Question again proposed, That the amendment be made.
Thank you, Mr. Deputy Speaker.
Sections 29 and 30 of the Energy Act 2004 were intended to prevent BNFL site licensee companies from incurring corporation tax charges as a consequence of accounting entries made to reflect the assumption of financial responsibilities for the decommissioning and cleaning up of certain civil nuclear sites by the NDA. As I said in Committee, the House agreed the provision to prevent a large amount of Government money from moving in circles. To be precise, it was intended to make sure that in transfers from public bodies, one public body does not have a tax-deductible loss, while the other public body receiving the assets has a gain that is also not taxable.
In Committee, my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) mentioned discussions on state aid issues subsequent to the 2004 Act. There was a mismatch between what was agreed by this House in the 2004 Act and subsequent clarifications on state aid. What is proposed now—it was included in the state aid notification in respect of the NDA—is not considered as state aid, because the effect of the exemption is tax neutral with respect to the Government, which is why I have mentioned the circular effect between publicly owned bodies. The provision allows accounting entries without the problem of money coming in with one hand and going out with the other.
My hon. Friend the Member for Wolverhampton, South-West has asked about the cost of decommissioning on the historic provisions of nuclear civil sites. That has nothing to do with the future, should there be one, because the matter is completely outside the arrangements. Clauses 99 and 100 were included in the Finance Bill because it was the next available parliamentary vehicle to correct the provisions in the 2004 Act, and I assure my hon. Friend that the clauses were not about preparing for a transfer to the private sector.
Section 29 of the 2004 Act, which is amended by clause 99, applies to accounting entries made for accounting periods during which a company is publicly owned. Where a company is sold during an accounting period, section 29 treats the end of the public ownership as the end of the accounting period. Section 29 does not, therefore, apply to accounting entries made for accounting periods during which the company is in the private sector. At that point, the normal tax rules would apply to that company. Section 29 applies only to public sector companies. I hope that I have clarified that.
I am talking about the creation of the Nuclear Decommissioning Authority and the movement from its predecessor authority, which is all that these provisions cover. The position as regards state aid confirms that it is tax neutral; otherwise, it would not get state aid. These provisions concern the arrangements in the Energy Act for transferring from one public body to another. The accounting period for those public bodies would end as soon as they became private companies and moved beyond the scope of the provisions.
My final point is not directly relevant to the clause but may help the House. Under the 2004 spending review, the Nuclear Decommissioning Authority received a budget of £2.2 billion for 2005-06. That is to be derived half from commercial activities and, over time, commercial income in recognising those costs. As I understand it, the proposals on tax neutrality within Government, having been agreed by this House in 2004, had to be amended following a mismatch with regard to timing. The Bill lines that up again to preserve the position. I can absolutely confirm to the House that there is no question of state aid subsidies, nor can there be given the clearance that we have sought.
On that basis, I hope that my hon. Friend the Member for Wolverhampton, South-West, who follows these issues with great interest and in some detail, will not press his amendment. I feel that his questions are more relevantly directed to the future than to the past, whereas these clauses are directed to the past and to ensuring that we discharge our responsibilities on nuclear decommissioning.
I thank my right hon. Friend for clearly setting out the position. The situation changed slightly a year after the passage of the Energy Act 2004, which I recall I voted for, because of the intervention of the European Commission—hence these clauses and my questioning of them.
I am grateful to my right hon. Friend for pointing that out. Of course, the Liberals do not seem to know that.
I am greatly reassured by my right hon. Friend’s assertion that the normal tax rules will apply when these companies are privatised, and that clauses 99 and 100 will deal solely with the tax position of the nuclear industry when it is in public hands. I am also reassured by her saying that the provisions will be tax neutral, should the amendments not pass and should the clauses pass into what will become the Finance Act (No. 2) 2006. However, in the interests of clarity regarding the nuclear industry, will my right hon. Friend write to me setting out the figures for the nuclear industry as covered by the two clauses? Will she specify the amount of corporation tax that will not be paid as a result of the measures, and the corresponding losses that will not be allowed to be offset? I hope that she will be able to do that. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Real Estate Investment Trusts: excluded business and income
Amendment proposed: Government amendment No. 28, page 349, line 5, leave out paragraph 1 and insert—
‘1 Incidental letting of property (whether in the United Kingdom or outside) which is held in connection with a trade in property.’.—[Ed Balls.]
With this it will be convenient to discuss the following:
Government amendment No. 29.
Amendment No. 64, in clause 106, page 97, line 14, leave out ‘6’ and insert ‘5’.
Amendment No. 65, page 97, line 23, leave out subsection (5).
Amendment No. 130, page 97, line 24, at end insert
‘or on the Alternative Investment Market of the London Stock Exchange or its equivalent European Union exchanges.’.
Amendment No.66, page 97, line 25, leave out ‘4’ and insert ‘3’.
Amendment No. 67, page 97, line 34, leave out ‘5’ and insert ‘4’.
Amendment No. 68, page 97, line 42, leave out ‘6’ and insert ‘5’.
Government amendment No. 27.
Amendment No. 60, in clause 112, page 101, line 5, at end insert
‘; but no charge shall arise under this section in respect of a company whose predominant purpose is investment in residential property.’.
Amendment No. 61, page 101, line 36, at end insert—
‘(8) The Treasury may by regulations provide for the application of this section to companies whose predominant purpose is investment in residential property.’.
Government amendment No. 30.
I rise to speak to our amendment No. 130, which seeks to allow real estate investment trusts—REITs—to list on the alternative investment market of the London stock exchange or its equivalent European Union markets. In debating this issue, we return to part 4 of the Bill, which deals with the regime to introduce REITs. I have said on several occasions that we welcome in principle the introduction of such a regime in the United Kingdom; indeed, this is an initiative that we have been advocating for quite some time.
That being the case, we have sought to work constructively with the Government to ensure that the regime is in good order when it commences its operation as scheduled in January 2007. I hope that it is fair to say that we maintained that approach in Committee, where we pressed the Government on a variety of issues, including the qualifying conditions for REIT status and the penalties for breaking those conditions, and the definitions to be used in operating the regime. The Minister might also recall that we were of some assistance, at the end of a lengthy afternoon sitting, in deleting clause 143 from the Bill. I see from his reaction that he remembers that.
However, there are still some weaknesses in the proposed REITs regime that I should like to address, both in relation to our amendment No. 130 and to amendments Nos. 60 and 61, which have been tabled by my right hon. Friend the Member for North-West Hampshire (Sir George Young). I shall begin, however, by referring to Government amendments Nos. 27, 28, 29 and 30.
Government amendment No. 27 relates specifically to clause 107 of the Bill, which deals with the conditions necessary for a business to qualify as tax exempt under the REITs regime. Condition 3 of clause 107 is that owner-occupied properties should be excluded from tax-exempt status. In Committee, we discussed the operation of condition 3 in some detail—particularly in relation to car parks, as I recall. A related issue had arisen during the consultation process that preceded our Committee deliberations, which was the definition of “owner-occupied” as generally understood under international accounting standard 40—known as IAS 40 for short. That problem threatened to create unintended consequences for the REITs regime. The problem would be that if, in certain circumstances, an REIT company were to provide significant services to the occupier of one of its properties, the company might itself be deemed to be an owner occupier under the strictures of IAS 40, and therefore fall outside the REITs regime under condition 3 of clause 107.
Government amendment No. 27 seeks to address that by ensuring that in such circumstances, where the tenant has exclusive occupation of the property, the accounting definition of “owner occupied” is effectively overridden, so that the REIT company is not deemed to have breached condition 3 of clause 107. The associated Government amendment No. 30 appears to be essentially a drafting amendment, which ensures that the revised application of clause 107 is extended to group companies via a corresponding change to the associated schedule 17. So far, so good.
The British Property Federation welcomed the amendment with the following comment, which is germane:
“We welcome this amendment, which addresses a concern raised by industry during the consultation. However, we are aware that there may be a number of different situations where the definition of owner occupied property inadvertently causes a property to be excluded from the tax exempt business. Government should be aware of this and have a strategy in place to listen to industry concerns and react quickly to those situations through producing appropriate guidance.”
That seems a not unreasonable request, given that this is an especially complex area. I hope that the Minister and his officials can liaise with the industry to try to address, as far as practically possible, any remaining anomalies in the subsequent guidance, in the light of ever-changing commercial circumstances. At some point, the guidance might have to be updated to take account of changing market conditions. Perhaps the Economic Secretary will address that question when he sums up.
Government amendments Nos. 28 and 29 relate to schedule 16 to the Bill. Schedule 16 defines various categories of business and income which are specifically excluded from the REITs regime. Those amendments relate to questions raised about the operation of the schedule in Committee, and when we debated the related clause 111—the issue of potential double taxation of properties held on so-called trading account, and yet another issue relating to the definition of owner occupation, to reiterate the point about the complexity surrounding that term.
In essence, those measures were originally proposed in the associated draft regulations, on which I spoke for the Opposition. In Committee, the Economic Secretary intimated that he would be likely to introduce amendments on those subjects on Report, and therefore to include such elements in the Bill, which in principle we welcome. He has kept his word and we commend him for that. We still hesitate about the solution, however, in this instance of what one might call clarification by exclusion. Even though the Government’s solution will now appear in the Bill, they still seek to achieve that clarification by extending the inclusion to encompass all so-called trading properties, which underlines how little this part of the Bill does for residential property, as that is a particular challenge for residential property companies. I shall refer to that topic again shortly, although I suspect that my right hon. Friend the Member for North-West Hampshire will also be keen to catch your eye on that, Mr. Deputy Speaker, when he speaks to his amendments.
Our amendment No. 130 is designed to extend the qualifying conditions for a company applying for REIT status under clause 106, specifically by allowing REIT companies to list on the alternative investment market of the London stock exchange—AIM, as it is now more popularly known. When the matter was touched on in Committee of the whole House, Ministers pointed out that, under EU law, that would also entail reciprocal listing on other comparable EU exchanges. Our amendment specifically caters for that, so I hope that it will be more acceptable as a result.
There are several good reasons why REITs should be able to list on AIM. First, property companies registered as REITs are likely to enjoy significant tax advantages over those usually smaller companies denied that status. It therefore seems probable that there could be considerable consolidation in the property market, as AIM-listed companies that cannot qualify for tax-exempt status are gradually taken over by companies on the full listed market that do enjoy those tax advantages. That is potentially unfair, and could cause the United Kingdom property market to be increasingly dominated by a relatively small number of very large REIT companies. That is presumably not what the Government intended when they introduced the regime.
Secondly, AIM-listed companies themselves might come under pressure to convert to a full stock exchange listing before they are really ready for it, principally in order to be able to qualify for REIT status, thus potentially causing a distortion in the orderly evolution of the market sector. Why not expand the condition at least to cover AIM-listed companies that meet all the other conditions in the Bill? There are a number of them and we have already debated them at length, so I hope I need not repeat them now. That would facilitate greater diversity in the REITs market available to investors.
