Taxable benefit of living accommodation: lease premiums

I beg to move amendment 213, in clause 70, page 34, line 24, leave out ‘section 105A’ and insert ‘sections 105A and 105B’.

With this, it will be convenient to discuss Government amendments 214 to 216.

The amendments are required to ensure that the full amount of a lease premium, payable in respect of a lease term up to a maximum of 10 years, is spread evenly across the term of the lease for the purposes of calculating the living accommodation benefit in kind charge.

At the Budget, we announced our intention to change the rules for taxing the benefit in kind charge, where employees are provided with living accommodation as a result of their employment, to stop attempts to avoid tax through payment of a lease premium rather than the full market rent for the use of the accommodation.

Clause 70 introduces a rule that means that the value of a lease premium, payable in respect of a lease of 10 years or less, will be taken into account when calculating the benefit in kind charge. The clause contains an anti-avoidance provision to prevent manipulation of the new rules by entering into a lease with an artificial term of more than 10 years and inserting an earlier break clause.

However, in cases involving leases with a break clause that is not exercised, the legislation will not spread the value of the lease premium across the term of the lease. In certain cases, it may not operate to bring the full value of the lease premium into charge in any taxable period.

The Government amendments ensure that the new rules for taxing the living accommodation benefit in kind charge operate as intended to bring into charge the full value of a lease premium and to spread it evenly across the term of the lease. Without the amendments, it would be straightforward to structure a lease premium arrangement in such a way that only a small proportion of the lease premium payable would fall to be taxed under the new rules.

We fully appreciate the thinking behind clause 70 and the amendments that the Financial Secretary explained. We agree that, but for the amendments, it would be relatively easy to avoid the purpose of the clause, but I have a couple of questions. First, what is the cost to the Exchequer of the existing loophole historically and in future? Secondly, will the Financial Secretary explain the reason for 10 years? I realise that there must be a limit, but I would be grateful to know what the thinking was that caused the Government to settle on 10 years as the necessary test.

Living accommodation is a significant cost in bringing internationally mobile employees to the UK, and that goes back to the point that I raised about the saving that will arise from the clause and the amendments. I do not have many comments to make, and I can pick them up on stand part if you are happy with that, Mr. Hood, but if the amount of revenue from additional tax on mainly internationally mobile employees is likely to be substantial in the context of a rise in higher rate income tax, has the Treasury or HMRC assessed what it is likely to be? That raises questions about the overall ability of the UK and specifically the City to attract internationally mobile employees, and whether there is any concern that in some small way the tax burden on them will increase,  thus making the UK less attractive to those employees and damaging the competitiveness of the UK and specifically the City. I do not want to make an issue of that, but I would be interested to know whether any assessment has been made.

The estimate is that the clause will protect £45 million of revenue in the current year.

I am sorry to intervene before the Financial Secretary has got going. Within that £45 million, does he have any idea of how many individuals will be affected so that we can have an assessment per person?

HMRC may well have an estimate, but I do not have it in front of me. If the matter is drawn to my attention, I will certainly let the hon. Gentleman know what it is. He is right about the sort of people about whom we are talking. The truth is that everyone knows what the rules are, and that tax should be paid, but it has become apparent that arrangements are entered into involving a front payment lease premium and a small rent to reduce tax. That arrangement is artificial, and I do not believe that closing the loophole will have a material impact on UK competitiveness.

I think I understood correctly that the hon. Member for South-West Hertfordshire asked about leases of different lengths. When a lease is less than 10 years with a break clause, the same rules apply. When it contains a relevant break clause that is not exercised, the new rules in the amendments will deem that, for the purposes of the legislation, a separate, notional lease had started immediately after the time at which the original lease would have ended had the break clause been exercised. The lease premium payment will be spread across the full terms of the original and notional leases, which would not have been the case under the Bill as drafted. Without the amendments, the total lease premium payment for the full original term of the lease would be spread across the shorter period to the date of the break clause whether or not it was exercised. That is unintended, and the amendments ensure that the new rules apply as intended.

The hon. Gentleman asked about the numbers affected. I cannot give the full number, but the costing was based on 47 cases of individuals employed by 19 companies using those arrangements.

