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Abolition Of Development Land Tax And Tax On Development Gains

Volume 82: debated on Wednesday 10 July 1985

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I beg to move amendment No. 157, in page 90, line 1, leave out clause 89.

This is the clause which abolishes development land tax, and we discussed it in some detail in Committee of the whole House.

The right hon. Gentleman says, "Absolutely". Since he has been watching the proceedings with interest and no doubt has been considering events outside the House, he will know that the purpose of the clause has been widened as a result of the ingenious schemes pursued by tax lawyers since our debate in Committee of the whole House. I am glad that the right hon. Gentleman sees the clause as so important that he has decided to attend the debate.

The clause abolishes development land tax, at a cost of £50 million — [HON. MEMBERS: "Hear, hear."] I recognise that that is popular among Government supporters, but the Opposition take a different view. The purpose of the amendment is to debate loopholes which have emerged as a result of the sloppy drafting of the Bill since our debate in Committee of the whole House.

The Government's intention, as announced in the Budget by the Chancellor of the Exchequer and repeated in our debate in Committee of the whole House, is to abolish development land tax with effect from the date of the Budget announcement. Subsequently, it has become clear that it is possible that development land tax has been abolished with effect before the date of the Budget, and it has happened in two ways.

It has become clear that it is possible for developers to use an existing deemed disposal in such a way that they can change the basis of the development land tax charge and avoid the charge which they would otherwise have incurred.

I give an example, which I take from an interesting article in The Law Society's Gazette of 8 May. The author points out that a developer who had planning permission to build 100 houses and whose development was due to last four years could have become liable to development land tax at the beginning of, say, March as a result of giving notice of the beginning of his project. If, after the Budget statement, he changed his mind and decided to build a smaller number of houses — say, 10 instead of 100 houses — to leave the other 90 houses until a later date and therefore to a later decision, and served a notice of variation of the project so that he was only taxed on a project for 10 houses, in the future he could change his mind again and decide to build more houses—90, 89 or 91 — and this decision and the development of the land would not be taxed.

There is the possibility of applying the decision in the case of Furniss v. Dawson about a pre-ordained series of transactions being taken as a single composite transaction where steps had been inserted which had no commercial purpose other than that of avoiding tax. However, it is clear that when this project began it was not pre-ordained that the other steps would follow, and it could be held that the variation of the project and the subsequent project could not be treated as a series of transactions or that that series of transactions could be ignored by the Revenue. It would be possible for a developer to avoid tax, especially if he could argue that there was some other commercial purpose for the variation and for the new project. As the author of the article pointed out, there could well be no problem in finding such reasons. The changes would mean that developers would not be liable for development land tax, which the Government intend them to pay.

I am aware that other clauses seek to prevent tax avoidance, but as the author of the article points out, in practice the clauses are not operated. That is one way in which a developer could avoid the stated intention of the Chancellor of the Exchequer on development land tax, which was that if a developer had already incurred liability on the date of the Budget statement, the tax would be payable.

A second way for a developer to avoid his tax liability would be to rescind a contract for the sale for development. With a contract which disposes of land the developer becomes liable for tax, but that liability can be extinguished by rescinding the contract before completion, and therefore vitiating the pre-19 March disposal. Again, the Opposition believe that people whom the Chancellor intends should pay tax, could avoid it.

We are drawing those two loopholes to the attention of the Economic Secretary. I am glad that he will reply to the debate because, in a previous debate on Report, I drew his attention to a loophole which the Government were blocking, but only after waiting 11 months. I also drew his attention to a second loophole involving the same tax, and asked him whether the Government intended to block it before they lost money, but he could not answer that question.

This time I hope that the hon. Gentleman will answer because next year the Treasury will not be able to block these loopholes. The developers will have got away with it, and the law will have applied as it is now. If, as the article suggests, those loopholes exist, the Treasury Ministers and the Chancellor of the Exchequer are obliged to ensure that the Budget statement of 19 March is put into effect by blocking these loopholes tonight.

The hon. Member for Birmingham, Hodge Hill (Mr. Davis) raises a question which derives from an article in The Law Society's Gazette of 8 May, in which Mr. Clifford Joseph, a barrister, suggested that development land tax on existing disposals or projects could be mitigated through arrangements involving rescission of existing contracts or variation of projects. However, he then said that purely contrived schemes could be challenged by the Inland Revenue on the strength of the House of Lords decision in the Furniss v. Dawson case.

I have asked the Inland Revenue to study the implications, but I understand that no cases have come to its attention, in which post-Budget rescissions have been made of pre-Budget contracts. I note the hon. Gentleman's comments, and shall certainly ensure that his points are followed up.

What will happen if the hon. Gentleman finds such a case? Why not block the loophole before the Bill is enacted? How will the Inland Revenue know whether the contracts have been rescinded or varied? Perhaps it is given notice. The developers who intend to use the loophole may well be waiting until the Bill is enacted, or at least has completed its Report and Third Reading. By then it will be too late for the Government to block the loopholes. Why have they not taken action? They have had two months since The Law Society's Gazette drew it to everybody's attention. What are they waiting for? On Monday they managed to table amendments to change the basis of capital gains tax. Why are they not prepared to stop developers avoiding development land tax? They have had two months, not two days.

12.45 am

The hon. Gentleman is correct to say that the matter was drawn to public attention some time ago. Had there been evidence of a serious risk of circumvention of the proposals, it would have been possible to frame means of dealing with that in the Bill. The matter has been drawn to the attention of the Revenue and I have asked that it should respond. It has advised me that no such cases of rescission have come to its notice. That is as far as I can reassure the hon. Gentleman.

How significant is that explanation? Does the Minister expect any examples of rescission — all examples of rescission and all rescissions and variations — to come to the notice of the Revenue? Is he saying that, if there are rescissions or variations the Inland Revenue is informed, or do we rely on pot luck?

Notice is not automatic, but the Revenue keeps in touch with these matters. Of course, there cannot be rescission unless there is existence in the first place.

I am not satisfied with that explanation. The Treasury has had long enough to look into these matters. I do not intend to delay the proceedings this evening by calling a Division, but I put it on record that the Government are happy to wait until a loophole has been exploited before they say or do anything about it, if they do. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.