Orders of the Day — Finance Bill — [2nd Allotted Day]

House of Commons, 28 April 2004.

Clause 86 — Income Of Spouses: Jointly Held Property

Dawn Primarolo (Labour, Bristol South)

This clause prevents tax avoidance by married couples who own shares in a close company together. Existing anti-avoidance provisions prevent people from saving tax by diverting their income to someone who pays tax at a lower rate, or not at all. These provisions specifically prevent people from saving tax by arranging for income to be received by someone else as dividends on shares in a close company. At the moment, married couples who own shares in a close company can side-step the anti-avoidance provisions by exploiting section 282A of the Income and Corporation Taxes Act 1988.

Section 282A of the 1988 Act was introduced to simplify the way married couples are taxed, and it treats income from the property that they hold in joint names as being shared equally between them. But when this rule applies to shares in a close company, it can divert income for tax purposes from one spouse to another, allowing them to make an unfair tax saving. Clause 86 ensures that where a husband and wife own shares in a close company together, they will be taxed in accordance with their actual ownership of the shares, rather than half and half. Each couple gets taxed on the income that it receives, and I am sure that the House would agree that that is clearly the right result. The vast majority of married couples will not be affected by clause 86, but now that the loophole is well understood, without it, the loss of tax would grow sharply, so I commend the clause to the Committee.

Howard Flight (Conservative, Arundel and South Downs)

May I first welcome you, Sir Michael, to chairing our deliberations today?

We object in principle to the Government's attack on the established principles of independent taxation and specifically on the tax position of husband-and-wife jointly owned businesses, which is represented by both clause 86 and the surprise attack on husband-and-wife businesses launched last April through the obscure settlements legislation contained in section 660A, with which clause 86 interrelates. As accountants pointed out to their clients, the section 660A attack could be defended by using the provisions of section 282A, to which the Paymaster General referred, and opting for joint ownership with 50:50 taxation, which clause 86 is designed to block.

Section 282A dates from the introduction of independent taxation in 1989 and 1990, when provision was explicitly made for the income from jointly owned assets to be split equally between spouses for tax purposes—unless each chose to split the income in accordance with the ownership. We see no argument for changing the position. Indeed, doing so amounts to a further stealth tax introduced under the guise of alleged anti-avoidance, which seeks to unravel the basis of independent taxation.

The section 660A attack on husband-and-wife owned businesses relies on being able to identify the way in which the shares are owned—namely, separately—as arrangements that create a settlement. The section 660 attack is the subject of litigation, which is set to be heard by the special commissioners this June. A joint statement has been issued by the Chartered Institute of Taxation, the Tax Faculty Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants, the Association of Taxation Technicians, the Federation of Small Businesses, the Society of Trust and Estate Practitioners and the non-Inland Revenue members of the Working Together group. The statement strongly criticises the Revenue's new position on section 660A, characterising it as a secret husband-and-wife tax.

In her references yesterday to my raising the matter on Second Reading, I fear the Paymaster General was misled in not appreciating that it was the heads of the UK's leading tax and accountancy bodies who were objecting to the Government's new disguised owner-manager husband-and-wife tax. If left unchallenged, the Revenue's controversial interpretation of section 660A will leave thousands of small owner-manager businesses facing entirely unexpected and significant tax bills, from which, if clause 86 were enacted, they could not protect themselves in the future by moving to joint ownership.

The above professional bodies assess that there are many more than the Revenue's 30,000 owner-manager husband-and-wife businesses at risk, which was the estimate. The Revenue's new interpretation of section 660A dates from 2001, but was then advanced only in an obscure tax manual. Yet it is seeking to apply that new interpretation for at least the last six years.

As the president of the Chartered Institute of Taxation commented, the Revenue has a legal and moral obligation to inform taxpayers of how legislation is going to be applied, and its current approach is a breach of human rights. What are the issues here? By way of illustration, where a couple has set up a business, jointly managed, and one spouse runs it with the other doing a limited amount of unpaid work for the company, and where the net profit of the company after the husband's pay is then distributed equally to the two shareholders as dividends with each having the same shareholding, the Revenue is seeking to claim that the dividends paid to the unpaid spouse should be treated as the husband's income and subject to tax at his higher rate, backdated six years.

John Burnett (Liberal Democrat, Torridge and West Devon)

What the hon. Gentleman is saying is of considerable interest to my colleagues and me. Is he saying that the tax treatment envisaged by the Revenue will not reflect the equitable ownerships in the shares?

Howard Flight (Conservative, Arundel and South Downs)

Indeed, that is what I am saying. However, if the hon. Gentleman will be patient, I shall point out that the matter was debated at length in 1989, when independent taxation was introduced. At that time, a Labour amendment contained proposals similar to what the Government are trying to do in this Bill. The then Chancellor made it clear that the amendment would contradict the principles of independent taxation.

A husband and wife can each own shareholdings. The wife's shareholdings may have been given to her by her husband, and I shall refer to a specific quotation in relation to such gifts.

There is a blatant and unacceptable stealth tax where husband and wife assume the same risk on their equity investment. It is wrong for the Revenue to argue that the non-salaried spouse's equity investment is wholly or mainly a right to income. The ownership of a share does not represent just a right to an income.

There was a debate in Parliament on this matter when the 1989 Finance Bill was being discussed. I understand that the matter was also discussed by the Prime Minister of the day. Also, the Budget press release relating to what became section 660A made it clear that the intention was to make the rules for settlements operate in a way consistent with independent taxation and that the income arising from outright gifts between husband and wife should be taxed as the income of the recipient spouse and not of the person making the gift.

In response to a Labour amendment, which would have rewritten what is now section 660A and which was designed to achieve roughly what the Government are now trying to achieve, the then Chancellor said that it would undermine the very basis of independent taxation, and that people should be free to arrange their affairs as they wished. He said specifically that independent taxation was bound to mean that some couples would transfer assets between them with the result that their total tax bill would be reduced. He said that that was an inevitable and acceptable consequence of taxing husbands and wives separately.

Such is the Government's deviousness that neither the recent Budget notes nor the explanatory notes to this Bill provide any explanation of what clause 86 is really about. They give no clue as to the clause's relationship to the section 660A attack.

Most small business owner-manager couples are as yet unaware of the Government's attempt to undermine their tax position as clearly set out when independent taxation was introduced, and to unravel the principles of independent taxation established in 1989.

I am sure that the special commissioners will come to a just conclusion in relation to the section 660A attack in the case that will come up in June. However, we oppose clause 86, as it undermines the established principles of independent taxation relating to the assets of businesses jointly owned by husbands and wives.

John Burnett (Liberal Democrat, Torridge and West Devon)

May I, too, begin by welcoming you, Sir Michael, to our proceedings?

Originally, my intention was to reiterate what Liberal Democrat Members had said in earlier debates—that we considered clause 86 to be a sensible anti-avoidance measure. However, if the hon. Member for Arundel and South Downs (Mr. Flight) is right, we will have to reconsider our position.

I hope that the Paymaster General will be able to answer a fairly straightforward question about the settlement provisions in income tax legislation with respect to income deemed to be that of the settlor. It should always be the rule that married couples should be able to organise their affairs in such a way that they can legally mitigate tax. The proposed change will be unacceptable if, when a husband decides to gift shares in a company to his spouse in a way that allows for an equality of shareholding, all the tax will fall on him.

I hope that the Paymaster General will put our minds at rest on this matter. If the thrust of clause 86 is an attack on the independent taxation of spouses, as the hon. Gentleman claims, we will oppose it. Liberal Democrats believe in the principle of independent taxation, and I hope that the Government will not erode that principle. Spouses should always be able to alter their equitable interests in property, free of capital gains tax and inheritance tax. Subsequent to that alteration, they should be taxed according to the equitable interests that they own. If clause 86 alters that, we will have to reconsider our view of the matter.

I listened carefully to the list of eminent bodies recited by the hon. Gentleman. It is a compelling list.

I hope that the Paymaster General can enlighten us on two matters. First, clause 86 refers specifically to "close company". That suggests that the rule is not intended to apply to joint holdings in non-UK resident companies. I refer the Paymaster General to section 414 of the Income and Corporation Taxes Act 1988. It excludes companies that are not resident in the UK from the definition of "close company".

Secondly, will she clarify why the words "equal or" are included in proposed new section 282A(4A)(b) to the 1988 Act? It is difficult to see what form of ownership in joint names of close company shares is not covered by the existing provisions.

Dawn Primarolo (Labour, Bristol South)

I shall begin by dealing with the question of independent taxation. I hope that I will be able to reassure the hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs (Mr. Flight). I think that they might be misreading the scope of clause 86.

The hon. Member for Arundel and South Downs is right to refer to the debates in 1990, when independent taxation was established. The approach settled on by the Government of the day ensured that, where property and incomes were jointly owned by spouses, the simplest and most straightforward way to apply taxation was on the basis of a 50:50 allocation. I shall come on to explain the target of clause 86 in respect of close companies, but I assure the hon. Gentleman that there is nothing in the clause to disturb that principle.

John Burnett (Liberal Democrat, Torridge and West Devon)

For the sake of completeness, will the Paymaster General confirm that it was open to taxpayers to elect otherwise and to choose to be taxed according to their equitable interests in shares or other property?

Dawn Primarolo (Labour, Bristol South)

I will come to that point because it is at the heart of this set of proposals, but first I want to reassure Members on the questions of the principle of independent taxation, and then explain exactly how the provisions in the clause will affect the avoidance that has been identified with regard to close companies.

