Taxes

HC Deb 12 November 2003 vol 413 cc337-74 3.19 pm

The Financial Secretary to the Treasury (Ruth Kelly)

I beg to move, That the Stamp Duty and Stamp Duty Land Tax (Variation of the Finance Act 2003) (No. 2) Regulations 2003 (S.I., 2003, No. 2816), dated 5th November 2003, a copy of which was laid before this House on 5th November, be approved.

Mr. Deputy Speaker (Sir Michael Lord)

With this it will be convenient to discuss the following motion: That the draft Stamp Duty Land Tax (Amendment of Schedule 5 to the Finance Act 2003) Regulations 2003, which were laid before this House on 30th October, be approved.

Ruth Kelly

I welcome the hon. Member for Hertford and Stortford (Mr. Prisk) back to the Dispatch Box. I have always enjoyed debating against him, and I look forward to his continued contribution.

We have taken a bold step in modernising the stamp duty regime. That essential task was long overdue, but it was one that Conservative Members fluffed when they had the opportunity to carry it out. It was one that the industry had often requested. Today, I can tell the House that the Treasury has laid the formal order to implement the new regime on 1 December. We are in the middle of a major customer education programme aimed at ensuring that solicitors, licensed conveyors and other practitioners are fully aware of the changes that are about to take place. The new arrangements will create a more robust tax regime for land and building transactions in the United Kingdom by addressing long-standing distortions and loopholes in the current charge that have been increasingly exploited by big commercial players at the expense of the majority of taxpayers.

In last year's Budget, my right hon. Friend the Chancellor announced that, as a result of tax avoidance, only half the stamp duty owed on all large commercial property transactions—worth £10 billion a year—is paid and that the 2003 Finance Bill would introduce new anti-avoidance powers to close those loopholes. It did. We now have a modernised, streamlined stamp duty system, with effective enforcement powers in line with other taxes. My right hon. Friend also committed the Treasury to reviewing the lease duty regime to ensure that businesses pay stamp duty on a fair and consistent basis. I shall deal with those lease duty regulations first.

Mr. Jonathan Djanogly (Huntingdon)

The British Retail Consortium says that those changes will lead to three quarters of retailers limiting their expansion plans. Does the hon. Lady consider that fair?

Ruth Kelly

To be honest, I do not think that the British Retail Consortium has credible figures to argue its case and I will shortly come to the impact of the new lease duty regime on small businesses in particular.

Mr. George Osborne (Tatton)

Will the Financial Secretary clear up something right at the beginning? This is called the stamp duty land tax. In what sense is it a stamp duty—there is no stamp and no duty?

Ruth Kelly

I know that the hon. Gentleman, whom I much respect, has a long-standing interest in the name of the stamp duty land tax—he referred to it frequently in debates on the Finance Bill—but the name is commonly understood by practitioners, and it also clarifies for the first time that the new tax regime applies to land transactions rather than to any other sort of transaction.

Jonathan Shaw (Chatham and Aylesford)

My hon. Friend will understand the concern of David Chesover, who is a general practitioner at the Thornhills medical group in my constituency. The group is due to move to new premises, and he has written to me saying that it expected to pay £4,000, but that the sum could now amount to about £36,000. What assurances can my hon. Friend give me that she has had discussions with the Department of Health to ensure that GPs are not put off moving to new premises and being involved in LIFT—the local improvement finance trust programme—which we both obviously support?

Ruth Kelly

My hon. Friend makes a powerful case on behalf of his constituent, and I commend him for that interest. I assure him that the Department of Health was consulted fully in developing these proposals. If he has specific concerns about the LIFT programme in his constituency, I would be very happy for officials in my Department to work with officials in the Department of Health to ensure that any concern that he has can be met.

Let me describe how the stamp duty regime has changed. Under the current stamp duty regime, lease duty is charged at different rates according to the term of the lease. That structure is unfair, arbitrary and distorts business decisions. For example, a 35-year lease is charged at 4 per cent. of the upfront premium paid, plus 2 per cent. of average annual rent, whereas a 36-year lease is charged at 4 per cent. of the premium, plus 12 per cent. of the average annual rent. If transactions relate to freeholds, 4 per cent. is charged on the entire purchase price. Given such cliff edges and the lack of coherence between leases and freeholds, decisions on transactions are driven by tax considerations, rather than by commercial ones.

Mr. Mark Simmonds (Boston and Skegness)

Will the Financial Secretary give way?

Ruth Kelly

I must make some progress with the argument.

Under a modernised regime, without widespread avoidance, such distortion would become increasingly clear. However, recognising the distinct nature of leases, my right hon. Friend the Chancellor announced that the Finance Bill would make provision for a charge of just 1 per cent. of the rental value of all new leases—four times lower than the usual stamp duty rate, on which we consulted in 2002. He also allowed further time for consultation with business and commerce on how to reduce avoidance and promote a more level playing field between leases and transfers. He added: If I have to trigger the change, I will increase the exemption from stamp duty for commercial property from £60,000 to £150,000… Therefore, in any event, there will be no duty on 60 per cent., of commercial rental contracts."—[Official Report, 9 April 2003; Vol. 403, c. 279.]

Several hon. Members

rose—

Ruth Kelly

I give way to the hon. Member for Hertford and Stortford, who speaks from the Front Bench.

Mr. Mark Prisk (Hertford and Stortford)

Can the Financial Secretary confirm that the data on which that 60 per cent. promise is based erroneously include lock-up garages, advertising hoardings and car-parking spaces and not just businesses?

Ruth Kelly

I certainly will not confirm that because that is not the case. [Interruption.] The hon. Gentleman asks from a sedentary position whether I will publish those figures, but let me deal with that 60 per cent. figure for a moment. That figure, which was estimated at the time by the Inland Revenue, has since been independently verified by the Investment Property Databank, which is very well respected, using research funded by the property industry. In fact, the database is far larger than that used by the Inland Revenue. It is based on £100 billion of commercial property and includes 15,000 leases. The data were circulated to the consultative committee, and I am sure that, if the hon. Gentleman asked the IPD, it would probably be prepared to publish the data.

Mr. Prisk

I have a copy of that survey, which the Financial Secretary has also obviously read. Can she confirm that it deals with only 5.000 hereditaments and that it had to be enhanced to become a representative sample by adding the erroneous data from the Land Registry that I criticised earlier?

Ruth Kelly

I do not think that that is the case. In fact, the figures are 5,000 leases a year and 15,000 leases in total. I think that the hon. Gentleman's argument is that 60 per cent. is too high a figure. I could make the opposite argument: it is probably too low a figure, because the data to which it had access were primarily on those properties that must be registered, which are primarily the higher-value properties. The sorts of properties that might be excluded from the survey are precisely the small shop fronts, shop leases and lock-up garages in which I know that he has a particular interest. If anything, the figure is biased downwards rather than being too high.

Mr. Prisk

I am grateful to the Financial Secretary for allowing us to clarify the situation. She started by saying that the figure is 60 per cent., and now it is possibly 87 per cent., but it could be higher or lower. What is worrying business is that the promise made at the Dispatch Box in the Budget by the Chancellor is based on false data. I have asked the Chief Secretary once to publish it so that we can clear up the problem. He has refused. Will she do it so that we can make sure that we are basing this tax on proper information?

Ruth Kelly

As far as I understand it, the Chief Secretary in no way refused to publish that data. They were not his to publish. They belong to the IPD. I am absolutely sure that if he asks it to publish its data, it would do so. I would certainly support that information being putinto the public domain. if anything, more than 60 per cent. of all leaseholds will be exempt from this tax. The figure of 60 per cent., or a figure greater than that, compares with around 9 per cent. of commercial leases that are not chargeable to stamp duty under the current regime. Many leases taken out by small and medium-sized enterprises and business start-ups that currently require the payment of stamp duty will therefore not do so under the new system.

Mr. George Osborne

While the Financial Secretary is clarifying matters, will she answer the question from the hon. Member for Chatham and Aylesford (Jonathan Shaw), who is normally an enthusiastic—indeed, over-enthusiastic—supporter of the Government? He Points out that in his constituency a medical business will see its land tax bill go from £4,000 to £36,000. Does she think that that is possible?

Ruth Kelly

It is certainly the case that the contract could be restructured so that it would not have to pay that amount of money—[Interruption.] I would certainly be prepared to look at the example that has been given, to see whether we can work with Department of Health officials to ensure that there is no impact on LIFT programmes.

In addition, around 93 per cent. of residential leases will not be chargeable for duty under the new structure. The modernised structure was based on five key principles. It was designed to minimise the scope for avoidance, to adjust the distortions inherent in the current system, to better reflect modern commercial practice, to be based on clear economic principles, and to be more in line with the charge on freehold transfers. The regulations today put the final legislative provisions in place for implementation. During the extended consultation process, a number of alternative proposals were submitted to us. Many were based on average annual rent. Because of the potential for avoidance, and because average annual rent does not assess the full economic value of the tenant's interest, it could not be a suitable basis for a new structure. I believe that net present value represents a commercially and economically justifiable way of assessing the economic value of the tenant's interest.

Mr. Prisk

The Financial Secretary is generous to allow me to intervene on this important issue. The Treasury is seeking to use a discount rate in this net present value valuation methodology, which is completely detached from the real market. Can she explain why?

Ruth Kelly

I am about to refer to the discount rate if the hon. Gentleman will allow me. Before I do so, I want to explain how the net present value represents the economic interest of the tenant. First, it recognises that shorter leases are economically of less value than longer leases, which in turn tend to resemble freeholds. Secondly, we have set the rate of tax on the net present value of the rental element of a lease at a significantly lower rate than that of freehold transfers.

To turn to the discount rate, in which I know that the hon. Gentleman is interested, we have chosen a discount rate of 3.5 per cent., because that takes account of the fact that future increases in these payments will not be included in the NPV calculation, and that the level of lease payments will already have been set taking risks into account—it is the Government's assessment of a risk-free discount rate. I am sure that the property industry would recognise that.

Mr. Prisk

I must dig into my land management class as a chartered surveyor, but the Financial Secretary seems to have just said that she will use contradictory valuation methods. On the one hand, the Treasury is seeking to provide what is known as an all-risks yield, yet in fact the valuation methodology is discounted cash flow. Why is there a contradiction?

Ruth Kelly

As I have already explained—this was also debated during the Finance Bill—this represents the risk-free level of the discount rate. Any other calculation would artificially benefit those who take out longer leases—generally larger businesses in their commercial property transactions—rather than the small business element.

Mr. Ian Liddell-Grainger (Bridgwater)

Will the Financial Secretary give way?

Ruth Kelly

I must make some progress. I have taken a lot of interventions, as I am sure the hon. Gentleman understands.

Other proposals suggested raising the nil rate threshold, having a starting rate or both. We shall of course continue to keep rates and thresholds under review. However, the figures that I gave earlier on the percentage of commercial leases that would not be chargeable under the new structure suggest that the proposed thresholds would exempt a large number of leases, especially those entered into by small and medium-sized businesses and business start-ups.

During the consultation process, many commentators expressed the view that the slab structure, under which the whole amount of net present value comes into charge when the threshold has been exceeded, created distortions. I accept that and, for that reason, propose to change the structure so that only the excess over the threshold would be taxable. That will mean that every time that a lease is chargeable, the duty will be £1,500 less than it would be under the original proposals. The relief will be of particular benefit to small and medium-sized businesses and business start-ups.

Mr. Prisk

Now that the Minister is to have a slice approach on business leases, will the Government do the same for residential properties?

Ruth Kelly

We constantly keep the stamp duty system under review. The hon. Gentleman will appreciate that we have undertaken huge modernisation of the stamp duty regime, which Conservative Members avoided doing when they had the chance. I hope that he will give us credit for our action to date.

