HC Deb 23 June 1976 vol 913 cc1677-93

(1) If the consideration which a person carrying on a trade obtains for the disposal of, or of his interest in, assets (in this section referred to as "the old assets") used, and used only, for the purposes of the trade throughout the period of ownership is wholly or partly applied by him in acquiring other assets, or an interest in other assets (in this paragraph referred to as "the new assets") which on acquisition are taken into use, and used only, for the purposes of the trade, and—

  1. (a) the old assets and the new assets are within the classes of assets listed in subsection (6) of section 33 of the Finance Act 1965 (replacement of business assets) and the 1679 old assets consist of or include land in the United Kingdom;
  2. (b) realised development value accrues to the person carrying on the trade in respect of the disposal; and
  3. (c) the amount of consideration for the disposal applied as aforesaid is greater than the difference between the whole of that consideration and the amount of the realised development value, then, if the person carrying on the trade makes a claim as respects that realised development value, the provision of subsection (2) to (5) below shall apply.

(2) There shall be ascertained the following amounts; that is to say:—

  1. (a) the amount by which so much of the consideration for the disposal as has been applied as described in subsection (1) above exceeds the difference mentioned in paragraph (c) of subsection (1) above; and
  2. (b) the amount of the consideration for the disposal which has been so applied in acquiring qualifying assets; and in the following provisions of this paragraph "the material amount" means whichever of those amounts is the smaller (or, if they are equal, the amount which is equal to each of them).

(3) The realised development value to which the person carrying on the trade is chargeable for the financial year in which the disposal was made shall be reduced by whichever of the following amounts is the smaller, that is to say:—

  1. (a) the material amount under subsection (2) above;
  2. (b) the amount, if any, by which chargeable realised development value exceeds allowable losses for the purpose of development land tax for the financial year.

(4) Where a reduction falls to be made under the preceding sub-paragraph, the person carrying on the trade shall be treated for the purpose of Development Land Tax as if the relevant base value for the new assets or the interest in the new assets were reduced (or further reduced) by what is under subsection (3) above the smaller amount; but this subsection shall not affect the treatment of the other party to the transaction involving the old assets, or of the other party to the transaction involving the new assets.

(5) If on the disposal of the new assets by the person carrying on the trade, no realised development value accrues, and the reduction in paragraph (b) of subsection (3) above does not fall to be made, a corresponding reduction shall be made so that for the purposes of capital gains tax, the amount or value of the consideration for the acquisition of, or of the interest in the new assets be reduced by the amount by which the relevant base value for development land tax purposes would have been reduced.—[Mr. Ian Stewart.]

Brought up, and read the First time.

7.30 p.m.

Mr. Ian Stewart

I beg to move, That the clause be read a Second time.

In Committee we tabled a clause in much the same terms to provide for deferment of development land tax on the replacement of business assets. We did not reach it because, to meet the timetable to which the Government wished to adhere for the Committee stage, we could not have a full debate on all the outstanding matters. This is the first time the subject has been raised. I hope, therefore, that the House will bear with me if I explain some of the technicalities involved in this difficult area.

The purpose is to ensure that a principle which has already been established for capital gains tax and development gains tax should be extended to the development land tax. Under the capital gains tax provisions, roll-over—the preservation of relief from taxation—applies when assets in a limited group of categories are disposed of and would otherwise give rise to a charge to capital taxation. Because the proceeds are in whole or in part reinvested in a similar group of assets, the liability to tax is deferred until an event which subsequently gives rise to the maturity of that taxation.

In this case—naturally enough, as it is a development land tax—we start with the asset consisting of land, but the clause is drafted in a way which provides for roll-over relief even if the proceeds from the sale of land or the realisation of development value are reinvested in the same groups of other assets as applied for capital gains tax. These are not only buildings and land but plant and machinery, ships and aircraft, commercial goodwill and so on. This may at first sight appear illogical, but it must be remembered that, over quite a large spectrum of transactions relating to property, development land tax will replace capital gains tax and, therefore, the base on which capital gains tax is calculated is narrowed. The part of the base which is removed will now be subject to development land tax instead. Therefore, in order to preserve the situation, it necessary to allow development land tax to have relief on replacement of assets in the same categories as capital gains tax.