I am grateful for that information, but it suggests a sum of about £1 million per person, which seems extraordinarily high, and I cannot believe that it is right. I do not know whether that is a sample from which the figures were extrapolated, but if we are talking about £1 million per person, it is quite a consideration.

My advice is that the costings are based on 47 cases of 19 trusts gaining a tax advantage. They are based on actual cases in which employers have used the lease premium arrangements, and the estimate that I gave does not involve extrapolating from those cases to assume higher levels of tax avoidance. We are indeed discussing some very up-market accommodation.

Amendment 213 agreed to.

Amendments made: 214, in clause 70, page 34, leave out lines 35 to 37 and insert—

‘(d) the net amount payable by P in relation to the lease by way of lease premium is greater than zero.’.

215, in clause 70, page 34, line 43, leave out from ‘the’ to end of line 21 on page 35 and insert

‘net amount payable by P in relation to the lease by way of lease premium.

(3) For provision about the application of this section in relation to certain leases with break clauses, see section 105B.

(4) For the purposes of this section the net amount payable by P in relation to a lease by way of lease premium is—

(a) the total amount (if any) that has been paid, or is or will become payable, by P in relation to the lease by way of lease premium, less

(b) any amount within paragraph (a) that has been repaid or is or will become repayable.

(5) In this section and section 105B “lease premium” means any premium payable—

(a) under a lease, or

(b) otherwise under the terms on which a lease is granted.

(6) In the application of this section to Scotland, “premium” includes a grassum.

105B Lease premiums in the case of leases with break clauses

(1) This section applies to a lease (“the original lease”) that contains one or more relevant break clauses.

(2) For the purposes of this section—

(a) “break clause” means a provision of a lease that gives a person a right to terminate it so that its term is shorter than it otherwise would be, and

(b) a break clause contained in the original lease is “relevant” if the right to terminate the lease that it confers is capable of being exercised in such a way that the term of the original lease is 10 years or less.

(3) For the purposes of section 105A—

(a) the term of the original lease, and

(b) the net amount payable by P in relation to the lease by way of lease premium,

are to be determined on the assumption that any relevant break clause is exercised in such a way that the term of the lease is as short as possible.

(4) If a relevant break clause is not in fact exercised in such a way that the term of the original lease is as short as possible, the parties to the lease are treated for the purposes of section 105A as if they were parties to another lease (a “notional lease”) the term of which—

(a) begins immediately after the time at which the term of the original lease would have ended, if that break clause had been so exercised, and

(b) ends at the time mentioned in subsection (5).

(5) The term of a notional lease ends—

(a) at the time the term of the original lease would end, on the assumption that any relevant break clause that is exercisable only after the beginning of the term of the notional lease is exercised in such a way that the term of the original lease is as short as possible, or

(b) if earlier, the tenth anniversary of the beginning of the term of the original lease.

(6) For the purposes of section 105A, the net amount payable by P in relation to a notional lease by way of lease premium is, in the case of a notional lease the term of which ends under paragraph (a) of subsection (5)—

(a) the net amount that would be payable by P in relation to the original lease by way of lease premium on the assumption mentioned in that paragraph, less

(b) any part of that amount that has already been attributed to a period in respect of a lease premium under section 105(4B)(b).

(7) For the purposes of section 105A, the net amount payable by P in relation to a notional lease by way of lease premium is, in the case of notional lease the term of which ends under paragraph (b) of subsection (5), the relevant proportion of—

(a) the net amount that would be payable by P in relation to the original lease by way of lease premium, on the assumption that no break clause is exercised, less

(b) any part of that amount that has already been attributed to a period in respect of a lease premium under section 105(4B)(b).

(8) In subsection (7) “the relevant proportion” means—

where—

D is the term of the notional lease (in days);

E is the sum of—

(a) the term of the notional lease (in days), and

(b) the number of days by which the term of the original lease would exceed 10 years, on the assumption that no break clause is exercised.”’.

216, in clause 70, page 35, line 32, leave out ‘section 105A’ and insert ‘sections 105A and 105B’.—(Mr. Timms.)

Clause 70 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned.—[Mr. Blizzard.]

Adjourned till Thursday 18 June at Nine o’clock.