as their purpose.

I do not see any reason why normal commercial securitisations should be affected by the measure. In the end, taxpayers and their advisers know when they are engaged specifically in tax avoidance. They know whether they are obtaining a relief in a manner that is contemplated by Parliament or whether they are seeking to abuse legislation. Only those who make use of tax avoidance schemes need concern themselves with any aspect of the measure.

The hon. Member for Rayleigh referred to REITs. The proposition is that passing the measure would make more difficult the ultimate decisions that the Government are committed to making on REITs. Obviously, we have taken that view seriously. We have considered matters, and we genuinely do not believe it would be appropriate to integrate the decision that we will have to make about REITs in due course with measures at this time, and nor do we accept, having considered matters carefully, that adopting the measures will make it difficult to achieve the right outcome in the best interests of British industry on the whole REIT issue. Given my reassurances, I hope that the hon. Gentleman will seriously consider withdrawing the amendment.

Photo of Mark Francois Mark Francois Shadow Paymaster General 4:00 pm, 30th June 2005

I have listened carefully, and the Committee will have realised that such a matter is controversial. We tabled various amendments to provide different options that we might press to a Division. To continue the naval analogies that my hon. Friend the Member for Cities of London and Westminster began this afternoon, we loaded several cannons in order to decide which one to fire. In all sincerity, I did not find the Minister's explanation entirely convincing. It was particularly unconvincing in respect of REITs because there has been a tremendous delay in the REITs process and all the hon. Gentleman did was to provide me with an generally worded assurance.

Photo of Mark Francois Mark Francois Shadow Paymaster General

My hon. Friend uses strong language, but the Minister's explanation was not entirely clear and comprehensive.

Paragraph 19 of the schedule still amounts to a general anti-avoidance provision, in all but name. It is unjustifiably broad in scope, which is why a range of organisations including the Chartered Institute of Taxation, the British Property Federation and the Confederation of British Industry have called for it to be withdrawn. Among people who will have to deal with the measure, there is consensus that the   Government have gone too far. The Committee should take notice of that, because it has important implications for the future viability of British business, particularly—to return to my original example—where companies are forced to reorganise because of changing commercial circumstances. We in Parliament often talk about the global economy and global competition, and this is a case where global competition really hits home. British business must be able to react to it. The measure could constrain that ability to react, so there is real danger in it.

I listened to the Government's arguments. I show no personal disrespect for the Economic Secretary, but he speaks for Her Majesty's Government, and they have completely failed to convince, so I wish to press the amendment to a Division.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The hon. Gentleman says that he does not wish to show any disrespect, having accused me of speaking waffle; that is a curious oxymoron.

I shall respond very quickly. Organisations and individuals who are not seeking to engage in avoidance have nothing to fear from the measures. Frankly, we have no sympathy whatever with organisations that have engaged, that continue to engage and that will in future engage in avoidance measures. That is why I think that the measures are proportionate and appropriate. I think that the Committee will have to divide.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 12.

Division number 5 Nimrod Review — Statement — Schedule 10 - Stamp duty land tax: miscellaneous amendments

Aye: 9 MPs

No: 12 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Schedule 10 agreed to.