Let us deal with the first proposition that the hon. Member for Arundel and South Downs asserted. There is no attack on the principle of independent taxation. Independent taxation is untouched by the amendment in the clause. The change simply stops couples manipulating the rules to save tax in a way not intended by Parliament when independent taxation was introduced; when married couples genuinely hold shares in close companies in joint names, the present provisions will continue to apply. The hon. Gentleman said that section 660A was an attack on husband and wife businesses, and that is absolutely—

Howard Flight (Conservative, Arundel and South Downs)

The new interpretation of it, not the section itself.

Dawn Primarolo (Labour, Bristol South)

I am grateful for that clarification. I am saying that it is a long-standing principle that people should not be able to direct income to people who are liable to a lower rate of tax or no tax at all, and that is what section 660A deals with.

Richard Bacon (Conservative, South Norfolk)

rose—

Dawn Primarolo (Labour, Bristol South)

It is important to keep focused for the moment on the question of independent taxation and close companies; afterwards I shall be happy to pick up on other points.

Richard Bacon (Conservative, South Norfolk)

When the Paymaster General says "to people", is she saying that that long-standing principle includes spouses?

Dawn Primarolo (Labour, Bristol South)

Yes. I am referring to the operation of independent taxation and transfers between spouses. The amendment in clause 86 simply ensures that anti-avoidance legislation is fully effective, as it had always been intended to be. We think that it is right, as I am sure the Committee will agree, that spouses should be taxed fairly and according to their income. Those who do not attempt to avoid those rules will not be affected.

The hon. Member for Arundel and South Downs also said that there had been legal challenges with regard to small businesses about the Inland Revenue's application of settlements legislation, but I say to him that there have been no successful challenges. The tax system is challenged quite a lot.

The amendment plugs a loophole whereby a person who is liable to tax at higher rates avoids tax by transferring his or her income to a spouse who is liable at a lower rate or not at all. It is not a stealth tax; it has nothing to do with section 282A and clause 86, which simply taxes husbands and wives on the income they are entitled to and according to their declarations. I want to come to that point, because it is about the use of the declaration in these circumstances. It also has nothing to do with gifts between husbands and wives; husbands and wives are still free to arrange their affairs as they choose, but they should not be able—I think that we would all agree—to manipulate by legal arrangements, by declaration, in order to avoid tax.

It may help if I explain exactly how the clause works. The settlements legislation exists to stop tax avoidance by means of the transfer of income from a higher-rate taxpayer to someone liable at lower rates or not at all. It is possible to side-step the legislation by transferring property into joint ownership, then declaring that most or all of the income belongs to one person only. The settlements legislation does not apply, because there has been no transfer of income, and section 282A of the Income and Corporation Taxes Act 1988 provides that income from property owned jointly by husbands and wives is taxed at 50:50—the settlement agreed in 1990 on the introduction of independent taxation. So, a person who is entitled to the whole of the distribution from a close company is taxed on only half of it, which was not the intention in 1990, and the clause provides that husbands and wives are taxed on the income to which they are entitled.

I would stress that, in the avoidance that we are seeking to prevent, the husband and wife, having had the joint ownership, produce a legal declaration to apportion not on a 50:50 basis but on a 100:0 basis or 90:10 or whatever, so the taxpayers themselves are declaring that the situation is not 50:50 but something else. They are transferring to the partner—the spouse—who has taxable allowances to use up.

Let us be clear about what the clause does. Its concern is close companies and only close companies—nothing else is affected here—that are jointly owned by a married couple, but where the company is really or mainly owned by one spouse and the married couple make a declaration to that effect. So, they tell us in that declaration that the ownership is not 50:50. Section 660A ensures that husbands and wives are taxed on their proper share in the income from the company.

By making a legal declaration—I should stress that we are using their legal declaration, which is voluntarily provided to the tax authorities—that the ownership is not 50:50, and that the income actually belongs to the partner who is really entitled to it, husbands and wives are trying to neutralise section 660A. That allows section 282A to kick in, attributing income equally even though the taxpayers have told us in the declaration that, truly, it is not equally apportioned. We are trying to get the right result following the declaration that the taxpayer has provided to us about the true nature of the income and assets.

Clause 86 gets us back to the right result. If the legal declaration is an accurate reflection of the ownership of the income—and it must be, because the husband and wife have signed it and declared it as a legal document—the husband and wife will be taxed on that basis. There is no need to look to the special rule that was provided in section 282A to work out their liability, because they have told us what their liability is and the tax consequences follow from that.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am extremely grateful to the Paymaster General for giving way. I should like to put to her a set of circumstances. Let us imagine that Mr. and Mrs. A form a company. Mr. A has 99 shares; Mrs. A has one share. The company's income is taxed accordingly, with Mrs. A taking one hundredth and Mr. A 99 hundredths. Three years down the line, Mr. A gives 49 of his shares—I hope that I have still got my maths right—to Mrs. A. Will they thereafter be taxed 50:50 or, because of the settlement provisions, will Mr. A be taxed 99 per cent. and Mrs. A 1 per cent.?

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman should focus on the declaration. If there is no declaration, the settlement provisions in section 660A will run and section 282A will kick in on the 50:50 split. A legal declaration is provided by the spouses to tell us that the ratio is not 50:50, but some other proportion. We need to follow that for tax purposes. If there is no declaration, the two provisions operate in the way that was always intended. It is not necessary to think up "what ifs". The only "what if" is if there is no declaration to the contrary, how do the two sections in the Income and Corporation Taxes Act operate? That is what I have explained.

The final question that the hon. Member for Torridge and West Devon asked was why the words "equal to" appear. Those words are needed because the clause must include any case in which couples have entered into a legal declaration—we do not require them to enter into such a declaration, but they have decided to do it—in respect of close company shares held in their joint names. If shares are held half and half, income will be taxed half and half. The effect of the clause is that couples will be taxed on their proper share of income, as they declare it to the tax authorities.

I do not see why the Commitee should object to income being taxed fairly, on the basis of information given to the authorities about the close company. The legal declaration seeks to neutralise the working of the two sections. Clause 86 ensures that if there is a declaration, it is followed. If there is no declaration, section 282A will apply, as normal. With that clarification, I hope that the Committee will agree that the clause is appropriate, proportionate and right to close a loophole whereby legal declarations have been used to get round the clear intent of Parliament since independent taxation was introduced in 1990.

Howard Flight (Conservative, Arundel and South Downs)

I apologise for taking the Committee's time but, with respect to the Paymaster General's comments, the clear intent in 1990 was not as she described. She agreed—I thank her—that clause 86 was introduced because if the Revenue is successful in its new interpretation of section 660A, which we object to, the clause removes the section 282A alternative defence. The two are entirely interlinked, in that the essential motive for clause 86 is to support the new initiative under section 660A.

John Burnett (Liberal Democrat, Torridge and West Devon)

I do not know whether the hon. Gentleman is minded to answer my last intervention on the Paymaster General. What effect will an alteration of equitable interests have? Will it invoke the settlement provisions—income deemed to be that of settlor provisions—in which case the allocation of shares will be altered by declaration of trust or otherwise, but the married couple will still suffer tax as to the ownership prior to the alteration, and the change will not be reflected?

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman. That is precisely the point. My understanding is that, if the Revenue succeeds with its new interpretation of section 660A, the couple, in spite of having transferred to 50:50, will go on being taxed as though the split were 99:1.

Let me elaborate on the areas of dispute in relation to section 660A. By the way, the case comes up on 14 June and I know a little about it, as it concerns a constituent. Perhaps the Paymaster General should be aware that all the bodies whose names I listed have come together to disagree with the Inland Revenue on that case. It is therefore the first test case, which will resolve the matter one way or the other.

The area of dispute in relation to section 660A concerns the application of the settlements legislation where a husband and wife set up a company together, each subscribing for the shares. One party—say, the husband—earns money in the market place, and the wife may play a supportive role, giving advice or organising appointments. After paying employees and the husband's salary, there are sufficient funds in the company for a dividend to be paid to the shareholders.

The Revenue view in its new interpretation of section 660A is that that combination of factors is a settlement, and the necessary bounty is created when the husband takes a salary that might be deemed to be less than market value, so to leave distributable profits. The dividends received by the wife should thus be re-allocated to the husband. That is the specific case that the Revenue made in its 64th tax bulletin. The Revenue holds that the mischief in such situations is that the shareholdings adopted and the dividends paid lead to the diversion of income from a spouse who may be liable to tax at the higher rate to the spouse with a more favourable tax situation.

The contrary argument that all those professional bodies have advanced is as follows: there is a clear exemption in section 660A(6) for outright gifts between husband and wife unless the gift does not carry a right to the whole of that income, or the property given is wholly or substantially a right to income. In a partnership where both the wife and the husband assume the risk of unlimited liability, it is surprising to see the Revenue arguing that the partnership share is wholly or mainly a right to income. In a company, the income comes to the wife by reason of her shareholding, and ordinary shares cannot represent a right to income. They are a bundle of rights, including a right to a share in the underlying capital of the company. The ownership of a share does not represent a right to income. At best, there may be an expectation. There may, in fact, be no income, or the directors may decide not to distribute the income. The wife is contributing to the business, even though she is not the person active in the external marketplace.

At the time of the 1990 Budget and Finance Bill, the Budget press release stated that although the settlements legislation was introduced in the 1930s, the exemption for gifts between spouses was introduced in the 1990 Finance Bill as clause 109. That subsequently became section 108 of the Finance Act 1990, and then section 660A(6) of the Income and Corporation Taxes Act 1988. The purpose of the clause was set out in the relevant Inland Revenue Budget press release:

"The Chancellor proposes in his budget to make changes in the income tax rules for gifts between husband and wife and for some other settlements. These follow the personal tax reforms in last year's budget. They will make the rules for settlement operate in a way which is consistent with the Government's objective for independent taxation . . . the changes will ensure that when independent taxation begins in April 1990 income from simple outright gifts of assets between husband and wife and certain pensions allocated between them will be taxed as the income of the recipient and not as the income of the person making the gift."