The amendment to the Finance Act 2003 to achieve the change is set out in paragraph 1 of the schedule to the regulations. Paragraph 2 of the schedule makes a technical change. Under both the current system and the new regime, a premium on the grant of a lease is charged at a rate of nil if it does not exceed the threshold. However, the nil rate applies only if annual rent does not exceed £600, which prevents avoidance by recharacterising a premium as rent. Paragraph 2 will ensure that when assessing the annual rent, any linked transactions will be taken into account. That will prevent avoidance by splitting up a single transaction into smaller transactions. We do not believe that the change will have any effect on genuine commercial transactions.

I turn to the Stamp Duty and Stamp Duty Land Tax (Variation Of The Finance Act 2003) (No. 2) Regulations 2003. The changes to the Finance Act 2003 are contained in the schedule to the regulations and I shall give a brief, non-technical description of each of them. [Interruption.] I am sure that Conservative Members are interested in what I am saying.

Paragraph I relates to the charge to tax when a contract is substantially performed because the purchaser takes possession. It will ensure that that includes possession by someone connected with the purchaser, such as a company in the same group. It will also clarify a potential ambiguity in the definition of taking possession.

Paragraph 2 will give partial relief for sale and leaseback transactions. It will exempt the lease-back leg of such a transaction from charge, subject to certain conditions. That reflects the fact that companies that sell and lease back their property commonly do so purely to raise finance rather than to acquire any new economic interest in the land.

Paragraph 3 introduces schedule 6A, which will give relief for a number of acquisitions of residential property, which were the subject of debate earlier this year when my right hon. Friend the Chief Secretary to the Treasury gave a commitment that relief would be considered. The schedule will replace the current limited reliefs for part exchanges and relocations, provisions for which are in sections 58 and 59 of the Finance Act. We believe that the reliefs will help to smooth the process of house buying for many people.

The transactions covered are: the acquisition of residential property, either by a house builder or a third party, when individuals buy a new house from a builder; certain acquisitions of residential property by chain-breaking companies—companies that specialise in stepping in when prospective sales fall through; the acquisition of residential property by either an employer or a third party in connection with the relocation of an employee; and acquisitions of residential property from personal representatives of people who have died by companies that specialise in that business. In each case, there are conditions to ensure that the relief is not abused and to permit withdrawal of the relief in cases of abuse.

Paragraph 4 will give relief when a unit trust is set up by seeding it with property. That will happen if the company that sets up the trust transfers property into it in exchange for units in the trust.

Paragraph 5 will make provision for a further return if additional tax becomes chargeable because of a later transaction. An example of that is the grant of an option followed by its exercise.

Paragraph 6 will permit the holder of a power of attorney to sign a return on behalf of a purchaser—we received several representations on that matter.

Paragraph 7 will ensure that transactions by the Crown will be subject to stamp duty land tax in the same way as they were to stamp duty. I should perhaps mention that existing exemptions from stamp duty for public bodies, such as Government Departments and health authorities, have been carried forward into stamp duty land tax.

Mr. Liddell-Grainger

My constituency has an enormous amount of Crown land. Three generations are covered on one lease for such land, and after the death of a lessee, the land will automatically go to the next person—there will be a family transfer. Will such a procedure still be exempt?

Ruth Kelly

Whether it is exempt would depend on the terms of the original lease and how it was drawn up. I am willing to consider any example that the hon. Gentleman sends me and reply appropriately.

Mr. Adrian Flook (Taunton)

Taunton has the same problem as the constituency of my hon. Friend the Member for Bridgwater (Mr. Liddell-Grainger) because much of it is also Crown Estate land. Has the Crown Estate advised the Treasury on the impact that the measures will have on most of its leases?

Ruth Kelly

We have treated the Crown Estate in the same way as it was treated under the old stamp duty regime and it is content with the proposals.

Paragraph 8 introduces schedule 17A, which relates to leases. As that is a distinct matter, I shall deal with the remaining paragraphs first. Paragraph 9 clarifies that the £5 fixed stamp duty is abolished for duplicates and counterparts of land transactions within the scope of the stamp duty land tax. Paragraphs 10 and 11 make minor changes to the transitional provisions in response to representations.

On schedule 17A, hon. Members will know that we had extensive consultation on the treatment of leases, much of which related to the charging structure, the subject of the other set of regulations. We also received many comments on technical aspects. The provisions address those concerns, although some are also intended to counter avoidance. The first issue is the treatment of leases if either the length cannot be ascertained at the start of the term of the lease or the lease continues beyond its stated end date. That often happens with both business and residential tenancies for a number of reasons, including statutory provisions giving security of tenure and, in Scotland, the doctrine known as tacit relocation. We consider it right that tax should be charged by reference to what turns out to be the actual length of the lease. Not to do so would permit avoidance by the grant of a very short lease when all parties know that the tenant will stay in occupation and pay rent for a much longer time.

Paragraphs 3 and 4 of schedule 17A therefore provide that for tax purposes a lease can grow beyond its stated term, one year at a time, and that additional tax may be payable as a result. The additional tax becomes due as the lease grows and interest on the additional tax is not backdated to the start of the lease. That is unlikely to be of concern to most residential tenants, for whom periodic tenancies are most common, since 93 per cent. of residential leases are not chargeable to tax. Paragraph 5 applies the same treatment if a number of successive leases are granted as part of a single arrangement. Paragraphs 6, 10, 13, 16 and 18 reproduce existing provisions in the Finance Act 2003 for convenience, so that all material on leases is brought together.

Paragraphs 7 and 8 deal with leases with uncertain rent, such as those under which rent varies with turnover; the intention is to give certainty and reduce the compliance burden on tenants. They provide for an initial return by the tenant on the basis of his or her best estimate of the rent that is to be payable while ignoring any changes that might take place more than five years after the start of that lease. After five years, or at any earlier time when uncertainties are resolved, the tenant makes a further return in the light of what he or she now knows the rent to have been, again ignoring any changes that might take place more than five years after the start of the lease. Any additional tax due is then payable or tax overpaid is repaid. Those provisions replace the provisions on rent reviews in the Finance Act 2003.

Mr. Simmonds

If a lease is purely a turnover lease and there is no base rent for the first five years of that term, does that mean that no stamp duty will be paid because it comes under the £150,000 threshold?

Ruth Kelly

It will depend on whether the best estimate comes under the £150,000 threshold. As I outlined, an estimate has to be made of what rent is payable. I am sure the hon. Gentleman will reach the same conclusion when he studies the provisions.

Paragraph 9 gives relief when a lease is surrendered and replaced by a new lease. That often happens when landlords and tenants want certainty for the future or when renegotiations take place. The paragraph provides that rent that has already been taken into account in calculating the net present value of the surrendered lease is not taken into account again in calculating the net present value of the new lease.

Paragraph 11 is designed to counter avoidance. Without it, a lease could be granted in circumstances where no tax is payable, such as within a group, and then assigned for a nominal amount to a third party. The assignment would normally be chargeable only on the consideration given. The paragraph ensures that in those circumstances tax is chargeable as if there were the grant of a new lease.

Paragraph 12 deals with situations where a lease is assigned and there is an obligation to make a further return. It specifies that the assignee is responsible for that obligation. That is necessary because often assignors are impossible to trace, or are companies in liquidation.

Paragraph 14 is designed to counter avoidance. As I said earlier, events taking place more than five years after the start of a lease are usually ignored. However, that would permit a large increase in rent five years and one day after the start of a lease to escape tax. The paragraph therefore provides that where a rent increase exceeds a certain amount, determined by a formula related to the retail price index, tax is charged as if that were the grant of a new lease.

I am grateful to the eagle-eyed people who spotted that the formula in the earlier version of the regulations contained a slight but vital error—I put my hand up to that. Hon. Members will appreciate that there is no facility for amending a statutory instrument, so the regulations had to be remade. That is why we are debating the second version instead of the original.

Mr. Prisk

I am grateful to the Financial Secretary, who informed me of the error last week. In relation to paragraph 15, will she clarify which of the three formulae in the six-step process that tenants use to work out what they have to include as an abnormal rent was incorrect?

Ruth Kelly

One number was missing from one of the formulae. I am afraid that I cannot remember the order in which the formulae are presented in the regulations, but I shall respond later to that specific question.

Paragraph 17 makes it clear that on an assignment of a lease, and except where paragraph 11 applies, the assumption by the assignee of the obligation to pay rent and observe and perform the other covenants in the lease does not count as a chargeable consideration. In other words, the assignee is charged only on what he pays to acquire the lease.

In conclusion, we have consulted business, and we have listened. We are taking further action to protect small businesses and enterprise while reducing distortions and securing a fair amount of revenue from those transactions. The regulations before us will remove 60 per cent. of all commercial transactions from the charge completely, and businesses that pay more under the proposals will pay at a flat rate of 1 per cent.—considerably less than the 4 per cent. on an equivalent purchase. The regulations remove the vast majority of residential leases from the charge.

Mr. David Laws (Yeovil)

Will the Financial Secretary clarify the net effect of the Government's proposals on the Exchequer's aggregate revenue for the next two years?

Ruth Kelly

The reliefs that we are granting today will reduce the aggregate revenue that has been published in the Red Book by £20 million, which will bring first-year revenue down to £170 million from the lease duty proposals.

We have listened to business on sale and lease-back transactions, chainbreaking companies and employee relocation, and have introduced measures requested by the industry to reduce the compliance burden. I therefore commend the regulations to the House.

3.48 pm

Mr. Mark Prisk (Hertford and Stortford)

May I reciprocate the Minister's remarks? I must confess that it is rather worrying to be welcomed back when I was not aware that I had been away in the first place, but she made a generous comment. In turn, may I say that all of us who served on the Committee that considered the Finance Act 2003 are pleased that she is back? It is true that we had some fun with the Chief Secretary to the Treasury in Committee, but hopefully we will get some serious answers now.

We are considering two sets of regulations. The first set seeks to amend schedule 5 to the Finance Act by revising the tax structure as it applies to business leases. The second tries to answer some of the many questions that the Government failed to address in the Act itself. I shall preface my remarks by telling the Financial Secretary that the piecemeal introduction of the new tax is wrong in principle and mistaken in practice. The Government are using section 109 of the Act to push large parts of the tax through Parliament without due consideration, and I hope that in her reply she will assure us that the Government do not intend to use that as a precedent for other tax changes.

In considering these two regulatory instruments, I suspect that the House will wish to recall the original aims of this new tax as set out by the Minister, who was then Economic Secretary, in April 2002. In the document, "Modernising Stamp Duty", she told us: Our aim is to create a stamp duty that better reflects modern commercial practice". Above all, we were told that fairness would be at its heart. Sadly, those laudable aims have gradually been replaced by the one overwhelming and desperate need of this Government—to collect the maximum amount of tax revenue to fill the black hole in their finances. As Bill Moyes, director general of the British Retail Consortium, put it only today: The Treasury claim—that they are tackling avoidance—is a red herring. This latest tax is a bid to refill the Treasury coffers, by milking the only sector that has refused to be beaten by the burgeoning weight of tax and regulation. How right he is.

I shall consider the regulations concerning schedule 5 later, but I come first—hoping to be somewhat more technical than was the Financial Secretary—to the Stamp Duty and Stamp Duty Land Tax (Variation of the Finance Act 2003) (No. 2) Regulations 2003. Unfortunately, as the Financial Secretary said, it is the second set of regulations issued by the Treasury. I am grateful to her for drawing our attention to that problem. As a result, outside organisations have had fewer than five working days in which to consider the correct regulations. Sadly, that is part of a pattern as regards this tax—from conception to consultation to legislation, the whole process has been rushed through with little time for business or Parliament to get it right.

Mr. Simmonds

As always, my hon. Friend makes a forensic case. Is he aware that with only 13 working days to go until 1 December, when the duty is supposed to be fully operational, neither set of regulations contains details about sub-sales and securitisation?

Mr. Prisk

My hon. Friend hits on a point that is of real concern to businesses.

Mr. Djanogly

Is my hon. Friend further aware that the Government say that they have to restart the consultation process on partnerships from scratch? How will they do that in 13 days?

Mr. Prisk

The root of the problem is that the tax is being made up on the hoof. On Third Reading, the Chief Secretary told us that it would take a couple of years to refine it. That is no way to make tax law. Many outside bodies and experts in the field concur with that conclusion. Today, we have a maximum of three hours in which to consider 26 pages of detailed changes—the result of this mad rush will be bad law.

