§ Question proposed, That the Clause stand part of the Bill.
§ Mr. Millan
I hope that we shall have a short explanation of the Clause, because I find it difficult to understand in particular why subsection (2) has been included. This subsection makes a certain qualification to the kind of land which will be caught by the Clause by saying:For the purposes of this section land shall be deemed to be acquired in connection with a contract for the erection of a building—and the next words are the important words—if that contract is entered into before or on the same day as the contract for the acquisition of the land…I do not understand why there should be this time qualification. I should have thought that the fact that land was held by a third person—to use the words at the beginning of subsection (1)—associated with the builder ought to have been sufficient to bring it within the terms of the Clause without making this qualification about the time at which the land is acquired.
Subsection (2) seems to mean that if the land is held by a third person associated with the builder before there is any question of building the building which comes within the Clause, there will be no question of tax liability on any profit on the sale of the land. I do not see what the date of the acquisition of the land has to do with the transaction.
If we imagine the circumstances in which a third person associated with the builder already has the land—and I imagine that this will be the most common circumstance—without necessarily having any particular building or any contract for the erection of a building in view, when a contract for the erection of a building on that piece of land comes along, the devices for the avoidance of tax which is meant to be caught by this subsection could equally well be put into operation in those circumstances as they would be in circumstances in which the land is acquired either simultaneously or after the 586 contract is entered into for the erection of a building.
I do not know whether I am making myself clear about this, but it seems to me that the point of time at which the land is acquired is irrelevant. Provided that the land is held by a third person associated with the builder, this ought to be sufficient to bring it within the purview of the Clause which is meant to deal with tax avoidance devices and not with a legitimate transaction. It is meant to deal with a transaction which is so manipulated as to avoid tax.
In those circumstances, the date of acquisition of the land seems to be irrelevant. There is the builder, the third party associated with the builder holding the land, and the appropriate opportunity comes along to use the land for the erection of a building in contract with some other person. The transaction is put into effect and tax is avoided. What has the date of the acquisition of the land got to do with that?
In most cases the land will be there before the contract is entered into for the erection of the building. Normally one does not contract to erect a building without the land on which to erect it, and therefore this subsection will nullify the intention of the Clause. I hope that the Chief Secretary will deal with this point.
I am not suggesting that there should be retrospective legislation, because even if this qualification in subsection 2 worked there would be no retrospective effect because the retrospective effect would be eliminated in any case by subsection (6). I am not pleading for retrospective legislation in any sense. I am pleading that the Clause should be made effective, and should not have what appears to be a substantial loophole in it. I hope that we shall get some explanation why this provision has been inserted in subsection (2) in a way which I think will nullify the effect of the Clause.
§ Mr. Brooke
As the hon. Gentleman pointed out, the Clause is intended to deal with a certain type of tax avoidance, and the general case is this, although there are variations of it.
A builder has freehold land and intends to put up buildings on that land 587 for sale leasehold. If he carried out the operations in a perfectly straightforward way, with no thought of tax avoidance, there would be a taxable profit which would be calculated by reference to the amount of any premium which he obtained for the lease, plus any amount to be brought in because of the freehold reversion. It would be done in a straightforward way and the profit would be taxable.
However, certain clever people have thought of ways of making this profit exempt from tax, or making it virtually impossible for the Revenue to charge tax on the profit. To take a simple case, the builder may take advantage of the fact that the owner of a company and the company itself are, in law, two different persons. He may buy the building sites himself, but transfer his building business to a company. Then arrangements are made whereby the prospective purchasers of the building enter into contracts with the company to put up buildings and with the individual to acquire a lease of the land. The individual is then left with a profit, the profit representing the difference between what the land cost him and the premiums he gets for the lease plus the reversion. His profit comes from the building operation, but in fact it has been found that he retains, at least for a period, the freehold reversion. There is no chance of the Revenue establishing that he is carrying on a trade as dealing in land and therefore he manages to escape tax.
There are variants of this. The customer may divide himself into two people as well as the builder. The hon. Member asked about subsection (2). I am not sure if he appreciated which acquisition of land that refers to. It refers, not to the acquisition of land by the builder, but to the acquisition of land by the customer. Only if the customer acquires land in circumstances set out in subsection (2) is there any question of a tax avoidance device by the landowner associated with the builder. Ingenious people have thought of various ways of using this general device for tax avoidance. I hope that the Committee will be at one in thinking this is the right way to legislate against them.
§ Mr. Millan
I appreciate the point made by the Chief Secretary, that in line 2 of subsection (1) the acquisition of land is acquisition by the prospective buyer. I suggest that that might be made clearer, because presumably there may be cases in which the builder may buy the land from the third person associated with him. Presumably it is not completely unknown for the builder to acquire the land, it eventually being passed on to the prospective purchaser. In those circumstances, subsection (2) would be a very bad subsection because the date of acquisition by the builder would be completely irrelevant to the tax avoidance device.
There may be some other provision in the 1960 Act or in some other Act which would catch that sort of device. Perhaps the Chief Secretary will look at that aspect. If necessary, this could be amended at another stage of the Bill.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.
§ Clauses 20 and 21 ordered to stand part of the Bill.