§ `Sections 222(1), (8) and (8A) of the Taxation of Chargeable Gains Act 1992 (which define private residence and job—related accommodation for the purposes of relief) shall be applied by the Inland Revenue in the exercise of all of its functions.'.—[Mr. Letwin.]
§ Brought up, and read the First time.
6.11 pm§ Mr. Oliver Letwin (West Dorset)I beg to move, That the clause be read a Second time.
The new clause is short and simple. Its effect would be to render it necessary for the Inland Revenue to treat all second homes owned by those who, because of their occupation, live and are forced to live in tied accommodation as principal residences for the purposes of, among other things, the working families tax credit. I shall explain briefly why that is necessary.
For many years, the Inland Revenue has treated second homes as principal residences for the purposes of capital gains tax if those second homes are owned by people in the position that [...] have just described—held as investments or hedges, purchased by people who are forced by their occupation to live in tied accommodation. The rationale for that is clear and a matter of consensus between the political parties. If an individual buys a principal residence, he or she is exempt from capital gains tax on that residence. It is and always has been regarded as reasonable that the second home owned by an individual who is forced by his or her occupation to occupy tied accommodation—perhaps a tenant farmer or farm worker, a caretaker, a person who works for one of the utilities, or a carer —should be treated as exempt for capital gains purposes, as is the primary residence of other individuals.
Were that not the treatment for capital gains purposes, an inequity would have arisen. A farm worker, for example, who was forced to live in tied accommodation would be exposed to one of two serious risks. If he chose to avoid the capital gains problem by not buying a second home, when he left his job or retired, and if in the meantime house prices had, as has been the case cyclically for decades now, risen significantly, he would find himself in serious financial difficulty and might be unable to buy a home or to rent one at a reasonable price. If, on the other hand, while living in tied accommodation he chose to buy the second home but to encounter capital gains tax on selling it, he could find himself at a huge disadvantage compared to those who live permanently in a primary residence, sell that and move elsewhere, and who do not pay capital gains tax. On those grounds, and as a matter of consensus, the Inland Revenue has for many years treated second homes owned by such individuals as principal homes. That is the purpose of section 222 subsections (1),(8) and (8A) of the Taxation of Chargeable Gains Act 1992.
161 6.15 pm
As I understand it—I am open to correction in narrating this history—when the Government introduced the working families tax credit as a substitute for family credit, the officials—I assume from the Department of Social Security—who handled family credit, or at least the rules and practices that guided those officials, transferred themselves to the Inland Revenue and began to administer the working families tax credit as part of the tax system, but according to principles that bore greater similarity to those that had applied in respect of family credit under the DSS. The right hon. Member for Birkenhead (Mr. Field) frequently alludes to a curious feature of our tax and social security systems, which is that our tax system largely treats individuals as individuals. It does not—or did not before the current Government took office—contain anything recognisable as a graduated means test, as opposed to thresholds of taxation. However, our social security system tends to look at families rather than individuals. It contains heavily graduated means-tested benefits—rather more, regrettably, under the current Government than hitherto. Above all, for the purpose of the current debate it contains a number of wealth tests, unknown in general to the tax system.
For example, I cite the famous case of a person who seeks to enter long-term care. That person will be funded fully by the Government only if his or her wealth is less than £18,000—I believe that that is the correct figure. It was, presumably, on that principle that family credit was never treated as exempt from a wealth test and it is, presumably, also on that principle that the working families tax credit is treated as it is.
§ The Paymaster General (Dawn Primarolo)I do not think that the hon. Gentleman's point serves his argument well. Let me try to assist him. The working families tax credit was indeed built on family credit, and the capital rules on family credit had been in place for 10 years under the previous Government. I do not think tat the issue of capital gains tax serves as a peg on which to hang the debate. The question is whether one has a capital rule and, if so, where the ceiling should be set; not whether, because it lies within the tax system, something should follow capital gains. If the hon. Gentleman thinks that capital rules should be abolished, he must explain why the Conservative Government, in 10 years of presiding over family credit, did not take the opportunity to abolish the capital limits.
§ Mr. LetwinThe Paymaster General mistakes the character of my argument. I freely acknowledge that capital rules were in place for family credit, just as they are, rightly or wrongly, for other means-tested benefits. I am not accusing the Government of suddenly introducing those rules into the working families tax credit; nor is it our intention to suggest that the capital rules should be removed for the purposes of receiving that credit. I was merely sketching a history. As capital rules have been a feature of benefits rather than taxes, second homes have been treated as a piece of capital. If an individual who lives in tied accommodation obtains a second home, the Inland Revenue will treat him as having capital in that second home for the purposes of disqualification from 162 working families tax credit, although he would be exempt from capital gains tax were he to sell it. That was also the case with family credit.
