Clause 70

Finance Bill – in a Public Bill Committee at 11:15 am on 5th June 2007.

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Anti-avoidance

Question proposed, That the clause stand part ofthe Bill.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this, it will be convenientto take the following: Amendment No. 213, in clause 70, page 44, line 7, leave out from ‘a’ to ‘the’ in line 9 and insert

‘pre-ordained series of transactions is carried out in connection with the disposal and acquisition, and it is undertaken in pursuance of a scheme or arrangement the only or main purpose of which is the avoidance or reduction of Stamp Duty Land Tax payable on the acquisition by P or to secure or increase a repayment of Stamp Duty Land Tax in relation to that acquisition.’.

Amendment No. 234, in clause 70, page 44, line 13, leave out ‘its disposal by V’ and insert

‘the disposal referred to in subsection (a) above’.

Amendment No. 214, in clause 70, page 44, line 13, at end insert—

‘(1A) Transactions taking place more than three years before the acquisition of a property by P shall be disregarded for the purposes of subsection (1).’.

Amendment No. 235, in clause 70, page 44, line 40, leave out

‘the largest amount (or aggregate amount)’.

Amendment No. 236, in clause 70, page 44, line 42, after ‘(a)’, insert ‘the largest amount’.

Amendment No. 237, in clause 70, page 44, line 44, after ‘(b)’, insert ‘the aggregate amount’.

Amendment No. 238, in clause 70, page 45, line 7, at end insert—

‘(c) the exercise of a statutory right of enfranchisement, extension or enlargement of a leasehold interest.’.

Government amendments Nos. 184 to 186.

Amendment No. 239, in clause 70, page 46, line 1, leave out ‘and 75’ and insert

‘75, and schedule 7, Part 1

Government amendments Nos. 187 to 192.

As this group of amendments contains Government amendments, I shall ask the Chief Secretary if he wishes to speak first, and then I shall come to the hon. Member for Chipping Barnet. That will not preclude the Chief Secretary from responding to anything else that is raised in the course of the debate.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Thank you, Mr. Gale, for clarifying how you intend to deal with the clause, which is the first of two that tackle stamp duty land tax avoidance schemes. It amends the Finance Act 2003 to counter two types of scheme—those that use leaseholds and those that use sub-sales that have been developed specifically to avoid payment of the tax. Clause 71 is designed to counter schemes that use partnerships as a way of avoiding tax.

The two schemes that the clause tackles seek to avoid payment of stamp duty land tax by adding extra stages into the sale of property by one party to another in such a way as to remove the need to pay tax on the transaction. We have always said that we will deal robustly with any avoidance effort along those lines. We were first made aware of the schemes late last year. We initially took action at the pre-Budget report by introducing time-limited regulations that prevented those schemes. We acted quickly because we took the view that it was unfair for those using such schemes to benefit, while most taxpayers who paid stamp duty and land tax could not use such complex avoidance arrangements. The regulations have worked well, and the industry has, on the whole, been happy with that. The clause replaces those regulations, which were introduced at the end of last year, debated in Committee and approved by the House on 15 January.

Hon. Members might ask why we have included the clauses. First, we hope that they will prove to be more finely tuned instruments than the regulations that they replace. Not only do they target more effectively those schemes that we want to stop but, in response to representations about the regulations, they do more to protect those who are involved in innocent transactions whom the regulations might have caught inadvertently. Of course the clauses, unlike the regulations, willhave permanent effect. In introducing the regulations, we explained that they would have effect for only18 months from the date on which they were made. That has given us a chance to consult the sector and I am grateful to all those who took the time to discuss the regulations with HMRC. We have tried to accommodate their comments, and that has made for clearer legislation.

Throughout the process, we have been open to changes that will make it clear that legitimate transactions will not be caught. For example, the Government amendments are the result of further representations from the property sector. Dealing with the avoidance of stamp duty land taxes is, in many ways, different from dealing with avoidance in other areas of taxation. For example, it is much harder to establish whether the main driver in a developed scheme is avoidance of tax or not. It is also sometimes difficult to establish who benefits from schemes, as they can be arranged to benefit both the buyer and the purchaser. Therefore, where we have deviated from what we have done in other areas of taxation to prevent  avoidance, we have done so simply because we have not been able to use the same types of legislation to prevent avoidance in this area.

We have been happy to listen to what groups such as the Law Society have had to say about how the clause is drafted and, where possible, we have agreed to changes that will protect those involved in legitimate land transactions.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 11:30 am, 5th June 2007

Does the Chief Secretary agree that a transaction caught by proposed section 75A would include the purchase of a long leasehold where the right to enfranchise is later taken up, because that involves a series of steps?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I am not sure quite how the measure would apply in the particular circumstance that the hon. Lady describes. Perhaps she would like to give a little more detail about the precise type of transaction that she envisages. The intention is to ensure that stamp duty is paid on the full value of the transaction. Artificial arrangements have been devised to try to avoid that; I do not imagine that her example is one of those arrangements. However, that is certainly the intention and I think that the effect of the clause, with the amendments that have been tabled, will be that, in whatever circumstances, the full value of the transaction will be captured for stamp duty land tax purposes.

On the Government amendments, we have made it clear that HMRC will only be allowed to use the retrospective taxation powers if it favours the taxpayer. We have clarified that only property investment partnerships are covered by the clause and that, where separate parcels of land are sold on as part of a transaction, we will use apportionment to reduce the amount of tax that purchasers might have to pay.