That was further elaborated in the detailed sections of the release:

"Under independent taxation the income arising from a gift of an asset between husband and wife will be treated as the recipient's for tax purposes only if it is an unconditional gift of both the asset and the income arising from it. The income will generally be treated as the donor's for tax purposes . . . if the donor has the right to get back the asset in the future, or to decide what the recipient should do with it",

or if

"the donor uses a trust to give the income to his or her partner while retaining control over the capital or passing the capital to a third party."

It should thus be noted that there is no mention of the sort of situation to which the Inland Revenue now refers in its new interpretation of section 660A, which was set out in examples 3 to 5 of its tax bulletin. Indeed, the press release indicated the opposite, by saying that unless the donor retains the underlying asset, the transfer will be effective for tax purposes.

The parliamentary debate on clause 109 of the Finance Bill back in 1990 makes interesting reading. It centred around an amendment tabled by the right hon. Member for Islington, South and Finsbury (Mr. Smith)—I apologise for not knowing his constituency at the time—to rewrite what is now section 660A(6) by adding a subsection that sought to achieve what the Government are currently seeking to achieve. The provision would have applied when the gift did not carry a right to the whole of that income, when the property given was wholly or substantially a right to income, or when the gift was undertaken with the sole or main objective of achieving a tax advantage. The amendment was tabled because the Labour party was concerned that it would be possible to make a gift producing income that was taxed at a lower rate than in other circumstances, especially when one household member was in a higher tax bracket, while the other paid tax at the basic rate.

The Chief Secretary of the time said that the amendment would undermine the very basis of independent taxation and that, if it were carried, there would be no independence for married couples and people would not be free to arrange their affairs as they wished. He added that independent taxation was bound to mean that some couples transferred assets between them, with the result that their total tax bill would be reduced. He stated that that was an inevitable and acceptable consequence of taxing husbands and wives separately. Even more explicitly, he said that the Government had made it clear that they expected that income splitting would occur, and the amendment was withdrawn.

The reallocation of assets between spouses to take advantage of one spouse's personal allowance and lower rates of tax was thus not only contemplated, but accepted by the Government of the time as part of the price for independent taxation. There is no reason why such transfer of assets should not include shareholdings and partnership shares.

I apologise for putting all that on record, but the bottom line is that if the Government wished to reinterpret section 660A, they would have been better off doing it by legislation. Instead, it is being done by Inland Revenue initiative. As has been pointed out, and as the Paymaster General conceded, that matter has an acute relationship with clause 86 and the defence usage of section 282. We therefore oppose clause 86 in principle, and we will certainly do so until the special commissioner's findings emerge in June to resolve the underlying section 660A issue one way or the other.

John Burnett (Liberal Democrat, Torridge and West Devon)

The Paymaster General stated that married couples should be taxed fairly and that this state of affairs will not be changed or altered by the clause. I put it to the Committee that married couples should be able to alter their shareholdings and should be taxed in accordance with that alteration, and that nothing should be done to disturb that.

There are many reasons why married couples decide to change their shareholdings in close companies. If there is a new marriage and a company is formed, only one share might go to one spouse because the other spouse has put considerably more capital into the project. After a few years of healthy marriage, there will be greater equalisation of those capital assets. These are common-sense matters. Drawing the settlement provisions into these arrangements is absolute nonsense; it should not happen and it is a disgrace.

Dawn Primarolo (Labour, Bristol South)

Surely, the hon. Gentleman is not saying that in 1990—this is the fundamental point that the hon. Member for Arundel and South Downs, who referred to the debates at that time, also misunderstands—it was expected that we should tax people in a way that was contrary to their explicit declaration as to how income was actually earned, as opposed to the operation of the 50:50 arrangement. It is to a declaration from the taxpayer, which was never discussed then, that the clause seeks to respond, and only in the case of close companies.

John Burnett (Liberal Democrat, Torridge and West Devon)

I have spent most of my life—or at least quite a lot of it before I came to this place—dealing with close companies and corporate taxation, and I believe that it should be clear to everyone in the Committee that people, and married couples in particular, should be free to alter their shareholdings, by declaration of trust or otherwise, and then to be taxed in accordance with that alteration. Undermining that principle flies in the face of tax practice for years. Why are transfers between spouses free from capital gains tax? Why are such transfers free from inheritance tax?

Dawn Primarolo (Labour, Bristol South)

The point is what happens where couples are saying that they jointly own a company and then seek to be taxed in a different way, which is not the 50:50 arrangement.

John Burnett (Liberal Democrat, Torridge and West Devon)

I have heard what the Paymaster General has said; she has made the same point once or twice. I believe that a declaration should be made at the end of the tax year that reflects the true ownership of the shares and the proportions in which they are owned.

Howard Flight (Conservative, Arundel and South Downs)

May I repeat the complicated point that clause 86 is relevant only because of the reinterpretation of section 660A? It is quite clearly an option for people to choose to hold assets jointly and achieve 50:50 if they are taxed successfully under the reinterpretation of section 660A. Therefore, the business of giving the declaration is not the fundamental underlying point that needs to be debated.

John Burnett (Liberal Democrat, Torridge and West Devon)

I think that all of us in the Chamber have understood that point.

The point that my party and I cannot accept relates to the fact that, if people alter their ownerships in close company shares, they should be taxed in accordance with that alteration. The anti-avoidance or settlement provisions should not bite on that principle, and people should be taxed fairly in accordance with such alterations. It is free, and it should be free—I thought that this was the philosophy even of the Labour party—for married couples to make changes in their equitable ownerships. Such changes should be free of capital gains tax and inheritance tax. Such couples should be taxed in accordance not with the previous situation, but with the alterations that they have made in those equitable ownerships and with the circumstances and ownerships that prevail at the time when they make their tax return. What is important is not to erode those principles, but to ensure that married couples can alter their equitable interests and shareholdings and be taxed accordingly.

Clause 111 — Restriction of Gift Relief etc.

Howard Flight (Conservative, Arundel and South Downs)

With your indulgence, Sir Michael, I wish to make some reference to our amendment No. 8 to schedule 21, which covers the same territory as the clause.

The combination of clause 111 and its supporting schedule removes, from 10 December last, the availability of gift holdover relief on any transfers into settlor-interested trusts and makes consequential amendments to the penalties regime and information powers. We fear that, in certain circumstances, that could result in a double inheritance tax and capital gains tax charge. We also seek confirmation that the provisions will not in any way affect charities. Although we are reasonably satisfied that that is the case, it has been suggested to us that it could happen in some circumstances.

Under gift holdover relief, the settlor may have to pay capital gains tax if the asset being transferred has gained in value during his ownership, as a transfer into a trust is a deemed disposal for capital gains tax. A settlor-interested trust is one in which the settlor making the transfer will continue to have some interest and to derive some benefit—for example, income—from the assets, and in which the tax position should be entirely transparent. Arguably, the tax should therefore fall when the settlor's trustee disposes of the asset, not when the asset is moved into the trust. That restriction of gift relief has been presented as an anti-avoidance measure because people have been entering into tax-planning arrangements using a combination of settlor-interested trusts and gift reliefs to exploit the changes introduced by the Government to the definition of business assets for taper relief purposes.

We have objected before to the unfairness of the Government's definitions, under which, for example, a person who has owned a newly qualified business asset for only two years will qualify for full business asset taper relief, reducing their capital gains tax to 10 per cent., whereas another taxpayer who has held a similar asset for six years, since the introduction of taper relief in 1998, could find themselves not qualifying for taper relief on the first proportion of the gain between 1998 and 2000 and suffer a capital gains tax charge of 16.67 per cent., despite the fact that they have held the asset longer. I recollect many such debates in Committees on previous Finance Bills. A similar change in definition will take effect from 6 April this year.

Not surprisingly, such inconsistency has led to the use of settlor-interested trusts to reset the taper relief clock and thereby redress the inequality created by the Government's time definitions for taper relief. Logically, if gift relief is to be restricted, the taper relief should be amended along the lines that we have previously suggested.

The double tax issue could now arise where the transfer is to a settlor-interested discretionary trust where no beneficiary has an absolute right to income. Under current legislation, there is an immediate charge to inheritance tax on any transfer into a discretionary trust unless the transfer qualifies for an inheritance tax exemption—for example, a business or agricultural asset. The accounting profession has anticipated a restriction to gift relief for transfers to trusts used for avoidance, but the expectation was that gift relief would be stopped where an immediate inheritance tax charge arose—in other words, that there would be either an inheritance tax charge or a capital gains tax charge. However, the clause and the schedule could result in both charges being levied in circumstances in which no reliefs are available. I see that the Paymaster General is shaking her head, so I hope that she will be able to assure me that that is not the case.

The schedule requires clarification in respect of the notification obligations—are they via self-assessment or stand-alone?—and there are some detailed points that are worth focusing on. Sub-paragraph (7), on page 382, refers to

"a person in receipt of"

certain benefits. Our amendment No. 8 would extend that to people who qualify for such benefits even if they are not claiming them, because not every disabled person claims benefits.

New paragraph 169C, on page 380, refers to the possibility of a revocation of a section 260 or section 165 claim. Can the election be revoked? If so, what is the time limit for so doing? Does the normal limit of five years and 10 months obtain? Does a revocation need to be entered into by both parties, in the same way as a claim?

New paragraph 169F uses the concept of derived property, which was debated in the West v. Trennery case. Should not it be made clear that the property referred to is property within the settlement under consideration, not property passing from one trust to another?

Michael Lord (Deputy Speaker, Central Suffolk and North Ipswich)

Order. The hon. Gentleman is straying into different parts of the Bill. Does he intend not to refer to those parts again; and will he be reasonably brief? We are debating clause 111 stand part.

