TAXATION OF HOLIDAY FLATS (I) (Hansard, 11 May 1983)

The Chairman
With this we are to take new clause 5—Taxation of holiday flats (2) `Profits and gains arising out of or from the use of land in the United Kingdom for the purposes of furnished holiday accommodation shall be charged to tax under class 1 of Schedule D.'.

§ Sir Walter Clegg (North, Fylde)
I beg to move, That the clause be read a Second time.
The purpose of the amendment is somewhat technical, and I have had some correspondence about it with the Financial Secretary. It is a matter that much concerns those who operate holiday flatlets in seaside resorts and, indeed, in all resort areas of the country.
Confusion seems to have arisen about how the income from these holidays lettings should be taxed. The intention of the new clause is to tax that income as a realisation of profit and for the operation to be treated as carrying on a trade or, as the case may be, part of a trade, and the profits gained therefrom taxed under class 1 of schedule D.
If the new clause were not accepted, these profits could be taxed as investment income, and that would have a drastic effect on the running of these holiday flatlets, which are now very much part of life in our resorts. I have tabled the new clause to obtain clarification and in the hope that my right hon. Friend will tell us that the profits should be taxed under class 1 of schedule D and not as investment income.

§ Mr. Ridley
I am grateful to my hon. Friend for giving me the opportunity to set out briefly the law as I think it is now, and then to say a word about the Government's intentions.
There is no doubt that the holiday lettings that my hon. Friend has in mind are probably taxable under case 6, and that the income would attract investment income surcharge, as long as the services provided to the tenants are not on such a scale as to turn the nature of the operation into a trade. There are probably many instances, on the strict interpretation of the law, and the people concerned are not trading. My hon. Friend the Member for Bridlington (Mr. Townend), who has been assiduous in these matters, brought to our attention a recent case which suggested to him that somehow the law was changed by that case. A more likely interpretation is that the Revenue's view of the law was merely confirmed by that case. It is difficult to draw the line, both for taxpayers and tax inspectors.
My right hon. and learned Friend and I have been considering the matter with great care. We have decided, as a result of the strong and persuasive representations by my hon. Friends, to change the law in the way that they want. At a suitable opportunity we intend to bring forward proposals to change the law so that those carrying on a business of furnished holiday lettings will, in general, be able to claim capital gains tax retirement relief and relief 837 on replacement of business assets, and to have their income from such a business treated as earned income, whether or not they are carrying on a trade.
I regret that it is not possible to bring the new clause into effect in the Bill, but the Committee will know the reason why that is so. The Bill's life is not likely to be as long as it should be before it becomes an Act, when the necessary complicated, technical drafting could be done. The Government are putting forward a complicated proposition. I regret to have to inform my hon. Friend that, perfect though his intentions are, his draftsmanship is not quite perfect. I am afraid that we shall have to return to this matter and put it right at a later opportunity. I am grateful to all my hon. Friends who brought the matter to the Government's attention. I hope that my announcement will be of comfort to them and to those whom they represent, who have been living in uncertainty about the law and the future.

§ Mr. Norman Miscampbell (Blackpool, North)
In putting my name to the new clause I was responding to the considerable worry felt in my constituency and the contiguous constituency by those who are running the holiday business of self-catering flats, which is perhaps the business that is expanding most. In many cases a great deal of assistance is provided, but there is still a fear that the profits will be taxed as investment, with all the natural disadvantages of such a tax imposition.
We understand that it is not possible to make a change in the Bill. It may take a little while before there is a properly drafted clause. We knew as well as anybody else that the clause would not do. It was not our purpose to pass the new clause. Our purpose was to elicit a response from the Minister. What a generous response we have had.
When many hard-working people in charge of prosperous little businesses find out what has happened in Committee today, they will be pleased and will welcome the Minister's words. It is not often, when a new clause is moved, that the Minister says that the Government will change the law in the way set out. I welcome that. If the law is changed the way we want, many people in Blackpool will be delighted. I extend my congratulations and thanks to the Government for what they have done. We fully understand why there must be a delay.

§ Sir Walter Clegg
I thank my right hon. Friend for the attitude that he has taken. In view of his reply and with the consent of the Committee, I beg to ask leave to withdraw the motion.

§ Sir William Clark (Croydon, South)
New clause 10, entitled "Rate of development land tax," is a most important new clause, but I fully realise, as I am sure my hon. Friends do, that at this late stage it is extremely difficult to pass all the proposals on the Finance Bill because Parliament must dissolve on Friday. However, this matter is possibly inhibiting development in industry. I hope that in the next Finance Bill it will not be forgotten that the new clause was called for debate, but the debate did not happen. If my hon. Friends and I put down a similar new clause in the next Finance Bill, I trust that it will have sympathetic consideration from those who select the new clauses to be debated. In those circumstances, I shall not move the new clause.