Making good anti-avoidance legislation involves dealing with two opposing requirements. First, we must ensure that the legislation is strong enough to stop the avoidance. Secondly, however, we do not want to entangle law-abiding businesses in its scope or make the overall tax structure any more complex. That is a fine line to walk. In tabling the amendments, we have shown that we will listen to concerns about the unexpected effects of legitimate traders and that we will act on those. I will be happy to give more details about each amendment, but I hope that, in these few words, I have explained the intention behind them.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I want to take the Chief Secretary up on his reference to complexity. A concern that has been expressed to me is the complexity and lack of clarityin the provisions. In particular, how will proposed section 75A operate if more than one transaction could count as the notional transaction? How will the notional transaction be selected? Will it be the highest transaction, or the first transaction?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Let me come back to the hon. Lady’s original question about the purchase of a long lease with a right to enfranchise. That kind of arrangement  will not be caught unless there is some connection between the transactions—for example, if they are all carried out in a very short time scale. The aim and effect of the changes is to ensure that the full value of the transaction is caught for stamp duty land tax purposes and that the full tax payable will be required. I think that intention is being delivered by the changes.

The hon. Lady makes a fair point about complexity. The clause has to be quite complex. Its aim is to counter schemes that involve the creation of complex networks to avoid paying stamp duty land tax. HMRC has already published detailed guidance on its website explaining what is and is not affected by the clause, giving examples of how it will work. If there are any uncertainties, it is happy to advise those who have queries about complex transactions on a case-by-case basis.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

If the Chief Secretary cannot answer the specific question about the possibility of multiple transactions that could qualify as a notional transaction, can he tell the Committee what will happen where there are multiple parties that could fall into the category P as defined by proposed section 75A(1)?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

There may well be some quite complex arrangements where sensible questions could be raised. My advice would be that those questions should be raised directly with HMRC in the light of what is already on the website. I think that the appropriate clarification could then be provided.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Before we debate the other group of amendments, may I make the point that the debate is being conducted on a clause stand part basis, so I am not putting any amendments formally at this stage? If the Opposition Front Bench or, indeed, any other hon. Member wishes to move any of the other remaining amendments formally, they will need to indicate that to me at the appropriate time.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Thank you, Mr. Gale. I join others in welcoming you back to the Chair.

My understanding of the reaction that the provisions have provoked among those affected by them is very much at variance with the Chief Secretary’s account of how they have been received. As ever, the Opposition would support attempts to shut down abusive and artificial tax avoidance schemes that would prevent stamp duty from being charged on transactions. However, we are concerned about the very wide scope of proposed section 75A. Although initially its provisions did not attract a huge amount of attention, considerable concern has since been expressed about their breadth.

The Chartered Institute of Taxation states:

“It is disappointing to note that despite a wide-ranging discussion of this legislation in January 2007 which identified various practical problems with its implementation, nothing has been done to tackle the major defects in the legislation... In our view the drafting of section 75A is fundamentally deficient in a number of respects... Most seriously... the section is drafted in such wide and general terms as to be almost unworkable in practice. Its general application means that it may apply to many common commercial transactions, and it appears to cut across many areas where existing SDLT legislation provides reliefs including, for example, charities and reconstruction reliefs.”

The Institute of Indirect Taxation, the Law Society and the Stamp Taxes Practitioners Group all seem to share the CIOT’s concern that innocent transactions could be caught by proposed section 75A. The Law Society points out:

“The uncertainty which this is generating is not simply the perception of a number of anxious professionals who cannot interpret the legislation and want a hand from HMRC.

Seasoned conveyancing and tax professionals have pored over this legislation and want a hand from HMRC, not with a view to picking holes in it, but with a view to understanding it so that they can give advice to clients as to the consequences of undertaking real estate transactions.

The fact that these professionals are still unclear as to the ambit of the legislation is testament to the fact that the legislation is unclear.”

Similarly, in a letter to Crispin Taylor at HMRC, the Stamp Taxes Practitioners Group stated:

“As a matter of principle, anti-avoidance legislation should be proportionate to the problem...The Stamp Taxes Practitioners Group consider that s75A goes far beyond what is necessary to deal with the type of schemes mentioned in the Technical Note issued by HMRC...and cannot on any reasonable basis be allowed to be enacted without, at the very least, major revision.”

The Government amendments to which the Chief Secretary referred help to deal with one or two problems and drafting errors, but serious issues remain unaddressed and unresolved. A key concern is that many high-street conveyancers and property lawyers who do not have access to specialist and sophisticated tax advice are unlikely to be aware of the risk that the transactions with which they are dealing could behit by the provisions of proposed section 75A. There is a risk of widespread but unwitting non-compliance.At the heart of the problem is the fact that themere linkage of transactions through conveyancing succession might trigger those provisions.

A number of examples of innocent transactions that might be caught by proposed section 75A have been canvassed with HMRC. In its briefing notes for the Committee, the Institute of Indirect Taxation set out the following case. In it, V owns a warehouse, which it sells to A for £250,000, the market value reflecting the hope that planning consent for redevelopment will be granted. However, consent is refused. As a result, A resells the building a year later to P for its then market value of £200,000. Proposed section 75A could bite in that situation because a series of transactions has taken place in relation to the property, ending in its purchase by P, and P could be liable for stamp duty on the higher original price of £250,000 rather than the price that he paid.

