§ (1) Where—
- (a) the cost of acquisition of an interest in land was not less than the consideration for which that interest might reasonably have been expected to sell in the open market, and
- (b) the disposal of the interest in land is either a deemed disposal or a disposal the consideration for which is not less than it might reasonably have been expected to be on a sale in the open market, and
- (c) the realised development value calculated in accordance with section 5 above is negative (in this section called "negative realised development value")
§ (2) Subsection (1) above shall not affect the amount of any deduction which is to be made under section 39 below.
§ (3) Section 12 above shall apply for determining the allowable amount of negative realised development value as it applies to determine the chargeable realised development value'.—[Mr. Ian Stewart.]
§ Brought up, and read the First time.
§ Mr. Ian StewartI beg to move, That the clause be read a Second time.
As in the case of the previous clause, we put down a new clause in Committee concerning allowances for loss, but it was not debated upstairs and, therefore, this matter now comes up for consideration for the first time.
The technical provisions of this new clause are that the land involved must be bought at arm's length market value or must be involved in deemed disposal at the beginning of material development. 1694 If, in these circumstances, the realised development value is calculated under the provisions of the Bill and produces a minus figure, it should be offsettable against other development land tax liabilities.
I would have thought it was self-evident in a tax of this kind that there should be a provision for an offset of gains against losses. It may be that the only explanation of why such a provision was not incorporated in the Bill lies in what the Minister has just said. He emphasised that this was not the normal sort of tax, partly because of its rate and partly because local authorities have the ability to buy net of tax; and, therefore, the tax which is suffered by the chargeable person might go to the benefit of the local authority in one case and to the benefit of the Revenue in another. Surely there are practical difficulties in the interaction between gains and losses in these circumstances, but I hardly think that mechanical reasons are sufficient to justify excluding natural justice in a tax of this kind.
The higher the rates, the more important it is that there should be an offset of losses against gains. It does not seem to be a very valid argument that, because the rate of tax is so high, to defer it would have very substantial consequences, or, indeed, to say that because the rate of tax is so high it would be a bad thing for it to be offset against loss. We have not agreed that the tax should be at 80 per cent., far less at 100 per cent. Most people outside the Government particularly those who have to ensure that we make progress towards the second appointed day of the Community Land Act, would agree with us.
The real difficulty, if we do not have provision for losses, will be in practice with house-builders and those who have begun projects of development, such as factories, warehouses, offices and shops. In the past, the element of their profit which represented the development gain was only evident at the end of the day. At that point it is taxed—when it has already been achieved. It is not taxed at all if the same company has made a loss on other projects which have wiped out the gain in that particular case. But if the development gain is to be taxed on the basis of valuation assessed at the start of the project, surely all marginal cases 1695 of development will be shelved. If there is not a clear profitable element in a particular project, it will not be undertaken.
Everyone knows that, with the changed circumstances in the property market and in different economic circumstances which arise from time to time, the value of the product of the building and development industries may be quite considerably different at the end of the day from what was expected when the development was undertaken. If taxation is charged only when a profit is realised at the end of the day, and there is an overall profit on all activities undertaken by the company in the meantime, the potential development gain serves as cash of value for the company undertaking the risk of the operation and also for the providers of finance as a margin of security of value against their borrowings of money which they will need to carry out the developments.
8.15 p.m.
If there is no offset for losses in this context, the practical effect will be that any case where the profitability at the end of the day is at all marginal or uncertain for any specific reason will be excluded altogether. Therefore, only the potentially profitable developments will go ahead. Obviously companies will do all they can to ameliorate this position, because if they have two parts of a development which are treated separately they will get no offset. But if they have two parts of a development which are treated as the same material development and the whole is treated as one assembly of land in the language of the Bill, only the overall profit at the end of the day, if that is when the tax is due to fall, will be charged.
The problem is not so much one of dealing with land which can or cannot be regarded as part of the same project, but it is one where builders or developers in the course of their business have undertaken other projects at the time on the understanding that only some will be very profitable. Of course they will hope that all will be profitable, or will at least break even, but in this hazardous business the chances are that some will prove to be unprofitable. If losses which are realised for development land tax are not offsettable against the gains for develop- 1696 ment land tax, this must inhibit the degree of land activity and building.
We are seeing another example in which the technical provisions of the Bill have been hedged about by the practical requirements to conform with the net-of-tax provision on the sale to local authorities. This is a levy, not a tax of the ordinary kind, and without such relief as that which we are seeking in New Clause 12 there will be more delay, fewer schemes carried out and greater costs. I cannot believe that that is what the Government want. Therefore, I commend the new clause to the House.
§ Mr. Denzil DaviesI do not think that the hon. Member for Hitchin (Mr. Stewart) will be surprised if I give a negative response to the new clause. I must make it clear that what we are talking about is a tax on betterment and not a tax concerned with the profits of a development. The tax draws a distinction between profit or gain made as a result of betterment and that made at a further stage in a development where the developer makes a profit by putting up buildings which people particularly want to buy or live in.
We are concerned with a betterment gain which arises to a farmer, a small builder or a property company as a result of the granting of planning permission. It is not a development gain; it is a betterment gain.