§ Dawn PrimaroloIt will help the debate if we clarify the terms that we use when we refer to tied accommodation. What the hon. Gentleman calls the second home is not, in fact, the second home. I understand the issue that he raises and, clearly, capital gains tax does arise on a second home. Tax language is precise, and so must we be. I accept that it is not a question of removing capital gains on second homes. The Opposition are interested in whether there is a requirement to revise the interpretation of "household" in the working families tax credit, which recognises the existence of only one household—the place where people live. We should be clear on that.
§ Mr. LetwinThe Minister is right; she has not mistaken our argument. I am sorry if the term "second home" caused confusion. It is, literally, a second dwelling that is treated for capital gains tax purposes as a principal dwelling. We believe that if such a house is owned by someone who lives elsewhere in tied accommodation, it should be treated as a principal dwelling—the dwelling—for the purposes of the working families tax credit. We do not want it to be treated as a piece of capital that leads to disqualification from that credit.
I freely admit that we are not launching an attack on the Government. That would be dishonourable because they are merely continuing a practice that pertained in family credit. Our purpose is to spot a lacuna that it is now easy to cure because the Inland Revenue administers both measures. The definition is easily available from the Taxation of Chargeable Gains Act 1992, for the reasons that I identified—the records are in a single place and easily accessed. All we need is a simple change so that farm labourers and others who are in tied accommodation can obtain the working families tax credit to which their income would otherwise entitle them, notwithstanding the fact that they have purchased a house as a hedge against exposure to the property market because they live in tied accommodation. It appears that the Minister understands our concern. We wait to see whether she accepts the new clause.
I do not know whether the way in which we have drafted the new clause and the mechanism that we have used are appropriate. The Minister has at her disposal the vast resources of the Treasury Solicitor and parliamentary counsel. No doubt she can highlight deficiencies in the drafting and, perhaps, in the mechanics, but the principle is clear and right. I have constituents who are, and have always been, in work and whose income is zero. That might strike people who are not from rural areas as strange, but that is the case for many tenant farmers who find themselves at the bottom of the heap. They are precluded from receiving the working families tax credit by virtue of owning a house, which in many cases is modest, as a hedge against the fact that their tenancy forces them to be in tied accommodation. People in the countryside believe that to be unjust, which it clearly is. I hope that the Minister will tell us that, no matter which party is in power after the election, it will be a matter of political consensus to change the system by an appropriate mechanism.
§ Mr. Edward Davey (Kingston and Surbiton)Today we have seen the House at its worst and best.
163 Time wasting and poor arguments in the debate on the business of the House motion were most unfortunate because that has prevented us from spending more time on this new clause.
I am persuaded by the arguments of the hon. Member for West Dorset (Mr. Letwin). I wondered what the new clause was trying to achieve because it was not obvious, but his remarks and the Minister's helpful interventions allow mere mortals to get our brains around it. He seems to have hit on an interesting issue. He made it clear that he was not trying to make a party political point, but trying to assist the Government in the operation of their policy. The argument is not just about the capital rules, but about a particular aspect of them; nor is it simply about social justice, but about labour mobility and the efficient operation of the labour market, especially as it applies to rural areas where most tied accommodation is to be found. We know how problematic and severe the difficulties are in many of those areas.
I doubt whether the Minister will accept the new clause. However, unless she has arguments to override the hon. Gentleman's case—I shall pay great attention to her comments—I hope that she will not dismiss the idea out of hand and that her response is in tone with the hon. Gentleman's remarks. We may well need to tackle the lacuna early in the next Parliament to ensure that there is social justice and efficiency in the operation of the labour market. This is a small but important issue.
§ Dawn PrimaroloI hope that I will be able to help the House and that the hon. Member for West Dorset (Mr. Letwin) will accept my reasons for not being able to accept the new clause, which relates to people in tied accommodation. He mentioned tenant farmers, but there is a long list of people who also live in such accommodation. The issue involves property that they might hold for their retirement or when they move occupations, when it will become their main residence. He fully appreciates that if the property were rented out and an income generated, the working families tax credit would probably not be triggered because the income from the property might take the family's income beyond its limits.