HMRC has indicated that proposed section 75A would not apply in that situation. However, the section requires that only one person, V, disposes of property, and that another person, P, acquires it, and that a number of transactions have taken place in connection with the disposal and acquisition of the property. The amount of SDLT payable in respect of those transactions is less than would have been due on a notional direct transfer between V and P. All those conditions would seem to be satisfied in the example given by the IIT, so P might be landed with an unexpected bill for extra stamp duty even though he had nothing to do with the earlier transaction. It seems that virtually all sub-sales could be caught in which A sells to B who then sells on immediately to C at a lower price.

Another example of the innocent transaction that might be at risk is one that I gave to the Chief Secretary—a long lease that is enfranchiseable when the right is exercised after the purchase of the lease. There is a sufficient connection even if the purchase takes place some years later, as there is no temporal restriction on the operation of proposed section 75A. There is a connection between the original purchase of the lease and the enfranchisement because if one had not purchased the original lease one would not be able to enfranchise. That has the potential to be caught by proposed section 75A. It is difficult to see how it could qualify as an artificial avoidance scheme of the sort supposedly targeted by the legislation.

Proposed section 75A does not require the direct disposal from P to V, nor does it require that V should have disposal to P in mind when entering the transaction chain. All that is required is that P should end up with the interest originally held by V, even if it arose because something else had happened in a series of other transactions. As the Law Society points out, wholly unrelated Vs and Ps could find themselves party to notional transactions and thus to the application of the provisions of section 75A. There is no requirement that the transactions should constitute an artificial scheme or that they should be motivated by a wish to avoid tax. The mere fact that transactions occur one after the other could turn them into a scheme under proposed section 75A. The danger is that wholly innocent transactions could be caught simply because they involve a series of steps.

The concern becomes even greater when one realises that those steps could take place over several years and still trigger the operation of proposed section 75A. The wide scope of the provisions is reinforced when one notes that proposed subsection (2) makes it clear that not all of the relevant transactions need to relate to land.

I am told that HMRC asserts—this is in line with the response that the Chief Secretary made to the example that I put to him—that the words “involved in connection with”, contained in proposed subsection (1)(b), mean that the provisions will bite only where V and P are party to the same arrangement. However, that is not what the Bill says. The words “in connection with” give a very limited and uncertain protection to those carrying out day-to-day real estate transactions. Both the Institute of Indirect Taxation and the Stamp Taxes Practitioners Group have expressed serious concern about the lack of clarity surrounding the phrase on which HMRC seeks to rely to ensure that its legislation does not have an impact on innocent transactions.

Leaving aside the infelicitous nature of the term “involved in connection with”, considerable ambiguity is attached to the phrase. The question that is difficult to answer is how substantial a link is needed for HMRC to be able to show that proposed paragraph (b) is satisfied and the required connection is established between the transactions and the acquisition by P.

The words “in connection with” have been interpreted in different ways by the courts. Mr. Justice Nourse in Emery v. IRC thought that it meant a “definite causal link”. In Johnson and Johnson, Lord Justice Somerville thought it meant merely “having to  do with”. In one of the more recent cases, in HMRC v. Barclays Bank, Lady Justice Arden took a wide interpretation of the term and also emphasised that it could mean different things in different contexts, and that it had to be read in context.

The phrase “in connection with” provides an inadequate safeguard because it does not require the deliberate and consequential link between the transactions, which groups such as the Institute for Indirect Taxation believe is vital if proposed section 75A is not to hit a range of innocent transactions. The Stamp Taxes Practitioners Group points out that the term

“is seemingly capable of including... a merely causal or historic interpretation—without a time limit, motive connection or even knowledge of the other parts of the ‘scheme’.”

The inclusion of “involved in” seems to offer no effective additional protection.

We need something stronger than just the words “involved in connection with” to separate artificial avoidance schemes that should be restricted from normal, everyday transactions, which should not. That is why I tabled amendment No. 213. As well as introducing a purpose test, it would require amuch closer link between the transactions in issuethan is required by the original drafting of proposed section 75A. The purpose test that the amendment would introduce is similar to those that we have already discussed. They are not without their problems, but they have become a regular feature of our tax law. The Government propose to use purpose tests twice in the Bill in other contexts in relation to their targeted anti-avoidance rule on capital losses and in relation to sideways loss relief in schedule 4.

The amendment takes on board the discussion that we had in relation to capital losses and the TAAR rule, and proposes to cover not just those schemes motivated by a wish to avoid or reduce tax, but those aimed at securing or increasing a tax repayment. I am seeking to insert not only a requirement of a real connection between the different transactions, but an element of deliberation in carrying out a sequence of transactions.

The amendment would remove the risk that the mere fact of a number of transactions taking place sequentially in relation to the property would trigger the operation of proposed section 75A, even where such transactions were years apart and had nothing to do with stamp duty, stamp duty land tax, or a holding tax. The amendment would introduce a concept of a pre-ordained series of transactions that amount to a scheme or an arrangement. Both those ideas draw on case law. The concept of a pre-ordained series of transactions was considered in a line of cases running from Ramsey v. IRC and Furniss v. Dawson. It requires such a clear and well established link between the transactions that they are, in effect, a single composite transaction. That type of close link is missing in proposed section 75A.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor 11:45 am, 5th June 2007

It occurs to me that if a scheme were designed to avoid stamp duty land tax and for whatever reason it fell apart halfway through, the individual who ended up buying the property but who had no connection whatever with the scheme would also be caught by the provisions.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

There is a risk that that might happen. I understand that there have been troubling examples of artificial avoidance schemes that have fallen outside  the scope of proposed section 75A. Not only has it the potential to hit innocent transactions, but it is not effective in catching all the non-innocent ones.

