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12th November 2003

Stamp Duty Land Tax - Retailers and Business to be Hammered Again

4.34 pm

Mr. Jonathan Djanogly (Huntingdon): I wish to declare an interest in rented property.

Everything that I have read or heard about the regulations on stamp duty land tax points towards a Government who have failed to listen to the representations made to them by almost everyone who takes an interest in the issue. To my mind, we are now cruising towards the onset of a disaster, which is what will occur when the tax takes effect in what is now not many days' time. I therefore fully support my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) in once again asking the Government to reconsider their position on the tax.

In short, it is my contention that the main result of the tax as amended by the regulations will be to increase hugely the stamp duty payable on leases and unnecessarily to increase the complexity of the calculation of tax, despite the provision in the regulations to vary the way in which it is calculated, which I believe will make the process even more complicated. In particular, retailers will be penalised and people in industry who want to enter into long-term leases will have to opt for short-term leases instead, depriving them of the security and certainty that they would otherwise have. That is not in the interests of British industry. I also wish to suggest on the basis of the regulations that this tax is the precursor to a massive Labour tax-raising exercise on property.

The Government seem to maintain that the ending of stamping leases will somehow simplify the system. While I agree that that may be a precursor or a necessity in respect of their proposals for electronic conveyancing, I regard the suggestion that the tax will become simpler to administer as defying belief.

Mr. Prisk: My hon. Friend referred to e-conveyancing, which is an important issue. Is he aware that the tax forms can now be submitted only in a handwritten form? Does he share my concern that that is a step backwards in terms of e-commerce?

Mr. Djanogly: My hon. Friend is right. I shall return to the form itself, as the regulations deal with it in passing, but not as they should do, which is a particular concern.

The formulae that the process now involves are making most professionals' eyes water. Indeed, I have heard from professionals that they simply cannot calculate them without using a computer programme. For most business men, the formulae have become a mystery. Unfortunately, that mystery is having a harsh impact, as up to 15 times as much is being paid at the end of it. The changes relating to the proposed charging of a 1 per cent. minimum will only make the matter even more complex.

The Government also seem fixated on the idea that the new tax is required to tackle tax avoidance and to ensure that everyone pays a full share. Indeed, the Financial Secretary keeps using the word "fair". For the majority of traders, however, the acquisition of a lease is simply a necessity in conducting their business, rather than a means of tax avoidance. In any event, over recent years, the inventiveness in the use of stamp duty avoidance schemes has been part of businesses' reaction to the no fewer than five previous stamp duty increases that we have seen since Labour came to power. Under the Conservatives, stamp duty was 1 per cent. on amounts of more than £60,000, and that was generally seen as acceptable. However, as the level has been ratcheted up, many companies have increasingly been forced to consider using avoidance schemes to avoid the rates of tax that have started to make their deals appear uneconomic.

Scrutiny of this new tax has been haphazard to say the least, as my hon. Friend the Member for Hertford and Stortford pointed out. The original consultation was conducted unfairly, not least because of the Government's decision to abruptly end it in early January this year. Then, because of the Government's unfairly short timetable for the Finance Bill, we did not even talk about this tax in Committee. It was only on Report that we addressed it for the first time, at which point the Government tabled more than 40 amendments. That alone shows that they do not have a handle on this tax. The Government admitted that they did not know how the tax would work and said that they would reconsult over the summer, which has led to the orders that we are discussing today. As I mentioned earlier, further consultations are continuing, especially in relation to partnership, on which the Government have admitted that they need to start again from scratch. On Report and earlier today, we have gone into various technical aspects of the new taxes and highlighted various failings of the legislation. I have made the point that the new taxes will increasingly be unacceptable to professionals and business people alike.

The Government reconsulted over the summer and it is worth reviewing some of their comments. The verdict from pretty much everyone who was asked about the proposals was "zero points", and I shall address some of the technical points that were made. In a recent article in the Solicitors Journal, a Mr. Nock, a barrister, said that

"the Government intends, lemming style, to rush headlong into bringing in stamp duty land tax on 1 December despite the many deficiencies in the Finance Act 2003. It appears the Government accepts it will take up to two years to discover the major defects and put them right, but is prepared to leave taxpayers and their advisers to live with the mess in the meantime."

If Mr. Nock is right, and having heard the debate today I fear that he is, how can it be acceptable that the Government can pass legislation that they know will not work? Mr. Nock gave the example of monthly or other periodic tenancies that are subject to tax as if they were a lease for a term of 12 years. However, if drafted as a lease for one month and thereafter from month to month until terminated by notice, the tax is assessed on the basis of a two-month lease. As Mr. Nock continues:

"Hundreds of . . . potential professional indemnity risks abound in the current legislation."-

I declare my interest as a solicitor-

"It is to be hoped, although not with any great degree of confidence, that the Inland Revenue Stamp Taxes Office will seek to apply the legislation contrary to the letter in most cases to produce a reasonable result."

That is a dramatic comment, because it means that if the Government are to be fair to taxpayers, the tax man will have to apply the law loosely. That will hardly be a comfort to most business people. Mr. Nock continues:

"In the paranoid pursuit of anti-avoidance rather than technical precision in setting the conditions for relief, transactions that were previously non-eligible for relief are now potentially exempt. The grant of a new lease 'in connection with' a company reconstruction, if part of an undertaking, is exempt or eligible for the lower rate even in the case of rent. Practitioners must therefore bring open minds to much of the legislation and not be too influenced by apparently similar stamp duty provisions. Clearly, these newly created reliefs have the potential for tax mitigation that would not exist with even moderately sophisticated legislation properly drafted."

