§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Patnick.]11.25 pm
§ Mr. Andrew Hunter (Basingstoke)
Would that you and I, Madam Deputy Speaker, could be spirited away to some distant enchanted timeshare accommodation. If I pursued that line, I fear that you would rapidly rule me out of order.
I turn to the subject of the debate, which relates to timeshare and the council tax. The heart of the matter and the real issue at stake is a simple question—is timeshare ownership a continuing commercial activity and therefore rightly subject to business rates, or is it a non-commercial, non-business activity and therefore rightly subject to non-business taxation? Historically, the first non-business taxation was domestic rating, followed by the community charge and now by the council tax.
The true nature of timeshare ownership is the heart of the matter, and that is for the Government to answer. The answer to that question alone should determine whether timeshare owners should pay business or non-business taxation. If timeshare ownership is a commercial activity, it should be subject to commercial taxation. If timeshare ownership is not a commercial activity, it should be subject to "domestic" taxation—currently the council tax.
The immediate background to the debate is known to my hon. Friend. Before the introduction of the community charge in Scotland in 1989, and in England and Wales in 1990—
§ Mr. D. N. Campbell-Savours (Workington)
On a point of order, Madam Deputy Speaker. I wonder if you could clarify a matter. I distinctly heard motion No. 3 being moved by the Government and folding on the Opposition's objection. Could you confirm whether that is the position?
§ Mr. Hunter
I wrongly anticipated an intervention from the hon. Member for Workington (Mr. Campbell-Savours). I now make the point that I do have an interest in the timeshare industry, which is unrelated to the subject of the debate. I thought that the hon. Gentleman was going to draw the House's attention to an oversight on my part. I do declare that interest and, of course, in applying for the debate to Madam Speaker, I also mentioned that I am involved in the timeshare industry. Having wrongly anticipated the point of order, I shall proceed.
I was making the point that the introduction of the community charge in Scotland in 1989 provided the first evidence that the Government had changed their mind, and henceforth intended to treat timeshare ownership as a commerical activity subject to business rates. Scottish timeshare interests took action and challenged the Government. The issue at stake was simple: had the Government properly given themselves all full, appropriate and necessary powers to make the change, or had they made a drafting cock-up? The latter was the case.
In August 1991, the Scottish Lands Valuation Appeal Court found against the Government and ruled that, under existing legislation, timeshare ownership in Scotland should carry a community charge, not a business rates liability. That decision was retrospectively effected to the 260 date of the introduction of the community charge, and remained in force until the abolition of the community charge in April last year.
During the community charge era in England and Wales—April 1990 to March 1993–the Government set about treating timeshare ownership in England and Wales in exactly the same way as they had demonstrated that they wished timeshare ownership in Scotland to be treated. The Government thus performed a U-turn in their treatment of timeshare ownership in England and Wales, as they had sought to do in Scotland. They deemed timeshare ownership a commercial activity and accordingly subject to business rates.
Following the success of timeshare interests in the Scottish Lands Valuation Court in August 1990, timeshare interests in England and Wales prepared to seek a similar ruling to restore the previous taxation regime in England and Wales. Very favourable counsel's opinion was obtained, but, as I understand the situation, no final decision has yet been made whether to proceed against the Government.
In April 1993, under the Local Government Finance Act 1992, timeshare ownership was well and truly encompassed within the business rates regime. The legality of that transition and the post-April 1993 ruling is not disputed. What is disputed, however, is the principle and correctness of the assessment and treatment of timeshare.
Through their taxation policy, the Government demonstrate their belief that timeshare ownership is different from other forms of home ownership. Timeshare ownership alone among second home ownership is categorised per se as a commercial activity for taxation purposes. No other form of second home ownership is automatically so categorised.
That view stems from a fundamental misunderstanding by the Government of the true nature of timeshare ownership. I believe that the wrong advice that my hon. Friend the Minister continues to be given about timeshare ownership has its origins in two paragraphs of a flawed departmental practice note entitled "The boundary between the community charge and non-domestic rates: definition of domestic property: practice note No. 4, May 1990."
The most relevant paragraph—paragraph 5.2–reads:The Valuation Office takes the view, however, that the timeshare company will be subject to business rates, provided that the accommodation is available for letting commercially for 140 days or more in a year (as is likely to be the case in most if not all instances).The disturbing reality is that the author of that paragraph, the purveyor of advice to Ministers, simply did not understand the subject matter with which he was dealing. He did not know what he was writing about. The direction of taxation that he advocated was wrong. He was thinking in terms of taxable income when no income existed.