The term “scheme or arrangement”, which is also utilised in the amendment, is familiar from case law. It echoes the wording used in a number of contexts in our tax law, such as sections 137, 139 and 140B of the Taxation of Capital Gains Act 1992.

In the view of the IIT, introducing the term “scheme or arrangement”—a phrase that it describes as commonly used and well understood—creates the consequential link that is needed and remedies the problems that occur when reliance is placed solely on the “in connection with” test. Confining the operation of proposed section 75A to instances in which that type of scheme or arrangement is entered into with the main purpose of avoiding tax, rather than for a bona fide commercial reason, would be a much more effective way to tackle the avoidance that concerns HMRC without imposing collateral damage on a range of transactions that have nothing to do with avoiding tax, and, critically, without imposing significant uncertainty and cost on those buying and selling property. The general approach taken in the amendment is broadly in line with representationsmade by the Institute of Indirect Taxation, the Law Society, the CIOT and the Stamp Taxes Practitioners Group.

Amendment No. 214 would also help to deal with the problems that I have outlined, in particular the issues connected with the absence of any time limit for the operation of the provision. It would provide that transactions taking place more than three years before the acquisition by P should be disregarded for the purposes of proposed section 75A. That would put a temporal limit on the scope of the operation of proposed subsection (1) which would significantly clarify the legislation, otherwise HMRC could in theory look back many years at transactions that happen to have been carried out in relation to a particular item of property. Like amendment No. 213, it would answer the very serious concerns raised by the representative groups to which I have referred.

In responding to calls for the scope of proposed section 75A to be tightened and for a motive test to be inserted, HMRC have responded that that is not necessary because uncertainties can be ironed out using the code of practice 10 clearance procedure. It is welcome that HMRC has indicated that access to the procedure will be extended indefinitely instead of being restricted to the early years of new legislation, as would normally be the case.

However, access to the procedure does not provide all the answers to the problems that I have outlined. For a start, it does not amount to the full clearance procedure for which organisations such as the CIOT and the IIT have called. The Law Society points out that if the Government want to introduce a mini-general anti-avoidance rule for SDLT in proposed section 75A, they need to have HMRC officials able and willing to provide the necessary clearances within a commercially acceptable timetable. An adjudicator under the COP10 procedure can give guidance only on what transactions are caught by proposed section 75A. He cannot disapply it to a transaction—even a wholly innocent one—if the law says that it applies.

The Law Society put the position best in relation to the limitations of the COP10 procedure. It said that

“HMRC will have to take a view as to the “innocence” or otherwise of a transaction in deciding whether the legislation should apply. COP10 rulings are not given on what the legislation intends to hit; they are an interpretative provision, where a matter of tax law is unclear, allowing the taxpayer to receive clarity as to how the legislation, as it is laid down, should be applied to a particular set of facts. Our experience is that the complex transactions unit takes a very legalistic view towards legislation, and we have no doubt that transactions which are innocent will get negative COP10 rulings because on the face of the legislation, it applies to them when it was never intended to.”

The Law Society went on to highlight a further problem with the procedure by saying:

“Taxpayers are reliant on HMRC’s executive view as to what is an ‘innocent’ transaction such that two taxpayers in very similar circumstances could be taxed differently at the whim of the HMRC officer to whom a COP10 clearance request is made.”

Moreover, application for such rulings takes time and generates costs, which is a problem. I have received representations about transactions that fell through because it was impossible to get a COP10 ruling quickly enough. Switching from the idea of precise and targeted legislation to a system more similar to US-style rulings has constitutional implications that should be properly debated. The implications for HMRC resources also have to be considered in light of the need for the prompt turnaround of applications.

Another argument put forward by HMRC, which echoes some of the points made by the Chief Secretary, is that we do not need to amend proposed section 75A because interpretive problems can be resolved using guidance. To that end, it has published a so-called white list of transactions that it does not believe should be covered by proposed section 75A. I am not keenon that phrase; I prefer cleared list. However, leaving aside what one should call it, its publication does not solve the problems with proposed section 75A. The Stamp Taxes Practitioners Group points out, with justification, that the white list approach is not an effective substitute for significant revision of the legislation. It identifies particular problems with the white list approach in this context because of the fact that the proposed section needs to be considered in relation to virtually all conveyancing transactions. Relying on non-statutory guidance is difficult enough in narrow specialist areas such as group relief and real estate investment trusts. However, it is much more difficult in relation to legislation that might have an impact on all conveyances and home purchases.

Many solicitors do not have in-house expertise or research staff who can regularly monitor HMRC’s website for guidance. Certainly, an average high-street solicitor is highly unlikely to have access to such resources or expertise. It will also be very difficult to come up with anything like a comprehensive white list. There are even more fundamental constitutional concerns at issue, however.