I think the third point quite important. I am sure that, given his business experience in the United States, my hon. Friend the Member for Braintree (Mr. Newmark) will want to expand on it. US experience suggests that widening the listing base is a good way of helping the concept to take off. The Financial Times estimates that more than $300 billion is now invested in US REITs, and notes that spreading the listing base was important to the generation of that significant investment. Our Government would presumably like to emulate that as well, at least on a comparable United Kingdom scale. We know that it worked well in the United States. Why should we not learn from that example? As the Americans have one of the oldest established REITs regimes in the world—I believe that it began in 1960—they have considerable experience in operating REITs, and they found widening the listing base to be a good way of helping the concept to grow. Why do we not learn from our American cousins in this instance?
I believe that one of the advantages of the American experience, which ties in with something that the Government are trying to achieve, is that quite a large unlisted real estate investment trust market stimulated residential housing. That is one of the Government’s objectives. Conservative Members fear that not having an unlisted market, or even allowing REITs to be listed on AIM, will tend to skew investment towards the commercial rather than the residential market.
That is an important point. As we said in Committee, we believe that one of the weaknesses of the current regime is that it is already heavily skewed in favour of commercial property. Leaving this impediment in the Bill may make the position worse. I shall say more about that shortly, while—I hope—not entirely stealing the thunder of my right hon. Friend the Member for North-West Hampshire.
The listing issue is a particular impediment for residential property companies that seek REIT status. In Committee, I made the general point that the REITs regime appeared to have been designed primarily with commercial property in mind, residential property having been included almost as an afterthought. I said at the time that I wanted to initiate a debate on that, and on what might be done to deal with it.
The fact that there appears to be a problem with residential REITs is illustrated by the fact that several major commercial property companies, including Land Securities and Hammerson, have already indicated that they have decided to convert to REIT status. As far as I am aware, no residential property company has yet made such a firm commitment.
On Friday 2 June, the Financial Times reported that a consortium of 17 housing associations was planning to launch a REIT. As we discussed this in Committee, the hon. Gentleman knows that we expected the residential REIT decisions to come later than the commercial decisions. I do not know whether he has any further information, but certainly on 2 June there were indications that housing associations were considering taking that step.
I thank the Economic Secretary for that intervention, but he highlighted the difference himself. He said that residential property companies are considering taking such a step, but commercial property companies have said definitely that they will do it—[Interruption.] He asked me a question and he must allow me to answer it. The difference is that several commercial property companies have said that they will definitely do it. A consortium of housing associations has said that it is considering doing it, but as I read the FT it has not said that it will definitely do it. So we still do not have a concrete example of any residential property company saying that it will convert to REIT status on these terms. That is an important distinction.
Yes. If a company is thinking of listing on AIM it will bear several factors in mind, including the cost of that listing and compliance. If it is thinking of upgrading to the full London stock exchange, the cost of compliance and registering will also form part of its consideration. My point is that as the regime exists, it may encourage some AIM companies to go for a full listing when they otherwise would not be ready. They feel that they have no choice, because if they are going to remain in property, they need the tax exemptions to qualify as a REIT company. If they do not qualify and just sit on AIM, they may be vulnerable to takeover by fully listed companies that have that tax wrapper to enhance their power. My hon. Friend again makes an apposite point.
We have established that there has been no definite announcement by any company to convert to residential REIT status. Moreover, residential property companies tend to be smaller, both by market capitalisation and the actual book value of their portfolio, than commercial property companies. While there are several residential property companies that might have little difficulty in obtaining REIT status on AIM—some 60 are registered on AIM—forcing them into a full listing before they are ready could be a serious impediment to them. The British Property Federation argued that point in a note on the subject:
“The property industry in the UK believes the consequence of limiting REITs to listed companies will be to unnecessarily limit the development of REITs because it heightens the barrier for new entrants to the UK REIT regime and as a consequence makes it that much more difficult for new REIT companies to form. Clearly, this has consequences for those seeking to establish new investment vehicles in traditionally under-invested property markets, such as the residential private rented sector.”
Fifthly, AIM is specifically designed to help emerging companies that wish to be open to public investment, but would find it difficult to sustain themselves on a recognised stock exchange at an early stage in their development. The London stock exchange describes AIM on its website as
“the most successful growth market in the world”.
“Since AIM opened in 1995”—
under a Conservative Government, I remind the House—
“more than 2,200 companies have been admitted and more than £24 billion has been raised collectively.”
As of May 2006, there were 1,528 companies, of which 1,266 were in the UK and 262 were international, listed on AIM. Those companies had a total market value of £74.2 billion and a turnover value of £28.6 billion, to May 2006. So AIM is a very successful market in its own right.
Amendment No. 130 seeks therefore to open up the current clause 106 legislation to allow companies listed via AIM to convert to REIT status. That will enable the development of new or smaller companies in the REIT market, thus helping to ensure that REITs are a sustained, successful investment vehicle across the property market.
Sixthly, and importantly, during the Committee of the whole House, the then Economic Secretary argued that an impediment to allowing REITs to list on AIM was that under EU law they would need similar listing opportunities on comparable EU exchanges. However, unlike our amendment at that stage, our amendment No. 130 specifically allows for that point. Moreover, the first condition of clause 106 is that to qualify for REIT status a company must be resident in the UK in any case, so even though a company could theoretically list on an alternative EU exchange rather than on AIM, given that it must be UK-resident to comply with the REITs regime generally, in most cases the most likely scenario would be for a UK listing, at least in the first instance. Common sense suggests that in the majority of cases a UK-resident company would probably register on AIM first, rather than going to one of the alternative EU markets. Even were that not the case, and the company registered on one of the alternative EU markets, why in principle need that be a showstopper? Will the Economic Secretary answer that question before we conclude the debate?
My hon. Friend raises a good point when he questions why a UK-resident company would list overseas. If it did so, it would have difficulty with potential investors, so there would, if anything, be commercial pressure to remain in the UK and to list on AIM or the London stock exchange. It would make little commercial sense to go elsewhere, because confidence in the company might be called into question, and if that were not the case, there would be no concern.
I thank my hon. Friend for making that important point. He had considerable experience as a commercial lawyer before coming to this place. Indeed, I understand that his wife has ongoing experience as a commercial lawyer, so no doubt they discussed the matter before our debate. Mrs. Gauke cropped up regularly in the Standing Committee and I am pleased to be making sure that she does so again today before we conclude our debates on the Bill.
Wherever the advice came from, my hon. Friend makes a good point. Given that a key condition—the first condition—of clause 106 is that a REIT company must be UK resident, it is likely in practice that in most cases it would register in the UK if it wanted to register on an alternative market rather than on a full listing. But even if it did not—even if it wanted to register on one of the other EU exchanges—will the Economic Secretary tell us why that should be an absolute showstopper? Why should such a company not have REIT status?
We know from the Standing Committee proceedings that the Economic Secretary sees himself as something of a philosopher, so we would like a clear philosophical response on that point—[Interruption.] My hon. Friend the Member for Fareham (Mr. Hoban) says that a clear response of any kind would be good. We shall see.
I respectfully remind the Economic Secretary of the British Property Federation’s comments about clause 106, which highlight the listing requirements as the major problem in its provisions. The BPF briefing note argued:
“In summary therefore, our main concern with Clause 106 as it is written is that while it is likely that a number of existing listed property companies will convert to the new REIT regime, the provisions do not cater for the growth and enhancement of this market which will in turn bring forward investment benefits and opportunities to improve the quantity and quality of property investment in under-invested markets. In short, by so restricting the REIT regime to only ‘recognised stock exchange’ listed vehicles the government may inadvertently smother the ability of the market to develop.”
I am grateful to the hon. Gentleman. I was studying websites and I found that the shadow Secretary of State for Environment, Food and Rural Affairs, the hon. Member for East Surrey (Mr. Ainsworth), has publicly announced that the current level of new house building is excessive. Does the hon. Member for Rayleigh (Mr. Francois) think that his hon. Friend will support his desire for a wider role for the residential property industry in REITs, or might the hon. Member for East Surrey be inclined to oppose the comments that the hon. Member for Rayleigh is making today?
I thank the Economic Secretary for that intervention, and I have two points to make in reply. First, under the principles of collective responsibility, I am sure that my hon. Friend will support the approach I am taking. Secondly, I do not want the Economic Secretary to think that he is the only person who can do a bit of research. I was researching in The Independent this morning, and I saw a wonderful heading:
“Revealed: Secret Tory past of Brown babe Balls”.
The story reveals that while he was at Oxford university, the Economic Secretary was a member of the Oxford University Conservative Association.
It does not, of course. But my point is simply to demonstrate to the Economic Secretary that I, too, can do a bit of research. Also, when he sums up, can he answer this one question: when did the Chancellor know?
The alternative investment market is generally regarded as something of a success story. We would like to make REITs a success story, too. Therefore we would like to know why the Government are reluctant to consider expanding the REITs concept to AIM. We hope that they will concede that point this afternoon, but if they do not, will they at least reassert the position—as given by the former Economic Secretary, the hon. Member for Bury, South (Mr. Lewis), and repeated in Committee—that, at the very least, they intend to keep this matter under review once the regime is rolled out from January 2007?
I suspect that REITs will at some point be expanded by being listed on AIM. We shall see when that happens. We have put down our marker very firmly in this debate. If the Government do not take this step, I suspect that we will when we become the Government.
I do not intend to rehearse all the arguments that we had on this issue on Second Reading and in Committee. However, let me state that the whole point of real estate investment trusts is that they offer a regulated, low-risk way for individuals to invest in the property market. The hon. Member for Rayleigh (Mr. Francois) is right that early indications suggest that there might be a question about where the balance lies in terms of the development of REITs and what proportion of them will be commercial REITs as against residential REITs. At present the balance is heavily in favour of the commercial sector, but as the Economic Secretary pointed out, it seems that some residential companies are hesitantly setting out their stall and looking to develop in that way.
Given the way in which the self-invested personal pension scheme was put forward and then withdrawn, it is important that we allow these regulations to go ahead as was suggested in the consultation with the industry, which was very constructive, and let them bed down. At that point, we can look at where the imbalances are, and at ways to overcome them. That is when we should reflect on whether the proposals in amendment No. 130 are required or appropriate. The Liberal Democrats are relaxed about this issue. We would rather see how the REITs regulations bed down over the first couple of years, and how the companies in question bed down in the London stock exchange, and then, if there is a problem, look to AIM.
I wish to address my remarks to amendments Nos. 64 to 68. The substantive amendment is amendment No. 65; the others are consequential, renumbering subsections in clause 106.
The Minister and others will know that I and my party are very supportive of the concept of real estate investment trusts. Like many, we believe that they offer a route into property investment for the vast majority of people, who do not have the means to purchase a second property outright, or for those who do have the means but who simply wish to avoid managing such properties themselves. We also believe that if REITs are local and highly focused residential trusts, they have the opportunity either to complement the existing local authority sector or housing association and private residential rented sector, or to provide additional rented properties in areas where there is little provision, or none at all.
However, the Bill as it stands will force all REITs to be listed on the stock exchange. We believe that that requirement alone might prevent the creation of the smaller, local, highly focused residential trusts that we would like to be created, along with the inevitable larger commercial ones.