6.30 pm
When the Government designed and implemented the working families tax credit, we used family credit as a building block for reasons of speed. The working families tax credit became operational in about 18 months and it has been a huge success in providing help to working families. I think that the hon. Member for West Dorset acknowledged that fact when he said that a group of people should be entitled to the credit even though they do not receive it at present because of the way in which the rules operate.
Neither during the design period of the working families tax credit nor during its operational period have we received representations that this issue might be a problem. Foot and mouth disease and the problems that it has caused in rural areas have probably put the spotlight on tenant farmers even though they are not the only people affected. Despite that fact, the issue is low key and it has hardly registered on our radar in terms of the 164 number of representations that have been made. None the less, the hon. Gentleman has highlighted the problem of tenant farmers. If they lived in the other house, there would be no question about their ability to claim the working families tax credit provided that they received no other income that would take them over the limit.
§ Mr. Howard Flight (Arundel and South Downs)The problem is not just foot and mouth, but that of declining farm incomes. Since the working families tax credit was introduced, I have been surprised to find in my constituency that many tenant farmers, who do not own other houses, rely on the credit to survive. Foot and mouth is not the immediate issue.
§ Dawn PrimaroloI am grateful that the hon. Gentleman is so appreciative of the credit. I will not descend to making a partisan comment—although I am sorely tempted to do so—because he makes a reasonable point about the issues involved.
I appreciate the comparison that the hon. Member for West Dorset made with capital gains tax, but the new clause will not necessarily produce the outcome that he seeks. It refers to all the functions covered by the Inland Revenue, and I cannot accept the mechanism that he suggests because there is a real risk that it could inadvertently change the application of the law in several other sectors. I am sure that he does not intend it to do that. For example, it could have implications when the Inland Revenue has to take a view on all sorts of tax issues relating to the status of a company, its shareholders, or employees when accommodation is provided. I am sure that he will accept that point.
The phrase in the new clause "all of its functions" worried me to such an extent that I had to ask one of my Revenue officials to return from a day's holiday to help us with this issue. It happens to be his birthday and I am sure that the House is extremely sorry to have deprived him of the opportunity to celebrate it with his children. [HON. MEMBERS: "Oh dear."] Even Revenue officials are entitled to a day off occasionally.
The working families tax credit is governed by regulations, and regulations that come before the House are the appropriate means to implement such a change if the Government are persuaded that it is necessary. About 17,000 farmers and farm labourers already receive the working families tax credit, and it greatly assists them.
I hope that the hon. Member for West Dorset will take my word that the new clause does not provide the solution and that it would create problems elsewhere. Therefore, I hope that he will not press it to a Division. If he does, I regret that I will have to ask my hon. Friends to oppose it. I need to consider the principle in more detail as there are other complications. For example, tenant farmers are self-employed and the rent for land, which may be subject to a low rate, may be offset in their profits and losses.
This is not a huge issue People are not knocking down the doors of the Treasury or the Inland Revenue or even writing to us about it. However, after the return of the House, I will be prepared to reconsider the matter and I undertake to speak to the hon. Gentleman about how we can deal with the problem. We shall certainly have corrected the problem by the time that integrated child credit takes over in 2003, but he is pressing me to act a little more quickly. I am willing to consider the issue 165 in more detail and the secondary legislation route of regulations may be the best means of addressing the issue if the Government decide to act.
The hon. Gentleman will understand that I cannot give him an absolute commitment, but I give him my word that I shall consider the issue closely and talk to him again, if necessary, about the details.
§ Mr. LetwinI am grateful to the Paymaster General for her reply. I take her point that a statutory change of type suggested by the new clause may have unintended consequences. I am delighted to hear that it may be possible to resolve the problem in regulations. Therefore, it appears that, whoever is in government, we shall be able to find a solution, and that fact will be widely welcomed.
The Paymaster General is right she will not have received many letters on this subject. The representations that have been made to me and to other Members representing rural constituencies are almost the result of happenstance and of talking to individual constituents. As she and my hon. Friend the Member for Arundel and South Downs (Mr. Flight) suggested, the decline in farm incomes, which has been compounded by foot and mouth, has brought the issue to light. However, I regret to say that most of the people most affected are not in a condition to write letters to Ministers. That is why urgent action is needed. Regulations might be an appropriate way forward and I take the hon. Lady's word that she will consider their introduction. That is what we will do if we find ourselves in her shoes after the election. Therefore, I beg to ask leave to withdraw the motion
Motion and clause, by leave, withdrawn.