Richard Stratton, chairman of the Law Society’s tax law committee, wrote to the Paymaster General in March referring to the principles articulated by the House of Lords in R v. HMRC ex parte Wilkinson. He pointed out that

“however willing HMRC is to confirm that a transaction was not caught, Wilkinson makes it clear that a tax collecting authority cannot ignore legislation and cannot have significant discretion in tax collection.”

As Lord Upjohn once famously commented:

“A taxpayer should be taxed by law not untaxed by concession”,

and as the IIT rightly points out:

“HMRC guidance is no substitute for introducing a fair law.”

The Stamp Taxes Practitioners Group has called for a non-exhaustive white list to be inserted into the legislation to give certainty to practitioners and reassurance about how to comply with the law. I welcome proposed section 75C(10), which allows the Treasury to do that and to disapply proposed section 75A in certain cases. However, as the CIOT has commented, that

“does not obviate the need for proper drafting of primary legislation.”

Amendment No. 234 seeks to amend paragraph (c) of proposed section 75A(1). That would deal with a problem that has been raised in a number of representations, which is that, as the clause is drafted, there is no need for the three paragraphs in proposed subsection (1) to be read in conjunction with one another. The amendment would clearly tie together proposed paragraphs (a) and (c) and ensure that they are read together rather than separately. Without that change, there would be an ambiguity about the chargeable interest to which the word “its” in the last line of proposed paragraph (c) refers. The amendment would ensure that the interest referred to in proposed paragraph (c) is that which is transferred to P and not the whole of V’s original interest.

The concern is about the situation in which V transfers only part of his interest. For example, if A agreed to sell land to B for £3 million and then B agreed to sell, via a sub-sale, one third of the land to three purchasers, C, D and E, for £1 million each, there is a danger, as the section is currently drafted, that proposed section 75A could operate to impose an SDLT charge on each of the three purchasers for the full £3 million rather than the £1 million that each of them actually paid.

On amendments Nos. 235 to 237, the CIOT views proposed section 75A(5) as being too wide. The Stamp Taxes Practitioners Group feels that it should be more focused so that it catches only the chargeable consideration that would have been payable for the land but forthe insertion of the phrase “scheme transactions”. It would be useful if the Minister could confirm thatno double counting will be allowed under proposed subsection (5)—in other words, that it should not be permissible to add up receipts and payments by the same party to arrive at the figure for the notional consideration.

Amendments Nos. 235 to 237 are aimed at reducing the risk of double counting. Subsection (5) refers to

“the largest amount (or aggregate amount)”.

That does not give rise to a problem so long as “or” is interpreted in the normal way; in other words, disjunctively, so that the tax is payable on either the largest amount or the aggregate amount. However in some legal contexts “or” has been interpreted conjunctively to mean “and”.

My three amendments would help to remove the problem by moving the reference to the amount to match the relevant paragraphs. The term “largest amount” seems focused on paragraph (a) whereas the only relevant  context for the application of “the aggregate amount” is the situation set out in paragraph (b). The amendments make it plain that either (a) or (b) applies and not both.

Amendment No. 238 is a simple amendment to resolve the problem that I drew to the Chief Secretary’s attention. It makes it clear that exercising a statutory right of enfranchisement, extension or enlargement of a leasehold interest cannot trigger the operation of proposed section 75A. Without this change, there is a real danger that someone who buys a lease and later exercises a statutory right to extend it could be hit by proposed section 75A.

Turning to amendment No. 239 and section 75C, the Law Society expresses the concern that the statutory carve-out for reliefs in subsection (2) of proposed section 75C will be restrictively applied. The question here is whether the reliefs and disregards that would be available in relation to the actual transaction will still be available in relation to the notional one. A key problem here is that subsection (2) applies only to reliefs.

Many important SDLT rules that reduce the liability of the taxpayer are not reliefs in a technical sense. They are simply computational rules, exemptions or disregards. If they cannot be applied to the notional transaction under proposed section 75A, this will involve a significant increase in the SDLT bill faced by taxpayers. It would turn section 75A from an anti-avoidance provision into a simple tax increase.

The Stamp Taxes Practitioners Group is also concerned that there is no clear mechanism provided for crediting SDLT that has been paid in relation to transactions earlier in the chain against the SDLT charged on the notional transaction. Considerable uncertainty surrounds this point and any clarification that the Chief Secretary could give would provide significant reassurance to people who are potentially affected by these provisions.

Amendment No. 239 to subsection (4) of proposed section 75C would deal with the specific problem of group relief. It is a concern that the SDLT group relief rules have been excluded from the list carried over into section 75C and thus available to relieve liability under proposed section 75A. Group relief plays an important function in this context and its loss would disrupt many significant commercial transactions. Again, unless this problem is dealt with, section 75A looks much more like a straight tax increase than an anti-avoidance provision. If the Chief Secretary will not accept the amendment, I hope he will at least explain why group relief provisions on SDLT contained in part 1 of schedule 7 of the Finance Act 2003 should not apply to notional transactions under section 75A.

Before concluding, I would like to flag up two general concerns about proposed section 75A. As I said to the Chief Secretary, there could be a number of instances where there could be more than one transaction in the same case that could fall within the definition of a notional transaction for the purposes of these provisions. It is not clear how section 75A is supposed to operate in this situation. It does not surprise me that the Chief Secretary was unable to give me an answer on that point. I should be delighted to take him up on his invitation to address the query to HMRC, but it is a concern that we do not have a clear  answer on that yet. In particular, how will a decision be made as to which transaction to select as the notional one?