Howard Flight (Conservative, Arundel and South Downs)

Thank you, Sir Michael. I endeavoured to make it clear at the beginning of my speech that the clause and the schedule are interrelated. I want to make sense of the two together by pointing to issues that could do with a little clarification. I confirm that I shall not want to speak when we focus separately on the schedule.

New section 169 refers to a former spouse being requested to supply information.

Dawn Primarolo (Labour, Bristol South)

I am sorry to interrupt the hon. Gentleman, but I want to be absolutely sure what I shall be replying to. I understand, Sir Michael, that we are discussing only clause 111, and that we shall then move on to the amendments to the schedule. I therefore intended to respond only to the points on the clause. It will be a bit difficult for me to do so if the hon. Gentleman puts all the subjects together.

Howard Flight (Conservative, Arundel and South Downs)

I have very nearly finished. I have two issues relating to the schedule, and I shall raise them when we discuss the schedule.

Will the Minister confirm that the provisions of clause 111 cannot result in a discretionary trust having a double tax liability to both inheritance tax and capital gains tax? If we cannot be persuaded by her answer, we might wish to vote against the clause. However, if our concerns can be addressed, we will accept it.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am happy to address the clause and not the schedule, although we have tabled amendment No. 42, which applies to schedule 21.

I should like to confine my points to the importance of holdover relief, especially for smaller businesses, and for sole traders and partnerships in particular. In Committee Upstairs, we shall no doubt discuss the inheritance tax changes proposed by the Government, especially on pre-owned assets, and how difficult it will be for taxpayers to alter capital accounts and partnerships if pre-owned asset provisions are introduced. It is important for the flexibility of business and of the economy—particularly in terms of helping smaller businesses—that we do not use a sledgehammer to crack a nut when we make tax changes.

Of course we will support genuine anti-avoidance provisions, but under the clause and schedule settlement legislation could apply a transfer to a settler-interested trust, thereby taxing the income of a trust as the income of a settlor. As has been said, the transfer could well be subject to inheritance tax if the assets were over the nil rate band or if they were not exempt. It is unfair to tax gifts as capital gains tax, because there is no cash arising from the gift with which to pay the tax. In due course, we shall discuss our amendment No. 42. Meanwhile, I look forward to hearing the Paymaster General's response to the matters that I have raised.

Dawn Primarolo (Labour, Bristol South)

I should like to respond briefly to the points made in the debate on clause 111 stand part. When we get to the amendments to the schedule, especially those relating to the taper relief, I shall have an opportunity to answer in greater detail the questions that have been asked.

Clause 111 will put an end to certain schemes designed to enable people to avoid capital gains tax by gifting assets into trusts before selling them—washing through gains. What people have been doing, as a first step, is transferring an asset into a trust in which they have an interest. They then claim gifts relief on the transfer so that the gain is held over and there is no tax to pay. The trustees can then use various techniques to ensure that when the asset is eventually sold, no capital gains tax liability arises, even in respect of the earlier held-over gain.

Among other things, the schemes have been used to avoid paying capital gains tax on the sale of second residential properties and on the sale of valuable shares in privately owned companies. The common feature of the schemes, and what I hope the House will agree is objectionable about them, is that without the interposition of the trust, the sale of the asset would attract capital gains tax. Trusts in which the transferor has an interest—known as settlor-interested trusts—are used in these avoidance schemes because they allow the person who is seeking to dispose of an asset without paying capital gains tax to retain an interest in the asset at all times and to benefit from the proceeds of the asset's sale.

This measure counters the avoidance by attacking the schemes at source. It will no longer be possible for people to defer a tax charge by claiming gifts relief when they transfer assets to a trust in which they have, or can obtain, an interest. The measure also restores related anti-avoidance legislation to stop abuse of the capital gains tax relief on gifts of shares to companies that was inadvertently repealed in 2003 by a prospective measure in an earlier Finance Bill. By stopping these avoidance schemes, clause 111 and schedule 21 will prevent people from exploiting the capital gains tax rules to gain an unfair tax advantage.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am very grateful to the Paymaster General for giving way; she is always very courteous in these debates. Will she elaborate a little on the steps taken to wash out gains when assets are in a trust? I am sorry about the length of this intervention, Sir Michael, but the right hon. Lady and I debated at length Upstairs the other day the new UK-New Zealand double tax treaty, and we referred to capital gains tax avoidance at some length during that debate. Is that part and parcel of what the Government have in mind with the anti-avoidance provisions, or is it something else? What mischief is she is trying to overcome?

Dawn Primarolo (Labour, Bristol South)

I have explained how the mischief operates in terms of capital gains tax. Perhaps it will satisfy the hon. Gentleman if I elaborate on what the measure does not apply to. One of the interesting challenges for a tax Minister is whether we have to descend to being tax planners as well, to challenge our own tax system, but I shall not be tempted down that route. In order properly to represent the Government and the best interests of the taxpayer, I confine my work as a Treasury Minister to ensuring that mischief does not happen; I do not advise on any mischief that might happen in future.

The hon. Gentleman said that we were using a sledgehammer to crack a nut, and asked whether the measure would unfairly hurt honest taxpayers. That is a perfectly reasonable question. Government policy is to stop people reducing their tax bills by using a settlor-interested trust. The fact that tax advisers have found such schemes a useful way of increasing business asset taper relief is no reason to leave it undisturbed. We should have that discussion when we consider the hon. Gentleman's amendment.

The Government's position on the taper relief and the reforms from the 2002 Finance Bill represent a point that I have addressed several times in Committee over the years. I am happy to explain again why the Government have not backdated taper relief rules, and I am sure that we will explore that when we come to the amendment. That is a better point at which to do so in terms of what is and is not allowed.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for kindly giving way. For the sake of clarification, will she confirm that, however we define it, the mischief is essentially that which I set out, which is the use of settlor trusts to change the acquisition date for the purpose of taper relief, or are there other mischiefs of which I am not aware?

Dawn Primarolo (Labour, Bristol South)

There are other mischiefs. I am trying, Sir Michael, not to drift into the debate that we should rightly have on amendment No. 42, but that is what has happened. Shares in UK companies are gifted to a trust in which the donor is a beneficiary and tax is deferred, as I explained in my opening remarks. The trust sells the shares to another company, but, at the same time, the donor's beneficiary interest in the trust is sold tax free to a non-resident company and the trustee creates a loss to match the gains. It is claimed that the rules interact so that the original donor does not pay any tax on the gains and the trustees do not pay any of the deferred tax. The availability of the gift relief on the initial gift to the trust is the foundation on which the whole scheme is built.

There has been no change in Government policy on business taper relief reform. Business asset taper relief supports enterprise. We have had this discussion at length many times in the House and the matter has been discussed during consideration of two Finance Bills. Government policy is that taper relief changes should not be backdated because that would reward past decisions rather than incentivise future behaviour. That is one of the issues that relates to the clause and the subject of the amendment tabled by the hon. Member for Torridge and West Devon (Mr. Burnett). Perhaps we should come to that, but it is not the only issue.

People are disposing of assets to others. It is right that that disposal is a chargeable event. By deferring tax, the gifts relief rules recognise the fact that some people may not receive any money on giving the asset away. The hon. Gentleman is more familiar with that provision than I am, because he has operated it. The deferral is the cancellation of the liability, which is not acceptable.

John Burnett (Liberal Democrat, Torridge and West Devon)

On a point of curiosity, I wonder whether the Inland Revenue challenges such avoidance.

Dawn Primarolo (Labour, Bristol South)

Sir Michael, may I ask the hon. Gentleman which one of the avoidances covered by the clause he is referring to? I beg your pardon, Mr. McWilliam, I have promoted you. I hope it will come soon.

John McWilliam (Labour, Blaydon)

It is about time.

Dawn Primarolo (Labour, Bristol South)

I could not have put it better myself.

In terms of the role of the Inland Revenue, and as a Minister who is enthusiastic in defending its work in ensuring that the tax system operates properly, I should say to the hon. Gentleman that when mischief is seen, the Revenue will challenge it. We are drifting away from the debate on the clause, but, as the hon. Gentleman well knows, tax planning schemes can sometimes have already taken effect by the time they become visible. However, that is a debate for another day.

The hon. Member for Arundel and South Downs (Mr. Flight) asked about charities, and he is particularly worried about whether people will be discouraged from gifting assets to charities or museums. He should not be worried about that. There is no change to rules for gifts of assets to charities and other special bodies. We have also excluded gifts to trusts set up for the preservation of historic buildings, which may have been the issue that he wanted to touch on.

The hon. Gentleman—like, I think, the hon. Member for Torridge and West Devon—touched on the question of the interaction with inheritance tax, or IHT. The position in respect of inheritance tax is unchanged. People will still be entitled to inheritance tax relief for business property transfers into settlor-interested trusts and, where appropriate, to the inheritance tax nil rate band. None of those schemes in practice involves inheritance tax liability. That may well be because of the business property IHT relief, the IHT nil band rate or the fact that a transfer by an individual to a trust in respect of which he is the person entitled to the income is not a chargeable transfer. That is one reason why most cases will not be caught by the provision. May I leave the issue regarding the taper clock on shares until we consider the relevant amendment, because we need to explore it?

Finally, may I deal with the question asked by the hon. Member for Arundel and South Downs about revocation of claims? This is a claim, not an election, so I am advised that sections 165 and 260 are claims-based sections and the normal rules relating to the withdrawal of claims apply. Thus, a claim cannot be withdrawn or amended after it has become final.

Within the time limit for amending the claim, it may be withdrawn at any time. If a claim is made within a return and the window for amending that return is closed, the settlor cannot undo the position, so they are stuck with the consequences of the decisions they made when they made the claim. Likewise, if a claim is made outside a return and the window for amending the claim has passed—12 months from the date when the claim was made, for example—the settlor cannot undo the position. Again, he is stuck with the consequences of his decision to make the claim.