The technical provisions of the clause are complicated, as they unfortunately must be. At so many points in the Bill we have found that relatively simple concepts which could be expressed in the helpful explanatory notes published by the Inland Revenue have become, when converted into the terminology of the Bill very long and complex in their formulation. In drafting our new clauses we have had an insight into what the Government faced in trying to produce a compact Bill. That is not to say that we do not think that in many parts it might have been drawn up more concisely, but it is difficult to deal with these technical problems in a simple, shorthand way.

I believe that it will be helpful if I summarise, albeit in slightly technical language, the provisions of the clause. It would grant roll-over relief in the following way. First, it applies only to persons carrying on a trade and not to people in any of the other categories who may have property which is subject to development land tax. Secondly, the original assets—in technical terms, the "old assets"—and the new assets which are acquired with the proceeds must fall within the classes I have mentioned. which are already specified for capital gains tax purposes.

Thirdly, the amount of disposal proceeds applied to purchase new assets must exceed that part of the consideration receivable in respect of current use value of the old assets. Otherwise, there would be no development value. Fourthly, the material amount—that is the technical term—on which relief is to be given is the lesser of two figures, the amount of sale proceeds applied to purchase the new assets or the excess of the proceeds applied to purchase the new assets over the part of the proceeds which reflects the current use value.

Fifthly, the chargeable realised development value is to be reduced by the material amount up to a maximum of the total net chargeable realised development value for the financial year.

Finally, this relief in turn reduces the base value of the new assets for development land tax purposes. That is the form in which the deferral of tax is achieved. If, however, no development land tax arises on the sale of the new assets, this relief reverts to be available for capital gains tax purposes on the sale of those assets.

I must apologise for the complexity of that explanation, but it is in line with, and I hope no more complex than, some of the comments which had to be made in Committee on the more technical aspects of the Bill. It has been something of a headache for us on this side of the House, and perhaps for the Minister, to deal with a Bill in which the intention of the clauses, even when one knows what they mean, is so hard to unravel or explain.

The clause does not seek exemption from the tax. It seeks only a deferment of a liability to the tax, as has already been done with the development gains tax, which the development land tax is designed to supersede.

There are two principal areas in which roll-over provisions are particularly needed. The first is agriculture. Farming is capital-intensive and is already suffering from a considerable shortage of working capital, partly because of the difficult years through which it has recently come but also because of the imposition of capital transfer tax and now the threat or prospect—depending on how one views it—of the wealth tax, which is waiting in the wings. Therefore, the voluntary sale of land by farmers is normally undertaken only when they have in mind reinvesting in land, buildings or equipment for the furthering of their agricultural activities.

But not all sales of land by farmers which might give rise to the tax are made voluntarily. Indeed, one of the most serious situations will arise where land falls to be acquired under a compulsory purchase order and the farmer has no option but to sell part of his farm. There is a current case in Hertfordshire, where there are proposals to extend the new town of Stevenage into north Hertfordshire between two farming villages, Graveley and Weston. Quite a lot of good-quality agricultural land owned by local farmers and under cultivation will be required for the expansion of the new town.

The farmers in those areas will have to farm their remaining land more intensively by improving their capital equipment or trying to increase their acreage again, so that they maintain their total farming area. Either way, they will be required to invest in the assets covered by the proposals in the clause. The difficulty is that if they are to buy further acres of agricultural land they will not be able to acquire them at current use value and they will have to pay over the odds for them. The land is in an attractive rural area fairly close to London. There are long-term development possibilities in some of the villages which give a potential increase above the farming value of the land.