Another concern is that it might not always be possible to ascertain who is P for the purposes of new section 75A(1). In a recent article for Taxation Magazine, Jeremy de Souza, a lawyer for Blake Lapthorn Tarlo Lyons, pointed out that in many cases there may be a number of potential Ps in the conveyancing chain. He concluded by stating of these provisions that

“warning flags should be flying over many property transactions from now on.”

In conclusion, new section 75A as drafted is simply too wide-ranging. It will have to be considered in virtually all conveyancing transactions. Thousands of high street legal and conveyancing practices across the country will have to grapple with these highly complex provisions. It is highly likely that many will be unaware of the application of the new section and hence of the need to make an SDLT return. Even if they are aware of the rules, it may be difficult in practice to get holdof the information needed to ascertain whetherlinked transactions have occurred, sufficient to trigger section 75A. This provision could add a significant conveyancing headache for thousands who just want to buy a new home. I hope that the Chief Secretary will reassure me that those fears are unfounded.

It is particularly harsh to impose complex, unclear and hard-to-understand tax provisions in a self-assessment system, where taxpayers themselves have to determine whether the provisions apply. One expert told me that these rules could leave transactions open to re-examination by Her Majesty’s Revenue and Customs, potentially backdating 21 years. The provisions are so unclear and uncertain that it will be difficult for HMRC to apply them consistently. The upshot is that significant extra costs will be imposed on the property market and on home buyers.

To return to Richard Stratton’s letter to the Paymaster General on behalf of the Law Society, he wrote that

“uncertainty engenders costs, whether this is due to lenders increasing the cost of borrowing ... or delay pending seeking clarification from HMRC either informally or under Code of Practice 10 procedure.”

The Stamp Tax Practitioners Group said:

“This uncertainty is causing delays in major commercial—and indeed some everyday—transactions because, although clients acquiring high value properties are willing to take risks based on a professional analysis, the banks and institutions that are providing finance for such transactions are generally not. STPG members have reported experience, in relation to transactions in the pipeline at the time when the Regulations were introduced, of funding offers either being withdrawn or the funders being prepared to proceed only on the basis of increased interest rates.”

The Chancellor has significantly increased the burden of stamp duty during his term of office at No. 11. Only a few weeks ago, we had the home information packs disaster, and I urge the Chief Secretary to think again before he imposes further costs and uncertainties on the property market, as a result of legislation which, I believe, contains some serious defects.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury 12:00 pm, 5th June 2007

I hope that I can persuade the hon. Lady that her amendments are unnecessary. We have seen the text of them before, because they have been suggested  by some of those involved in the property sector. As she knows, we have accepted quite a number of her proposals—they were in the Government amendments that we discussed a few minutes ago. We have rejected this particular group for good reason. Some of the amendments would reopen the avoidance opportunities that the clause is designed to shut down.

Understandably, the hon. Lady spent most time discussing amendment No. 213, which would, as she said, replace the clause’s objective test with a different set of tests. First, there would have to be a “pre-ordained series of transactions”. The problem is that it is often easy for the parties to arrange things so that the steps are not “pre-ordained” because they might or might not happen, so it is quite easy to avoid that test. A test of purpose is difficult to apply to a transaction tax such as stamp duty land tax, because the main purpose of the transaction is likely to be the commercial one of transferring economic ownership of the property from vendor to purchaser, so I do not think that the approach in this amendment works. It would not give greater certainty to those not engaged in tax avoidance either.

In most cases where a transaction is financed by borrowing, the lender is most concerned to have certainty about the tax consequences, but it is unlikely that lenders could satisfy themselves as to the purposes of the parties to the transaction. The answer, therefore, is that certainty can be secured through clear guidance from HMRC, both generally and in relation to specific transactions. As I have said, there is a firm commitment to giving that guidance.

I also hope that members of the Committee will be reassured to note that the Government have already responded constructively to representations made both during the original drafting of the Bill and in relation to the Government amendments that we discussed this morning, and we will continue to listen carefully to representations in the future. If it still proves to be the case that transactions that are not tax avoidance transactions are likely to be caught, we can and will help innocent taxpayers who are inadvertently caught. We can do that by using the power that the hon. Member for Chipping Barnet referred to, in new section 75C(10), which can disapply the application of new section 75A in specific circumstances.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Is HMRC contemplating using new section 75C(10) on an individual basis for individual taxpayers? It seems most peculiar to draft wide-ranging legislation and then implement secondary legislation to exempt specific individuals.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I refer the hon. Lady to what new section 75C(10) says:

“The Treasury may by order provide for section 75A not to apply in specified circumstances.”

I do not think that it would be usual for the “specified circumstances” to apply to just one individual transaction, but the wording does not make that impossible.