The hon. Gentleman made a point about both parties making a claim. Trustees of settlements make gift relief claims only where they are the party making the disposal. I hope that that clarifies the position with regard to revocations.

Howard Flight (Conservative, Arundel and South Downs)

May I return to the previous point, on which the hon. Member for Torridge and West Devon and I expressed a concern that a discretionary trust could have both an inheritance tax and a capital gains tax liability when agriculture or business exemptions did not apply? Is that the Paymaster General's understanding? If so, will the Government propose a way to stop such double taxation arising?

Dawn Primarolo (Labour, Bristol South)

I know that the Opposition often attack the Government for looking for revenue at every point, but I assure the hon. Gentleman that we are not venturing into double taxation. There would be a huge outcry were we to ask people to pay tax twice on the same income or the same assets. If he wants me to do so, I will get my officials to draft a detailed reply. As a matter of principle, he and I may disagree on many points in this Finance Bill, as in previous ones, but we will not disagree on the fact that double taxation is not acceptable. I therefore commend the clause to the House.

Question put and agreed to.

Clause 111 ordered to stand part of the Bill.

Schedule 21 — Chargeable Gains: Restriction of Gifts Relief etc

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 8, in schedule 21, page 382, line 10, at end insert

'; or

(c) a person who would qualify for one or more of such benefits mentioned in paragraph (b) above if the appropriate claim were made.'.

First, may I welcome your chairmanship of our deliberations this afternoon, Mr. McWilliam? In the course of the clause stand part debate, I referred to this amendment, the essence of which is to include people who would be entitled to disability allowance even though they may not have claimed it, as in many cases people who are entitled do not do so. There may be some practical problems in implementing that, but there seems to us to be an issue of basic fairness, whereby people should not be excluded merely because they have not put in the relevant claim.

John Burnett (Liberal Democrat, Torridge and West Devon)

Is it in order for me to speak to my amendment No. 42, Mr. McWilliam?

John McWilliam (Labour, Blaydon)

No. It is a separate argument and in a separate group.

Dawn Primarolo (Labour, Bristol South)

I hope that I will be able to persuade the hon. Member for Arundel and South Downs (Mr. Flight) to withdraw this amendment. First, I have no quarrel with the thought behind the amendment. The problem is how to deliver such a change through the Inland Revenue. The concerns that prompt the amendment are that, currently, the definition of a disabled person means that there may be trusts for people who are disabled, under which the settlor will not get the benefit of the exemption provided for in the measure. The hon. Gentleman asks that we modify the definition to include people who might be in receipt of attendance allowance or disability living allowance, if they had made an appropriate claim. We must therefore know that they might have made a claim, and that it might have been appropriate.

In all honesty, for the life of me, I cannot see how the Inland Revenue, as the tax department, could possibly know who might have applied and whether they may have been successful under the rules. Obviously, there are huge practical difficulties in terms of how the Revenue, as the tax department, would be able to settle on these issues for the purposes of taxation. I hate to say this, but I do not even want to contemplate what the anti-avoidance measures would need to be in relation to decisions at each stage by the Revenue. Basically, the Revenue would have to adjudicate on what are deemed applications—as they may never have been made—when clearly it would be the role of another Department in relation to people who are entitled to such benefits.

The other point that struck me is that if a disabled person for some reason chose not to claim state benefits, in the knowledge that that would have an effect on the capital gains tax bill, that is their choice. Surely, if a huge amount of money was at stake, I cannot believe that the taxpayer would not be advised at least to apply for one of the benefits, to see whether they were entitled, although they may not wish formally to make the claim, which would be processed through the Revenue.

What lies behind the proposal is a laudable aim, in terms of ensuring that people receive everything to which they are entitled, and that wherever possible, rights are delivered to that person, regardless of whether an application through another route had been made. I discussed this matter with my officials, and I know that the hon. Gentleman is keen to reduce the costs of central Government in what we have affectionately called the Flight plan for £30 billion of public sector cuts. I hate to say this to him, but he would be spending a huge proportion of that revenue on the checks and balances in the process that his amendment proposes.

Although the principle would be generally accepted that, wherever possible, rights should be delivered, rather than requiring an application, at present, there is no way known to Ministers, officials or humankind to deliver his amendment. I therefore ask the hon. Gentleman to consider withdrawing it, having aired the important principle in the House.

Howard Flight (Conservative, Arundel and South Downs)

First, I am delighted to hear that when the Gershon team has outlined planned savings of up to £30 billion, the Government will name them after me.

I accept the Paymaster General's argument that the proposal is probably impractical. There is a moral point, and I would just hope that in any circumstances in which someone had historically suffered as a result of not claiming a benefit, that might be put right and attention given to sorting out the tax affairs to date. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

John Burnett (Liberal Democrat, Torridge and West Devon)

I beg to move amendment No. 42, in schedule 21, page 386, line 15, leave out '10th December 2003' and insert '1st April 2005'.

May I also welcome you, Mr. McWilliam, as Chairman? I have had the privilege of sitting on several Committees that you have chaired, and I am pleased to move amendment No. 42, in my name and the names of my right hon. and hon. Friends.

The amendment is probing, and before I go into great detail, I want to refer to the fact that the Paymaster General, in the last but one debate, said that she was not here to give tax advice. That may or may not be the case, but I remember that in 1985, the Inland Revenue issued a consultation document called "The Preceding Year of Assessment and the Cash Basis of Assessment". It contained a textbook example of exactly how to lose one year's profits, which came to be quoted in many learned textbooks.

Basically, amendment No. 42 seeks to extend the time for the provisions of the schedule to apply. We are seeking to replace 10 December 2003 with 1 April 2005. Effectively, the amendment delays the implementation of the proposals to allow for further comment. I know that the Paymaster General is excitedly waiting for an opportunity to discuss what is behind the amendment, and to assure us that the proposal will not unfairly prejudice taxpayers and unfairly fetter businesses. There has been discussion about taper relief rules and their manipulation.

I look forward to hearing what the Paymaster General has to say. Having considered that, I shall make up my mind about whether we feel satisfied with the explanation.

John McWilliam (Labour, Blaydon)

I thank all Members for their kind words of welcome, and hope that they will not have cause to recant in the next couple of months, when they will be spending far too much time in my company.

Dawn Primarolo (Labour, Bristol South)

I shall be asking the House to reject the amendment, for two reasons.

First, this is anti-avoidance legislation designed to stop people from obtaining gifts relief on transfers of assets to settlor-interested trusts in order to avoid capital gains tax. To delay the introduction of a measure designed to protect public revenues would simply increase the drain on the Exchequer from the avoidance that already exists, and would give a flag for it to be possible for at least another 12 months. The loss is almost impossible to calculate because we do not know what the behavioural changes might be; but according to current estimates, if we delayed the introduction of the provisions the Exchequer could lose some £50 million—a significant amount. In effect, people would be rewarded for trying to avoid tax for a further 12 months, and I cannot agree to that.

The second reason for rejecting the amendment is that in this case there is no need to provide a period of grace giving people an opportunity to unwind existing arrangements that might have been caught by the start date of 10 December 2003, because the measure applies only to disposals to trusts on or after that date. Disposals made earlier are not affected.

The Inland Revenue published draft legislation and detailed explanatory notes on 10 December 2003 so that anyone contemplating a disposal to a settlor-interested trust on or after that date could be fully aware of the capital gains tax consequences of such a disposal. I think that that is entirely right.

The hon. Gentleman mentioned taper relief. I think he was referring to the so-called taper clock, to which the hon. Member for Arundel and South Downs (Mr. Flight) also referred. Some people have used settlor-interested trusts to gain full business asset taper relief on assets that they owned before April 2000 that did not become business assets until the definition was relaxed, gifting the assets into trusts after 5 April 2000 and thereby restarting the taper clock. It remains the Government's policy that changes to the taper relief rules were to be effective from 6 April 2000, and that they should not apply in relation to any part of the period of ownership falling before that date. This measure prevents people from using settlor-interested trusts—as they have been—to reduce their capital gains tax liability in a way that was never envisaged or condoned, as the policies of 2000 and 2003 made absolutely clear.

I hope that the hon. Gentleman will not press his amendment. No other measures relating to the taper relief rules have been changed. Anyone with a business asset who sells it will receive business asset taper relief. Assets that became business assets on 6 April 2000 will receive the relief in proportion to the time during which the assets were business assets before being sold. There is no question of any of the rule changes made in 2000 or 2002 being disturbed. All that is being prevented is the use of settlor-interested trusts to restart the clock.

John Burnett (Liberal Democrat, Torridge and West Devon)

I think I made it clear at the outset that ours was a probing amendment. I was delighted, or at least pleased, to hear what the Paymaster General said.

The Paymaster General said earlier that we had debated the point about business asset relief many times in Committee. It is of course grossly unfair that those who have held assets before a certain date do not receive relief, while those who hold them after that date do. It is chronically unfair—but I will not start that debate again, because we have already discussed it at length on at least two occasions.

Howard Flight (Conservative, Arundel and South Downs)

It is in circumstances like these, in which people feel that they have been treated unfairly, that they turn to avoidance techniques such as the one we are discussing. In a sense the problem is of the Government's own making.

John Burnett (Liberal Democrat, Torridge and West Devon)

I have heard that view asserted frequently. I certainly asserted it myself before I became a Member of Parliament, to justify certain steps that I used to take on behalf of clients. I shall be rather more circumspect now, but the hon. Gentleman is right: people do feel very unfairly discriminated against because of the arbitrary nature of the relief.

Dawn Primarolo (Labour, Bristol South)

I shall not ask the hon. Gentleman to share with us exactly what he got up to in tax planning, and we will not tell anyone else about it.