As we know, the minimum entry level for a stock exchange listing is £750,000, plus another £750,000 for fundraising, plus 2 to 5 per cent. in commission, and advisory costs of some £250,000. Fundraising on the stock exchange can be for any amount. We also know that the typical value of a stock exchange-listed company is £100 million upwards. If one combines those costs with the other rules—that 75 per cent. of a REIT’s commercial activity must come from rentals, and that 90 per cent. of the rental income must be returned in dividends to investors—there is a very real danger, to which the hon. Member for Rayleigh (Mr. Francois) alluded, that REITs will focus solely on high-end commercial and retail properties that already offer a guaranteed high rental income. It is also likely that, to cover the listing costs and to meet all the other rules and obligations, such trusts will purchase property rather than seek to develop it.
Our view is that to encourage smaller, more focused residential trusts to deliver rented housing, the entry bar should be far lower than the stock exchange listing requirement in current legislation. For example, the minimum entry cost for introduction to the alternative investment market is about £300,000. Fundraising accounts for another £300,000, and there are similar commission levels of 2 to 5 per cent.; however, the ongoing advisory costs—some £50,000—are far less than the £250,000 figure.
In AIM, companies tend to be in the £10 million to £150 million range, with fundraising costs in the of £2 million to £20 million range—the kind of figure that a small, locally focused residential trust might seek to raise. Further down the range is the off-exchange market, with a minimum entry figure of £30,000, fundraising costs of about £100,000 and similar commission levels, but with ongoing advisory costs of some £10,000. Ofex caters for businesses up to the £20 million mark—not a tiny sum—whose fundraising costs are in the £300,000 to £4 million range. Of course, there is also the opportunity for any business or trust to be financed privately.
So, given the other conditions applying to REITs—not least the residency qualification—there seems little logic in forcing a REIT to be quoted on the official list; indeed, in the light of the associated costs and the typical size of businesses on the list, there is almost a disincentive for local residential trusts to be created. Our amendments would eliminate that requirement from the Bill by deleting subsection (5) from clause 106, thereby removing the condition that a trust company’s ordinary shares be listed on the stock exchange. The only argument previously posited in favour of full listing is that it would perhaps give confidence to investors and to those seeking to rent a property from such a trust. However, a given individual or business will take the decision to invest or rent after applying the correct degree of scrutiny and due diligence.
Although a full listing indicates a large company with deep pockets, a small, privately funded trust—or one whose shares are traded on AIM or Ofex—could prove to have better local knowledge, equally experienced management and excellent internal management systems. In short, there should be no assumption that a stock exchange listed company is always a better option than one that is not listed.
The key point is that although I welcome the creation of the REIT regime, the Government should not limit the creation of highly focused local residential trusts through the mechanism of a stock exchange entry and its associated fundraising costs. We have great hopes that REITs will complement the existing social and for-profit rented sector, but that opportunity would be enhanced by a more liberal approach to the regime’s operation from the outset. I suspect that the Government have some sympathy with that argument.
We want a commitment from the Government that they will move as quickly as possible to liberalise the REITs regime, in order to ensure that the hoped-for benefits in the residential sector are brought to fruition, and that REITs do not simply become players in the high-end commercial property market. I hope that, when the Minister sums up, he can guarantee, or at least hint at, the fairly speedy liberalisation of the market. Should that not be forthcoming, we will—should you allow us, Madam Deputy Speaker—press one of our amendments to a vote.
I commend my hon. Friend the Member for Rayleigh (Mr. Francois) on for his eloquent advocacy of amendment No. 130. I was delighted to hear that his arguments have struck a chord in other parts of the House. I agree with what the hon. Member for Dundee, East (Stewart Hosie) said towards the end of his remarks about getting a healthy residential market on its feet.
I want to speak briefly to amendments Nos. 60 and 61, and I refer again to my entry in the Register of Members’ Interests. Although it is not a registrable interest, I was also a member of the Oxford University Conservative Association, although the impact that I made may have faded by the time the Economic Secretary signed up a few years later. This is the fourth and penultimate time that I will speak in the Finance Bill proceedings on real estate investment trusts. Let me summarise where we are. There is a background of an all-party consensus on the need for a new investment vehicle to promote investment in residential property, attracting long-term institutional funds, broadening the market, giving a wider choice for those who want to rent and enabling private and institutional investors to get exposure to the residential property market that they do not have at the moment.
When the Government took office, there was an all-party consensus that we needed an initiative. The Government took the debate forward and I give them credit for that. We had the Kate Barker report and then, in March 2004, the Treasury consultation paper. In paragraph 1.14, it said that a REIT
“structure in the UK would therefore set a challenge for the industry to encourage development of new housing, which could…be managed within”
a REIT structure. The paper went on to say:
“Improvements and expansion to this sector”—
the private rented sector—
“could enhance efficiency and flexibility in the housing market.”
“The Government is keen to encourage greater renewal in the property sector, and the development of new…residential buildings”.
Finally, it stated that the Government were keen for a REIT
“to stimulate greater development activity in the residential market providing a vehicle into which new properties can be converted and managed more efficiently.”
There is no disagreement on either side of the House about those objectives. The debate in Committee was about whether those objectives would be achieved with the regime that is before us. We had a constructive and, by and large, consensual debate. We established that there was domestic harmony between the Economic Secretary and the Minister for Housing and Planning on the approach to REITs and that the framework for our debate was what the Chancellor said in his Budget speech:
“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[Official Report, 22 March 2006; Vol. 444, c. 293.]
I want to bring one or two points from the debate to the attention of the House. The Economic Secretary was asked what went wrong with the previous initiatives and he replied:
I suspect that he meant me—
“will probably agree that the regime did not work; in our view, it was too prescriptive and insufficiently flexible and thus did not attract capital.”
There is some concern that the new regime may have the disadvantages of the regime that he criticised in that debate. He went on to say:
“We are trying to deliver a regime that will be more flexible and more appropriate for residential property investors.”
I will come to that in a moment.
The debate spanned a morning sitting and, as my hon. Friend the Member for Rayleigh said, a rather warm afternoon sitting. Again, I want to pick up on some of the key points of that debate. The Economic Secretary said that he fully supported the
“objective of encouraging further investment in residential property.”
We probably pushed him right to the limits of his negotiating powers by extracting from him a general undertaking that if things did not go as he hoped, he would have another look at the matter. He did not go quite as far as we all wanted, but at the end I withdrew the relevant amendment, saying:
“The Minister is a reasonable man, and he went as far as I suspect his brief allows him to go in giving the undertaking. Without prejudice to the possibility of bringing back on Report a related amendment…I beg to ask leave to withdraw the amendment.”—[Official Report, Standing Committee A, 8 June 2006; c. 479, 503, 509.]
I remind the House that there is enormous potential here. I understand that there is a proposition to build the Olympic village through a REIT. There is also the possibility of using REITs to provide student accommodation and other opportunities. However, the key question is whether we will have the correct regime. My amendments Nos. 60 and 61 approach the problem from a slightly different angle from the one that I moved in Committee. They would amend clause 112, which introduces the entry charge, or conversion charge, which is the entry tax that must be paid to become a residential REIT.
It is worth bringing to the House’s attention the fact that the entry charge, or conversion charge, was not a feature of the regime initially proposed by Kate Barker, who focused on residential REITs. The conversion charge came on to the radar when the concept was extended from residential REITs to commercial REITs. By converting to a REIT, a quoted company will avoid capital gains tax liabilities, so to defray any possible loss of revenue, the Government decided to introduce a conversion charge to compensate the Treasury for the prospective loss of finance. I have no difficulty with that as a concept. In my view, the charge was set at a generous level, and the Minister explained how it was calculated. When the announcement was made, the market was pleasantly surprised.
Although a conversion charge might be appropriate for a commercial REIT, I argue that it is wholly inappropriate for a residential REIT. We have established that no quoted residential property company is likely to convert, so a residential REIT will have to start from scratch. In an earlier intervention, the Economic Secretary referred to 17 housing associations that are forming a consortium with a possible view to converting to a REIT. If one examines the model that that consortium will have to follow, one realises that there are severe disincentives to adopting the REIT structure.
The first thing that will happen when a housing association wants to put its residential properties into a residential REIT is that it will have to pay capital gains tax on any profit from the disposal of those properties. That will crystallise a capital gains tax liability that would not have been there otherwise. Capital gains tax will have to be paid on any properties transferred from the existing portfolio to a residential REIT. Secondly, stamp duty at 4 per cent. will be payable by the REIT vehicle on purchase, and, thirdly, the REIT will have to pay a 2 per cent. charge on conversion. Those are serious disincentives before any new supply is created. If the objective is to establish a more benign fiscal regime, it is absurd to start by expecting a residential REIT to pay three taxes that it would not have to pay at the moment.
I shall outline what has gone wrong. The original regime was aimed at residential REITs, but that has been transferred to cope with commercial REITs, so that regime is simply inappropriate. The Economic Secretary is frowning, but those three taxes—capital gains tax, stamp duty and the conversion charge—will be payable before a residential REIT gets into the business of providing new homes, which is the object of the exercise. In a sense, the commercial property companies have become the cuckoo in the nest. The nest was originally designed for residential REITs, but the cuckoo has come along and displaced the original occupant—the residential REIT. Unless the Minister makes a concession today or at a later stage, I am worried that the hurdles that will confront—[Interruption.] I will happily give way if the Minister is about to indicate that he will accept my amendments, or indeed waive some of the taxes to which I referred.
I am slightly sorry that the Minister has taken so seriously the analogy that I was trying to convey to the House. In Committee he displayed traces of humour, which we enjoyed. I am sorry that that is the best response that he can produce to the rather serious case that I am making, which is that the regime—or the nest, if he does not find that reference offensive—most appropriate for the commercial sector is not appropriate for the residential sector. There is an offshore alternative to UK REITs, which the Treasury should not ignore.
I hope that the Economic Secretary will reflect on the fact that there are some serious hurdles to overcome before the residential REIT gets going. I also hope that, when he winds up the debate he will exhibit some flexibility—and possibly some humour—in his response to my case, which I have made against the background of the model that will be used by the very housing associations that he mentioned earlier.
I, too, would like draw attention to my entry in the Register of Members’ Interests. In common with my right hon. Friend the Member for North-West Hampshire (Sir George Young) and the Economic Secretary, I was a member of the Oxford University Conservative Association. I hope that hon. Members will forgive me for not registering that interest before.
The objectives are quite simple—they are first, to stimulate an onshore REIT market and, secondly, to achieve the Government’s and the Chancellor’s aim of having a REIT market that stimulates residential housing. Those are the two aims that we want to achieve.
When I read that Paul Herrington, head of UK property investment at Foreign and Colonial, believes that the Chancellor’s proposals for REITs are welcome, it has to be a good thing. He thinks that the proposals
“confirm property’s position as the main alternative asset class to equities and bonds”
and that changes need to be made to the Finance Bill. He recognised REITs’ importance as an alternative asset class and went on to argue:
“There are other types of property investment vehicles that are currently outside the Reit regime. These include offshore investment trusts, limited partnerships and some very successful companies listed on Aim, which are likely to stay outside of it under currently proposed rules”.