When farmers have to sell land to accommodate something which is imposed upon them from outside, such as the expansion of a new town, they will be able to maintain the scale of their farming activities only if they reinvest either by farming their existing smaller area more thoroughly or profitably or by acquiring new land, which itself may be available only at inflated prices. The purpose of the new clause is to give them the opportunity of deferring tax on the sale of the land for a purpose of which they do not approve so as to enable them to continue farming on the same scale.

This provision applies to agriculture, but perhaps its most important application is to industrial companies. Under the Government's New Clause 1, which was accepted yesterday as a replacement for Clause 19, if a company builds a factory for its own use—this is the industrial purposes argument which we discussed at some length yesterday—any realised development value that would have fallen to be taxed on the deemed disposal that took place at the commencement of the material development of the factory will be deferred until the factory is sold. The purpose of my new clause is to provide that the money that is realised from the sale—if it is sold—that triggers off the disposal for development land tax purposes, if reinvested in the class of assets I have described, would allow a further deferral of the tax so that the cash flow of the company concerned will not have to bear at that point a substantial extra tax demand.

There are a number of ways in which that could come about, and I shall give one brief illustration. If a company has expanded and it finds that its factory is too small, it may need to sell the premises and move to a larger factory. It seems entirely wrong that at that point, when the company is successful and expanding and, no doubt, needs all the working capital it can get, it should fall to pay development land tax, whereas a company that was less progressive and expanded less rapidly could still fit into its old factory and would not have to pay the tax while it remained there. The same could apply to other forms of activity.

The person with an outdated factory in a residential area of a small town could stay there and redevelop it without paying development land tax as long as it was put to the same use and remained within the tolerance of 10 per cent. in area. However, if the owner wished to move to a different factory on the outskirts of the town, which might accord much better with new concepts of town planning or demographic changes, without New Clause 11 he would fall to be taxed at the very moment when he had all the other expenses of the removal of the factory.

In my constituency the first new town in the world was built—namely, Letchworth Garden City. It was designed by Ebenezer Howard at the turn of the century. Three-quarters of a century ago, ideas about the size and shape of Letchworth were rather different from those of today. The needs of industry 75 years ago were rather different from its needs today. That is not surprising if new industrial areas are to grow up that are not so close to the centres of towns such as Letchworth, and if at the same time there is a move to use land in the centre, or nearer to the centre, of such towns for further residential development or other purposes. On the sale of a factory in the middle of Letchworth and removal to one of the outskirts, any deferred tax under the provisions of Clause 19 would be triggered unless we had a roll-over provision.

7.45 p.m.

Equally, if a company has been operating from a freehold factory but needs to move to a new area in which factories are available to rent but not to buy, and if it wishes to take advantage of the funds available from the disposal of its old factory to buy plant with which to equip the new premises, we feel that the roll-over provision would be helpful.

We believe that it is essential to enable industry to continue to operate in suitable premises. It should not feel constrained by the need to stay in the same place for fear of triggering off a substantial development land tax liability. That is why we believe that a roll-over provision on the lines suggested is required.

What do the Government say? They say "All right. Stay where you are. We shall clobber you if you have to move." That is not in harmony with any of the Government's industrial objectives or with the needs of industry. The Government may say that, when the second appointed day comes along under the community land scheme, such provisions will only complicate the tax and that they should be avoided at this stage. However, on anyone's reckoning that day is a long way off. In the meantime, we have to prepare ourselves to live with this tax as it will operate.

The Government should not seek to exclude a roll-over provision. Without one, we could starve the expanding and changing companies of working capital. By their very definition, it is those companies which have grown larger and more successful. The companies that have responded to the changing needs of our modern industrial society will be caught whereas the less active, less adventurous or more moribund companies which stay where they are will not be caught in the same way.

A roll-over provision was provided by the Government in the formula for the development gains tax in 1974. We are seeking to perpetuate a principle which already exists for capital gains tax and which was considered to be welcome and sensible by representatives of all political parties at that time. It seems that the only reason for such a provision not being brought into the Bill is, as we always find, that it fell under the shadow of the community land scheme. That, however, makes nonsense of the reality of industrial and agricultural needs.