Amendment No. 214 would assist those avoiding payment of stamp duty land tax by restricting the application of clause 70. It would disregard transactions occurring more than three years before the ultimate acquisition of the property by the purchaser. The intention  there is understandable, but there is no reason why purchasers should have to make the inquiries that the amendment would spare them. As long as they are planning to pay stamp duty land tax on their purchase in the normal way or they qualify for a relief such as charities relief, the anti-avoidance provisions in the clause will not apply to them. Incidentally, the hon. Member for Chipping Barnet queried whether charities relief and reconstruction relief would be affected. Those reliefs are expressly preserved and are not affected.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I am grateful to the Chief Secretary for his clarification, which I accept entirely and very much welcome. I would like to ask him about the three-year time limit in amendment No. 214. His answer to my concern about enfranchisement of the leasehold interest was that there had to be sufficient connection between the transactions so that they happened very close together. He therefore seems to envisage that new section 75A should apply only when transactions are relatively close together. If that is the case, why does he not accept the amendment, have the three-year cap and reassure people who are very worried about this legislation?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Because it is not needed. As I have said, as long as the parties involved are planning to pay stamp duty land tax in the normal way on their purchase or they qualify for a relief, they will not be affected. It is only where their involvement results in a reduction of the tax that would normally be payable that the clause will be likely to affect them.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The issue is that people may not know that transactions way back in history are affecting their SDLT liability, so they may be planning to pay the SDLT that they think is due—I am sure that they would be. The concern is that, if HMRC can look back on a string of transactions in previous years, the party concerned will simply not know that that affects their current liability.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

It may be of some reassurance to the Committee to know that transactions that occurred before 6 December 2006, when the regulations that preceded this clause were laid, would be disregarded in any event, and a provision such as that set out in the amendment would not have any effect until 2009 at the earliest. I do not think that there is a problem that needs to be fixed here.

I understand the purpose of amendment No. 234, but, again, I think it is unnecessary, because it is clear from the context that the interest referred to in subsection (4)(b) is the same as the interest disposed of by V in subsection (1)(a). Amendments Nos. 235, 236 and 237 do not add anything, and would in fact reduce the effectiveness of the anti-avoidance provisions by changing the circumstances in which the section could be applied. They would lead to the clause not being applied fully in circumstances where any one person gave consideration in the form of more than one transaction, and that would allow tax to be avoided by breaking the consideration into a series of transactions, only the largest amount of which would be liable to stamp duty land tax—which is precisely what we want to prevent.

Amendment No. 238 would mean that newsection 75A would not apply to the exercise of a statutory right of enfranchisement—the point raised with me by the hon. Lady earlier on. That would create an opportunity for avoidance, however, because it is not possible to rule out the exercise of such a right as a step in new types of avoidance schemes. I want to reassure those involved in legitimate transactions that, in most cases, the exercise of such a right would not be one of a number of transactions involved in connection with a disposal and acquisition, so it would not be affected by new section 75A.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 12:15 pm, 5th June 2007

I may have misunderstood, but would not much of the discussion be academic, as stamp duty land tax would never be payable anyway? If we talk about leasehold enfranchisement for many houses in the west midlands, for example, we may note that they were sold originally on a 99-year lease, and the usual multiple was 11 times the annual ground rent, which as I understand it would not get anywhere near stamp duty land tax. I am not saying that no transactions would be caught, but many of the average transactions of our constituents, using the Leasehold ReformAct 1967, would not be caught at all anyway, as they are below the stamp duty land tax threshold.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

My hon. Friend is absolutely right, and the increases that we have made in the stamp duty land tax threshold have helped in this context.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The problem is that the enfranchisement cost is unlikely to be above the SDLT threshold in many cases, but if new section 75A bites, the cost of the original lease would have to be taken into account, which could well take the combined cost above the threshold, so it is relevant even where the enfranchisement cost is below the threshold.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Finally, amendment No. 239 would exclude from the application of new section 75A any consideration paid under a transaction that qualified for group relief. We have, I am afraid, seen a number of avoidance schemes in the past that made use of group relief as part of a series of transactions, so I would not at this stage want to exclude considerations paid under a transaction that qualifies for group relief. Again, I can reassure the Committee that if there are specific categories of legitimate transactions involving group relief where it is appropriate to disapply newsection 75A, we would be prepared to consider exercising our powers under new section 75C(10). I hope that that is helpful to the hon. Lady.

My concern is that the Opposition amendments would allow, inadvertently I am sure, some of the very schemes that the clause aims to end, to carry on unchecked. Therefore, I hope that the Committee will not accept them.

I will pick up one or two further points made by the hon. Lady. The schemes that this clause is designed to prevent are wholly artificial, and those using them must expect that we will act to prevent their use, as they pose  a significant threat to Exchequer revenue. For example, before the pre-Budget Report, Revenue and Customs was aware of two transactions using these schemes, which alone were worth a combined total of£850 million. We had no option other than to act as quickly as we could to counter those schemes, hence the laying of the regulations at the time, and the clause.

The hon. Lady suggested that, if those involved in the transaction did not intend to save any stamp duty land tax through the transaction, the provision should not be applied. However, it is often difficult to establish what the motivation in any transaction was, and there is a real danger of leaving a gate wide open to those wishing to avoid tax.

The hon. Lady was concerned that mere linkage through conveyancing succession would be caught by proposed new section 75A. I assure her that that will not be the case. There must be more connection than mere succession, as is implied by the phrase “involved in connection with” in proposed new section 75A that she referred to. The acquisition involvement means more than mere temporal succession. When drafting the measure, we looked at the phrase “involved in connection with”. Our legal advice was that the terms are not too vague, as she suggested, and that they will not create any difficulties of interpretation. In any case, as I have said, we will be issuing guidance to ensure that the meaning and intent of the legislation are clear.