“By excluding Aim, we might end up with a two-tier market like a Premier League and a Division One.”
Yes, he did.
As the Royal Institution of Chartered Surveyors has said:
“A successful REIT market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size and also to provide a pooling facility for smaller REITs to develop outside a listed market until such time as they are ready and able to go public—this should be particularly helpful to smaller players in the market.”
Does the hon. Gentleman think that having smaller REITs might enable more local and regionalised funds to be brought into play? Many people feel that they would like to help particular geographical areas, rather than necessarily contributing to the national pot. The smaller ones, operating on a regional and local basis, can be very attractive.
The hon. Gentleman makes an excellent point. We discussed in earlier debates how to stimulate housing, but not just in the south-east where there are enormous stresses and strains. My hon. Friend the Member for East Surrey (Mr. Ainsworth) alludes on his website to the fact that there is already far too much house building in the south-east. If we want to stimulate such building out in the regions— I see that I have finally got the attention of the Economic Secretary—I suggest that we follow Schumpeter’s principle that small is beautiful. If we want to encourage regional housing developments that tend to be smaller, the particular residential housing required is more likely to be of the right size to be on AIM, but not to have the wherewithal, facility or finances to list on a fully listed stock exchange.
The then Economic Secretary repeated a commitment in Committee of the whole House:
“We are willing to consider any consequence of market developments…We must always be willing to consider whether we want to change the regime in the interests of the market and clearly not to the disadvantage of the Exchequer.”—[Official Report, 3 May 2006; Vol. 445, c. 1041.]
I would be interested to know whether the current Economic Secretary is still willing to be open minded about the matter. Perhaps he would like to intervene? I guess not. As AIM listing will have no adverse impact on the Exchequer—I recognise that the Economic Secretary and the Chancellor are concerned about that—will the Economic Secretary give a commitment at least to review the listing requirement in response to the lack of expected take-up from the residential property sector? That is all we ask. We want the Economic Secretary to be open minded and watch how the market develops. If the Government are not achieving their aims of stimulating the residential, not simply the commercial side, for REITs, we ask them at least to take an open-minded approach.
It is worth considering the comments of my hon. Friend the Member for Rayleigh (Mr. Francois) in Committee, when he gave a good analysis of the benefits of AIM. I must quote his thorough analysis in full. He stated:
“AIM-listed companies already provide a legitimate form of collective investment, so why have the Government decided to exclude them from the REIT regime from the start?”
The Economic Secretary never answered that. My hon. Friend continued:
“On a practical level, property companies that are registered as REITs are likely to enjoy significant tax advantages over those—usually smaller—companies that are denied the advantages that REIT status confers. There could therefore be considerable consolidation in the market as REITs take over other property companies such as those on AIM”—
my hon. Friend made that point again earlier today—
“which cannot qualify for REIT status. That is potentially unfair”.
I know that the Economic Secretary views fairness as an important criterion when considering such matters.
My hon. Friend continued by saying that, over time, that inability to qualify
“could mean that the UK property market was increasingly dominated by a relatively small number of large REIT companies. I presume that the Government did not intend that. We would move in the direction of an oligopolistic market and I am not sure that Ministers want that.
Moreover, AIM-listed companies might come under pressure to convert to a full stock exchange listing before they were ready for it, principally to qualify for REIT status, thus potentially causing a distortion in the orderly evolution of the market sector. Why not, therefore, expand the condition to cover at least AIM-listed companies”?
My hon. Friend makes that point time and again. He was dogged—indeed, almost terrier-like—about it. He continued by saying that expanding the condition would
“thus facilitate greater diversity in the REITs market available to investors… There is a strong common-sense argument for doing that.”—[Official Report, 3 May 2006; Vol. 445, c.1026.]
I agree with that.
Your timing was perfect, Madam Deputy Speaker, because I had just finished the quote.
The Government appear to be worried about the regulatory position, but AIM is not unregulated and it does not lack the transparency that the Government seek, for once, to encourage.
To clarify, Madam Deputy Speaker, I was previously talking about my hon. Friend’s analysis of AIM and I am now moving on to the regulatory regime.
AIM does not stipulate minimum criteria for company size, track record or the number of shares required to be in public hands. The Government gave a parliamentary answer in response to queries about AIM’s regulatory position. In November 2003, the right hon. Member for Coatbridge, Chryston and Bellshill (Mr. Clarke) tabled a written question:
“To ask the Chancellor of the Exchequer…what discussions he has had with the (a) London Stock Exchange and (b) Financial Services Authority on the alternative investment market becoming an unregulated market…what research he has carried out on the way in which an unregulated alternative investment market would affect companies and investors”—
an important question—
“and what discussions he has had with the European Commission about the alternative investment market becoming an unregulated market.”
The right hon. Member for Bolton, West (Ruth Kelly), responded:
“The London Stock Exchange…is a Recognised Investment Exchange…under the Financial Services and Markets Act…and”—
this is the important part—
“has to operate all its markets, including the Alternative Investment Market (AIM), in compliance with the recognition requirements for REITs. The Financial Services Authority…supervises its compliance with these obligations…Because AIM is not going to become an unregulated market, the Treasury has not done any research about the impact of such a scenario on investors and issuers, nor have we discussed it with the European Commission.”—[Official Report, 4 November 2003; Vol. 412, c. 624-25W.]
Let us come to the important issue, which is the housing requirements that the Chancellor, the Economic Secretary and, I assume, the Paymaster General are seeking. The Chancellor, as we have heard, said in this year’s Budget speech:
“To attract more capital into house building, we are now legislating to introduce for Britain the real estate investment trusts that are so successful in the USA.”—[Official Report, 22 March 2006; Vol. 444, c. 293.]
So, we hear two things now. We hear that the Chancellor is looking to the US as an excellent example of successful REITs, and he is looking at REITs as a way of stimulating the housing market. However, we have heard today that the main emphasis with REITs seems to be on stimulating the commercial side of the market rather than the residential side. The success of REITs in the USA is arguably because there is no listing requirement at all, which the Chancellor does not seem to have acknowledged. The important point is that without such a requirement smaller, more flexible residential property companies, would be allowed to participate.
What do the Government really intend REITs to achieve? All the evidence points to the death of the original concept of stimulating investment in the residential property market. The hon. Member for Bury, South (Mr. Lewis), when he was Economic Secretary, said that
“one of the aims of introducing UK-REITs is to improve efficiency, affordability and professionalism in the private rented sector to the benefit of residential tenants.”—[Official Report, 13 February 2006; Vol. 442, c. 1556W.]
However, my right hon. Friend the Member for North-West Hampshire has said:
“When the concept was originally considered, there was concern that it should not simply be a new vehicle for existing property companies. Consideration was given to a requirement that, in order to qualify for a REIT, one would have to add to supply.”
He also said:
“Housing hardly gets a mention in the post-Budget comment on REITs.”—[Official Report, 24 April 2006; Vol. 445, c. 422-23.]
Dave Ramsden, of Her Majesty’s Treasury, said:
“We would expect that REITs in the version we have ended up with—REIT UK, if copyright allows us to call them that but that is another story—are more likely to encourage flexible investment in commercial property. That is clear from the consultation. It does not mean that we will not get some residential property, I think we will get some but it is not going to be the main focus of the REIT.”
That is the point that we continue to make: REITs are stimulating not the residential housing market, but the commercial property market.
The debate over listing, however, consists of two main points. The argument for public listing—this is an important point that the Government make—is that it would subject companies to the appropriate listing authority rules regarding investor base, disclosure and market scrutiny, and would therefore help to ensure suitability for a wider retail investor base.
We have heard the hon. Gentleman recite what his hon. Friends think is important. We have heard him recite what the Government think is important. We have heard him recite also what Mr. Dave Ramsden thinks is important. When will the hon. Gentleman get around to telling us what he thinks is important and what the point of his speech is?
The right hon. Lady must be patient. I am reaching my peroration, but not quite yet.
The arguments against listing involve allowing a company to develop initially as an unlisted UK REIT potentially to increase the size and scope of the market, of which we have heard much already.
I think that I will ignore the hon. Gentleman’s interjection. The hon. Gentleman says that he wrote it down, but he obviously was not paying attention.
Lee Nuttall, who is a real estate tax partner at Wragge & Co., said:
“It should be immaterial whether the investment comes from a private REIT or from a REIT recognised by the Stock Exchange. The expense of obtaining and maintaining a Stock Exchange listing will have an adverse impact on investor returns...It would be easy for the Government to squander this opportunity through over-regulation and a failure to listen.”
We criticise the Government for a lack of listening. Even the Financial Services Authority’s implementation of the transparency directive on investment entity listing review in March 2006 said:
“A successful REITS market should have both listed and unlisted vehicles in order both to allow maximum choice to investors of differing experience and size and also to provide a pooling facility for smaller REITS to develop outside a listed market until such time as they are ready and able to go public. This should be particularly helpful for smaller players in the market.”
The National Association of Real Estate Investment Trusts said:
“While we anticipate that a good number”—
not necessarily all—
“of currently listed property investment companies will convert to UK-REIT status, we expect further companies to list for the first time in order to qualify under these tax rules. As a result, these proposals will have a significant impact in this area.”
We have heard—it was an important point that my hon. Friend the Member for Rayleigh raised—that about 190 are publicly traded REITs in the USA, with assets totalling more than $475 billion. The shares of those companies are traded on major stock exchanges, which sets them apart from traditional real estate. Other REITs may be publicly registered, but non-exchange traded or even private companies. About 800 REITs are not registered with the Securities and Exchange Commission and do not trade on any stock exchange. Yet, as we have heard, the US is an extremely successful market. Even the Chancellor of the Exchequer, as we have heard, looks to the US as an example of where a successful REIT market has been developed, and one that we should emulate.
I am reaching my peroration. I say from the depth of my heart that I respect the Government’s cautious approach on deciding whether to have a fully listed requirement versus AIM. I would not go as far as to suggest that we follow the US example of having an entirely unregulated REIT market with no listing requirements at all, notwithstanding the success of the experience in the US. I ask the Government to reflect once again on the advantages of AIM, which has a simple listing requirement, a flexible regulatory approach and lower compliance costs. It is transparent, it is established and—this is an extremely important point—it is the world’s leading market for smaller companies. I am concerned that without further consideration of the proposal introduced by my hon. Friend the Member for Rayleigh, the Government will create an oligopoly of institutional investors. Instead of creating an inclusive, flexible and entrepreneurial REITs market, we will end up with a REITs market that is exclusive, inflexible and commercial.
I wish to consider whether condition 3, which requires REITs to be listed on a recognised stock exchange, is appropriate, as it excludes shares traded on the alternative investment market. My hon. Friend the Member for Rayleigh (Mr. Francois) made an eloquent case for the inclusion of such shares. In the Committee of the whole House, however, the then Economic Secretary, the hon. Member for Bury, South (Mr. Lewis), argued against doing so, and the present Economic Secretary referred to those arguments in Standing Committee. Three arguments have been deployed including, first, the assertion that REITs require full regulatory protection, presumably to avoid a scandal. REITs are new products, so one would not want something to go wrong in the early years by listing them on AIM, which is regarded as a higher-risk market.