I understand that even as of yesterday, the tax return forms that taxpayers will have to complete are yet to be issued, with only 12 working days to go. Can the Financial Secretary tell the House whether those forms have been published or distributed? She is nodding, so we will take that as a yes.

The regulations contain several specific issues that give considerable cause for concern. I turn first to the question of sale and lease-back arrangements. We welcome, in general, the reinstatement of relief for that common form of transaction. When I first drew attention to that oversight in Committee, the Chief Secretary seemed remarkably unaware of its significance. I am glad that the Financial Secretary saw sense and responded, but I have questions relating to the qualifying conditions in the regulations. Subsection (3)(a) of new section 57A states that the property must not be residential. How will mixed-use properties be treated? For example, how would an old mill be treated if the lease-back arrangements envisaged a part residential accommodation? Similarly, can the Financial Secretary define the phrase "same premises" under subsection (3)(c)? Does that mean the same hereditament or something else? Subsection (4) refers to market value. Does that mean open market value? If so, what valuation method is envisaged?

The Financial Secretary referred to exchanges. The amendments, which relate to residential property exchanges, follow discussions in Committee. At one point, the Government's plans bizarrely denied relief to elderly people who sought to trade down in their retirement yet exempted those who wanted to trade up to, for example, a mansion. That was a peculiarity and, to be fair to the Government, they relented after we questioned the Financial Secretary about it.

Will the Financial Secretary confirm that the meaning of "new dwelling" in schedule 6A covers the conversion of properties, including a change of use? That is unclear in the drafting. For example, would a former workhouse that was converted into flats be acceptable? That is a change of use and a conversion. The financial viability of many urban regeneration schemes will be directly affected by her answer.

Why does paragraph 8 of the same schedule specifically exclude sole traders and the self-employed from the definition of property trader? What is the ground for discriminating against unincorporated enterprises? Was it simply an oversight?

Why do the Government feel the need to set a maximum figure for expenditure on refurbishment schemes under paragraph 9? How will that be enforced without creating a new raft of bureaucracy? Are people to provide receipts or invoices? Who will check the evidence of work done and its value and ensure that the figure of £20,000 has not been exceeded?

Mr. Liddell-Grainger

My hon. Friend makes serious and interesting points. What about the position when the purpose of a grade 2 listed building has been changed and a subsequent refurbishment is undertaken, in which the façde is VAT exempt because the building is listed? I can find nothing about listed buildings in the provisions.

Mr. Prisk

Perhaps listing is separate from the immediate regulations that we are considering, but my hon. Friend makes a good point. He draws attention to the question of whether the Government have thought through the unintended consequences.

I want to ask the Financial Secretary about value as well as practicalities. It is fair to say that many people might consider the figure of £20,000 per unit for refurbishment a reasonable cap. However, the sum could prove wholly inadequate when, for example, asbestos needs to be removed. The result could be that the most dilapidated buildings remain empty. What assessment has the Treasury made of the effect on urban regeneration projects? How will the Government ensure that the worst buildings do not continue to stand empty?

The Financial Secretary referred to paragraphs 2 and 3 of schedule 17A. Paragraph 3 deals with the extension of fixed-term leases. She claimed that the change was fair, but is it fair for tenants to face an additional tax bill because of an event beyond their control? If a building is expected to be demolished for a planned new road, a fixed-term lease might be granted. If a long delay occurs or demolition is cancelled, is it fair to tax again? Do the Government intend to tax people in those circumstances?

I have received several professional and business representations, including from the Institute of Indirect Taxation, on leases for indefinite terms. There is considerable anxiety about the bureaucracy that the regulation will create. When a tenant exercises his or her statutory right to renew, how will the new lease be treated? Will it be linked with the original lease or not? There is a significant tax difference.

The treatment of variable and turnover rents is important and my hon. Friends have referred to that. The Financial Secretary partly responded. As members of the Committee that considered the Finance Act know, the legislation failed to account for variable rents. They typically occur in the retail sector, but they also exist in the licensed and hospitality sectors. As the original legislation stands, the occupier would have to submit a new tax return every time the rent varied. That would create an unbearable compliance burden. I welcome the Government's acknowledgement of our anxieties, but I remain to be convinced that the offered solution makes business sense.

Paragraph 7 on page 13 of the regulation allows for just one return after the fifth year. Up to that point, each new rent level means a new tax return, but under these proposals, just one return would be required after the fifth year. A lot of people in business—particularly in small businesses—argue that that is illogical. After all, it is the first few years that make a difference when setting up a business, so why leave business start-ups with the greatest compliance burden?

Paragraph 14 on page 16 of the regulation deals with the treatment of so-called abnormal rents. The Financial Secretary told us that that this was an anti-tax-avoidance measure. I hope that she will not be giving any advice on that aspect of it today. As drafted, this paragraph and paragraph 15 are misguided in purpose and hideously bureaucratic in form. Indeed, all the independent experts believe that they run counter to modern commercial practice. I say that because the regulation provides that where there is an increase in rent after the fifth year, the tenant must assess whether that increase is abnormal.

I am sure that hon. Members are beginning to wonder what "abnormal" means, and the answer lies in paragraph 15 of the regulation, which sets out a two-page, three-formula, six-step definition. Believe it or not, this is what tenants are going to have to understand in order to work this out. In step 1, they will need to define the start date, which is the beginning of the period by reference to which the rent assumed to be payable after the fifth year of the term of the lease is determined in accordance with paragraph 7(3)". So that is a nice easy start.

Then we move on to step 2, in which the tenant will need to divide the period between the start date and the date on which the new rent first becomes payable and they are given two ways in which to deal with that. I trust that hon. Members are keeping up with this so far. Step 3 moves us on to finding the factor by which the retail prices index has increased over each period identified in step two", so I hope that we are all aware of what happened in step 2. We are then told: This is a figure expressed as a decimal and determined by the formula—

(RD-RI)/R1

where— RD is the retail prices index for the month in which the last day of the period in question falls, and RI is the retail prices index for the month in which the first day of the period in question falls. I should warn Members that it gets quite complicated after this.

In step 4, tenants are asked to find

the relevant factor for each period identified in step two. If I may help the Financial Secretary, I suspect that this might have been the point at which there was a figure missing, resulting in the Treasury having to pulp all the original regulations. Step 4 goes on: This is a figure expressed as a decimal and determined by the formula—

1 + {0.05 x m/12} + r

where— m is the number of months in the period in question…and r is the increase in the retail price index over the period in question, determined under step three. Obviously. What could be simpler? I do not know how the Treasury could have got that wrong, but there we are.

Tenants have reached step 4, and they are obviously doing very well, so they are now asked to move on to step 5. Here, they are asked to find the uplift factor for the reference period", and there is just a seven-paragraph section to explain what that is. I will not detain the House with that at this point.

Finally—I suspect that hon. Members will enjoy that word—we come to step 6. Here, the tenant—should they still be awake—must assess, using the third of the formulae, that the rent increase will be regarded as abnormal if the new rent is greater than

R x UF

where— R is the rent previously taxed…and UF is the uplift factor for the reference period. So there we have it. It could not be simpler.

I have to say that this is Sir Humphrey Appleby at his worst. I recognise that some large organisations will be able to put in place the systems needed to handle this process, but hon. Members will understand, having listened to all that, that to ask small or even medium-sized businesses to try to work their way through a six-step, three-formula, two-page regulation process is entirely unreasonable. Given that the Treasury got the formula wrong, could the Minister tell us how on earth a humble taxpayer is expected to cope? Will she assure us that when businesses—not surprisingly—make reasonable errors in this form of calculation, there will be no attempt to impose fines?

There is also a wider point of principle. Is it not inherently unfair for a tenant facing a large and inflationary rent rise, for reasons outside his control, to incur a substantial liability for this tax at the same time?

Will the Minister clarify paragraph 10, on page 20, which relates to substantial performance and the implementation date? Many in the property and, indeed, the business world fear confusion over which leases will and will not be affected. Will the Minister give examples of transactions covered by the paragraph?

I have not been able to deal with the whole range of areas in which errors or ambiguities might arise. The Minister has been very reasonable so far. Will she confirm that if the regulations are found to have further defects, she will come to the House in person and explain what has happened? We do not want a written ministerial statement; people outside are very concerned and want to hear exactly what the problems are.

May I be the first to congratulate the Minister on the regulation that amends schedule 5? I thought that the quality of her spin was magnificent. Alastair Campbell would have been proud. As she explained that the tax burden would not be too onerous, it seemed that if we listened carefully enough we would hear the sound of business men dancing in the streets in unalloyed joy at the generosity of Ministers. But, as was pointed out by the hon. Member for Yeovil (Mr. Laws) and others, despite all the warm words and soothing assurances the order represents not a reduction but a fourfold increase in tax revenue, from £50 million to £230 million in a full year.

Mr. George Osborne

My hon. Friend is making a powerful speech. I have a constituency interest in Marks and Spencer, as one of the largest and most successful branches in the country is in my constituency. The head of its tax group has said: The new lease duty regime…will increase our anticipated leasehold transaction costs by a factor of 8 over the next six years. This type of increase, which is standard for the sector, will inevitably have adverse economic effects".

Mr. Prisk

I met him this morning, along with a number of other representatives of business organisations. His case is typical of the problems faced by businesses.

I must say, to be fair, that the regulations have managed one significant achievement: they have brought businesses together as never before. This morning the shadow Chancellor and I hosted a press conference jointly with seven leading business organisations, including the main consultees who met Inland Revenue representatives and the Chief Secretary over the summer. We did so because the regulations have united businesses in opposition to the Government's plans. Miraculously, they have brought together landlords, tenants and professional advisers, who have joined the Conservative party—the official Opposition—to challenge this stealth tax, not just because of the extreme rises such as that mentioned by Marks and Spencer, but because of the impact it will have on business mobility, business investment and jobs.

The Minister spoke of the consultation that preceded the order. Let me tell her the views of the consultees whom I met this morning. All reject the Government's plans. They believe that the consultation itself was a sham. On behalf of Business in Sport and Leisure, Hugh Siegle said: We have fallen over ourselves this summer to work with officials from the Treasury and Inland Revenue, to try and find a solution. They just have not listened and see Stamp Duty as a revenue raising measure. How right he was.

In practical terms, this regulation will restrain business investment and severely distort the property market by favouring short leases. Information from property experts such as the Royal Institution of Chartered Surveyors shows that longer leases of 15 to 35 years will be taxed the most. A typical 25-year lease faces a possible sevenfold increase, and a 35-year lease faces an almost ninefold increase. And as was pointed out earlier, Marks & Spencer expects an eightfold rise in its tax bill. Gary Grant, managing director of The Entertainer toy stores group, told me that for just one planned store expansion in south Wales his tax bill will rise sixfold to £6,000.

The licensed trade faces a similar problem. Because of high set-up and fitting-out costs, the average leasehold pub has a lease length of about 14 years and an annual rent of about £30,000. Such a lease will be subject to a duty of £1,776—almost 300 per cent. more than the current rate. Indeed, the British Beer and Pub Association has reported that almost a quarter of all leases in the pub sector are currently of 30 years in length. The average rent for those leases is £39,000 per annum. Current lease duty is £800, but to renew a lease on the same terms under stamp duty land tax will now cost £5,673. That is £4,873 more—or in excess of a 700 per cent. increase.

Nick Bish, head of the Association of Licensed Multiple Retailers, said to me today: As they stand at present, the proposals would create major distortions in the market for leasing, dramatically increase the costs faced by businesses dependent upon leasehold property, threatening ongoing investment, business expansion and jobs. Moreover, stamp duty"— on land tax— would become a major capital cost when setting up a business, creating a…real barrier to entry for individual tenants and small pub companies. Why has the Treasury chosen to ignore the expressed views of its outside consultees? Why did the Revenue refuse to change either the thresholds or the peculiar discounting rate that it has chosen? Can the Financial Secretary tell us today which of the six trade bodies that were consulted have backed her proposals? Does she not accept that her Department's consultation has been a shambles? When every consultee rejects the result of a consultation, surely something has gone badly wrong.