Surely the hon. Gentleman will acknowledge that when the Government introduced taper relief it was for future gains, and related to the development of businesses from that time forward. It is not acceptable to say that we should backdate it, at huge cost to the taxpayer, with no gain in the explicit policy. That is why the start date is where it is.

John Burnett (Liberal Democrat, Torridge and West Devon)

I do not agree. People should be given incentives to stay in business and to grow their businesses. The fact that they fall short of the arbitrary date by a few days, or a year, is economic nonsense. People should be given incentives throughout their ownership of business assets. If relief is introduced, they should benefit. When business assets relief was introduced for inheritance tax, and other reliefs for capital gains tax, they did not arbitrarily discriminate against already-held assets. This is nonsense.

I think I have said enough. The Paymaster General has given me a reasonable explanation. We have trespassed slightly on old ground; so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Twenty-first schedule to the Bill.

Howard Flight (Conservative, Arundel and South Downs)

May I ask the Paymaster General to make it clear that the concept of derived property used in new section 169F refers to a property within the settlement under consideration, and not to property that might pass from one trust to another?

New section 169G refers to a former spouse being required to supply information to the Inland Revenue. We seek some assurance that such a request would be treated sensitively, recognising that a former spouse may not have information, or may not wish to be involved in their former spouse's affairs any longer.

Dawn Primarolo (Labour, Bristol South)

As the hon. Gentleman said, this is about sensitivity. It would be depend on the precise facts, which as he knows can cover a vast array of examples. If a person is able to enjoy benefit from the property, the question is: is it derived from that trust, or is it derived from another trust? It would depend on the precise facts of the transfer. It may be helpful if he wrote to me with some specific examples of the difficulties, so that I could respond to those particular points, rather than make general statements that will be wide of the mark. It is necessary to have sensitivity and these issues can be complex. Some will be acceptable and some will not be. We need to take it forward on that basis.

Question put and agreed to.

Schedule 21 agreed to.

Clause 282 ordered to stand part of the Bill.

Schedule 37 — Stamp Duty Land Tax and Stamp Duty

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 11, in schedule 37, page 506, line 30, leave out 'or request'.

As this is my first contribution today, may I also welcome you to the chair, Mr. McWilliam? You have chaired us during a number of our deliberations and I look forward to your guidance in the coming hours. I also welcome the Financial Secretary. She and I have discussed these issues on a number of occasions and I look forward to jousting with her later today, and indeed on this amendment.

Schedule 37 seeks, it is fair to say, to revise and to correct parts 4 and 5 of the Finance Act 2003. However, it also seeks to re-enact temporary regulations that were introduced under section 109 of the Act. Amendment No. 11 is a probing amendment. It concerns the different professional and legal roles of contractors and developer traders.

The background is that new section 44A is believed by some experts to have been devised to counter situations in which a developer acts merely as a building contractor to a landowner and is paid out of the proceeds of sale. Clearly, in many cases, a landowner will also want a developer's sales expertise to be made available. Such an arrangement could legitimately include a provision for the developer to act in that respect.

There must be certainty as to when a genuine contracting relationship coupled with sales advice is brought within the tax. A normal estate agent "introduces" a purchaser and "advises" whether the price offered should be accepted. While that does not immediately seem to encompass the concept of the word "request", a number of lawyers who are far more expert in these matters than I have suggested that the wording is not clear. The purpose of the amendment is to ask whether the Financial Secretary will be willing and able to help us to clarify the intention of the provision.

Ruth Kelly (Labour, Bolton West)

I also welcome you to the Chair, Mr. McWilliam, and look forward to you being with us over the next few weeks and months. I look forward to debating amendments and clauses with the hon. Member for Hertford and Stortford (Mr. Prisk), who takes a deep and personal interest in these matters.

This amendment affects new section 44A, which prescribes the stamp duty land tax treatment of contracts where one party can direct or request that a conveyance of land is made to a third party. He is correct that new section 44A is there to ensure that stamp duty land tax is not avoided, especially in commercial transactions, by disguising what is in substance the purchase of land for development as a non-land transaction, often described as a "building licence". The Government believe that the tax treatment should reflect the substance. That is our policy on a variety of issues that are to be debated today.

The effect of the amendment would be to tempt taxpayers and their advisers to draft building licences that are still in substance the purchase of land but which provide that the developer will "request" rather than "direct" the landowner to convey to a third party. That would no doubt be the sort of request that it is hard to say no to.

Concern has been expressed about the interaction between new section 44A and existing section 44, dealing with contracts to be completed by a conveyance. I reassure the hon. Gentleman that section 44 remains the primary charging section where contracts for land transactions are substantially performed. In particular, the fact that a normal contract for sale includes a provision permitting the contracting purchaser to nominate someone else to take the conveyance does not take the contract out of section 44 into section 44A.

The hon. Gentleman mentioned the fact that section 44A may catch a contractor. I believe that it will not. It should not catch a person who genuinely acts only as an agent. I hope that with that reassurance he will withdraw the amendment.

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to the Financial Secretary for that clarification. It helps. I think that she understands, as I am sure the Committee does, that one of the important purposes of the amendment was to put that clarification on the record. Given that she has done that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 12, in schedule 37, page 510, leave out lines 2 to 5.

This is also a probing amendment. It seeks to clarify the sale and leaseback tax relief arrangements. Again, a number of professionals in the sector who have many years' experience have identified a potential problem with the provision, and I use the word "potential" with due care.

For the benefit of the Committee, the background is that section 57A was inserted into last year's Finance Bill on 12 November. Under the revisions to its text, certain relaxations are to be incorporated. The text is to take effect between 17 March this year and Royal Assent in July.

I understand that a temporary transition such as that means that conveyancers and solicitors involved will have to be very careful in the advice that they provide in researching the situation backwards, before advising their clients. That is quite an awkward problem, which arises because of the transition. It creates significant uncertainty and the regulations seem to be at variance with the tax treatment of such sale and leasebacks when assessing capital gains tax liabilities.

In relation to CGT base value reductions, there is only a part disposal of the interest originally held, with the economic value retained being left out of account, yet stamp duty land tax has been constructed differently. The purpose of the amendment is to ask: why the difference?

Ruth Kelly (Labour, Bolton West)

The amendment seeks to remove an anti-avoidance provision in the Bill. The provision is designed to ensure that a taxpayer cannot obtain two reliefs: sub-sale relief when he on-sells land without taking title to it; and sale and leaseback relief, if the land is leased back to him by the sub-purchaser. The Government believe that sale and leaseback relief should apply only to the leaseback leg of a transaction where the seller has previously taken title to the property and has paid stamp duty land tax, or old stamp duty, on that acquisition.

In principle, we believe that it would be wrong for a taxpayer to be allowed to sub-sell land and not have a stamp duty land tax charge because of sub-sale relief and then also to take a leaseback of the land that he has sub-sold and claim leaseback relief. We believe that the taxpayer should choose either to sub-sell and pay stamp duty land tax on the leaseback to him, or to pay stamp duty land tax when he acquires the land and then enter into a sale and leaseback transaction and obtain relief on the leaseback. We do not think that he should be able to have it both ways.

Mark Prisk (Conservative, Hertford and Stortford)

I understand what the Minister says about tax avoidance, but does she not also understand that the treatment of the same issue with two different taxes in two different ways is confusing for the taxpayer? What are the reasons behind it?

Ruth Kelly (Labour, Bolton West)

The issue does not arise in the context of two taxes. The point is that it is possible to obtain two reliefs on the same transaction, which we want to avoid. We think that the tax treatment should follow the substance of the transaction, and that it is only right that only one relief should be allowable. I am sure that the hon. Gentleman would support us in that end.

Mark Prisk (Conservative, Hertford and Stortford)

I suspect that we may differ on parts of the issue, but I accept that the Minister has clarified a couple of nuances in her second response that were not clear at the beginning. We could probably debate this all day, and while that might be tempting on occasions, in the present instance I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 14, in page 532, line 17, at end insert

'in the case of leases assigned within three years of grant'.

John McWilliam (Labour, Blaydon)

With this we may consider amendment No. 13, in page 534, line 29, leave out from beginning to end of line 7 on page 537.

Mark Prisk (Conservative, Hertford and Stortford)

The amendment concerns cases in which there is an assignment of a lease treated as a grant of lease, as in paragraph 11. This part of the schedule is a reasonable measure, designed to prevent a landlord from getting a lease to an unconnected third-party tenant without the stamp duty land tax paid on the lease. Without the measure, somebody could grant a lease to a company within a group and obtain the benefit of intra-group relief from the tax. The lease could subsequently be assigned to a tenant without the tax being paid. The tax would not be payable on an assignment of lease unless there was another consideration given—I presume that we are talking about cash or something similar.

The amendment would restrict the application of the rules to assignments taking place within three years of the grant of the lease. Both landlords and tenants—both sides of the property equation—have told me that they accept that this should be sufficient to counter avoidance. Without the amendment, an unnecessary compliance and tax burden will be placed on taxpayers taking an assignment of a lease where there is no real evidence of a tax avoidance motive.

We chose three years as the time limit partly because it reflects similar clawback provisions for other group reliefs, but I am open to suggestions from the Minister for a different time frame, if she chooses to respond positively. I believe, as do many people outside, that the amendment would improve the schedule and I look forward to a positive response.

Amendment No. 13 is more substantial. It concerns abnormal rents and relates to paragraphs 14 and 15. It would remove all the provisions relating to such rents. When the Minister, who was then the Economic Secretary, proposed the reform of stamp duty land tax, she said that the Government's aims were to simplify the tax and to "reflect modern commercial practice". These provisions not only fail in those aims but in many senses directly contradict them.

The provisions say that, when there is an increase of rent after the fifth year, the tenant must assess whether that increase is abnormal. Members of the Committee may be asking themselves what constitutes abnormality. The answer is in paragraph 15, but it is a very long answer, covering two pages of law, with three formulae and a six-step definition.