The hon. Lady made the point that code of practice 10 rulings cannot disapply legislation. Of course that is true, but a code of practice 10 application might result in the Government exercising their disapplication power under proposed new section 75C(10), potentially with retrospective application. She was concerned about the speed of those rulings. HMRC aims to turn them around within 28 days.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

I thank the Chief Secretary for his generosity in giving way. Will he make it absolutely clear why there is no exemption for long-term leaseholders who may choose to enfranchise and buy the freehold, in cases in which that purchase exceeds the limit? Why is that not very clearly spelled out somewhere? I sensed a slight hesitancy in his response, even to the hon. Member for Wolverhampton, South-West.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I accept that there are some good intentions behind these amendments, and no doubt behind others, but in drafting the legislation we must avoid opening a new opportunity, or leaving open an opportunity, for avoidance because, sadly, there will be plenty of people piling in to take advantage of such openings if they are provided. That certainly applies to a number of the amendments tabled by Opposition Members, and one can envisage other blanket exclusions that could have the same effect. That is why we are being very cautious about the wording we have adopted.

The hon. Lady was concerned about double counting under proposed new section 75A(5). Subsection (5) will add up the amount paid by any one person or received by the vendor. It is aimed at identifying the true purchase price, which might be artificially split up, and ensuring that the full amount  of tax is payable. She was also concerned that there was no clear mechanism to credit to the notional transaction stamp duty land tax paid earlier in the chain. Proposed new section 75C(9) contains precisely such a mechanism, so that issue is addressed.

Finally, in contrast with the concerns expressed by Opposition Members, let me refer to some of the comments made when the regulations that precede the clause, which I think have worked well, were made. Sue Taylor, head of real estate tax at Eversheds, said that this

“will catch most of the planning in current use....It is a serious bit of legislation”.

Craig Leslie, head of stamp taxes at PricewaterhouseCoopers said:

HMRC are making very good use of all the planning information they receive”.

Patrick Cannon, a leading barrister in the area, said that

“this is a well aimed measure”,

as indeed it is. I hope, on that basis, that the Committee will support my amendments, but not accept those tabled by Opposition Members.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The Chief Secretary may believe that the provision is designed to target a few wholly artificial schemes, but the reality is that the Government have not succeeded in focusing in on that target, and they are going to hit other innocent transactions as well.

I am grateful to the Chief Secretary for confirming on the record that mere linkage through conveyancing succession does not satisfy proposed new section 75A. That is very welcome. I am not sure whether it is consistent with what the statute states, but at least we have it on the record for the purposes of interpretation by the courts.

I continue to be concerned by the approach that the Chief Secretary seems to have confirmed today, which is that the intention is to create a broadly worded provision that can, if necessary, be disapplied in certain circumstances if it operates in an unintended way and applies to innocent transactions. That raises some constitutional concerns about the legislation.

I am also grateful for the Chief Secretary’s reassurance on the operation of proposed newsection 75C(9) and credit for earlier stamp duty land tax paid. Given that relevant transactions can also include share transactions, it would be useful to clarify whether previous tax paid in relation to stamp duty on shares can also be taken into account, but proposed new section 75C(9) provides useful reassurance on the point that I made.

I have listened to the Chief Secretary’s concerns about the purpose test that I have proposed. I will not press that issue to a vote because I wish to reflect further on the appropriate wording and approach of that measure in the light of what he said. There is no excuse, however, for turning down the three-year restriction proposed in amendment No. 214. I would like to press that amendment to the vote.

Amendment proposed: No. 214, in clause 70, page 44, line 13, at end insert—

‘(1A) Transactions taking place more than three years before the acquisition of a property by P shall be disregarded for the purposes of subsection (1).’.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 15.

Division number 9 Nimrod Review — Statement — Clause 70

Aye: 9 MPs

No: 15 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Amendments made: No. 184, in clause 70, page 45, line 20, leave out ‘(but subject to subsection (2))’.

No. 185, in clause 70, page 45, line 29, at end insert—

‘(3A) In subsection (3)—

(a) paragraph (a) is subject to subsection (2)(a) to (c),

(b) paragraph (b) is subject to subsection (2)(a) and (c), and

(c) paragraph (c) is subject to subsection (2)(a) to (c).’.

No. 186, in clause 70, page 45, line 31, at end insert—

‘(5) In this section a reference to the transfer of a chargeable interest from V to P includes a reference to a disposal by V of an interest acquired by P.’.

No. 187, in clause 70, page 46, line 2, at end insert—

‘(4A) In the application of section 75A(5) an amount given or received partly in respect of the chargeable interest acquired byP and partly in respect of another chargeable interest shall be subjected to just and reasonable apportionment.’.

No. 188, in clause 70, page 46, line 7, after first ‘a’ insert ‘property-investment’.

No. 189, in clause 70, page 46, line 7, after ‘partnership’ insert

‘(within the meaning of paragraph 14 of Schedule 15)’.

No. 190, in clause 70, page 46, line 21, at end insert

‘and may make provision with retrospective effect.”’.

No. 191, in clause 70, page 46, line 25, after ‘But’ insert—

‘(a) ’.

No. 192, in clause 70, page 46, line 28, at end insert—

‘, and

(b) a provision of new section 75C (inserted by subsection (1) above) shall not have effect where the disposal mentioned in new section 75A(1)(a) took place before the day on which this Act is passed, if or in so far as the provision would make a person liable for a higher amount of tax than would have been charged in accordance with those regulations.’.—[Mr. Timms.]

Question put and agreed to.

Clause 70, as amended, ordered to stand part ofthe Bill.