We must, however, consider AIM’s role. My hon. Friend did so, and spoke about the market’s success. I, too, have visited the London stock exchange website, and the very first words on the AIM homepage state that the market is
“specifically tailored to growing businesses”.
Many REITs are growing businesses—as a new product, they will probably grow larger—so it is appropriate to list them on AIM. The hon. Member for South-East Cornwall (Mr. Breed) said that the market provides an opportunity for regional REITs, as did the hon. Member for Dundee, East (Stewart Hosie). That is an important element which I, as a localist, would support.
The argument is about investors trusting the investment manager. If they want the security of a more highly regulated market, they should invest in REITs that are listed on the London stock exchange or their European equivalents. If that is what the market demands, there are unlikely to be many REITs listed on AIM. There could easily be REITs that are aimed more at institutional investors, which it would be more appropriate to list on AIM because it is less regulated and less expensive. I therefore do not find that argument entirely convincing. However, it is worth stressing that at almost every stage of the Bill, the Government said, and I hope the Economic Secretary will reiterate, that the matter will be kept under review.
When we discussed AIM in Standing Committee, the flavour of the remarks made by the Economic Secretary was that AIM was part of a transitional process: a company lists on AIM for a while, then it grows and gets a full listing. Clearly, some companies do. The figures on the London stock exchange and AIM website that were quoted by my hon. Friend show that in total 1,528 companies are listed. The total number of admissions is 2,401. Many of the 900 or so companies that are no longer listed on AIM will no doubt have a full listing. Some may not. Some may have been merged, and others may be de-listed altogether. That still leaves a substantial number, 1,528, which remain on AIM, so we should be a little careful about characterising AIM as a stage that a company passes through. It does not always work like that. For many companies it is their final destination.
I turn to the second argument used by the former Economic Secretary, that the expression
“‘recognised stock exchange’ is a fundamental concept used in our tax legislation.”
That is true, but it should not be leading policy. Just because the expression “recognised stock exchange” is appropriate for qualifying for an ISA, that does not seem to be a persuasive argument for it to apply to REITs and for condition 3 to be drafted as it is.
The third argument, which my hon. Friend dealt with thoroughly, was set out by the former Economic Secretary when he said:
“Thirdly, and crucially . . . it would not be possible to allow companies with shares listed on AIM to be eligible for the regime without also extending the same position to companies listed on similar markets in the European Union.”—[Official Report, 3 May 2006; Vol. 445, c. 1044.]
He made two arguments to support that. One was the cost to the Exchequer of allowing that to happen, which the former Economic Secretary said would be difficult to quantify at this point. The second was the risk for small investors.
The same points about caveat emptor, trusting the people and the reality of the risk can be made again, but I come back to what my hon. Friend said about condition 1, which states that a company must be UK resident in any event. If that is the case, it is unlikely to want to list in another EU jurisdiction. If it does, that is unlikely to be a commercial advantage in marketing it to the UK, particularly if it was listed on an EU version of the alternative investment market. That would be commercially unattractive, so companies are unlikely to do it. If it is attractive commercially, that is probably because those companies are able to overcome any reputational concerns about the particular market. If the company is able to overcome such reputational concerns, the second argument—the risk to small investors—is likely to fall away. The matter comes down to the issue of the cost to the Exchequer. I am sceptical that it would be extremely expensive, because, for the reasons that I have outlined, few companies will list on foreign exchanges. The leading exchange in Europe is the London stock exchange, and the leading alternative investment market in Europe is AIM.
I ask the Government to continue to review the matter. As one former member of Oxford University Conservative Association to another, I ask the Economic Secretary to look again at the policy. If the Government are not prepared to accept the amendment today, I hope that they will review the matter soon.
I do not want to disappoint hon. Members who were members of the Standing Committee, so I shall declare an interest: I am currently chairman of two fully listed companies, one of which is an investment vehicle and the other of which is a real business, although I will be in that position for a matter of days because the company has just been taken over.
Craving your indulgence for a moment, Madam Deputy Speaker, I was also at Oxford university, although I was not a member of OUCA. However, I was educated at the same college as the Economic Secretary, where we shared some of the same tutors, although I cannot recall reading any of Professor Davison’s texts.
I apologise to my hon. Friend the Member for Rayleigh (Mr. Francois) for missing his opening remarks on amendment No. 130, because I was engaged in Select Committee. The Government are caught in an academic dilemma—the distinction between the full market and AIM—which may stem from the academic approach that the Economic Secretary has taken to many of the clauses in the Finance Bill, but I want to draw to his attention what is happening out there in the real world.
My hon. Friends have already referred to some of these statistics. If one casts one’s mind back to the beginning of this Government, one recalls that 2,704 companies were listed on the main market, and 252 companies were quoted on AIM at the beginning of 1997. As we have heard, the number of quoted companies on AIM had risen to 1,528 by the end of May, which is an increase of 1,276. Over the same period, companies were leaving the full market in droves, many as a result of takeovers and some as a result of migrating down from the main market to AIM. The numbers are revealing: there are currently 1,326 UK companies left on the main market, 29 per cent. of which are investment vehicles, which means that there are now only 939 UK trading companies on the main market. That significant reduction has been more than matched by the increase in the number of companies quoted on AIM.
It is also revealing to discover that there are 43 real estate, holdings and development companies on the main market, yet 70 real estate, holdings and development companies are currently quoted on AIM. I contend that companies that have the choice of whether to take advantage of full market listing or to list on AIM tend to list on AIM, because of the lower costs, lighter regulation and the fact that the market has matured. AIM is now regarded as an appropriate place to gain access to capital, whereas in the early days people had their doubts. When the company that I took to market was listed in 1998, we regarded it as appropriate to go direct to the main market, although it was a small company, because there were concerns about access to capital on AIM. Those concerns have been substantially overcome.
We therefore have to ask ourselves why the Government are not prepared, at the introduction of this new regime, to sanction quotation on AIM as perfectly legitimate and appropriate for new REITs. The arguments that they advanced have been thoroughly demolished by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) and, I am sure, by my hon. Friend the Member for Rayleigh, whose comments I look forward to reading tomorrow in Hansard. The argument advanced by the Economic Secretary in Committee—that there would be a greater potential risk to investors should these shares be available on AIM—is palpable nonsense. I hope that he will reflect on this debate and on what was said in Committee and will be prepared to accept amendment No. 130 if it comes to a vote.
I have a wide range of speeches and points to respond to. The right hon. Member for North-West Hampshire (Sir George Young) accused me of taking him seriously, and criticised me for it. We had an interesting debate about the distinction between Schumpeter’s and Schumacher’s views on the concept of “small is beautiful”. The hon. Member for Ludlow (Mr. Dunne) chided me for not understanding the real world, having just admitted in his declaration of interest that he runs an unreal company. It would be interesting to find out what that means in practice.
There have been several other references to the past, and I am happy to explain the position. Conservative Members might have heard of a writer called Geoffrey Trease, who wrote a series of books about Bannermere, a fictional lake in the Lake District. The hero of the books goes to Oxford university, the first of anybody in his family to do so. When he gets there he joins all the political societies so that he can go to hear all the speeches at all the political clubs. I did the same. I joined the Labour, Liberal and Conservative clubs and went to hear very many speeches. I heard the then Chancellor of the Exchequer discuss the economy and the then Trade and Industry Minister discuss industry and housing. That was very interesting, as both of them left the Government within months.
Thank you, Madam Deputy Speaker.
We have also discussed, in passing, real estate investment trusts, which we debated at length in Standing Committee and in the Committee of the whole House. I am pleased that there is cross-party support for our aims for the REITs regime. We believe that it will be successful when it is introduced next January, that it will remove inefficiencies that currently persist in the commercial and residential property investment markets, and that it will support our wider housing policy and the implementation of the Barker review.
I will not go over all the points that were debated in Committee, but try to respond in detail to some of those raised today. I shall start by responding to the hon. Member for Rayleigh (Mr. Francois) on Government amendments Nos. 27 to 30. On 2 June, I made available to Committee members the draft excluded business regulations, which amended schedule 16. That followed a commitment made by my predecessor, my hon. Friend the Member for Bury, South (Mr. Lewis), which I was keen to honour not only in the spirit but the letter to give sufficient time for proper consideration. As the hon. Member for Rayleigh reminded us, we had a detailed discussion about car parks, phone masts and other matters. I hope that we provided clarity that will give the industry a basis on which to plan ahead. During that debate, I explained to hon. Members that a better way to effect these changes than the draft regulations would be by way of a Government amendment to the Bill as it passed through its parliamentary stages. As I explained to the Committee, the points that prompted the changes had been raised at a very late stage and it had not been possible fully to analyse the issues in time to table an amendment in Committee. Instead, we decided to expose the issues in draft regulations and to consult on the details, with the aim of making the necessary changes through amendments to be tabled on Report.
Government amendments Nos. 27 to 30 are the outcome of that consultation. They deal with two sets of circumstances: owner-occupied property, and property held as trading stock. Amendment No. 28, which deals with trading stock, aligns the treatment of rental income from this kind of property with that already set out for rent incidental to a trade of property development. The amendment will keep trading stock property out of the ring fence, which will mean that the incidental rent will be taxable but the measure will remove the threat of double taxation that could otherwise follow from taxation of any increase in the value of the property at conversion and the levy of an entry charge on the same value. The industry was keen for us to clarify that position.
Amendments Nos. 27, 29 and 30, which deal with owner-occupied property, address two issues. The first is to ensure that rental income from owner-occupied property is excluded from the tax-exempt business of a UK REIT, as was our original policy intention. The second is to allow into the ring fence some properties that, despite be let to unconnected third-party tenants, fall to being accounted for as owner occupied. Their exclusion was an unforeseen consequence of the international accounting standards definition of “owner-occupied”—as the hon. Member for Rayleigh pointed out—and not in line with our original policy.
These changes are the result of points being brought to our notice by the industry, and I am sure that it will welcome them. They are fully consistent with the statements that I made in Standing Committee. On the definition of owner-occupied property, I can assure the hon. Member for Rayleigh and the House that we will continue to work with the industry and to listen to any issues arising on the matter. I hope that that will give him the reassurance that he seeks.
A number of issues have been raised today that pertain to the more general question of the balance between residential and commercial property. I will deal with the specific points first, and refer to the general issue at the end. I shall deal first with amendments Nos. 64 to 68, and then with amendment No. 130, which deals with the listing requirement.
Amendments Nos. 64 to 68 have been tabled by the hon. Member for Banff and Buchan (Mr. Salmond) and his colleagues, and were spoken to today by the hon. Member for Dundee, East (Stewart Hosie). Taken together, they would remove altogether the requirement that a company should have its shares listed on a recognised stock exchange before it can become a UK REIT. That would allow any company to enter the regime. We have estimated that the cost of the amendments, if passed, would run not into tens or hundreds of millions of pounds but into billions of pounds. It would therefore be quite wrong to accept them. I hope, however, that in explaining why we believe that a requirement for listing is important I shall be able to give some reassurance to the hon. Member for Dundee, East.