I will explain to my hon. Friend the Minister as slowly and carefully as I can, lest he hears only what his officials tell him. In timeshare operations, neither the leasehold nor the freehold titles to timeshare dwellings are kept by the timeshare company. They are made across by the developer to a trustee, who then holds the title for the benefit of the timesharer. It is hard to conceive how a more fundamental mistake could have been made by my hon. Friend's Department.
261 The commercial element and dimension of timeshare comes to an end when the timeshare is purchased. The timeshare owner—he or she whom the Government view for taxation purposes as a commercial activist—is not remotely or by any conceivable criterion of judgment involved in on-going commercial activity. There is therefore no justification for treating him or her in that way. The Government have got it wrong—they should listen to what their friends are telling them.
In May 1990, the Government acted on advice that was fundamentally flawed. Inevitably, key aspects of related and subsequent policy on timeshare have reflected and perpetuated that monumental error. My right hon. Friend the Member for Wokingham (Mr. Redwood)—then the Minister for Local Government and Inner Cities—wrote in his "Dear Member of Parliament" letter on 31 March 1993:Timeshare units in England have been assessed for business rates under the Community Charge and will continue on the same basis with the Council Tax. People will not therefore face big changes in their bills for their properties…Some people think it would be advantageous to switch timeshare properties to a Council Tax levy, although this would entail more sizeable changes both up and down depending on the nature and location of the property. For any individual timesharer their portion of the difference would usually be very small. On balance we feel it is better not to change the basis of taxation for these properties, which do have similarities to hotels and self-catering holiday accommodation in terms of holiday use, although ownership is different.My right hon. Friend thus expressed the Government's opinion that timeshare ownership henceforth was to be regarded as a commercial enterprise, and would therefore be subject to business rates. He further expressed the Government's opinion that the imposition of business rates did not, or would not, disadvantage timeshare owners.
My right hon. Friend spoke in good faith. We were right to accept his judgment, pending evidence to persuade us otherwise. We were justified in giving him the benefit of our doubts—at least for the time being. I regret that we now know that he was mistaken. The judgment of those of us who warned him that he was miscalculating has been proved to be right. He wrote:For any individual timesharer their portion of the difference"—between council tax and business rates—would usually be very small.Few statements could be further from the truth.
Lochanhilly in Speyside has the smallest difference that my researchers unearthed. Even there, the increase is 94 per cent.—from £9.40 to £18.64 per week. Few people would regard that as "a very small" increase. Delfaber in Speyside has witnessed a 152 per cent. increase from community charge to business rate—from £9.60 to £24.20 per week.
At Forest Hills in Stirling, the increase was from £13.80 to £36.64 per week, which was 164 per cent. Loch Rannoch in Perthshire witnessed an increase of 332 per cent.—from £5.06 to £21.86. The increase at Kilconquhar, Fife was £10.92 to £39.16 per week, which is a staggering 358 per cent. Pride of place in the catalogue goes to Kenmore in Perthshire, where the weekly increase is a towering 703 per cent.—a jump from £5.06 a week under the community charge to £40.64 under the business rate.
Mr. Eric Sheehy wrote to me from Solihull a few days ago:I have just paid my management fee invoice for the three weeks I have at Craigendarroch, Royal Deeside. There is an item 262 'Dwelling tax: £40.50' for each week, a total of £130.50. On an annual basis the tax is £2,262 which compares with the £701.83 band H property tax I pay to Solihull.I calculate that Mr. Sheehy pays £13.83 per week in council tax to Solihull, compared with £40.50 per week in business rates for his timeshare ownership.
It is easier to find the evidence in Scotland, where the transition from community charge to business rates has been made, but it can also be found in England. I learned yesterday of a timeshare site in Kent, where, even with the benefit of transitional relief, the annual business rate for an average unit is £743. Without transition relief, it would be £,760. The annual council tax on property of the same market value is only £450. The difference between business rates and council tax is 165 per cent. per week with transitional relief, and 391 per cent. without relief.
I have focused attention on one small sector of national economic activity—the purchase of timeshare. I do not regard tonight's debate as an exercise in confrontation. I suspect that most United Kingdom timeshare owners have a greater affinity with the political philosophy of the Conservative party than with that of other political parties. Therefore, I whisper to my hon. Friend the Minister that I believe that the Government have got it wrong, and should reconsider.