The regulations before us represent not, as the Financial Secretary said in her written statement, another step forward in modernising stamp duty, but two steps back for business. First, they impose a fourfold tax hike that is unfair to businesses and sectors alike. Secondly, this is a bad, ill-conceived and ill-considered tax that is being rushed through Parliament expressly against all independent advice.

I am aware that these regulations are temporary and may have to be rewritten back into the next Finance Bill. I therefore ask the Financial Secretary to listen to the complaints and concerns expressed, and now to commit herself to revising her plans for next year's Bill. Both business and my party will continue to campaign for a fair deal on this issue. It is now time that the Government responded.

4.13 pm

Mr. David Laws (Yeovil)

I join the hon. Member for Hertford and Stortford (Mr. Prisk) in welcoming back the Financial Secretary, although I appreciate that she has been back at her desk for some time now. She must have hoped when she was away, however, that by the time that she returned to her desk to deal with the outcome of the consultation, some of the heat would have gone out of this subject, which was the cause of great concern when the Finance Bill was debated earlier this year. She will be aware that, as the hon. Gentleman has just said, she and the Government have not succeeded in satisfying the professional, business and other groups that expressed concern at the Government's proposals earlier this year. Indeed, the chairman of the Institute of Indirect Taxation's stamp taxes committee said the following in a letter to her of 24 October: We note that this consultation has generated vigorous differences of opinion and approach between the Government, on the one hand, and the professional and commercial bodies who participated in the consultation, on the other. It seems as if the Financial Secretary and the Government have been entirely unsuccessful in addressing the concerns of professional and commercial bodies in relation to this matter.

The impression was created in the Financial Secretary's speech a few moments ago that the Government were seeking to deal with several anomalies and unfairnesses in the existing system for dealing with leases and their taxation. However, as has been pointed out, the net effect of the measures that the Government are pressing through will be a significant increase in the tax burden on business. Although the Financial Secretary rather rattled off the numbers in the same way that the Chancellor of the Exchequer is inclined to do when revealing to the House increases in borrowing figures, I thought that I detected the admission that in the coming financial year the measures that we are debating today will raise some £170 million, even after the Government's concessions. The full-year cost of £230 million was mentioned earlier. If I have those figures wrong, I would appreciate the Financial Secretary's clarification later.

Mr. Simmonds

Is the hon. Gentleman aware that the British Retail Consortium has assessed that the cost to its retail members will be £200 million alone, so the estimates provided by the Chief Secretary and the Financial Secretary grossly underestimate the real cost to businesses in this country?

Mr. Laws

The hon. Gentleman is right that that is the assessment of business bodies. We will have to deal with that serious underestimate in the next few months. I hope therefore that the Government will eventually change their minds on the proposals.

Mr. Djanogly

Is the hon. Gentleman aware that there are implications for sectors other than business? The pensions industry is now only just cottoning on to the fact that transfers between members' retirement benefit schemes will also be caught, so pensions will be affected.

Mr. Laws

The hon. Gentleman is right that the proposals will be another blow to pension funds, which are already struggling as a consequence of recent changes in asset prices.

Without straying off the specific issue before us today, the background to the debate is obviously the concern among business about the overall level of business taxation in this country. The Financial Secretary will be aware of the report issued by the CBI recently, which compared business taxes in several different countries. The Government reacted in a robust and agitated manner to that report, but it was useful for highlighting the fact that, although our corporate tax levels and rates—and, to some extent, the social costs on businesses—are lower than in many of our European competitor countries, we have much higher taxes on property and transport costs, for example, which must be taken into account. The net increase in business taxation contained within the measures before us is highly unwelcome to business.

The Financial Secretary will be aware of the strong comments that the CBI made about the amended proposals that the Government have brought forward. A couple of weeks ago its press release talked about the "mass opposition" of companies in this country and complained about the Government pressing ahead despite that opposition. It said that the Government's decision would drive up prices, cost jobs and damage regeneration". The CBI also said that the Government are underestimating the potential cost to business of this measure, and it states explicitly that the Government are understating how many leases will be affected and overestimating the present value of leases. The hardest hit, as the hon. Member for Hertford and Stortford (Mr. Prisk) has already mentioned, will be particular sectors in which there are long leases—for example, the retailing and consumer services sector, many pubs and restaurants.

The director general of the CBI commented on the Government's latest proposals: It's extremely disappointing that the government, in its inexorable search for new areas to tax, is targeting the one sector that has kept the economy afloat: the high street…The majority of business premises are leased and duty increases on this scale will be damaging. This tax hike could easily swing the balance against marginal projects—Long term investment will be hit as firms look for shorter leases. Surely, in the light of that criticism from business, the Financial Secretary must look again at the measures, especially at their net impact on business as a whole, rather than giving us the impression that they are simply designed to reduce avoidance and to tackle unfairness within the existing tax structure.

The hon. Lady must also address the fact that the measures hit particular sectors extremely hard. We have already heard examples of the effects on the leisure industry in particular constituencies, and reference has been made to Business in Sport and Leisure, an umbrella organisation that represents more than 100 private sector companies in the sport, leisure and hospitality industry. That organisation has pointed out that many parts of the leisure industry face an eightfold increase in stamp duty under these proposals. It cannot be the Government's intention to increase business taxes in such a penal way for some parts of the business sector. Business in Sport and Leisure stresses that there has been no suggestion from the Inland Revenue that the sector is involved in any avoidance of tax, so it cannot be the case that the Government designed the measures simply to capture tax avoidance.

The impact of the measures will be especially acute in those sectors where there are long leaseholds. Obviously, that is relatively common in the leisure sector, where there are leases of between 20 and 25 years due to the high cost of investment in leisure properties and the need to refurbish them regularly. For that reason, there is concern about the unfairness embedded in the measures. The tax increases will fall especially hard on some sectors and the Financial Secretary seems to have done nothing to address that concern. I hope that she will attempt to amend the proposals in future so that those hard-hit sectors will not be so severely affected. Although the hon. Lady said that about 60 per cent. of businesses will be exempt from the increase, she will be aware that in the leisure sector the figure will be 30 per cent. or less, as a consequence of the thresholds that the Government have set.

We must also consider fairness between different parts of the country. Earlier, the hon. Members for Taunton (Mr. Flook) and for Bridgwater (Mr. Liddell-Grainger) were in the Chamber. Their presence made me realise that there was a Somerset phenomenon in terms of unfairness, although the phenomenon goes well beyond Somerset. Can the Financial Secretary confirm that a leisure business—for example, one in the eastern part of my Yeovil constituency, quite a deprived area—which is above the threshold and affected by the totality of the Government's proposals on stamp duty land tax on leases, will pay increased taxation; yet for businesses in other parts of the country, such as a pub in Canary Wharf or Harvey Nichols in Leeds, there will be no increase in taxation because deprived area relief will interact with the measures?

Mr. Simmonds

The hon. Gentleman makes a good point. Is he aware that deprivation is measured on residential areas and not on the amount of commercial activity that takes place? That would create anomalies; for example, removing all the stamp duty from the Meadowhall shopping centre, just outside Sheffield, would add £50 million to its value—equivalent to 1p on the net asset value of the share price of the company that owns it. That is neither a sensible nor a wise use of public money.

Mr. Laws

The hon. Gentleman is right. He echoes the comments made by the Lords Committee on the Finance Bill. The House of Lords Committee urged the Government to reconsider the measures before the House today, and to look at how the deprived area relief interacts with them. It makes no sense that a leisure business in a deprived part of Yeovil should suffer as a result of the proposals, when a pub in Canary Wharf serving well paid investment bankers or a major department store in Leeds remain exempt. That is irrational.

The hon. Member for Hertford and Stortford (Mr. Prisk) mentioned many of the detailed concerns about the proposals felt by businesses and professional organisations, and I shall not repeat them. My criticism, and that of my party, is that the proposals represent a significant tax increase for business, and hit specific sectors very hard. There is no good economic rationale for hitting businesses with long leases, unless the Government are determined to change the maturity structure of leases. However, there seems to be no good reason to do that in the leisure sector. We also consider the proposals to be unfair in the way that they affect businesses in deprived areas.

The Government held a consultation and listened to the results, but they do not seem to have heard the points made by business. It may be too late to get them to change their mind today, but I hope that the Financial Secretary will return to these matters in the future. At present, the Government have got the proposals wrong.

4.26 pm

Mr. Stephen Dorrell (Charnwood)

I begin by declaring a personal interest. I am a director and shareholder of a trading company that occupies leasehold property. As far as I know, we are not involved in renegotiating any leases, so I do not anticipate that the proposals would have any immediate effect. However, at some time in the future I could have a direct personal interest.

The Government say, euphemistically, that they want to modernise stamp duty. My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) made a compelling case against the policy, in terms of detail and, more importantly, of strategy. What the Government describe as modernising stamp duty is, in fact, a policy of raising extra revenue through a new tax structure that they hope that voters will not notice.

We in this House have a responsibility to look beyond the immediate effect on voter perception and to consider the economic effect of the Government's tax policy. My hon. Friend the Member for Hertford and Stortford was right to say that the Government have ambitious spending plans and want to raise revenue without voters noticing. For that reason, they are looking for opportunities to use tax policy to squeeze extra revenue out of parts of the economy that they hope that voters are unaware of. However, getting extra revenue from stamp duty will do substantial economic damage, along the lines described by my hon. Friend.

The Minister herself identified why stamp duty is an especially damaging tax. She said that the reforms would remove cliff edges from the operation of stamp duty. Yet stamp duty is a cliff edge in itself—that is the nature of a tax on capital transactions. Cliff edges cannot be removed from it. In a nutshell, that is why the Government are wrong to use this tax to close their revenue gap.

The more tax that the Government raise out of capital transaction taxes, the more distortions they build into the economy, and the more economic damage is done. My hon. Friend the Member for Hertford and Stortford was right to focus attention on the effect that taxing new leases will have on encouraging urban regeneration and the establishment of new businesses. If we tax something we make it less likely to happen. That is one of the basic rules of economics. The Government are putting up taxes on urban regeneration and new business creation, and we must assume that they understand that the likely economic effect of their policy will be less urban regeneration and less new business formation, especially in the leisure industry.

Mr. John Taylor (Solihull)

Does my right hon. Friend recall that when Lord Lawson was Chancellor of the Exchequer and halved the rate of stamp duty, he doubled his revenue from that source?

Mr. Dorrell

My hon. Friend is right—although he will probably remember that there were some secondary effects, which at the time were controversial. None the less, that example is a clear illustration of the principle that reducing the rate of tax on something tends to increase the activity, and increasing the rate of tax on something tends to reduce the activity. That is what the Government must be assumed to be planning as a result of this policy, and that is the fundamental objection to it.

I shall make two other points about tax policy, and explain why I think this tax is even worse than other forms of capital transaction tax. My first point is that when a new lease is taxed, what is really being taxed is a prospective revenue flow. Inevitably, an estimate has to be made. If both parties to the lease go under as a result of signing it, huge damage will have been done, but the Government will in the meantime have made off over the hills with their sack of gold. To tax a prospective revenue flow is to tax something that is particularly risky within the spectrum of economic activity.

My second point is that if we choose to focus on that tax base, we introduce a huge incentive for people to distort their estimates. Listening to the Minister justifying this draft of her policy, I noticed that she was describing the introduction of a tax system that already, before the structure comes into effect, the Government recognise will be riddled with avoidance and tax planning opportunities.

When I held the Financial Secretary's job, I learned that whereas in my previous existence—I am happy to say that this also applies to my present emancipated existence—I was allowed to call such activity tax planning, in her rather sterner existence she has to learn to call it tax avoidance, and sometimes tax evasion. No doubt she is better than I was at remembering the difference between those two. One is legal, and the other is not, but I could never remember which was which.