Amendment No. 130 also relates to the listing requirement. However, rather than removing it altogether, it seeks to extend the definition to include the alternative investment market—AIM—of the London stock exchange and its equivalent in the European Union. This issue was debated at length during the Committee of the whole House, as well as in the Standing Committee. Following those Standing Committee debates, I looked again in detail at our requirement for a full stock exchange listing. As I explained to hon. Members at the time, I had come late to those debates—my hon. Friend the Member for Bury, South was the Minister during the Committee of the whole House—and I wanted to understand the difference between a full listing on the London stock exchange and a listing on AIM.
In passing, I want to say that I completely associate myself with what the hon. Member for Rayleigh said about the success of AIM, and its importance not only as a liquid market but a tax advantage market, compared with a full listing. Capital gains tax, inheritance tax and loss relief are all reasons why we tax advantage an AIM listing in order to bring new companies into listing. The success of London as a market that attracts listings from around the world has increased substantially over the past few years, and I am sure that the success of AIM is part of the broader success of London as a centre for listing. Therefore, I fully support the continuance and strength of AIM.
We always aimed to ensure that the UK REIT regime would make property investment accessible to small investors in a way that was revenue neutral in tax terms while providing proper protection. The requirement for a listing on a recognised stock exchange assures investors, especially small investors, that their investments are covered by the full protection of direct regulation by the Financial Services Authority. That has a direct bearing on companies, through rules on dispersion of the share base and share approval for major transactions. An AIM listing has several tax advantages, while a full listing on the stock exchange has several more onerous requirements, ensuring proper protection for the smaller investor through direct FSA regulation, but also ensuring that the tax advantages that I set out are used for the intended purpose. We argued consistently that the right approach was to restrict the REIT regime to a full listing, partly to protect the revenue base and to ensure that it is revenue neutral, and partly to protect the small investor. We made that point consistently in consultation and in discussions with several interested parties, including the Investment Property Forum, the British Property Federation and the Royal Institution of Chartered Surveyors, and our objective has always been understood.
Aside from the regulatory aspects, it is important to take account of suggested changes to the rules in the context of the regime as a whole. We are considering a package of legislation and conditions that combine substantial tax advantages with substantial restrictions and protections to ensure that we achieve our objective, but in a way that does not run to substantial cost. While the costs of the Scottish National party amendments would run into billions of pounds, there is no doubt that these amendments would cost hundreds of millions of pounds, not least because allowing such listings to qualify for other European markets would run not only a regulatory risk but a financial one. As I said to the hon. Member for Rayleigh, I have considered the matter again, as I wanted to understand exactly what was happening, and we still believe that we have the right balance of regulation and protection to achieve a revenue neutral package and encourage the establishment of a REIT regime.
If more companies were allowed to list as REITs on AIM, they would put their property portfolios into the REIT regime, on which a 2 per cent. entry charge would be levied, which would be revenue raising. The Economic Secretary said that part of the Government’s rationale in not allowing REITs to list on AIM was to protect small investors. What is the difference in principle between small investors investing in lots of other companies listed on AIM but not in property companies listed on it?
We are trying to combine those protections with the revenue neutrality that I talked about. On the basis of our calculations and estimates, a substantial increase in the entry charge, above 2 per cent., would be necessary to make the proposal revenue neutral. As a whole, the package has been put together to allow substantial tax advantages while at the same time ensuring that such investments will be genuine and not for tax purposes. Removing any one of those conditions—especially one as important as listing on a recognised stock exchange, which brings with it a wide range of regulatory and market-driven protections—would, I fear, result in the imposition of detailed rules and potential increases in costs elsewhere, and would undermine the regime that we have put together.
We consulted for a long time on that regime, and responded in detail to a number of points. We have discussed today whether the Government have been willing to respond to points made in consultation during the Bill’s passage so far. I do not think any Opposition Front Bencher could disagree with the proposition that we have not only consulted extensively on the REITs regime but, in very material ways, responded to what has been said. In the same spirit I took advice on not just cost, but the protection that we could give investors to ensure that their investments would genuinely fulfil their intention of investing in residential property, as opposed to merely benefiting from a tax advantage. Our judgment was that we had got things right.
The Economic Secretary has said a number of times that the Government believe they have got the balance about right, ensuring both that the revenue base is protected and that there is enough regulation to protect investors. That would still leave us with very large REITs, probably worth more than £100 million. What will the Government do to encourage smaller trusts with a local residential focus, if the Economic Secretary is not prepared to liberalise in the way that has been suggested today?
I am grateful for that intervention, which allows me to deal with the broader comments made by the hon. Gentleman, the hon. Member for Rayleigh and, in particular, the right hon. Member for North-West Hampshire (Sir George Young). I apologise to the right hon. Gentleman if I took him literally when he started talking about cuckoos. A few weeks ago, we discussed the proliferation of Jaguars. As I said then, I know that the right hon. Gentleman has a great deal of experience and understanding of these matters. I am very pleased that as a result of contacts since the Committee stage, we will meet on 18 July so that I can hear from him directly about his concerns and also his ambitions for residential property investment in our country. I was also encouraged to receive a letter from him a few weeks ago, after the Committee stage, in which he told me that he had engaged in a dialogue with a housing association that is thinking of establishing a REIT. I commend him for the work he is doing to ensure that the take-up of REITs is as successful as we all want it to be.
We are not attempting to establish a regime that will try to bias investment in one direction or another. We want a regime that is not particular, distorting or potentially inflexible in the way in which it encourages in the property sector. The right hon. Gentleman asked why the 1996 regime had been too restrictive, which is how I described it in Committee. The main problem was the fixed upper limit on the cost of each unit that could be part of the regime, which was lower than the cost of most houses. It was not successful, because most houses could not be invested in. There are no such restrictions or upper limits in our UK regime.
I think I have explained our diagnosis of the 1996 regime. I shall be happy to discuss the history at our meeting on 18 July, but I think our most important task is to ensure that the regime works. I have assured the right hon. Gentleman that we intend the regime to support investment in both commercial and residential property. I have also assured the hon. Member for Rayleigh and others that we will continue to keep the listing issue under review, and I repeat that assurance today. We do not have a closed mind. We want small investors to invest in both kinds of property under the regime. However, as I have said, on the basis of extensive consultation we believe that we are establishing the right regime, and we ask the House to support it so that we can achieve our objectives.
The problem with the amendments is that they would introduce inflexibility and distortions. They would cost substantial amounts of money or would increase the entry charge for other aspects of the regime. The danger is that the amendments would also encourage people to manipulate their affairs to qualify for more generous tax reliefs if they presented their REIT in one way rather than another. That would be a retrograde step. I ask the right hon. Member for North-West Hampshire to retain his interest in these matters but to support the regime that the Government propose.
As I explained to the hon. Member for Rayleigh, we always imagined that the commercial property sector would make its intentions clear earlier, because of the scale and sophistication of its operations, but that it would take more time for housing associations and some other smaller investors on the residential side to consider the way forward. We are encouraged by the fact that discussions are continuing.
We have been criticised by Opposition Members for not doing enough to support investment in residential housing, and perhaps the regime will not fulfil the thinking behind the Barker review. I understand the thrust of that thinking, because only a few months ago the shadow Chancellor, the hon. Member for Tatton (Mr. Osborne), told a conference:
“I want us to be on the side of the first time buyer, helping young families realise their dream of home-ownership.”
His sources explained that he was trying to shed the Tory image of nimbyism. The problem is that that message has not fully got through. I referred earlier to the views of the hon. Member for Braintree and the belief of the hon. Member for East Surrey (Mr. Ainsworth) that house building is excessive. I draw the House’s attention to early-day motion 158, opposing house building in Essex, which has been signed by the hon. Member for Rayleigh, and to early-day motion 23, which opposed house building in Hertfordshire and was signed by the hon. Member for South-West Hertfordshire (Mr. Gauke). The right hon. Member for Horsham (Mr. Maude), the chairman of the Conservative party, said of housing in Sussex:
“I oppose the huge increases in house building currently being contemplated.”
—[Official Report, 19 October 2005; Vol. 437, c. 847.]
The hon. Member for Chipping Barnet (Mrs. Villiers) said:
“Suburbs like Barnet are under attack from John Prescott’s excessive targets for new house building”—
I shall finish with this conclusion. If one wants to be credible in one’s support for first-time buyers, one has to support not just REITs, but the Barker review in its entirety. That means supporting new house building, not opposing it case by case and constituency by constituency.
Amendment agreed to.
Amendments made: No. 29, page 349, line 15 , at end insert—
‘2A (1) Letting of property if the following two conditions are satisfied.
(2) Condition 1 is that the property is let—
(a) by one member of a group to another, or
(b) by a member of a group to a company the shares in which are stapled to the shares of a member of the group.
(3) Condition 2 is that the property would fall in accordance with generally accepted accounting practice to be described as owner-occupied.
(4) For the purpose of sub-paragraph (2)(b), shares of one company are stapled to shares of another if in consequence of the nature of the rights attaching to the shares of the one company (including any terms or conditions attaching to the right to transfer the shares) it is necessary or advantageous for a person who has, disposes of or acquires shares of that company also to have, to dispose of or to acquire a holding of shares of the other company.’.
No. 101, page 349, line 19, leave out from ‘into’ to end of line 20 and insert ‘structured finance arrangements to which section 774B or 774D of ICTA applies (factoring of rent and other income receipts).’.—[Dawn Primarolo.]
On the basis of the commitment by the Economic Secretary to an ongoing review and the possibility of a many billion pound reduction in tax yield if the system is liberalised very quickly, I do not seek to press the amendment. However, we still believe that the system is too restrictive.
Conditions for company
Amendment proposed: No. 130, page 97, line 24, at end insert
‘or on the Alternative Investment Market of the London Stock Exchange or its equivalent European Union exchanges.’.—[Mr. Francois.]
Conditions for tax-exempt business
Amendment made: No. 27, page 98, line 43, at end insert—
‘(a) no account shall be taken of the fact that a property may fall to be described as owner-occupied by reason only of the provision by the company of services to an occupant who is in exclusive occupation of the property and is not connected with the company (within the meaning given by section 839 of ICTA),’. —[Ed Balls.]
Group Real Estate Investment Trusts: modifications
Amendment made: No. 30, page 351, line 9, at end insert—
‘(1A) In section 107(7)(a) a reference to the company shall be treated as a reference to a member of the group.’.—[Ed Balls.]
Recycling of lump sums
Amendment proposed: No. 14, page 135, line 34, at end insert—
‘(7) The Treasury may make regulations about the application of subparagraph (2) of this section which will be deemed to take effect from 6th April 2006.’.—[Mr. Hoban.]
Question put, That the amendment be made:—
Pension schemes etc: miscellaneous
Amendments made: No. 31, in page 462, line 29, at end insert—
‘Short service refund lump sum: protected rights etc.