I hope that the new clause will commend itself to the House.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I begin by apologising to the House for having missed the last few debates, which is more than the Minister of State has done. I think it is due to the hon. Gentleman for me to say how marvellously he has stood out the debates alone, while palely loitering on the Government Front Bench. It is disgraceful that his senior colleagues should have left him alone to grapple with these difficult matters. As far as I can make out, he has had neither food nor drink, nor sleep.

Mr. Denzil Davies

I have had water.

Mr. Ridley

But nothing stronger. I am glad that at least the hon. Gentleman has had that. Surely the Minister for Housing and Construction, who is the eminence grise behind this measure, his boss the Chancellor of the Exchequer, or several other of the hon. Gentleman's senior colleagues, might have turned up to give him a bit of support. They might have taken one or two of the debates from time to time. I congratulate the hon. Gentleman on his perseverance, and sympathise with him for the lack of support—

Mr. Deputy Speaker (Sir Myer Galpern)

Order. The hon. Gentleman will address himself to New Clause 11. I shall provide the Minister of State with a sandwich in between times, but let the hon. Gentleman address himself to the new clause.

Mr. Ridley

I am glad, Mr. Deputy Speaker, that you allowed me to pay tribute to the Minister of State before bringing me to order, quite rightly, on the new clause. I think that my hon. Friend the Member for Hitchin (Mr. Stewart) has done a great service in bringing it forward. It raises some very important points. I am sad that it applies only to industry and agriculture, and not to private individuals, as I shall demonstrate.

I listened to the Minister yesterday telling us that industry was so desperately broke that this levy must not apply to it where it was simply developing its own land and could not afford to pay the tax. I cannot see how he will be able to justify resisting the clause, because industry will be just as broke in relation to roll-over as in the case of deferment at the time of material development.

The Minister of State's argument yesterday will be very useful to us this time in pressing the need for industry to be able to defer tax still further if it is forced to move, either through its own volition, because it has to, having grown out of its premises, or through some compulsory purchase, some road-widening scheme, or whatever it may be. If industry is broke, it should not pay the tax at all. Indeed, that is the argument we had yesterday.

But that there is more to it than that. It is quite true, as my hon. Friend said, that there were roll-over provisions of this sort in the capital gains tax, and in some senses also in the capital transfer tax. More and more in our capital taxation legislation—and that is what this tax is—there is provision that if an asset has to be realised in order to buy another one, the payment of tax can be either excused or deferred. 'That is obviously right. If a man has to move from one farm to another, why should he pay tax when his luckier neighbour is excused tax because he does not have to move?

It seems to me that the principle underlying the new clause is that we should really tax disinvestment. It is not offensive to me if any individual has assets and uses them for the whole of his life. An individual may be worth millions. He may inherit millions and die worth millions, but throughout his life he may have lived frugally and employed those assets in business and trade of one sort or another. I cannot believe that it is this which causes the Government to want to put this sort of legislation on the statute book. The man who inherits property worth millions and then either sells it or blows it in riotous living is offensive.

The right principle in dealing with capital taxation should be, wherever possible, to tax disinvestment rather than sound investment. This is, of course, difficult to apply in relation to development land tax, because the realisation of a development gain is often not so much the realisation of a capital asset as the realisation of a gain—as the hon. Gentleman said—whose value has been enhanced by a decision of the community. But as far as we can, we should move in the direction of restricting swingeing capital taxation to those who want to sell and get out, leaving the capital in the hands of those who may want to sell, but only for the purposes of buying another asset.

I have always thought that the unfairest thing of all is that if a man thinks it is right to change capital from one share to another, he should have to pay capital gains tax on the sale of the first, irrespective of the fact that he only wants to switch.

Switching is one of the essential ways in which capital finds its way to the proper areas to which it should go, and in the matter of land use the same argument applies. It may well be that the good farmer finds his farm so encompassed with developments that in order to carry on he feels it necessary to switch, yet he knows that if he does so he is liable for a development gain. The same is true of business assets. If a factory has grown out of of its factory buildings, it is monstrous that the fact that it has done so well should force it to pay an arbitrary amount of tax simply because it has to move.