Introducing a new higher tax on an uncertain future revenue flow condemns us, without peradventure, to a new industry of tax planning experts, who even now, in the big accountancy firms, will be planning ways in which their clients can avoid the tax that the Financial Secretary is introducing. I guarantee to the House that, as with capital gains tax, the further this policy goes on, the more the Treasury will come to the House year after year with page after page of what it will describe as anti-avoidance legislation. At the moment, the phrase used is "abnormal rents"—but what the Treasury describes as abnormal rents is today's normality. When we tax today's normality, that creates tomorrow's abnormality, because that is where the tax planning industry will go.

I congratulate my hon. Friend the Member for Hertford and Stortford on the case that he has made against the measure. It is objectionable because it will introduce a new and higher rate of tax on something that we should be encouraging, and because the only thing that the new set of taxes will encourage is the tax planning industry and the big accountants, who must even now be rubbing their hands with glee.

4.34 pm

Mr. Jonathan Djanogly (Huntingdon)

I wish to declare an interest in rented property.

Everything that I have read or heard about the regulations on stamp duty land tax points towards a Government who have failed to listen to the representations made to them by almost everyone who takes an interest in the issue. To my mind, we are now cruising towards the onset of a disaster, which is what will occur when the tax takes effect in what is now not many days' time. I therefore fully support my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) in once again asking the Government to reconsider their position on the tax.

In short, it is my contention that the main result of the tax as amended by the regulations will be to increase hugely the stamp duty payable on leases and unnecessarily to increase the complexity of the calculation of tax, despite the provision in the regulations to vary the way in which it is calculated, which I believe will make the process even more complicated. In particular, retailers will be penalised and people in industry who want to enter into long-term leases will have to opt for short-term leases instead, depriving them of the security and certainty that they would otherwise have. That is not in the interests of British industry. I also wish to suggest on the basis of the regulations that this tax is the precursor to a massive Labour tax-raising exercise on property.

The Government seem to maintain that the ending of stamping leases will somehow simplify the system. While I agree that that may be a precursor or a necessity in respect of their proposals for electronic conveyancing, I regard the suggestion that the tax will become simpler to administer as defying belief.

Mr. Prisk

My hon. Friend referred to e-conveyancing, which is an important issue. Is he aware that the tax forms can now be submitted only in a handwritten form? Does he share my concern that that is a step backwards in terms of e-commerce?

Mr. Djanogly

My hon. Friend is right. I shall return to the form itself, as the regulations deal with it in passing, but not as they should do, which is a particular concern.

The formulae that the process now involves are making most professionals' eyes water. Indeed, I have heard from professionals that they simply cannot calculate them without using a computer programme. For most business men, the formulae have become a mystery. Unfortunately, that mystery is having a harsh impact, as up to 15 times as much is being paid at the end of it. The changes relating to the proposed charging of a 1 per cent. minimum will only make the matter even more complex.

The Government also seem fixated on the idea that the new tax is required to tackle tax avoidance and to ensure that everyone pays a full share. Indeed, the Financial Secretary keeps using the word "fair". For the majority of traders, however, the acquisition of a lease is simply a necessity in conducting their business, rather than a means of tax avoidance. In any event, over recent years, the inventiveness in the use of stamp duty avoidance schemes has been part of businesses' reaction to the no fewer than five previous stamp duty increases that we have seen since Labour came to power. Under the Conservatives, stamp duty was 1 per cent. on amounts of more than £60,000, and that was generally seen as acceptable. However, as the level has been ratcheted up, many companies have increasingly been forced to consider using avoidance schemes to avoid the rates of tax that have started to make their deals appear uneconomic.

Scrutiny of this new tax has been haphazard to say the least, as my hon. Friend the Member for Hertford and Stortford pointed out. The original consultation was conducted unfairly, not least because of the Government's decision to abruptly end it in early January this year. Then, because of the Government's unfairly short timetable for the Finance Bill, we did not even talk about this tax in Committee. It was only on Report that we addressed it for the first time, at which point the Government tabled more than 40 amendments. That alone shows that they do not have a handle on this tax.

The Government admitted that they did not know how the tax would work and said that they would reconsult over the summer, which has led to the orders that we are discussing today. As I mentioned earlier, further consultations are continuing, especially in relation to partnership, on which the Government have admitted that they need to start again from scratch. On Report and earlier today, we have gone into various technical aspects of the new taxes and highlighted various failings of the legislation. I have made the point that the new taxes will increasingly be unacceptable to professionals and business people alike.

The Government reconsulted over the summer and it is worth reviewing some of their comments. The verdict from pretty much everyone who was asked about the proposals was "zero points", and I shall address some of the technical points that were made. In a recent article in the Solicitors Journal, a Mr. Nock, a barrister, said that the Government intends, lemming style, to rush headlong into bringing in stamp duty land tax on 1 December despite the many deficiencies in the Finance Act 2003. It appears the Government accepts it will take up to two years to discover the major defects and put them right, but is prepared to leave taxpayers and their advisers to live with the mess in the meantime. If Mr. Nock is right, and having heard the debate today I fear that he is, how can it be acceptable that the Government can pass legislation that they know will not work? Mr. Nock gave the example of monthly or other periodic tenancies that are subject to tax as if they were a lease for a term of 12 years. However, if drafted as a lease for one month and thereafter from month to month until terminated by notice, the tax is assessed on the basis of a two-month lease. As Mr. Nock continues: Hundreds of…potential professional indemnity risks abound in the current legislation."— I declare my interest as a solicitor— It is to be hoped, although not with any great degree of confidence, that the Inland Revenue Stamp Taxes Office will seek to apply the legislation contrary to the letter in most cases to produce a reasonable result. That is a dramatic comment, because it means that if the Government are to be fair to taxpayers, the tax man will have to apply the law loosely. That will hardly be a comfort to most business people. Mr. Nock continues: In the paranoid pursuit of anti-avoidance rather than technical precision in setting the conditions for relief, transactions that were previously non-eligible for relief are now potentially exempt. The grant of a new lease 'in connection with' a company reconstruction, if part of an undertaking, is exempt or eligible for the lower rate even in the case of rent. Practitioners must therefore bring open minds to much of the legislation and not be too influenced by apparently similar stamp duty provisions. Clearly, these newly created reliefs have the potential for tax mitigation that would not exist with even moderately sophisticated legislation properly drafted. My right hon. Friend the Member for Charnwood (Mr. Dorrell) made a similar point in his excellent contribution to the debate. So there we have a tax barrister saying that the new legislation, which was introduced to counter avoidance, could attract avoidance schemes because of its complexity.

Many other technical issues arise in relation to the orders. We could see an increase in negligence claims against professional advisers, with the consequence of increased costs for clients. That could happen because many entries in the land transaction return require valuations or estimates and, because it is a self-assessment tax, judgments will be required on such matters as market value, market cost and estimates of what is likely to be produced by variable consideration. That will put a lot of pressure on the professionals.

Certain actions—for example, substantial performance, such as the payment of rent or entering into the possession of property without any formal grant—are not notifiable, even though no SDLT is payable by reason of the low rent, and even though the grant of the tenancy may not be notifiable. The rules on notification in the case of the acquisition of freehold or leasehold interest in property might necessitate multiple notifications.

For example, where a developer acquires land and, without taking a transfer, enters into possession of the land, having paid the purchase price, he will be required to make a return. A fresh return may then be required each time a plot is sold or leased to third parties. In some cases, both the developer and the purchaser, or tenant, will be required to file returns. Of course, the term "acquisition" also includes releases, surrenders and variations—so more form filling and more red tape. Nothing in the schedule to the order will deal with that, as my hon. Friend the Member for Hertford and Stortford has said.

Service charges are not subject to this new tax, provided that they are not included as part of the rent. However, if they are taxable as rent, and since service charges are variable, an uncertain rent will be produced, so the tenant will be obliged to notify the stamp taxes office every time the landlord increases the service charge—again, more red tape, more hassle.

The complexity and length of the land transaction return might well increase in the light of the publication of regulations in the near future. Some professionals have made it clear that although the Revenue is currently attempting to make the form appear short, it is deceptive and advisers should take care not to be misled by the simplicity of the form.

Only a couple of weeks ago, Mr. Gordon Keenay of KPMG Stamp Taxes Group, who happens to be a former business director of the Inland Revenue stamp taxes office, noted: The downside on the legislative front, though, is the unprecedented breadth of the powers to modify this tax by Statutory Instrument. The Government ought not to use it as a more painless way to change the tax rules than waiting for the next Budget. We will increasingly see a series of Statutory Instrument Committees, digging the Government, bit by bit, out of the mess that this tax has already been shown to be. Of course, we are seeing something similar to that happening today.

The problems with the orders go far beyond the technical. Other hon. Members have referred to important practical points. Yes, there is complexity. Yes, there is bad drafting. Yes, there are technical weaknesses. However, a whole host of practical issues have been raised, particularly by business people. The British Retail Consortium has been mentioned, but the director general has also noted: The Government has ignored all our advice and seems determined to hurt the very sector which is keeping the economy afloat at the moment. Digby Jones, the director general of the CBI has said: Duty increases on this scale will be damaging. The Chancellor must promise an early review of the effects of this legislation. I have a feeling that, because of all the debate that is going on, there will be regular reviews of this legislation, but not for reasons that the Government particularly want. Digby Jones also cited an example of a retailer, leasing a shop for 25 years at an annual rent of £120,000, who would now pay £2,400 in duty. Under the new rules that retailer would pay about £19,000, so the new £1,500 reduction, as proposed in the order, is not a sizeable relief in the context of the deals that businesses actually do. What we have seen over recent days is business people trying to understand where the Government are coming from in relation to the orders and this new tax, as it all seems nonsensical. Mr. Griffin, the head of stamp duty at Ernst and Young, said that the inevitable conclusion is that this is a political fudge.

We know that pubs, retailers and restaurants in particular will be hardest hit by of the tax. One of the reasons for that is that they typically take long leases of 20 to 35 years to amortise the multi-million pound cost of fitting out their buildings over the duration of the lease. The British Retail Consortium, too, has said that it reckons that about 74 per cent. of retailers will look to get shorter leases.

What about the Government's new concession in the order? A lot has been said about it, and I will not go over new ground. It is important to make the point, however, that the Government's figures are consistently being seen as underestimates by business. B & Q in particular expects that the average cost of its lease per store will increase from £35,000 to £285,000 because of this regulation.

With seemingly everyone either opposed to or critical of this new tax, what is behind it all? Mr. Griffin addresses it in the context of the new form, which was discussed by my hon. Friend the Member for Hertford and Stortford and is touched on in paragraph 6 of regulation 3. He notes: Whereas the old stamp duty form was a one-page document, which took solicitors five minutes to complete, the new form will run to eight pages, with a further 30 pages of explanation. He says that the new form is effectively an "an information-gathering exercise." He says: It's an ideal platform for the chancellor to introduce a wave of property taxes…The Inland Revenue will compile a vast database of residential property…This system gives the chancellor enormous flexibility for future changes to stamp duty, and a launchpad for an array of new property taxes.

That gets to the nub of why we are here today. We are at the start of a massive Government offensive against property and property owners. They are going to start it through stamp duty, but they will use the build-up of information on the new forms to extend it across other sectors of property and the economy. Today, we are seeing only the start.

4.52 pm

Mr. Mark Simmonds (Boston and Skegness)

Before I begin, I want to draw the House's attention to my interests, which I have declared in the Register of Members' Interests. I join my colleagues and others who have welcomed the return of the Financial Secretary to the Front Bench—it is the first time that I have taken part in a debate on this topic when I have had a feeling that at least somebody on the Treasury Bench understands and takes this matter seriously. That is not the conclusion that I have reached in relation to her two colleagues who have partaken of these debates previously.

I have spoken at length on this topic in previous debates, but I have no desire to continue at length today. Suffice it to say that I do not agree with this additional tax. It is not about closing loopholes, as the Financial Secretary and her colleagues have said previously. It is purely about raising additional revenue. It is nothing to do with modernisation; it is about trying to fill the gap in the Treasury finances created by the disparity between the increase in public expenditure and the reducing revenues coming into the Treasury.