26A In paragraph 5(1)(d) of Schedule 29 (requirement that lump sum under a pension scheme must extinguish member’s entitlement to benefits under the pension scheme in order to be short service refund lump sum), after “scheme” insert “(except to the extent that it is prohibited from being extinguished by the payment of a lump sum by reason of the operation of provision made by or under any enactment).”.’.
No. 97, in page 470, line 6, at end insert—
‘40A In section 256(1) (enhanced lifetime allowance regulations)—
(a) in paragraph (d), after “7(1)(b)” insert “or 11A(1)(c)”, and
(b) in paragraph (e), after “12(1)” insert “or 15A(1)(b)”.’.—[Dawn Primarolo.]
Amendments made: No. 102, in page 484, line 34, column 2, at beginning insert—
‘Sections 43A to 43G.’.
‘Sections 43A to 43G.’.
No. 103, in page 485, line 5, at end insert—
‘Finance Act 2000 (c. 17) Section 110. Capital Allowances Act 2001 (c. 2) In Schedule 2, paragraphs 11 and 12.’.
‘Finance Act 2000 (c. 17)
Capital Allowances Act 2001 (c. 2)
In Schedule 2, paragraphs 11 and 12.’.
No. 104, in page 485, line 6, column 2, at beginning insert—
‘In section 103(4)(a), the words “43A(1),”.’.
‘In section 103(4)(a), the words “43A(1),”.’.
No. 105, in page 485, line 10, at end insert—
‘Income Tax (Trading and Other Income) Act 2005 (c. 5) In Schedule 1, paragraphs 26 to 30.’.
‘Income Tax (Trading and Other Income) Act 2005 (c. 5)
In Schedule 1, paragraphs 26 to 30.’.
No. 106, in page 485, line 11, column 2, after ‘paragraphs’ insert ‘1,’.—[Dawn Primarolo.]
Order for Third Reading read.
I beg to move, That the Bill be now read the Third time.
I should like to take the opportunity to thank all hon. Members who participated in Committee of the whole House and Standing Committee. Our debates have again been detailed, ensuring effective scrutiny.
The Budget that my right hon. Friend the Chancellor presented to the House in March set out a vision for a strong economy and a fair society, with opportunity and security for all. The Bill delivers measures to enhance productivity, help create a fairer society, protect the environment and safeguard the revenues that are needed to deliver high-quality public services.
The Bill introduces two new tax regimes—the real estate investment trusts—REITs—and the film tax, which have been warmly welcomed by stakeholders. The real estate investment trusts, which clauses 103 to 145 introduce, will improve the efficiency of our property markets and allow smaller investors greater access to property returns. Clauses 31 to 53 introduce a new and generous film tax relief, which will provide better targeted and more direct support straight to film production companies.
The Government believe that, in a modern and fair tax system, we need to keep pace with a changing world. We need a tax system in which everyone pays their fair share of tax. To build a fairer tax system, we must take action against those who seek to avoid paying their fair share or set out to defraud the Exchequer. The Bill therefore takes action against tax avoidance, which distorts markets and adds no value to the UK economy. The vast majority of taxpayers do not engage in avoidance, and it would be inappropriate and unfair if the Government failed to act against it.
Disclosures have enabled Her Majesty’s Revenue and Customs to become aware that a minority of employers are using highly contrived schemes to avoid paying income tax and national insurance contributions on their earnings. In 2004, the Government announced that they would take action against any such complex and contrived avoidance schemes, if necessary with effect from the date of that announcement. That is exactly what the Finance Bill does, and it is right to do so.
It should also be clear to anyone in this House and outside that paying tax should not be voluntary. Before the Budget it became clear that some wealthy individuals were using trusts as a way to shelter wealth from inheritance tax, and schedule 20 addresses that unfairness, bringing the tax regime for accumulation and maintenance trusts and interest in possession trusts in line with mainstream rules for the taxation of trusts and discretionary trusts.
It is also important that our tax regime remains relevant in a changing world. The Bill changes the tax regime for the North sea oil companies to reflect the world as it is today, while continuing to promote investment in the North sea and to ensure fairness for taxpayers. The North sea is a national resource and it is important that the United Kingdom receives an appropriate share of the economic rent from its exploitation, and of course it is also important in this area and others that the tax system does not provide artificial incentives to indulge in non-commercial tax-driven behaviour.
Yesterday there was a very full debate on the importance of protecting the environment, a goal that the Government share, and measures in the Bill help to achieve that by introducing further reforms to vehicle excise duty and increasing the climate change levy in line with inflation from 1 April 2007, to encourage energy efficiency in the business sector.
The Bill introduces important measures that ensure that the United Kingdom has a modern and fair tax system which keeps pace with a changing world, with incentives for individuals to work, save and invest, supporting business and individuals, while ensuring that public money is used appropriately. I commend the Bill to the House.
I shall try to match the Paymaster General for brevity, but I cannot guarantee that I will be quite as quick as she was.
Although there are a number of aspects of the Finance Bill that we support, we have grave concerns about a number of its provisions, and the Opposition will therefore vote against the Bill this evening. Before turning to the provisions—I assure the House that I am not going to take each one in turn—I echo the right hon. Lady’s thanks to all the Members who have participated in what has often been a very constructive series of debates. I want also to put on record the debt of gratitude that my Front-Bench colleagues and I owe to many professionals and professional organisations that have given us impartial and very useful advice to aid us in scrutinising the Bill.
Turning to the matters on which there is a degree of consensus across the House, we welcome the broad thrust of the Government’s attempt to prevent the abuse of charitable reliefs. However, we share a number of the concerns of the charities tax reform group, particularly in relation to the paperwork and record-keeping requirements imposed on charities.
We welcome also the attempt by the Government in clauses 95 to 98 to provide a legal and tax framework to accommodate sharia-compliant finance arrangements of wakala and diminishing musharaka. I acknowledge the valuable work done by the Government on this issue, which is important not only for our international competitiveness in an increasingly important global market in Islamic finance but for tackling financial exclusion in Britain’s Muslim community. I take the opportunity to pay tribute to one of the imams in Barnet, Mufti Barkatullah, for his work on this important matter.
We also welcome, as we have said this afternoon, the Government’s framework for real estate investment trusts. We feel that the reform is long overdue, since such structures have been in place in other developed economies with great success for many years. We also feel that more could be done to encourage residential property in REITs, and we continue to believe that REITs quoted on the alternative investment market would be feasible and a sensible extension of the framework provided for in the Bill.
Although we welcome clause 19, on cracking down on missing trader fraud, we want to know when the Treasury will get the EU derogation that it needs to put the clause into operation. We are grateful for the assurances given on that point by the Paymaster General. I emphasise again the urgency of tackling this problem, which as we have heard again today is estimated to have lost the Exchequer about £1.9 billion in 2004-05. The problem is now so serious that it is undermining the accuracy of our trade figures, and it is high time the Government took effective action to tackle this organised criminal fraud, which is depriving the Exchequer of so much money.
I move on to more contentious matters. One of the main reasons for opposing the Bill is that we do not believe that it is a green Bill. We do not believe that it implemented a green Budget. The Red Book shows that the proportion of green taxes is falling as a proportion of tax revenue. It is lower than it was in 1997-98. The Chancellor’s headline-grabbing scheme on car tax will have a minimal impact. Anyone who delves into the small print will find that schedule 8 abolishes tax incentives for leasing environmentally friendly equipment. We regret that the Government voted down the entirely reasonable demand that the Chancellor report to Parliament on the uptake of crucial microgeneration technology.
As for the climate change levy, sticking in the words “climate change” does not mean that the levy works to tackle climate change. It is a tax that does not do what it says on the tin. Yes, some of the climate change agreements that the levy has produced have been useful but the fundamental problem remains that it is a tax on energy and not on carbon. It needs to be converted into a genuine carbon tax that does much more to encourage and promote the uptake of clean renewable energy than it does at present.
The second key reason for opposing the Bill is that we believe that it will further undermine our competitiveness in an international world economy. The Chartered Institute of Taxation put the problem in measured terms as follows:
“We appreciate that the UK’s competitive position depends on a number of factors and that potential investors in the UK will consider the whole business environment and not just the tax system in isolation. Our experience is that the UK is becoming regarded as a more difficult place to do business, with the complexity of the tax system being perceived as a disincentive to invest.”
The institute describes the UK tax system as “spinning out of control”.
It appeals for an end to
“excessive tinkering with tax rules.”
The abolition of the zero per cent. rate of corporation tax and other changes to business tax relief are prime examples of chronic instability in our tax regime. Year in and year out, the Chancellor announces initiatives that make a good soundbite in the Budget. He is not in his place today but he turns up for the Budget. Businesses carry out the difficult, time-consuming and expensive task of adapting to yet more changes in the tax system. Just as they have become used to those changes, the Chancellor scraps them and his cycle of continuing revolution continues.
This pattern of volatility recurs in clauses 31 to 47, in introducing a new regime for the film industry. The Chancellor introduced major changes to film tax in the Finance Acts of 2000, 2002 and 2004-05. Yet still the reliefs haemorrhaged a staggering £560 million from the Exchequer in the past financial year. An entire industry has developed around the misuse of these reliefs. The Opposition certainly hope that the Government’s latest attempt to focus tax breaks more accurately on people making films will provide better value for money than reliefs have proved to date.
We are not sorry to see the back of the sections 42 and 48 reliefs. We hope that the Government have at last got it right; otherwise, expect “Groundhog Day” this time next year with yet more changes to the film tax regime in the Finance Bill 2007.
The continual cycle of change has produced a huge amount of uncertainty in the film industry and has jeopardised some important projects. For example, the filming of the latest James Bond film has moved to the Czech Republic. Even the Government’s most famous civil servant has moved offshore, partly as a result of the instability caused by changes in the film tax regime.
I move on to a rather less glamorous aspect of the Bill. Schedules 8 to 10 introduce what the Finance and Leasing Association describes as the biggest change to leasing taxation for a generation. A thriving leasing industry is crucial for business investment and productivity, both of which have performed poorly under Labour. We are not convinced that the Government have fully thought through the impact of these eye-wateringly complex new provisions, given their impact on business investment, on indirect investment and on the public sector. These areas face higher leasing costs as a result of the changes.
We are dismayed at the phenomenal complexity of pension provisions, supposedly adopted with a view to simplification. We believe that the Government’s attempts to prevent recycling of lump sums could discourage people from saving for their old age. The provisions are incredibly widely drafted. The Economic Secretary tells us, “Don’t worry, innocent transactions will be excluded by detailed guidelines.” It is not acceptable to draft a hugely expansive statutory provision that catches many entirely innocent taxpayers and then to say, “It is OK because we will not tax everyone who falls within the statute. We will only tax the bad guys.” This is suspiciously close to taxation by decree. That is why Opposition Members oppose the provisions. We regret that the Government have failed to address the injustices caused by the annuity rule.
We strongly oppose the Government’s hare-brained proposal to bring forward the filing dates for tax returns to September. The Carter report would involve a huge amount of unnecessary hassle for taxpayers and would impose great pressure on their professional advisors, so we urge the Government to reject it.