These seem to me to be the worst sorts of results of a tax of this sort. I hope that the Minister of State—tired though he must be now, and weary of this Bill—will agree in principle that there is something in what I have said. Although I accept that it is not easy or practicable to apply across the whole field of capital taxation, I suggest that in this one small instance, where business assets are to be replaced either to the same extent or to a greater exetent—or, in the case of a lesser extent, to that extent—it would be fair to defer this tax.

I have only two gentle criticisms of the clause. The first is that it applies only to business assets and not to individuals property. The second is that it is for deferral of the tax.

It was mentioned yesterday, over and over again, that the position concerning these large and growing blocks of deferred tax in the accounts of companies is becoming ridiculous. Why can we not just waive the tax? There will be businesses and people who will in the future have far larger theoretical debts in deferred tax hanging over their heads than the value of their assets. That is a bad situation. It inhibits borrowing and it inhibits the proper use of the assets, but beyond that it is demoralising. It simply means that the Government have invented taxes that are infinitely too high for the population to bear in certain cases, and have had to resort to the device not of reducing or cancelling taxes but simply of deferring them in order to save face.

The Bill is full of possibilities for deferral of tax. If tax can be deferred for either the reason in the clause or the reason in New Clause 1, which we discussed yesterday, it had better be waived altogether, because it means that it is too high and that it cannot be paid. Indeed, that was the argument of the Minister of State yesterday. He said "Industry cannot pay the tax, therefore we shall not make it pay. We shall defer it." But this leaves these large blocks of taxation against the company. It would be infinitely better if, instead of "deferred", we used the word "waived".

I strongly support my hon. Friend and congratulate him on his initiative, but in a way I wish he had been bolder.

8 p.m.

Mr. Denzil Davies

The clause, as the hon. Member for Hitchin (Mr. Stewart) said in moving it, is concerned to try to provide some kind of roll-over relief in respect of the disposal of land and the reinvestment of the proceeds by the vendor in land or in plant and machinery, so that he will not have to pay immediately the development land tax on that particular sale.

The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) argued an interesting case—that we should not concern ourselves with deferral and that we should instead say immediately "You shall not pay any tax at all, rather than have this tax hanging over your head." There is something to be said for avoiding deferral as much as possible. I take the point concerning stock relief, which was debated in the Committee stage of the Finance Bill.

There is a danger that these deferrals will cause problems in company accounts, but here we are concerned with a situation in which a person sells his land and makes a betterment profit. We are concerned with that situation and not with a situation where he makes a capital gain in the conventional sense. He can roll over that capital gain anyway under existing legislation. Therefore, a farmer who may be forced to sell his land because development encroaches closely on his sphere of operations, because a motorway is coming along or because he gets planning permission for houses, and who makes a betterment profit, will pay the tax. But he will still have enough money left over to reinvest in farming land. If he wants to carry on his farming operation, presumably he will buy farming land which has no planning permission.

The farmer, by having a capital gains tax roll-over on a current use value basis, still has sufficient funds left to buy a comparable piece of land which does not have a betterment value. If he wants to buy land with a betterment value, as a result of having 80 per cent. of that betterment profit taken from him he may not have enough left to buy other land with betterment value. But I thought that the object of the exercise was for him to get back into farming and to buy farming land which did not have planning permission. If he is concerned with farming, he gets his roll-over relief in relation to any capital gain on current use value, which should leave him enough to invest in land for farming.

Mr. Graham Page

Is it not something of a gamble whether he will find land which has not at least some hope value? It is wishful thinking that he can go anywhere and buy land at current use value for farming.

Mr. Davies

Some land may have very little hope value. I remember the case of a gentleman who sold his farm on the edge of a town, moved to the next town, bought land on the edge of it and thereby made quite a lot of money over a period of five or 10 years. He was buying land with the hope of development for the purpose of making a betterment profit.