The first point of contradiction that I want the Financial Secretary to explain relates to why, initially, the Chancellor and his Treasury team said that these measures would be revenue-neutral. The Treasury then gave a figure of £250 million, which was reduced to £230 million, and I understand from her opening remarks that it is now £170 million. As I told the hon. Member for Yeovil (Mr. Laws), the figure from the British Retail Consortium—which relates to retailers who are members of that organisation, and not the totality of retailers in the United Kingdom by any means—is £200 million alone. That ignores businesses in the industrial market and the office market and businesses that take out smaller leases in different sectors, including the licensed premises sector and the restaurant sector.

The Government appear to believe that all leases are tax-avoidance schemes, but that is simply not true. As my hon. Friend the Member for Huntingdon (Mr. Djanogly) said, businesses need leases to create flexibility and ensure that their capital is not tied up in property so that they have spare capital to invest in opening new stores or expanding their factories or office premises, which generates additional employment and allows them to go forward. The briefing for the debate written by the Royal Institution of Chartered Surveyors supports that point.

It is worth pinpointing several serious side effects of the measures, although I have highlighted them before. The Association of Licensed Multiple Retailers has produced pertinent statistics that we should all take on board before deciding whether the additional tax will be good for the economy, businesses and jobs. Its survey shows that the impact of the new lease duty will mean that 85 per cent. of retailers will not invest in certain areas, 80 per cent. will limit expansion, 61 per cent. will want shorter leases and 40 per cent. will cut jobs. If that would not be serious for the economy, I do not know what would be. We would have to cope with that in our constituencies. Marginal sites will be hit and such sites tend to be in areas with socio-economic deprivation. We need to regenerate those areas, not hit them hard with additional taxation.

The measures will affect employment. The retail sector employs a significant number of people in our constituencies. Some 5,500 people—12 per cent. of the work force—are employed in the retail sector in Boston and Skegness, which is a slightly higher percentage than average. In East Ham, 23 per cent. of the work force are employed in the retail sector and the figure is 24 per cent. in Thurrock—one in four people are employed in the retail sector in that constituency. The measures will have a dramatic impact on job creation and sustainability in the retail sector. They are diametrically opposed to what the Government have been talking about, although such contradiction is not peculiar, because they go against a flexible, entrepreneurial and dynamic economy.

I have asked several specific questions about the measures before but no answers have been forthcoming, so I hope that the Financial Secretary will answer them in her winding-up speech. How did the Government arrive at the net asset figure of £150,000 because no one seems to know where the figure came from? More appropriate figures have been proposed, such as the much more sensible threshold of £500,000 that was suggested by the consortium led by the CBI that wrote to the Financial Secretary during the summer. I was interested to hear her cite the results of the Investment Property Databank regarding the collation of the property market information. As far as I am concerned, it did not say that 60 per cent. of leases will be caught but that 98 per cent. of the value of all leasehold transactions in the United Kingdom will be caught by the measure—almost all leases. It has been argued that the average length of a lease is 10 years but leases are generally longer than that, especially those for prime properties. Therefore, if a lease had a net asset value of £150,000, the rent paid would be between £10,000 and £12,000 a year, which is low for commercial property these days.

My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) mentioned the subject of my second question during his polished and articulate speech. Where does the 3.5 per cent. figure for discounted cash flow come from because it bears no relation to commercial practice? The team that was led by the CBI suggested alternative figures. One cannot borrow money commercially at an interest rate of 3.5 per cent. or issue bonds with a gilt yield of 3.5 per cent., so there is no correlation between the Government's figure and the reality in the marketplace.

I was intrigued and surprised to hear the Minister confirm that 60 per cent. of leasehold transactions would be exempt. According to a written answer to the Leader of the Opposition, the then shadow Chancellor, that figure was 87 per cent. The British Retail Consortium says that only 30 per cent. of leases will be exempt. The British Property Federation says that no leasehold transactions will be exempt in the City of London. The Royal Institution of Chartered Surveyors strongly supports the IPD's view that 98 per cent. of the value of commercial leases will be subject to lease duty. I know whom I would believe.

It is highly unlikely that the changes in stamp duty will be limited to increases of four to eight times. That will have a direct impact on the money that those with longer leases, up to 35 years, will be prepared to invest in new properties. I have in mind those who occupy retail warehouse units or those with licensed premises who need that length of lease to enable them to write off shop-fitting costs.

Why did the Treasury reject the proposals alluded to or specifically suggested by the group led by the CBI? If we accept the need to tidy up or, to use the Treasury's term, modernise, then a graduated tax rate, an exemption threshold of £500,000 and an increase in the discount rate from 3.5 to 7 per cent. are eminently sensible ideas.

The tax increase has serious implications for the commercial property market. Not only will there be market distortions, but shorter leases, which will inevitably affect the capital value of property and the capital and human investment that firms are prepared to make in their businesses. As my right hon. Friend the Member for Charnwood (Mr. Dorrell) said, it will reduce Exchequer yield because it will reduce and lessen economic activity.

The tax increase will also affect the UK's competitiveness in the global economy. Retailers make decisions on an international basis. They do not necessarily decide just to go from one town to another. International retailers that are based in the United States, parts of continental Europe or the UK have branches abroad. The United States and Germany have no taxation on the granting of new leases, so we are making ourselves uncompetitive. Potential investors outside and inside the UK are worried about whether they should leave their money in this country as the commercial property market is hit.

We discussed the impact on the UK property investment market, but it is not simply the traditional property investment sectors—retail, industrial and offices—that will be affected. The hon. Member for Chatham and Aylesford (Jonathan Shaw) made a pertinent point. The proposal will have significant impacts on tangential investment sectors based on the premise that, as the stamp duty takes a hold, leases will become shorter and capital values will be lowered. The only way to support the value if capital values decrease is by increasing rent, but as tenants cannot afford to pay increasing rents, some investors will withdraw from tangential sectors.

The specific examples given to me of sectors that will be hardest hit are those that should most concern the Government. They include hospitals, nursing homes, learning disability units and brain injury units. The main investor in that market said that, if the stamp duty regime is introduced, it will withdraw from the sector, having a direct impact on the Government's ability to increase their public sector provision.

The Treasury has provided an online calculator for small businesses. That is obviously on the internet. My constituency in rural Lincolnshire does not have broadband. People do not have access to such facilities. I hope that the Treasury has other ways to communicate with businesses and professionals to ensure that information is disseminated to the relevant people as soon as possible, especially in light of the fact that there are only 13 working days to go.

When the rate increases are combined with property costs, the second biggest factor facing employers after wages, that challenges all the Government's lines on job creation and regeneration, which supposedly encourage a thriving, dynamic and entrepreneurial business sector. That does not fit comfortably with those reassurances. I am pleased that there is now some clarity in the orders, particularly regarding sale and lease-backs. However, it is not obvious whether, in the sale and lease-back proposals, the relief applies just to freehold to leasehold, or long leasehold to normal leasehold.

David Taylor (North-West Leicestershire)

Surely the hon. Gentleman is aware that there is relief without limit for the conveyancing and leasing of non-residential property in disadvantaged areas. Could the Treasury not tackle the problems in his constituency and elsewhere by broadening the definition of those areas?

Mr. Simmonds

The hon. Gentleman made an interesting intervention, but he may not understand a point made by both the hon. Member for Yeovil (Mr. Laws) and myself. A change would not necessarily help because the definition would still be based on the affluence or otherwise of the residential population, not commercial activity in those areas. It is ludicrous, for example, that an enormously affluent and successful business environment such as Canary wharf should be completely exempt. Meadowhall shopping centre just outside Sheffield is also exempt, adding £50 million to its value. I think that it equates to 1p for the net asset value of the company that owns it.

Mr. Laws

The hon. Gentleman is making an effective point. Does he agree that the Government define many major city centres as deprived, so all the businesses in the area, even those selling to affluent shoppers, are exempt? In many other parts of the country, businesses are bearing a burden that they can ill afford to bear.

Mr. Simmonds

The hon. Gentleman made a good point, and he is right. My understanding is that in Birmingham, Manchester and Leeds the whole city centre is exempt, which is not right, as other commercially disadvantaged areas will be hit by the proposals.

There are two remaining issues that I would like the Financial Secretary to deal with today, or respond in writing if she does not have the facts at her fingertips. What happens if there is a 10-year lease with a three-year break clause? Is the stamp duty based on the length of lease up to the break clause, or on the entire lease? That would make a significant difference to the sums involved. I should like to have a much more detailed conversation about turnover leases, because I am not sure that the Financial Secretary understands how they operate, given her answer to my intervention, but I shall not ask about that now. However, what happens when a tenant takes a five-year lease in a shopping centre, trades for only one year, and then the shopping centre shuts? Do they get their money back? Is there a rebate system, or is it a case of the Government taking their whack, and it is just tough for the tenant? Such situations can arise in deprived areas.

In conclusion, the orders make provision for a minimum eightfold increase, and will damage flexibility in the marketplace. They may lead to lower investment, reduced margins and job losses. Furthermore, the Government have ignored the consultation process. The regulations will have an unnecessary and negative impact on a vital area of the economy merely to correct the Chancellor's financial and fiscal irresponsibility. I very much hope, therefore, that the Government will reconsider their proposals.

5.8 pm

Ruth Kelly

With the leave of the House, Mr. Deputy Speaker, I shall wind up our debate on the regulations. It is worth reminding hon. Members why we introduced the reforms in the first place and on what basis we did so. The reform of stamp duty land tax is a wholesale reform of tax on land transactions, and is not something that hon. Members should shy away from. It is a long overdue tax reform, which was welcomed in discussions of the Finance Act 2003 as a much-needed measure to modernise the system.

Mr. Laws

Do any professional or business bodies welcome the proposals as they stand?

Ruth Kelly

I am putting these lease duty proposals in the context of the broader package to reform stamp duty—an absolutely essential, but complex, tax reform that previous Administrations long shied away from. Reforming tax on leases, specifically on their rental element, is an integral part of that root and branch reform.

The right hon. Member for Charnwood (Mr. Dorrell) argued—to put it in one sentence—that he could not support an increase in the rate on leases because stamp duty is a transaction tax. I recognise his point, but the reality is that Governments of all persuasions, in many countries, have used stamp duty as a cheap and efficient way of raising revenue. Indeed, many countries have far higher levels of stamp duty than those currently operating in the UK. Given that stamp duty embraces an important quantum of revenue, it must be right to address anomalies, distortions and avoidance.

Mr. Dorrell

rose—

Mr. Laws

rose—

Ruth Kelly

I want to finish my point before giving way.

Stamp duty land tax does just that. It ensures that the tax is fair to all taxpayers, including those who were previously avoiding it. The charge on new leases is an integral part of that, as leases represent an interest in land.

Mr. Dorrell

The Financial Secretary seems to he arguing that although she recognises that capital transaction taxes cause distortion, because other countries have them we should feel free to close our revenue gap by increasing the yield from precisely those taxes. Can she explain her case a little further?

Ruth Kelly

Is the right hon. Gentleman arguing for the abolition of all capital taxes? If so, where would he raise the revenue from?

Mr. Dorrell

All taxes distort; but in raising revenue, we should recognise that the more we raise taxes based on capital transactions, the more economic damage we do. That should be an even further incentive on the Treasury to begin to exercise some control over public expenditure.

Ruth Kelly

I am sure that we could debate this subject for hours, but this is not the appropriate forum in which to do so. It has long been accepted on both sides of the House that there is an argument for taxing transactions and interests in land. What we have done, and propose to do, is to modernise the way in which that tax regime operates.

David Taylor

Does my hon. Friend agree that the right hon.—and unjustly overlooked—Member for Charnwood (Mr. Dorrell) was wrong in one aspect of his critique of capital taxes, in that he suggested that they were innately cliff-edge taxes? That is not so if a graduated form is introduced. Might the Chancellor receive submissions to that effect?

Ruth Kelly

I have listened to my hon. Friend's comments, and I will draw them to the attention of my right hon. Friend the Chancellor.