§ The Parliamentary Under-Secretary of State for the Environment (Mr. Tony Baldry)
I recognise that my hon. Friend the Member for Basingstoke (Mr. Hunter) has built up considerable expertise over the years in making clear the concerns of the timeshare industry. I have careful regard for what he has to say, because my hon. Friend has regular and detailed contact with all the important figures in the timeshare industry. As his comments this evening have shown, he has made a careful study of the subject and has sought to put all the facts before the House.
However, having listened carefully to everything said by my hon. Friend tonight and in the meetings that we have had with him, my ministerial colleagues and I still remain firmly of the view that timeshare accommodation is essentially a commercial activity. It is a business activity, and should clearly be regarded as non-domestic for local tax purposes.
My hon. Friend questioned whether timeshare should be considered as a business or non-business activity. That is the wrong test. The test is whether it should be considered a domestic or a non-domestic activity. My hon. Friend also fairly acknowledged that the Government's approach is entirely consistent in the way in which they tax timeshare ownership. As my hon. Friend said, alone among second home ownership, time ownership is categorised, per se, as a commercial activity for taxation purposes.
Officials in my Department and the Scottish Office met the timeshare industry three times between 1991 and 1993. My hon. Friend the Member for Hornchurch (Mr. Squire), who was then a Minister in the Department of the Environment, met the industry on three further occasions, including one meeting when my hon. Friend the Member for Basingstoke was present. It may help to finalise the matter if I explain in some detail why we have taken, and continue firmly to hold, our view.
It is fair to say that, under general rates, the specific treatment of timeshare accommodation was not important—there was only the element of domestic rate relief at stake. It was with the advent of separate local taxation 263 systems for domestic and non-domestic property that the boundary between the regimes, particularly the treatment of holiday accommodation, became more significant. The test of whether a property was domestic or non-domestic became important.
In settling a number of broadly similar boundary issues, the status of timeshare accommodation was approached from basic principles. We decided to treat such property as non-domestic because its use was more like that of self-catering and other short-stay accommodation—which is rateable and is treated as non-domestic—than the use of second homes. A variety of different people use timeshare property throughout the year for short periods, and can swap their access to it for "time" elsewhere.
Despite consulting widely in 1988 before the decision was made, we did not receive any representations from the timeshare industry. It was not until 1991 that the newly established Timeshare Council began to lobby that timeshare properties should be considered as domestic. As I said, officials met the council a number of times to talk about their argument for a change in Government policy.
Throughout that period, Ministers have been of the view first taken in Scotland in the 1985 revaluation, that such property was clearly non-domestic. We remained of that view during consultation with the industry in late 1992 and early 1993, leading to the making of the orders in England and Wales and in Scotland to define the property as non-domestic. Those orders have been before the House.
I shall explain later the significance of an appeal case that led to the temporary difference in the Scottish treatment to which my hon. Friend referred. As I explained earlier, in the period running up to and just after making the orders, Ministers had a number of meetings with the timeshare industry, including one with my hon. Friend. I therefore hope that the House will be in no doubt that Ministers have considered this issue very carefully on a number of occasions, and have considered all the arguments that might be and have been put to us.
Nothing said then or tonight has persuaded me that it is wrong to consider timeshare units as non-domestic. We are concerned not with what a property looks like but with how it is used. Timeshares are used like holiday cottages, but occupied all year round by different people. Some of those people are not the owners, because it is common practice for owners to swap their access to a timeshare property with others. Moreover, the use of timeshare units as permanent residences is prohibited by the terms of their occupation, so they are not like other domestic property, and they are clearly not holiday homes.
Because timeshare properties are likely to be occupied all year round, they place on local authorities demands for services that differ from those of second homes. We therefore have no plans whatever to revoke the orders made to define timeshare units as non-domestic property. That is how we view the question of principle, which follows the facts in a straigthtforward way.
I am well aware that many timeshare owners regard the size of the rates bills as the most important consideration. Notwithstanding the arguments about principle, may I turn to the analysis that we have done of the claimed differences in bills under rates and the community charge or council 264 tax? The position in England and Wales is different from that in Scotland, so it may be helpful if I deal with the countries separately.
Since the introduction of the community charge, and subsequently the council tax in England and Wales, timeshares have been treated as non-domestic. Timeshare complexes have been entered in rating lists and, although the assessments have been challenged, the courts have not ruled against our view that such property should be treated as non-domestic.