The abolition of the home computing initiative is a major blow to the competitiveness of the economy. Thousands of low-income families, many of whom would find it difficult to obtain credit to buy a personal computer on the open market, have benefited from the scheme. The Government’s decision to abolish a scheme that it recently relaunched does not help us to embrace the digital age or develop the highly skilled work force that we desperately need to compete with the new global economic giants of China and India. It does not help the Government Departments that were rolling out the scheme when the Chancellor’s axe fell; nor will it help working people in Britain to develop a good work-life balance; nor does it help people striving to improve their skills and their lives.
In conclusion, the Opposition oppose the Bill, because it fails to equip us to compete effectively in the globalised world economy. It heaps further confusion, complication and instability on a tax system that the Chancellor has made one of the most complex in the developed world. It contains no effective measures to tackle climate change, and despite the Chancellor’s ignominious retreat on a range of key issues, schedule 20 still imposes punitive new inheritance tax charges on a wide range of ordinary hard-working people whose only wrongdoing is to use a trust to provide responsibly and prudently for their family’s future. Those iniquitous new IHT charges were introduced without consultation. They are deeply flawed, which is why the Government have tabled no fewer than 50 amendments to the schedule that brings them into effect. They are retrospective, and they penalise thrift and prudence. They hit the sick, the dying, the mentally ill and the vulnerable, as well as those struggling with the misery of divorce. They have caused needless anxiety to thousands of people across the country, and I urge the House to oppose them and the Bill this evening.
We support certain parts of the Bill, but some of the serious concerns that we expressed on Second Reading remain on Third Reading. However, we broadly welcome the proposals on real estate investment trusts, which are a classic example of the way in which consultation can produce workable legislation. The proposals have been welcomed by industry, because the Government took time to consult, so we largely support them. By contrast, the Government did not consult professionals on their inheritance tax treatment of trusts, and the result was poorly drafted proposals that would have affected large numbers of individuals and called into question fundamental assumptions in IHT such as the spouse exemption. Dozens of amendments were tabled to improve the proposals. The spouse exemption has been safeguarded, but it is still not clear how many individuals will be affected by the changes.
Ministers continue to insist that a minority of a minority will be affected, but they have failed to produce evidence to back that up. The Select Committee on Treasury asked for background information before the Standing Committee considered the issue, but it was not produced. I asked for that information in written parliamentary questions, only to be told that it was not normal procedure to release it. There is a significant public interest in making that information available, as it would allay the fears of many people who are still concerned that they will be affected by the changes, so I hope that Ministers will reconsider their decision and publish the information. Despite the many amendments made in Committee and on Report, uncertainty remains, so I am sure that we will revisit the relevant clauses and schedules in future Finance Bills.
Other changes that were made without any warning include the withdrawal of the home computer initiative, which is another example of the Government throwing the baby out with the bathwater. Indeed, they abolished the initiative without prior warning or consultation. Instead of tightening the definition of relevant equipment, they have removed the scheme altogether, even though it helped to achieve computer access for many households, including low-income households. Besides affecting those families, the scheme’s sudden withdrawal has resulted in businesses losing their core work, and has disrupted Government Departments that were planning further roll-outs when the withdrawal was announced.
Confidence in any similar schemes that may be announced by the Government has been affected because, ultimately, businesses need to be certain of the stability of the systems that they use. Once again, however, that confidence has been undermined or eroded. One has only to look at the changes to corporation tax to see how further instability and complication have been introduced. Gordon Brown has introduced changes virtually every year, and although we welcome the situation that we are now in, why has it taken the Chancellor such a long and circuitous route to arrive back exactly where he started?
There have been many measures to tackle fraud and evasion, including missing trader fraud, which we discussed again this afternoon. Although the closure of loopholes in the tax system is welcome, considerable complexity has been added to the tax system by the Bill, and the concern is that it will result in a cat and mouse process, with further complication required every year to overcome further loopholes that have been created by further more complex legislation.
Fundamentally, we see the significance of the Bill in what it does not do, mainly in terms of green action. Limited changes are present in the Bill. We welcome the revalorisation of fuel duty and the climate change levy, but at best these measures will only halt the decline that we have seen in green taxes as a proportion of the total tax take. They will not increase the proportion that it represents. We are disappointed that the Government did not adopt the new clause tabled by the hon. Member for Nottingham, South (Alan Simpson), as it would have helped make strategy, which is clearly lacking from the Government and the Treasury, very clear. I find it astounding that the Paymaster General can refer to the constructive debate that took place on the new clause yesterday, but refuse to support it.
What we see in the Bill is tokenism of the worst kind, which has been announced with fanfare but will do next to nothing to change behaviour. The clearest example is the introduction of a new band of vehicle excise duty for the most polluting cars, which introduces a differential in value to the next band down equivalent to less than a tank of petrol for the most polluting cars. I was glad to hear the comments of the hon. Member for Chipping Barnet (Mrs. Villiers) about those proposals in her remarks on Third Reading, but we saw no proposals from the Conservatives for green measures. We have seen tokenism from those on the Conservative Benches, too.
To conclude, what we would like to have seen but in large part did not see is action to follow the rhetoric that is so often expressed by the Government on green issues and on many other important matters. We have not seen any significant simplification of our tax regime. We have not seen any changes to make the tax regime fairer. Inequalities are still growing, and the richest 20 per cent. are still paying less in tax as a proportion of their income than the poorest. We have also not seen any greater devolution of spending power in the Bill. The United Kingdom remains one of the most centralised states in Europe.
I would like to associate myself and my colleagues with the thanks expressed by the Paymaster General to all Members of the House. The Clerks have been very helpful in their assistance with amendments, as have many organisations, such as the Law Society, the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales, PricewaterhouseCoopers and KPMG, among many others.
There have been some welcome aspects to the Bill, but we are disappointed by the lack of action on green issues and we therefore cannot support the Bill on Third Reading. There are still significant problems relating to trusts, inheritance tax and other matters about which I have expressed my concerns. I thank you, Mr. Speaker, for your patience in dealing with all of us.
It is 10 years since I last served on the Standing Committee on the Finance Bill, and it will be 10 years before I do that again. I mean no disrespect to my colleagues who served on the Standing Committee, or, indeed, to Ministers. On the contrary, it is a reflection of the increased length and complexity of the Finance Bill that only those with the most acute understanding of the country’s tax system can play a useful role on the Standing Committee. It is rather like a soap opera. If one misses a few episodes, it is very difficult to catch up with the plot.
I shall make three comments. One must be ever alert to globalisation. There may be very good reasons for some of the tax changes that we make in this country, but one must be aware of the impact that they may have on the highly mobile capital industry, which can locate its investments anywhere.
Secondly, we must do all we can to remove the driver for complexity in the tax system, and we must do even more to get more people outwith the warm embrace of the tax system. We seem to be making slow progress towards the simpler tax system that we all want.
Finally, we were particularly fortunate to have the hon. Member for Wolverhampton, South-West (Rob Marris) in the Standing Committee, because he was able to give us the ministerial rebuttal of our amendments minutes before the Minister. I hope that it will not be too long before his energy and talents are recognised and rewarded.
Some of the measures in the Finance Bill are welcome, as was the Government’s willingness on some occasions to listen and make changes. Of those changes, the inclusion of those with parental responsibilities for vulnerable children in the trust regime was particularly helpful, although a number of other helpful suggestions made by hon. Members on both sides of the House were not taken on board in such a positive manner.
The Bill provided an excellent opportunity to debate the supplementary charge in the North sea, which we believe is a damaging change to the regime. Likewise, the Government’s change to the blended oil regime was subject to detailed debate and correspondence.
We had a useful debate on REITs, which we welcome. Although we believe that the regime, with its stock exchange listing element, is still rigid, we welcome the commitment to review the matter on an ongoing basis, which we too will do.
We also had a useful debate on the high cost of fuel. However, it was disappointing that the Government still failed to recognise the requirement to introduce a fuel tax regulator both to provide specific assistance for the road haulage industry and to help those in sparsely populated rural areas who need a car.
The Finance Bill was the result of a Budget that one commentator described as “heavy with light measures”. Chief among those light measures was the abolition of the home computer initiative. The Paymaster General said on a number of occasions that alternatives would be put in place, and today she discussed proposals to provide computers in community centres and by community education departments. However, if someone on a low wage wants to educate themselves and to improve their IT skills, they need a computer in the home. Following the abolition of the home computer initiative, I suspect that a similar initiative will have to be reintroduced in the future.
The Bill is a missed opportunity. Although there was talk about additional assistance for research and development, expenditure on R and D in the UK is half that of our major European competitors, and the rate in Scotland is about half that of the UK. The position is deplorable, and the Bill includes very little to improve the situation.
Our key difficulty with the Finance Bill is the changes on the North sea. The Bill takes billions more out, and makes unnecessary changes to the supplementary charge and the blended regime system, yet it offers nothing in return for new exploration and for the development and extraction of heavy oil in the central North sea, the fields west of Shetland and the fields in the very deep water west of Scotland. For that reason, if no other, we will oppose Third Reading tonight.
Unlike my right hon. Friend the Member for North-West Hampshire (Sir George Young), this was my first experience of the Finance Bill, and I want to make one or two observations. [Interruption.] I know that hon. Members are keen to watch France play Portugal.
As we have progressed through the Bill, I have been surprised by how frequently the European Union has cropped up. On Second Reading I addressed the question of why we are substantially changing group relief as a consequence of a European Court of Justice judgment. That is usually an important issue, yet the UK Government have little scope for manoeuvre given the existing constitutional position. Several times during the Bill’s passage—for example, when we attempted to tackle missing trader intra-community fraud, leasing rules or film taxation—we found that the motivation for changing the law was that it was required by an ECJ judgment or potential judgment.
I echo the remarks made by my right hon. Friend the Member for North-West Hampshire as regards the sheer complexity of the tax system and, as a consequence, the need for outside expert advice. [Interruption.] The Economic Secretary anticipates my point. An error or oversight by Treasury officials was spotted by an eagle-eyed professional adviser—[Hon. Members: “Name her!”] Her name is Mrs. Rachel Gauke, a lawyer at Travis Smith. It would be fair to say that other errors have been spotted by professional advisers who are not necessarily as eagle-eyed as my wife.
The Government got themselves in a bit of a muddle on their initial drafting with regard to trusts. They attempted to tackle it without consultation, so that professional advisers were unable to provide their input, although they did when the draft Bill was published. To be fair, I must add that the Government have made a substantial number of amendments in that area, for which I am grateful. We now have a better Bill than we did initially—better, but not good enough. The complexity in the tax system remains considerable. Speaking as a non-tax lawyer, it is always difficult to grasp even the relatively small elements that we cover in the course of a Finance Bill.
As my right hon. Friend the Member for North-West Hampshire said, we live in a globalised world where capital flows from one jurisdiction to another, and we have to be careful to ensure that we have a fair system that not only deals with evasion but is manageable for individuals and for businesses. Conservative Members are deeply concerned that that balance is increasingly being got wrong, which is of major concern for the long-term competitiveness of the British economy.
Question put, That the Bill be now read the Third time:—
Bill read the Third time, and passed.