It is only fair that the granting and transfer of leases is also subject to lease duty where transactions and transfers are subject to that tax.

Mr. Laws

Will the Minister give way?

Ruth Kelly

I want to make some progress: I shall give way in due course.

The distortions apparent in stamp duty, where the rate of duty is increased at eight and 36 years, are not a feature of stamp duty land tax. The tax is charged at a flat rate of 1 per cent. of the net present value over the relevant threshold. A business takes into account the economics of the transaction when it enters into it. Stamp duty land tax places a value on the benefit received by a business entering into a lease transaction using lease length and rental payments as determining factors. That is no different from modern valuation and accounting practice. For example, the International Accounting Board is to recommend that all leases are shown as assets on the balance sheets of companies that have them. Stamp duty land tax uses a method to calculate that value, then applies a tax rate to it.

The proposed structure for taxing lease rentals is more in line with the structure for taxing freeholds, but it acknowledges that leases are not the same as freeholds because the rate is set at a flat 1 per cent. instead of being dependent on value. That contrasts with the old stamp duty regime, which it replaces. It determined tax rate by the term of a lease. To assist smaller businesses and start-ups, the new regime taxes only the excess value over the appropriate threshold.

Mr. Laws

I do not know whether I heard the Financial Secretary correctly earlier. Will she confirm that she gave an indication to the House that, in tackling the distortions and threshold effects in stamp duty, she will actively consider them in the residential market? The latter arise as a consequence of the application of stamp duty thresholds. Will she introduce proposals to deal with that in the next pre-Budget report?

Ruth Kelly

I shall take the hon. Gentleman's comments as an early Budget representation and convey them to my right hon. Friend the Chancellor.

In determining the form of stamp duty land tax, I have been acutely aware that the reforms are not welcomed by the whole leasing community. Conservative Members have made comments to that effect. However, the reforms will exempt far more leases from the duty than the old stamp duty regime. In my opening statement, I made it clear that 60 per cent. of all leases would be exempt from stamp duty land tax. I listened to the comments of the hon. Member for Boston and Skegness (Mr. Simmonds). Although I understand that the IPD said that 98 per cent. of the value of leases will be subject to tax—I have no reason to dispute those figures, which are consistent—it underlines my point that small leases and start-ups will be exempt from the impact of the tax. We specifically designed it to be consistent with a small business agenda.

As I said earlier, 93 per cent. of leases in the residential sector will be exempt from the tax. In the Budget, my right hon. Friend the Chancellor offered more consultation with the industry and we undertook precisely that. The process provided much valuable information on the leases that businesses take out. For example, for the first time, we had genuine data on sale and lease-back transactions. Those data informed our subsequent judgments.

The consultation was fully taken into account in the decisions on the new regime. Through the consultation process, we could preferentially target small businesses and start-ups to ensure that they were significantly less likely to face an increase in tax from the measures and that most small businesses would be exempt from the tax.

Mr. Prisk

Will the Financial Secretary give way?

Ruth Kelly

I must make some progress because time is passing.

Earlier, I outlined the five principles against which we would test any measures that were proposed in the consultation process. I do not propose to repeat them. We did not receive a significant representation that fulfilled the tests. The hon. Member for Boston and Skegness mentioned the CBI proposal that received much support from the industry. It was one of several comprehensive proposals that were considered in detail. Although it claimed to be simple, it reintroduced a stepped duty rate and extended it over 40 years. That is a step backwards from modernisation and reminiscent of the old stamp duty regime.

The CBI proposal also used a discount rate of 7 per cent. For short leases, that makes little practical difference to the net present value, which is calculated using a discount rate of 3.5 per cent. The main effect of a 7 per cent. discount rate would be on longer leases, which larger, more mature businesses, rather than start-ups and those with smaller value leases, typically take out. We consider that the longer the term of a lease, the more like a freehold it becomes. Given that the tax is set at a flat rate of 1 per cent.—a quarter of the rate of tax on freeholds—I could see no justification for lowering the discount rate on the longer-term leases.

Earlier, I also explained why 3.5 per cent. represents a risk-free rate.

Mr. Laws

Does the Financial Secretary accept that a specific sector—the leisure and pub sector—has a problem with the proposals? The nature of the business means that members of that sector have long leases. Does the Financial Secretary accept that the vast majority of businesses in that sector will be hit? Will she therefore agree to reconsider the effects on it?

Ruth Kelly

I am sure that the hon. Gentleman will understand that it is not possible to ensure that the measures will impact exactly equally on each sector across the economy, as each sector has its own particular requirements. I am confident, however, that in general the increase in the threshold will mean that, in most sectors, more businesses will be exempt from the tax than were exempt under the old stamp duty regime.

The hon. Member for Hertford and Stortford (Mr. Prisk) mentioned the licensed trade sector. Representations from the licensed trade were made throughout the consultation process, and we are grateful for that input. From the information supplied by a representative body in that sector, we learned that very few leases in the licensed trade were exempt from stamp duty under the current regime. The effect of the increase in the threshold will be that more than 30 times the number of leases in that sector will be exempt from stamp duty land tax as were exempt from stamp duty. The introduction of the slide system will mean that a further 5 per cent. of such leases will pay less stamp duty land tax than they are paying under the current system.

I shall try to address a few of the other points that have been raised today. The hon. Member for Huntingdon (Mr. Djanogly) argued that long-term leases would be penalised and that there would he a move towards short leases with less security. I would argue that our policy encourages flexibility in the lease market. Shorter leases provide a form of flexibility, and should that happen, it would be in line with Government policy. The hon. Gentleman made an important point about the security of businesses, but that is taken into account in the net present value calculation, wherein longer, more secure leases will have a higher net present value, reflecting that security, and will consequently pay more stamp duty land tax.

Several hon. Members mentioned pension funds, and I think that I can lay their fears to rest. When there is a change in the trustees—in other words, when there is a transfer between different pension schemes—there is now no charge imposed by the stamp duty land tax. I hope that I can reassure Members that the measures should not have a direct impact on pension funds.

The hon. Member for Hertford and Stortford asked whether the forms had been distributed, and I promised that I would return to that point during my winding-up speech. I have examined the forms closely, which I believe are currently being issued. Starter packs of forms are currently being dispatched to every relevant firm in the United Kingdom, and bulk orders are being taken by the Inland Revenue forms order line. However, if any solicitor or conveyancer should find themselves without a form, they can, as a fallback, get them from their local stamp office. I am not saying that I expect that to happen, but that facility exists, in case anyone is worried about that before the introduction of the new tax.

I was very impressed by the level of very detailed knowledge that the hon. Member for Hertford and Stortford showed when examining the regulations. I am sure that that derives from his previous experience of working in this field. I could address all those points—or, at least, as many as I managed to write down while he was speaking. He mentioned the complexity of the formula, and we will of course be providing an online calculator. For those firms that do not have access to that, the Inland Revenue will be perfectly willing to help anyone who phones in and asks for the calculation to be made on their behalf. I am sure that the hon. Gentleman need not be too worried about many of the points that he raised. I can write to him in due course to set the record straight. For example, he asked what was meant by "same premises" in relation to sale and lease-back relief, and I can assure him that it means the same area of land, not the same building. He also asked about chain breaking, and why we were excluding sole traders. I can inform him, following the consultation in which we have engaged, that the businesses active in this market are companies, or companies that organise themselves into partnerships, so the relief is targeted at those who need to benefit from it.

The hon. Gentleman's points on chain breaking were also relevant. He mentioned asbestos, and asked whether the threshold was high enough to allow firms to refurbish their properties when dealing with asbestos. I can assure him that the cost of dealing with asbestos does not count as part of ordinary refurbishment costs and would therefore be exempt from that limit.

I remind the House that the regulations that we are laying today will modernise the system. They are fair, and they will ensure that all businesses pay their fair share of lease duty.

They relieve companies in many ways. There is relief for chain-breaking companies and those involved in employee relocation, sale and lease transactions and surrender and re-grant of leases. There are provisions to reduce the compliance burden, and to provide certainty with regard to leases involving uncertain rents.

For those reasons, I commend the regulations to the House.

Question put:—

The House divided: Ayes 313, Noes 189.

Division No. 361] [5:25 pm

AYES
Adams, Irene (Paisley N)	Dawson, Hilton
Ainger, Nick	Dean, Mrs Janet
Ainsworth, Bob (Cov'try NE)	Dhanda, Parmjit
Allen, Graham	Dismore, Andrew
Anderson, Janet (Rossendale &	Dobbin, Jim (Heywood)
Darwen)	Dobson, rh Frank
Armstrong, rh Ms Hilary	Donohoe, Brian H.
Atkins, Charlotte	Doran, Frank
Bailey, Adrian	Dowd, Jim (Lewisham W)
Baird, Vera	Drew, David (Stroud)
Barnes, Harry	Dunwoody, Mrs Gwyneth
Barron, rh Kevin	Eagle, Angela (Wallasey)
Battle, John	Edwards, Huw
Beard, Nigel	Efford, Clive
Beckett, rh Margaret	Ellman, Mrs Louise
Bennett, Andrew	Ennis, Jeff (Barnsley E)
Benton, Joe (Bootle)	Etherington, Bill
Berry, Roger	Field, rh Frank (Birkenhead)
Best, Harold	Fisher, Mark
Blackman, Liz	Fitzsimons, Mrs Lorna
Blizzard, Bob	Flint, Caroline
Boateng, rh Paul	Flynn, Paul (Newport W)
Borrow, David	Follett, Barbara
Bradley, rh Keith (Withington)	Foster, rh Derek
Bradley, Peter (The Wrekin)	Foster, Michael (Worcester)
Bradshaw, Ben	Foster, Michael Jabez (Hastings
Brennan, Kevin	& Rye)
Brown, rh Nicholas (Newcastle E	Gardiner, Barry
Wallsend)	George, rh Bruce (Walsall S)
Browne, Desmond	Gerrard, Neil
Bryant, Chris	Gibson, Dr. Ian
Burden, Richard	Gilroy, Linda
Burgon, Colin	Goggins, Paul
Burnham, Andy	Griffiths, Nigel (Edinburgh S)
Byers, rh Stephen	Grogan, John
Cairns, David	Hain, rh Peter
Campbell, Alan (Tynemouth)	Hall, Patrick (Bedford)
Campbell, Mrs Anne (C'bridge)	Hamilton, David (Midlothian)
Casale, Roger	Hamilton, Fabian (Leeds NE)
Caton, Martin	Hanson, David
Cawsey, Ian (Brigg)	Harris, Tom (Glasgow Cathcart)
Challen, Colin	Havard, Dai (Merthyr Tydfil
Chapman, Ben (Wirral S)	& Rhymney)
Chaytor, David	Healey, John
Clark, Dr. Lynda (Edinburgh	Henderson, Doug (Newcastle N)
Pentlands)	Henderson, Ivan (Harwich)
Clark, Paul (Gillingham)	Hendrick, Mark
Clarke, rh Tom (Coatbridge &	Hepburn, Stephen
Chryston)	Heppell, John
Clarke, Tony (Northampton S)	Hesford, Stephen
Coaker, Vernon	Heyes, David
Coffey, Ms Ann	Hill, Keith (Streatham)
Coleman, Iain	Hinchliffe, David
Colman, Tony	Hood, Jimmy (Clydesdale)
Connarty, Michael	Hope, Phil (Corby)
Cook, Frank (Stockton N)	Hopkins, Kelvin
Cook, rh Robin (Livingston)	Howarth, rh Alan (Newport E)
Cooper, Yvette	Howarth, George (Knowsley N &
Corbyn, Jeremy	Sefton E)
Cousins, Jim	Howells, Dr. Kim
Cranston, Ross	Hoyle, Lindsay
Crausby, David	Hughes, Beverley (Stretford &
Cruddas, Jon	Urmston)
Cryer, Ann (Keighley)	Hughes, Kevin (Doncaster N)
Cryer, John (Hornchurch)	Humble, Mrs Joan
Cunningham, Tony (Workington)	Hurst, Alan (Braintree)
Dalyell, Tam	Iddon, Dr. Brian
Davey, Valerie (Bristol W)	Illsley, Eric
David, Wayne	Irranca-Davies, Huw
Davidson, Ian	Jackson, Glenda (Hampstead &
Davies, rh Denzil (Llanelli)	Highgate)
Davies, Geraint (Croydon C)	Jamieson, David
Davis, rh Terry (B'ham Hodge H)	Johnson, Alan (Hull W)