Last year, I understand, the Timeshare Council compiled evidence which it claimed showed that timeshare owners would be considerably better off if their property in England and Wales became liable to the council tax. It said that, on average, the difference was a factor of five or six times.
Reforms of local taxation always have redistributive effects. It is inevitable that a Government who want to change a tax do so because they think that burdens are not falling in the right places at appropriate levels. When moving from rates to a community charge, or from a community charge to a council tax, changes in the disposition of that tax would inevitably occur.
However, such a Government reach conclusions about who should pay and the amount of their bills on grounds of principle, not simply according to the size of bills. In England and Wales, timeshare accommodation has been taxed as non-domestic property throughout the period since 1990, and the introduction of the council tax has not led to increased bills. So this was a question of the gain that might have been achieved for timeshare owners.
I acknowledge the Timeshare Council sample was representative and the council's assumptions about the relative rateable values and council tax bandings were correct; but in practice, we believe that a number of factors would reduce the difference shown by the council between the rates and council tax bills.
First, the Timeshare Council automatically assumed that a 50 per cent. council tax discount would apply, thus doubling the difference between rates and the council tax. We would want to consider whether such a difference was appropriate, given that such property would be almost continuously occupied throughout the year.
Secondly, the Timeshare Council disregarded the effects of business rate transitional relief, which most English and Welsh timeshare complexes currently enjoy, and of last year's Budget measures incorporated in the Non-Domestic Rating Act 1993, which held the timeshare complexes bills constant in real terms. All that was therefore approximately equivalent to a further doubling of the difference between the burden of the taxes.
Thirdly, the Timeshare Council did not take into account the fact that most, if not all, timeshare complexes would be composite hereditaments with a continuing rates liability, even if the units of accommodation were domestic. There would be rates payable on the extensive and often well-appointed communal facilities, which would have to be met by timeshare owners.
Taken together, those factors reduce quite substantially the difference claimed by the timeshare industry. Instead of the eight or ninefold difference that the council claimed for its examples, even allowing for the 50 per cent. council tax discount, we consider the factor to be no more than about three. The actual figure would vary in each case, and from place to place, as facilities and transitional relief differ.
265 It is important to remember that each timeshare owner faces only a week or fortnight's share of the annual bill, so the actual cost to any particular timeshare owner is not particularly large.
In Scotland, while timeshare units were originally treated as non-domestic following the 1985 revaluation, as we have already acknowledged in the debate, a court case found that the law north of the border should have been interpreted in such a way that they were domestic.
Until the introduction of the council tax, timeshare properties in Scotland were subject to the standard community charge. Notwithstanding the court's interpretation of the meaning of the law, the Government remained of the view that such property should in principle be non-domestic.
Although we did not consider it necessary to legislate to reverse the court's decision at the time, we took the early opportunity, with the introduction of the council tax, to remove the ambiguity and restore consistency of treatment throughout Great Britain. The treatment of timeshare properties has been exactly the same in Scotland as it is in England and Wales since the introduction of the council tax.
While there may be arguments which suggest that the bill that timeshare owners face would be lower if their property were subject to the council tax, the margin of the reduction would be smaller than is claimed. Notwithstanding that, we remain of the view that, as a matter of principle, timeshare units are more properly treated as non-domestic and thus subject to rates.
266 I know that this matter has caused my hon. Friend concern. This evening, he gave a number of examples where he feels that people have been treated harshly. Without looking at the exact facts—for example, in some of the instances he gave in Scotland—it is difficult to calculate how much of the increase that people may be asked to pay relates to communal facilities. Those communal facilities are often well appointed, including swimming pools and other recreational facilities, and clearly must be treated as business and non-domestic usage.
I acknowledge that my hon. Friend will not necessarily be satisfied with my response, and I have no doubt that the timeshare industry will consider my comments disappointing. However, he will no doubt acknowledge that successive Ministers have considered this issue very carefully several times. Having given it the deepest thought, we have come to the clear conclusion that, on the basis of any common-sense and objective approach, timeshare properties are commercial properties in which business activities are conducted and should be treated, for local tax purposes, as non-domestic.
I hope that this valuable debate has enabled us to clarify the matter once and for all.
§ Question put and agreed to.
§ Adjourned accordingly at five minutes to Twelve midnight.