Mr. Graham Page

He would be caught under Section 884.

Mr. Davies

If a farmer wants to reinvest in land which does not have a value in excess of current use value, he still has the capital gains tax roll-over provisions to protect him in reinvesting at current use value.

The proposal of the Opposition is to incorporate the 1965 capital gains tax provisions into this legislation. Right hon. and hon. Gentlemen opposite are concerned with assets other than land, so that there could be a roll-over in the case of betterment profit into physical assets as well as into land. That is one reason why I cannot accept the new clause. We are dealing with a different situation and a different tax which is concerned with the disposal of land, and not land and other assets as in the case of capital gains tax.

There is the further difficulty that, whereas the 1974 legislation on development gains tax contained some provisions for roll-over, they did not provide for roll-over into bare land. I am sure that the hon. Member for Cirencester and Tewkesbury will accept that if a roll-over relief from tax is introduced it often creates an inflationary situation. There are cases in West Wales where farmers who received large sums of money for the betterment value of their land bid in the market for other land which had only current use value, and, there being more money about, prices went up. Therefore, there are dangers in giving roll-over relief at a high rate of 80 per cent. on land, because it pushes up the price of agricultural land. The 1974 legislation provided a 30 per cent. roll-over relief and did not include bare land.

Mr. Ridley

I do not accept that that is undesirable. It seems proper and right that in those circumstances the price of land should rise. If there is no roll-over relief and the price of land remains stable, many good farmers will not get land and many less good farmers will cling on to land of which they should be dispossessed.

Mr. Davies

The hon. Gentleman said that a good farmer would not be able to acquire land. However, this is not the case of a good or a bad farmer: it is the case of a farmer who receives a sum of money in excess of the current use value of agricultural land and who is then able to bid up and pay more for good agricultural land, as opposed to another farmer who has not been so fortunate that planning permission has been given in respect of his farm. It is the man with the money, because of a fortuitous gain, being able to bid up the market. This has happened. This is one of the reservations about roll-over relief. At 30 per cent. it is not so bad, but at 80 per cent. the problem becomes greater.

Mr. Nicholas Winterton (Macclesfield)

Some of the betterment gain could improve the agricultural land that the farmer intends to buy after being dispossessed of his existing farm for one reason or another. It would help to improve the land, buildings and farming methods and thereby increase agricultural production, which I thought was part of the Government's policy as outlined in their White Paper "Food from Our Own Resources".

Mr. Davies

I accept that some of it could be so used, but much of it might be put into investment in other assets. Some might be used for agriculture. However, that does not detract from my argument that this pushes up the price of agricultural land. If the hon. Gentleman talks to farmers in his area, he will discover that this is the complaint made frequently in respect of large sums realised from the sale of farms which have had planning permission. The 30 per cent. roll-over provisions of capital gains tax have created this problem.

Another reason why I cannot accept the new clause is that, quite frankly, it does not fit into our net of tax arrangements. I do not know the views of the Opposition with regard to the betterment tax. I gather that they are in favour of helping local authorities in some way whether by net-of-tax arrangements or otherwise. But presumably, even under their arrangements, we should have some kind of accounting. We should not know at any given time when the deferred tax would be paid to the local authority. We should therefore have very complicated arrangements, and roll-over relief does not fit in with the net-of-tax concept. We have tried to meet that point by having a £10,000 exemption on the betterment profit and by having a rate of 66 per cent. on the first £150,000. This compensates for the fact that we cannot introduce this kind of roll-over relief.

There are other reasons as well. There are economic reasons why we should not roll over a high rate of tax based on an 80 per cent. rate into other land, especially agricultural land. In most cases farmers would not be prejudiced, because they would be reinvesting in land with current use value.

I am sure that the Opposition will be happy with this explanation. This tax is different from other taxes because the arrangements for it are different, and local authorities are involved with net-of-tax purchases.

For all those reasons, I cannot recommend the House to accept the new clause.

Question put and negatived.

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