My right hon. Friend the Member for Charnwood (Mr. Dorrell) made a similar point in his excellent contribution to the debate. So there we have a tax barrister saying that the new legislation, which was introduced to counter avoidance, could attract avoidance schemes because of its complexity.

Many other technical issues arise in relation to the orders. We could see an increase in negligence claims against professional advisers, with the consequence of increased costs for clients. That could happen because many entries in the land transaction return require valuations or estimates and, because it is a self-assessment tax, judgments will be required on such matters as market value, market cost and estimates of what is likely to be produced by variable consideration. That will put a lot of pressure on the professionals.

Certain actions-for example, substantial performance, such as the payment of rent or entering into the possession of property without any formal grant-are not notifiable, even though no SDLT is payable by reason of the low rent, and even though the grant of the tenancy may not be notifiable. The rules on notification in the case of the acquisition of freehold or leasehold interest in property might necessitate multiple notifications.

For example, where a developer acquires land and, without taking a transfer, enters into possession of the land, having paid the purchase price, he will be required to make a return. A fresh return may then be required each time a plot is sold or leased to third parties. In some cases, both the developer and the purchaser, or tenant, will be required to file returns. Of course, the term "acquisition" also includes releases, surrenders and variations-so more form filling and more red tape. Nothing in the schedule to the order will deal with that, as my hon. Friend the Member for Hertford and Stortford has said.

Service charges are not subject to this new tax, provided that they are not included as part of the rent. However, if they are taxable as rent, and since service charges are variable, an uncertain rent will be produced, so the tenant will be obliged to notify the stamp taxes office every time the landlord increases the service charge-again, more red tape, more hassle.

The complexity and length of the land transaction return might well increase in the light of the publication of regulations in the near future. Some professionals have made it clear that although the Revenue is currently attempting to make the form appear short, it is deceptive and advisers should take care not to be misled by the simplicity of the form.

Only a couple of weeks ago, Mr. Gordon Keenay of KPMG Stamp Taxes Group, who happens to be a former business director of the Inland Revenue stamp taxes office, noted:

"The downside on the legislative front, though, is the unprecedented breadth of the powers to modify this tax by Statutory Instrument. The Government ought not to use it as a more painless way to change the tax rules than waiting for the next Budget."

We will increasingly see a series of Statutory Instrument Committees, digging the Government, bit by bit, out of the mess that this tax has already been shown to be. Of course, we are seeing something similar to that happening today.

The problems with the orders go far beyond the technical. Other hon. Members have referred to important practical points. Yes, there is complexity. Yes, there is bad drafting. Yes, there are technical weaknesses. However, a whole host of practical issues have been raised, particularly by business people. The British Retail Consortium has been mentioned, but the director general has also noted:

"The Government has ignored all our advice and seems determined to hurt the very sector which is keeping the economy afloat at the moment."

Digby Jones, the director general of the CBI has said:

"Duty increases on this scale will be damaging. The Chancellor must promise an early review of the effects of this legislation."

I have a feeling that, because of all the debate that is going on, there will be regular reviews of this legislation, but not for reasons that the Government particularly want. Digby Jones also cited an example of a retailer, leasing a shop for 25 years at an annual rent of £120,000, who would now pay £2,400 in duty. Under the new rules that retailer would pay about £19,000, so the new £1,500 reduction, as proposed in the order, is not a sizeable relief in the context of the deals that businesses actually do. What we have seen over recent days is business people trying to understand where the Government are coming from in relation to the orders and this new tax, as it all seems nonsensical. Mr. Griffin, the head of stamp duty at Ernst and Young, said that the inevitable conclusion is that this is a political fudge. We know that pubs, retailers and restaurants in particular will be hardest hit by of the tax. One of the reasons for that is that they typically take long leases of 20 to 35 years to amortise the multi-million pound cost of fitting out their buildings over the duration of the lease. The British Retail Consortium, too, has said that it reckons that about 74 per cent. of retailers will look to get shorter leases.

What about the Government's new concession in the order? A lot has been said about it, and I will not go over new ground. It is important to make the point, however, that the Government's figures are consistently being seen as underestimates by business. B & Q in particular expects that the average cost of its lease per store will increase from £35,000 to £285,000 because of this regulation.

With seemingly everyone either opposed to or critical of this new tax, what is behind it all? Mr. Griffin addresses it in the context of the new form, which was discussed by my hon. Friend the Member for Hertford and Stortford and is touched on in paragraph 6 of regulation 3. He notes:

"Whereas the old stamp duty form was a one-page document, which took solicitors five minutes to complete, the new form will run to eight pages, with a further 30 pages of explanation."

He says that the new form is effectively an "an information-gathering exercise." He says:

"It's an ideal platform for the chancellor to introduce a wave of property taxes . . . The Inland Revenue will compile a vast database of residential property . . . This system gives the chancellor enormous flexibility for future changes to stamp duty, and a launchpad for an array of new property taxes."

That gets to the nub of why we are here today. We are at the start of a massive Government offensive against property and property owners. They are going to start it through stamp duty, but they will use the build-up of information on the new forms to extend it across other sectors of property and the economy. Today, we are seeing only the start.

4.52 pm

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