Jones, Helen (Warrington N)	Naysmith, Dr. Doug
Jones, Jon Owen (Cardiff C)	Norris, Dan (Wansdyke)
Jones, Kevan (N Durham)	O'Brien, Bill (Normanton)
Jones, Lynne (Selly Oak)	O'Brien, Mike (N Warks)
Jones, Martyn (Clwyd S)	O'Hara, Edward
Jowell, rh Tessa	O'Neill, Martin
Joyce, Eric (Falkirk W)	Organ, Diana
Kaufman, rh Gerald	Osborne, Sandra (Ayr)
Keen, Alan (Feltham)	Owen, Albert
Keen, Ann (Brentford)	Palmer, Dr. Nick
Kelly, Ruth (Bolton W)	Perham, Linda
Kemp, Fraser	Pickthall, Colin
Khabra, Piara S.	Pike, Peter (Burnley)
Kidney, David	Plaskitt, James
Kilfoyle, Peter	Pollard, Kerry
King, Andy (Rugby)	Pond, Chris (Gravesham)
King, Ms Oona (Bethnal Green &	Pope, Greg (Hyndburn)
Bow)	Pound, Stephen
Knight, Jim (S Dorset)	Prentice, Ms Bridget (Lewisham
Kumar, Dr. Ashok	E)
Ladyman, Dr. Stephen	Prentice, Gordon (Pendle)
Lammy, David	Primarolo, rh Dawn
Lawrence, Mrs Jackie	Prosser, Gwyn
Laxton, Bob (Derby N)	Purchase, Ken
Lepper, David	Purnell, James
Leslie, Christopher	Quin, rh Joyce
Levitt, Tom (High Peak)	Quinn, Lawrie
Liddell, rh Mrs Helen	Rammell, Bill
Linton, Martin	Rapson, Syd (Portsmouth N)
Lloyd, Tony (Manchester C)	Raynsford, rh Nick
Lucas, Ian (Wrexham)	Reed, Andy (Loughborough)
Luke, Iain (Dundee E)	Reid, rh Dr. John (Hamilton N &
Lyons, John (Strathkelvin)	Bellshill)
McAvoy, Thomas	Robertson, John (Glasgow
McCafferty, Chris	Anniesland)
McCartney, rh Ian	Robinson, Geoffrey (Coventry
McDonagh, Siobhain	NW)
MacDonald, Calum	Rooney, Terry
McDonnell, John	Ross, Ernie (Dundee W)
MacDougall, John	Ruane, Chris
McFall, John	Ruddock, Joan
McGuire, Mrs Anne	Russell, Ms Christine (City of
McIsaac, Shona	Chester)
McKechin, Ann	Ryan, Joan (Enfield N)
McKenna, Rosemary	Salter, Martin
Mackinlay, Andrew	Sarwar, Mohammad
McNamara, Kevin	Savidge, Malcolm
Mactaggart, Fiona	Sedgemore, Brian
McWalter, Tony	Shaw, Jonathan
McWilliam, John	Sheerman, Barry
Mahmood, Khalid	Sheridan, Jim
Mallaber, Judy	Shipley, Ms Debra
Mandelson, rh Peter	Short, rh Clare
Mann, John (Bassetlaw)	Simon, Siôn (B'ham Erdington)
Marsden, Gordon (Blackpool S)	Simpson, Alan (Nottingham S)
Marshall, David (Glasgow	Singh, Marsha
Shettleston)	Skinner, Dennis
Marshall, Jim (Leicester S)	Smith, rh Andrew (Oxford E)
Marshall-Andrews, Robert	Smith, rh Chris (Islington S &
Martlew, Eric	Finsbury)
Meale, Alan (Mansfield)	Smith, Geraldine (Morecambe &
Merron, Gillian	Lunesdale)
Michael, rh Alun	Smith, Jacqui (Redditch)
Miliband, David	Smith, Llew (Blaenau Gwent)
Miller, Andrew	Soley, Clive
Mitchell, Austin (Gt Grimsby)	Spellar, rh John
Moffatt, Laura	Squire, Rachel
Mole, Chris	Starkey, Dr. Phyllis
Moran, Margaret	Stevenson, George
Morgan, Julie	Stewart, David (Inverness E &
Morley, Elliot	Lochaber)
Morris, rh Estelle	Stewart, Ian (Eccles)
Mountford, Kali	Stinchcombe, Paul
Mudie, George	Strang, rh Dr. Gavin
Munn, Ms Meg	Stringer, Graham
Murphy, Jim (Eastwood)	Stuart, Ms Gisela

Tami, Mark (Alyn)	Watts, David
Taylor, rh Ann (Dewsbury)	White, Brian
Taylor, Dari (Stockton S)	Whitehead, Dr. Alan
Taylor, David (NW Leics)	Wicks, Malcolm
Thomas, Gareth (Clwyd W)	Williams, rh Alan (Swansea W)
Tipping, Paddy	Williams, Betty (Conwy)
Todd, Mark (S Derbyshire)	Wills, Michael
Touhig, Don (Islwyn)	Winnick, David
Trickett, Jon	Winterton, Ms Rosie (Doncaster
Truswell, Paul	C)
Turner, Dennis (Wolverh'ton SE)	Wood, Mike (Batley)
Turner, Neil (Wigan)	Wright, Anthony D. (Gt
Twigg, Stephen (Eniield)	Yarmouth)
Tynan, Bill (Hamilton S)	Wright, David (Telford)
Vaz, Keith (Leicester E)	Wright, Tony (Cannock)
Vis, Dr. Rudi	Wyatt, Derek
Walley, Ms Joan
Ward, Claire	Tellers for the Ayes:
Wareing, Robert N.	Derek Twigg and
Watson, Tom (W Bromwich E)	Jim Fitzpatrick
NOES
Ainsworth, Peter (E Surrey)	Fallon, Michael
Allan, Richard	Field, Mark (Cities of London &
Amess, David	Westminster)
Arbuthnot, rh James	Flight, Howard
Bacon, Richard	Flook, Adrian
Baker, Norman	Forth, rh Eric
Baldry, Tony	Foster, Don (Bath)
Baron, John (Billericay)	Francois, Mark
Barrett, John	Garnier, Edward
Beggs, Roy (E Antrim)	George, Andrew (St. Ives)
Bercow, John	Gibb, Nick (Bognor Regis)
Beresford, Sir Paul	Gidley, Sandra
Blunt, Crispin	Goodman, Paul
Boswell, Tim	Gray, James (N Wilts)
Bottomley, Peter (Worthing W)	Grayling, Chris
Bottomley, rh Virginia (SW	Green, Damian (Ashford)
Surrey)	Green, Matthew (Ludlow)
Brady, Graham	Greenway, John
Brake, Tom (Carshalton)	Grieve, Dominic
Brazier, Julian	Hague, rh William
Breed, Colin	Hammond, Philip
Brooke, Mrs Annette L.	Hancock, Mike
Bruce, Malcolm	Harvey, Nick
Burnett, John	Hawkins, Nick
Burns, Simon	Hayes, John (S Holland)
Burstow, Paul	Heald, Oliver
Burt, Alistair	Heath, David
Butterfill, John	Heathcoat-Amory, rh David
Cable, Dr. Vincent	Hendry, Charles
Calton, Mrs Patsy	Hermon, Lady
Cameron, David	Hoban, Mark (Fareham)
Campbell, rh Menzies (NE Fife)	Hogg, rh Douglas
Carmichael, Alistair	Horam, John (Orpington)
Cash, William	Howard, rh Michael
Chapman, Sir Sydney (Chipping	Howarth, Gerald (Aldershot)
Barnet)	Hughes, Simon (Southwark N)
Chidgey, David	Jack, rh Michael
Chope, Christopher	Jackson, Robert (Wantage)
Clappison, James	Jenkin, Bernard
Clifton-Brown, Geoffrey	Johnson, Boris (Henley)
Cotter, Brian	Jones, Nigel (Cheltenham)
Cran, James (Beverley)	Kennedy, rh Charles (Ross Skye &
Curry, rh David	Inverness)
Davey, Edward (Kingston)	Key, Robert (Salisbury)
Davis, rh David (Haltemprice &	Kirkwood, Sir Archy
Howden)	Laing, Mrs Eleanor
Djanogly, Jonathan	Lait, Mrs Jacqui
Dorrell, rh Stephen	Lamb, Norman
Doughty, Sue	Laws, David (Yeovil)
Duncan, Alan (Rutland)	Leigh, Edward
Duncan, Peter (Galloway)	Letwin, rh Oliver
Evans, Nigel	Lewis, Dr. Julian (New Forest E)
Ewing, Annabelle	Liddell-Grainger, Ian
Fabricant, Michael	Lidington, David

Lilley, rh Peter	Selous, Andrew
Llwyd, Elfyn	Shephard, rh Mrs Gillian
Loughton, Tim	Shepherd, Richard
Luff, Peter (M-Worcs)	Simmonds, Mark
McIntosh, Miss Anne	Simpson, Keith (M-Norfolk)
Mackay, rh Andrew	Smyth, Rev. Martin (Belfast S)
Maclean, rh David	Soames, Nicholas
McLoughlin, Patrick	Spicer, Sir Michael
Malins, Humfrey	Spink, Bob (Castle Point)
Maples, John	Spring, Richard
Marsden, Paul (Shrewsbury &	Stanley, rh Sir John
Atcham)	Steen, Anthony
Mates, Michael	Streeter, Gary
Mawhinney, rh Sir Brian	Stunell, Andrew
May, Mrs Theresa	Swire, Hugo (E Devon)
Mercer, Patrick	Syms, Robert
Mitchell, Andrew (Sutton	Tapsell, Sir Peter
Coldfield)	Taylor, Ian (Esher)
Moore, Michael	Taylor, John (Solihull)
Moss, Malcolm	Taylor, Matthew (Truro)
Murrison, Dr. Andrew	Teather, Sarah
Norman, Archie	Thomas, Simon (Ceredigion)
Oaten, Mark (Winchester)	Tredinnick, David
O'Brien, Stephen (Eddisbury)	Trend, Michael
Öpik, Lembit	Turner, Andrew (Isle of Wight)
Osborne, George (Tatton)	Tyler, Paul (N Cornwall)
Ottaway, Richard	Tyrie, Andrew
Page, Richard	Walter, Robert
Paterson, Owen	Waterson, Nigel
Pickles, Eric	Watkinson, Angela
Portillo, rh Michael	Webb, Steve (Northavon)
Price, Adam (E Carmarthen &	Weir, Michael
Dinefwr)	Whittingdale, John
Prisk, Mark (Hertford)	Wiggin, Bill
Pugh, Dr. John	Willetts, David
Randall, John	Williams, Hywel (Caernarfon)
Redwood, rh John	Williams, Roger (Brecon)
Reid, Alan (Argyll & Bute)	Wilshire, David
Rendel, David	Winterton, Ann (Congleton)
Robathan, Andrew	Winterton, Sir Nicholas
Robertson, Angus (Moray)	(Macclesfield)
Roe, Mrs Marion	Wishart, Pete
Rosindell, Andrew	Young, rh Sir George
Ruffley, David
Russell, Bob (Colchester)	Tellers for the Noes:
Sanders, Adrian	Gregory Barker and
Sayeed, Jonathan	Mr. Peter Atkinson

Question accordingly agreed to.

Resolved, That the Stamp Duty and Stamp Duty Land Tax (Variation of the Finance Act 2003) (No. 2) Regulations 2003 (S.I., 2003, No. 2816), dated 5th November 2003, a copy of which was laid before this House on 5th November, be approved.