The difficulty in principle of accepting the new clause, which seeks to offset loss, is that I cannot really see where the concept of betterment loss comes in. If we are to offset betterment loss against betterment gain, I cannot see where betterment loss is involved, because by definition we are concerned with betterment. If there is no betterment gain, that is the end of the situation. I cannot see how this can be turned into a negative or loss situation.
A gain on development is taxable, and if there is a loss on other developments they can be offset against the gain, but I cannot understand the concept of betterment losses set off against betterment gains. It is also difficult to identify particular projects against which a loss should be allowed.
If we were to accept the clause it would involve recasting the interaction provisions, because they are based upon a 1697 decision not to try to introduce some form of loss relief. This point was considered seriously, but the technical problems of providing loss relief with a betterment tax were found to be considerable. In addition, there was the difficulty of accepting in principle that there could be such a thing as a betterment loss with this kind of tax. These are the sort of problems encountered in incorporating a clause such as this in the Bill. For example, decreases in current use value would have to be taken into account. Because increases are brought into the base value, decreases would have to be brought in as well. There are similar provisions concerning the betterment levy, but these will be dealt with in a later amendment.
Therefore although it appears strange not to allow a loss in a tax, we are concerned with betterment gain and that gain is isolated. There is, therefore, no such thing as a betterment loss.
§ Mr. FairbairnIt seems a very artificial concept to try to isolate a gain. A gain is not isolated. It is part of the general situation of loss and gain, and it is quite improper for the Government to rely on the concept that gains are isolated while losses are not.
§ Mr. DaviesThe hon. and learned Gentleman was not here when I began my speech and he perhaps therefore does not fully understand my argument. I was saying that this is not a general gain which can be set off against a general loss. A loss on development can be set off against a profit. We are concerned here with the first stage. When development commences, there is a charge to tax if there has been an increase in the betterment value of the land. If there has been no increase, there is no charge. Therefore, I cannot accept the concept of a loss at that point unless something special were to happen to the land, such as planning permission being withdrawn, and there are already provisions for that in the Bill. Therefore, we are isolating a gain. Once that is isolated, and it arises because of the granting of planning permission, I do not see how a loss can arise in that kind of situation.
§ Mr. FairbairnI fully understand the Minister's position, but throughout our debates he has based his case on the concept of fairness. A developer who on 1698 an individual transaction is refused planning permission and therefore makes a loss, or who suffers a change in surrounding developments which causes him a loss, has no remedy. But if he makes a gain he is stumped. Therefore, in what the Minister calls the speculative activities of a pension fund the circumstances are similar to betting on a horse. If the horse loses, that is the punter's bad luck. But if it wins, under these proposals the Government take the winnings.
§ Mr. DaviesIn most circumstances it would not be a case of putting on a bet. Where there is no gain and no loss, there is no bet in the first place. We are concerned with an application for planning permission—that is, the putting on of the bet—and with the granting of permission—that is, the win. Quite apart from that, it would be extremely difficult to fit into a tax of this kind a loss relief even if the development loss could be defined. The interaction provisions would have to be entirely recast because they are based upon a no-loss situation. Decreases in current use value would then have to be taken into account because increases are taken into account in computing base values. For these reasons, I cannot agree to the clause.
§ Mr. Graham PageThe Minister has shown quite clearly the unfairness of this measure. He has admitted that one would expect when one is charged a tax on betterment to be charged on the profit one makes. If one does not make a profit, or if one makes a loss, one is entitled to deduct that loss from the profit. That is fairness in taxation. Here, however, we are dealing with a levy, not a tax. It is a levy on a certain occasion, not even a levy on the gain. It is a levy on the estimate of the increased value of the property, and it is not impossible to assess a loss to set against a gain of that sort.
It is described in the new clause as "negative realised development value". That is not an elegant phrase, perhaps, but at least the formula is well set out. I appreciate, of course, that if this principle were accepted there would have to be a lot of other amendments in other parts of the Bill. The clause was on the Notice Paper during Committee stage and the Government could have looked at it then. If they were sympathetic to losses, they could have suggested the amendments that were required elsewhere.
1699 Earlier in our proceedings on the Bill, the Minister saw fit to withdraw two clauses. He did not find them entirely satisfactory and said that he would reintroduce them at a later stage in a Finance Bill. I ask him tonight, because he was sympathetic to the idea of setting a loss against a gain, to look at this clause again and see whether there is some way in which fairness can be brought to the levy so that one would be able to set losses against gains. If the Minister could find some way to do this in the Finance Bill when he reintroduces his own clauses, we should be grateful. I am not encouraging any Government to increase the size of the Finance Bill, because we have spent too much time in Standing Committee on the massive Bills we already get.
§ Mr. Denzil DaviesI would be very happy to look at this again, but I have to choose my words carefully. The problems seem quite insurmountable. We will look at the clause and see whether it gets round the problem. If it does, we will consider putting it into a Finance Bill, but I can see great problems.
The hon. and learned Member for Kinross and West Perthshire (Mr. Fairbairn) quite rightly spent some time in Committee talking about the phrase "realised development value". He chastised us for using the phrase "realised development value" in circumstances where there was no such thing. Now we have "negative realised development value". I am not just making a semantic point but showing how difficult it is to isolate the concept of loss.
Without giving any undertaking, I am prepared to look at the new clause to see whether it would be possible to surmount the difficulties involved.
§ Question put and negatived.