For those who are unfamiliar with what the Government expect them to do as tenants, let me take them briefly—I hope to be as concise as possible—through the process. Tenants will first have to define the start date, which is

"the beginning of the period by reference to which the rent assumed to be payable after the fifth year of the term of the lease is determined in accordance with paragraph 7 (3)".

Tenants then have to

"Divide the period between the start date and the date on which the new rent first becomes payable".

We are then helpfully given two ways of doing that.

Then, for those poor tenants still struggling to work this out, step three comes along and tells them that they must

"Find the factor by which the retail prices index has increased over each period identified in step two.

This is a figure expressed as a decimal and determined by the formula—

(RD–RI)RI

where—

RD is the retail prices index for the month in which the last day of the period in question falls, and

RI is the retail prices index for the month in which the first day of the period in question falls."

At this point, it gets complicated. In step four, tenants are asked to

"Find the relevant factor for each period identified in step two."

Hon. Members will realise that a rather awkward formula is coming up. Step four continues:

"This is a figure expressed as a decimal and determined by the formula—

m1 "0.05 X —" r 12

where—

m is the number of months in the period in question (treating part of a month as a whole month), and

r is the factor by which the retail prices index has increased over the period in question, determined under step three."

What could be simpler than that? However, we then find that the tenants have not completed what the Government require them to do to establish what an abnormal rent is. Indeed, no—there is far more to come, and those tenants who are still awake must proceed to step five, in which they are asked to

"Find the uplift factor for the reference period as follows."

What follows is a helpful seven-paragraph definition.

Finally, we come to step six—for those tenants who are still awake and have not lost the will to live. Step six says:

"The rent increase is regarded as abnormal if the new rent is greater than:

R X UF

where—

R is the rent previously taxed (see paragraph 14 (4)), and

UF is the uplift factor for the reference period."

There we have it. What, indeed, could be simpler?

When we debated this back in November, I said that Sir Humphrey would be proud, and I am sure he is. I recognise that some large organisations will probably be able to put in place systems that can handle the process, but everyone in the Committee will understand that the vast majority of tenants will find the provisions—the two pages, three formulae and six steps—unintelligible and unduly onerous.

Indeed, the Treasury itself could not get the formula right. When it was first printed, it was wrong, so it had to be pulped and reprinted, so how on earth is a humble taxpayer meant to cope?

John Redwood (Conservative, Wokingham)

My hon. Friend is taking justifiable delight in setting out the complexities. Can he fathom how the uplift factor is derived? How can we be sure that it is appropriate, given that rents rise at different rates in different circumstances throughout the country, depending on the supply and demand in the market?

Mark Prisk (Conservative, Hertford and Stortford)

As usual, my right hon. Friend has identified the point. The problem is in having an academic, theoretical set of formulae that conflicts entirely with the way in which the market works. That is at the heart of the error of the thinking underlying this proposal. Will the Financial Secretary assure businesses that any reasonable errors in the six-step, three-formula calculation will not lead to punitive fines?

There is a wider point of principle involved. Is it not inherently unfair that a tenant who faces a large inflationary rent rise—"abnormal" in the Government's language—for reasons outside their control should at the same time incur a substantial tax liability? Can the Financial Secretary explain in what possible way that is fair?

I cannot help taking a little delight at the language, because it merely reinforces the view that "Yes, Minister" is a training film and not a comedy, but in truth, this is a serious issue. With my amendments, I am trying to ensure that we keep the compliance burden at the lowest possible level. That is what is at issue here and I hope that the Financial Secretary will be able to explain to us why she is pressing ahead with this measure, which is absurd in purpose and unacceptable in practice.

John McWilliam (Labour, Blaydon)

For the sake of clarity, when we get past amendment no. 14, I will invite the hon. Gentleman to put his second amendment formally if he wishes to press it to a Division.

John Redwood (Conservative, Wokingham)

I have declared my interest in the register.

I am grateful to my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) for drawing attention to the enormous complexity that overlies the injustice of the measures. My party has been very unhappy about the Government's decision to introduce a new tax, masquerading as an old one, called stamp duty land tax and stamp duty, and it is typical of the Government that, having bungled that in the first place in regulations, they are now inviting us to re-enact it, but with crucial amendments in the light of experience and reconsideration, in such a gargantuan format in this bumper Finance Bill, which we have been picking our way through selectively and with difficulty yesterday and today on the Floor of the House.

The charge against the measure is one of drafting and of principle. My hon. Friend made it clear that absurd complexity and difficulty are involved. He kindly said that he feared that tenants might fall asleep before they got to the fifth or sixth stage of the calculation, but I think that they will be awake on caffeine tablets, tearing their hair out with extreme worry that they might get something wrong. Believe it or not—I know that the Government often do not—most of us want to comply with the tax laws and pay our fair taxes. However, it is getting very difficult these days for many people to know how to calculate their tax and to ensure that they have got it exactly right. It will be very unfair if the Revenue mistakes understandable error because of complexity for unwillingness to pay on the part of the many law-abiding people who will be wrestling with the legislation if we pass it in this form or something like it.

As my hon. Friend pointed out, there are three formulae. Anyone with a reasonable qualification in algebra will be able to handle that, but the people whom we are discussing have businesses to run, livings to earn, families to look after and elderly relatives to care for. They do not really want all this visited on them at the same time in order to try to comply. The Financial Secretary might grandly say, "Let them employ an accountant." I am all in favour of the professional classes doing well, but if someone is running a small business there are limits to how much they can afford to pay in professional fees for handling 550 pages of this Finance Bill, on top of the thousands of pages of tax and company legislation that we already have and that directors and executives are expected to be cognisant of, and capable of handling.

My hon. Friend is right to say that, on grounds of complexity and opacity, it would be good to strike this measure out or to come back with a paragraph or two that provides a sensible and more moderate explanation. However, I also have a problem with the measure in principle. As I suggested to my hon. Friend in my intervention, the property market is complicated and busy and there can be large changes in rentals after a five-year period for all sorts of reasons. The centres of towns change radically, and the centres of big cities can change even more. An area can plunge in estimation because uses and users change, or rise because of a major development, because of change in use or because a new group of rich or prosperous businesses or people comes into that district, which can justify higher rents. I hope that the formulae can fully reflect that sophistication and that people will not be penalised for extraneous forces that can move rents a lot for understandable and good reasons. The formulae and academic calculations can often be too abstract and unfair.

My final point is that I do not like the tax, which is yet another stealth tax, at all. The market economy worked perfectly well without it, but we all know why it is necessary: because the Government are wasting so much money. A much better answer would be to reduce Government waste rather than burdening all of us, and the many businesses out there struggling to earn a living in a globally competitive marketplace, with this high degree of complexity and, ultimately, cost. I welcome the bold attempt of my hon. Friend to simplify the measure and would heartily like to see the back of the tax altogether.

Ruth Kelly (Labour, Bolton West)

I thank the hon. Member for Hertford and Stortford (Mr. Prisk) for the reasonable way in which he introduced amendment No. 14, although the same does not apply to amendment No. 13.

Amendment No. 14 affects paragraph 11 of new schedule 17A, which provides that, where the grant of a lease is exempt from the charge of stamp duty land tax by virtue of certain statutory provisions, the first non-exempt assignment of the lease is treated as the grant of a new lease. That ensures that stamp duty land tax is paid at some stage on the rental element. To his credit, the hon. Gentleman accepts the case for trying to prevent avoidance and ensuring that a bank of leases is not built up, then assigned later on down the road. Without that provision, any property-owning group could set up a bank of leases within the group in the knowledge that, sometime later, it could enter transactions with tenants that were in substance grants of leases, but in legal form assignments of existing leases, thus enabling the tenant to avoid stamp duty land tax on the rental element.

My problem with the amendment is that it merely postpones that practice for a three-year period and, after three years, enables the tax to be avoided. I could not condone that. There should not be a time limit after which tax avoidance is acceptable, so I ask the hon. Gentleman to reconsider setting in stone a three-year period after which such a practice would become acceptable. Perhaps I can reassure him that paragraph 11 applies only to leases granted on or after 1 December 2003, so there is no question of the assignment of a lease being treated as the grant of a new lease when the grant of the lease was within the old stamp duty regime.

The hon. Gentleman considers amendment No. 13 substantive. It would strike out, as he put it, provisions relating to abnormal rents. I should first emphasise that no tenant can possibly be affected by the provisions in paragraphs 14 and 15 of new schedule 17A until December 2008 at the earliest, because they apply only to leases that, when granted, are within the stamp duty land tax system. I also emphasise that the normal rule for stamp duty land tax purposes is that rent increases after the end of the fifth year are ignored completely. In particular, no one paying tax on the grant of a lease need take post-five-year rent increases into account, either in submitting an initial return or if the return needs to be revised when the rent for the first five years is ascertained.

Mark Prisk (Conservative, Hertford and Stortford)

Given those points, just how many people will be directly affected by the measure? If only a very small number of people will be liable, the problem is that a very much larger number will be anxious that they might be and therefore have to deal with the compliance burden in terms of their time and money. Can the Financial Secretary tell us how many people—what proportion of tenants—will be affected? If it is a tiny number, surely that reinforces our argument to get rid of the measure altogether.

Ruth Kelly (Labour, Bolton West)

I assure the hon. Gentleman that the vast majority of leases, such as those providing for retail prices index increases, will be completely unaffected by the provisions. We are talking about a small number. [Interruption.] He asks from a sedentary provision why, therefore, we do not strike out the provisions. The answer is that, if no provision were made for abnormal rent increases, it would be in the interest of parties to negotiate a nominal rent for the first five years and then a very high rent increase in year six and thereafter. I am sure that he would not want that to happen.

