DEVELOPMENT LAND TAX (AMENDMENT) (Hansard, 18 March 1980)

§ Mr. John Heddle (Lichfield and Tamworth)

I beg to move, That leave be given to bring in a Bill to amend the Development Land Tax Act 1976 by repealing section 2 relating to the charge on deemed disposal; to make further amendments to enable advance assessments to be reached on the calculation of gains, and to introduce a system of relief for development losses against development gains; and to make provisions for matters consequential upon the foregoing. I declare an interest. As a valuation surveyor, I have had the opportunity to see the way in which commercial decisions taken by people, particularly those connected with the building industry, are affected by the Development Land Tax Act, which received its Second Reading almost exactly four years ago to the day, on 15 March 1976.

The amendments that my Bill seeks to achieve are based not upon private prejudice or partial affections but upon practical experience born of commercial experience in the intervening years. I am concerned that not enough new homes are being built for sale, particularly for young married, first time buyers. Until the building industry starts to expand again, no new jobs will be created.

I accept that increases in land values resulting from planning decisions should bear a special tax. I accept that capital gains resulting from planning permission should be in a special category. I acknowledge that in his Budget last year the Chancellor of the Exchequer lightened the tax burden considerably across the board by reducing the element of tax from 80 per cent. to 60 per cent. However, I believe that certain anomolies and inequities still exist at the margin and that further trimming is necessary. If the Act remains unamended in the particular, it will continue to discourage the construction industry from making its vital contribution to housing the nation and thus discourage it from expanding and creating new jobs for those with skills upon whom the economy so desperately depends.

My Bill seeks to draw attention to three main points of principle. First, I believe that any system designed to tax development gains should recognise that 222 there is a distinction between windfall or speculative gains and gains which are created by the combination of enterprise, endeavour, expertise and risk. The Development Land Tax Act treats both windfall gains—those that merely happen—and development gains—which are created and earned—in exactly the same manner. The effect is to discourage the stimulus of enterprise, hard work and the reward for effort.

The technical device in the Development Land Tax Act which gives effects to discrimination against effort is called "deemed disposal". In seeking leave to introduce legislation to repeal section 2 of the Development Land Tax Act 1976, I seek to strike out that provision which penalises gains made by those who are in the business of creating homes, factories, shops and offices and which, perhaps inadvertently, devalues the importance of their contribution to the fabric of society.

The fiction of "deemed disposal" works only if another fiction is invented—that there are only development gains and never development losses. The effect of taxing the development and construction industry particularly on "deemed disposal", that is, at the start of a development, is that over a period the base of the industry is severely eroded. That is because each time a builder starts a development—before a brick is laid—he is taxed on any gains that may arise on that development on the basis of the market value of the land on which he starts the development. At the same time, however, he must go back to the market and buy more land to replenish his land bank to build more houses for first time buyers and to keep his skilled men employed. He must do that unless over a period he is to run down the size of his enterprise with the consequent loss of jobs and new homes.

Having paid development land tax, the builder inevitably has less money to get back into the market to replenish his land bank. The result is that he reduces his output, cuts the number of new homes that he builds or increases his borrowing to maintain his output. In commercial terms, he runs faster to stand still or he goes backwards.

That form of taxation creates two anomalies. First, it stifles the output in the private house building industry—indeed 223 it may even reduce that output particularly by the small and medium-size builders who cannot extend credit or obtain overdrafts. It inevitably leads to an expansion of demand for domestic credit and an increase in overdrafts as builders seek to extend their borrowings in order to maintain the same level of production.

It is the only form of tax which is levied upon a series of hypothetical assumptions. It is the only form of tax which becomes due for payment before a profit is made. Indeed, it becomes due for payment whether a profit is realised or a loss is made.

The second anomaly of the Act is that tax liabilities cannot be calculated until a development scheme has been started and until material development takes place. As a consequence, builders are unable prudently to plan in advance in a businesslike manner for their tax liabilities, simply because they do not know what they will be until they have made a material start.

There are no provisions in the Act to enable builders, as of right, to obtain a valuation on the land at the time of their acquisition of it, or at some other point prior to the start of that material development. They are therefore forced, as it were, to buy blind and to guess what might be the opinion of the district valuer as to its value at the start of that actual material development and to hazard the best guess as to what their tax liability might be. In effect, they are, metaphorically speaking, laying drains with one hand and signing a blank cheque with the other.

There can be no more unfavourable climate, no greater discouragement imaginable, within which any major industry has to operate. For that reason, I seek leave to amend the Development Land Tax Act to allow for advance valuations to permit tax liabilities to be planned prudently.

224 I draw the attention of the House to the structure of the Development Land Tax Act. Although it allows for development gains, it makes absolutely no allowance whatsoever for development losses, or for losses to be offset against development gains, as indeed happens in every other form of commercial activity.

I therefore seek the leave of the House to amend the Development Land Tax Act to permit development losses to be offset against development gains and to ensure that all relevant costs incurred in holding land ripe for development are also eligible to be offset against gains.

I believe that my Bill will have beneficial effects. It will encourage the building industry to bring forward land for development. This will bring about an expansion in the building industry and provide new jobs and new homes at stable prices.