Mark Prisk (Conservative, Hertford and Stortford)

I do not understand the logic of the argument, which is that people are trying to organise their tenancy arrangements on that basis. Such an attitude involves an unnecessarily suspicious mindset. I am not naive enough to suggest that no one would try to do such things at the margins, but given that the Financial Secretary has already told the Committee that a tiny number of people are involved—presumably, a tiny sum would therefore be recouped in terms of tax avoidance—in the name of the apparent aim of this tax, which is modern commercial practice, we could surely get rid of two pages of gibberish.

Ruth Kelly (Labour, Bolton West)

I beg to differ with the hon. Gentleman. First, the provision is not gibberish; secondly, it has a serious purpose, which is to put people on notice that they cannot reach an agreement that provides for a nominal rent during the first five years and a very sharp increase thereafter. We have to make it clear that we cannot tolerate such a situation. Only when the rent increases after the end of year five will tenants need to consider this situation at all. As the hon. Gentleman rightly points out, given that such people are on notice that tax cannot be avoided in this way, only very few will be affected by the provision. Of course, if it were not included in the Bill, a much greater number might be affected as the practice became more widespread. It is essential to include such a measure in the Bill to give people the required notice not to enter into such agreements.

The hon. Gentleman is trying to make a name for himself through his fondness for reading formulae from stamp duty provisions in regulations and Bills. He tries to make out that the formula is extremely complicated and that no reasonable tenant could possibly conclude whether their rent increase is normal. In fact, it is a fairly simple formula of—at the moment—RPI plus 5 per cent. The Inland Revenue intends to provide an online calculator for those who wish to calculate the figure in that way. Such a calculation is not a particularly onerous one for a tenant in that situation. We shall of course maintain an interest in stamp duty land tax issues between now and 2008, and we will always be ready and willing to introduce improvements to the legislation where they are justified. However, removing such provisions altogether and failing to replace them with anything that improves matters is unacceptable. I therefore ask the Committee to reject the amendment.

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to the Financial Secretary for that explanation. May I clarify one point, Mr. McWilliam? Do you require me formally to move the amendment?

John McWilliam (Labour, Blaydon)

We have to dispose of amendment No. 14 before we get to amendment No. 13, which has not yet been put. Once we have disposed of amendment No. 14, I shall invite the hon. Gentleman to propose amendment No. 13 formally, if he wishes to press it to a vote.

Mark Prisk (Conservative, Hertford and Stortford)

I have listened to the Financial Secretary's comments on amendment No. 14 and, although I am disappointed that she seems alone among professionals in the field in her interpretation of it, it would not be appropriate at this stage to press it to a vote. I hope that the Government have listened to the arguments and will improve the Bill in their future refining process. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 13, in page 534, line 29, leave out from beginning to end of line 7 on page 537.—[Mr. Prisk.]

Mark Prisk (Conservative, Hertford and Stortford)

It is disappointing that the Division was unsuccessful from our point of view, but it is important that we made the point.

Schedule 37, together with clause 282, re-enacts temporary provisions concerning the detailed implementation of stamp duty land tax on leases. It also makes a series of changes, corrections and revisions to the legislation. Part 1 of the schedule makes changes to the Finance Act 2003. Indeed, it makes 35 pages of such changes—and only nine months after the Act came into force. In many ways, that shows how the original legislation was ill considered in its preparation and enacted in haste.

I am well aware that the Chief Secretary told us last year that the legislation would need "refining"—I think that that was his term—over the next couple of years, but I have to say that this scale of refining is ridiculous. Such a piecemeal approach to a tax creates bad tax law by increasing the complexity, which results in greater uncertainty not only for the taxpayer but for the tax collector. It also undermines the Government's own arguments on tax avoidance. After all, if tax law is constantly changing, it is far more likely to result in loopholes. Inevitably, the Government have to come back the next year to fill them—and on we go with the ridiculous and vicious cycle.

Given the 35 pages of changes, we could be forgiven for thinking that the Government had sorted everything out. I wish that that were true, but problems and unfulfilled commitments remain. I shall give an example, and I hope that the Financial Secretary will be able to respond, as it relates to what is at the heart of the schedule.

I have been approached by a number of expert solicitors in this field, including solicitors belonging to the firm Wards of Bristol. They have been concerned by the commitments made by the Chief Secretary to the Treasury about chain-breaking companies. The representations arrived only in the past couple of days, which means that I have not had time to table an appropriate amendment.

On 10 June 2003, the Chief Secretary to the Treasury told the Standing Committee considering last year's Finance Bill:

"I can provide some comfort to the hon. Members who have raised the issue of chain-breaking companies. I can confirm that we will consult with bodies in the sector and will table appropriate amendments to clause 59 before the implementation of the modernised regime to ensure that chain-breaking companies can operate without a double charge to stamp duty land tax. A relief for this specific point would assist liquidity in the housing market, which we all agree is desirable. The Office of the Deputy Prime Minister has already issued a paper making the promotion of chain-breaking companies a Government policy."—[Official Report, Standing Committee B, 10 June 2003; c. 415.]

Amendments were duly tabled. Schedule 6A to the Finance Act 2003, when finalised, addressed many of the needs of chain-break schemes. However, a raft of different constraints remain, contrary to the Chief Secretary's commitment in Standing Committee. As a result, many transactions in this area operate with a double charge, as I shall show in three short examples.

First, the current requirement for a chain to have broken down prevents the creation of a completed chain by taking out a prospective buyer who has not yet put his property on the market. Secondly, the requirement in the legislation that the vendor, apparently simultaneously, should acquire another property as his main residence prevents chain-break companies from buying from people who need to go into nursing care; who may be undergoing divorce; or who are threatened with repossession. Finally, the restriction that the property must have been occupied as a main residence in the past two years prevents the purchase, for example, from someone who has been in a nursing home for an extended period; or from someone trying to get out of the buy-to-let market; or from someone who has been working abroad and who is looking to make the move permanent.

I hope that the Financial Secretary will consider these important matters. The proposals being considered today should have been contained in last year's Bill. What progress has been made in ensuring that the provisions introduced last year are corrected? The Chief Secretary made a clear commitment in relation to these matters, and I hope that it will now be fulfilled.

A raft of other problems have been caused by the Government's piecemeal approach. I gather that statutory instrument No. 1069 was introduced earlier this month, but that it has had to be corrected by a new provision. That highlights the Government's piecemeal and ad hoc approach to making tax law.

Finally, it is clear that this remarkably opaque tax has been very badly prepared. Today, we are considering 35 pages of changes that have been needed in less than a year, and that serves to prove my point. The various amendments to schedule 37 that the Committee considered today were tabled with the aim of improving the legislation. However, the Opposition want to put on record our concern about the impact of the tax, and our strong rejection of the Government's ad hoc and piecemeal approach to its enactment.

John Redwood (Conservative, Wokingham)

My main concern about allowing schedule 37 to stand part of the Bill is that it contains 35 pages of extremely complicated provisions in respect of a new tax introduced by the Government very recently and in a rush. The schedule represents a series of wholesale amendments to the Finance Act 2003, of recent memory, and it also amends amending statutory instruments that had to be introduced in-year because of the mess that was made of the original legislation.

The 35 pages of schedule 37 are followed by the 15 pages taken up by schedules 38 and 39, which also deal with the same tax. That means that the House is being invited to agree some 50 pages of legislation in the space of perhaps an hour, in respect of a very new and badly designed tax whose introduction was bungled and badly explained a year ago. The tax warrants a Bill all to itself, with a proper Committee procedure. That might help the Government grope their way towards the proper introduction of an enormously complex tax. The Government designed it badly, and they have to revise it every six months to respond to the complexity of a marketplace that surprises them with its constant rises.

John Bercow (Conservative, Buckingham)

I am very grateful to my right hon. Friend for giving way because he is a respected veteran of these debates in Committee. Can he tell me what compatibility exists, if any, between schedule 37 and the tax law rewrite project, conducted under the auspices of the tax simplification panel, which is regularly and enthusiastically championed by the Government?

John Redwood (Conservative, Wokingham)

I believe there is little or no relationship or connection. As I understand the rewrite and simplification, its intention is not to change the incidence or the impact of the legislation in any way, whereas today the Government, by rushing through these schedules, are seeking to make quite substantial changes in something that they designed a little over a year ago, legislated for in haste, re-legislated for in statutory instrument form and are now seeking to legislate for again. It is a very different exercise. Simplification would be very welcome, but I think even the best brains in the country would be unable to boil these schedules down to many fewer pages than we currently have before us, because they are ill thought through and badly designed. Even the most brilliant prose stylist in the world would be unable to condense into a reasonable space something that is so ill thought through and badly designed, because the whole point of it is that it is ghastly and complex and prolix and tedious and contradictory and inaccurate, and doubtless will need amending in subsequent regulations and in subsequent Finance Bills.

I admire the wit and wisdom of the officials involved in all this because it is clearly a lifelong task to keep bringing things back to the House in the vain hope that one day they will hit on the right solution—that one day we may have a stamp duty land tax of which Ministers can be proud, that one day there may be a lucky Minister who is allowed to come to the House and say, "Good news: we do not have to legislate again on this. We have at last succeeded." But so far Ministers have had to come to the House and say, "I know I was here last year doing this, but it is not Groundhog day; we are not doing the same again, we are doing something very different. The intention is still the same but we have discovered that what we did last time was fundamentally wrong." I know that the Committee would not like me to go into all the detail in these 35 pages, but hon. Members should at least be aware how fundamental are many of the issues that have to be re-legislated for in this extraordinary way.

We have to look again at contracts providing for conveyances to a third party—an extremely wide category under this legislation. We have to consider the effect of transfer rights. We have to consider registration of land transactions. We have to redefine the effective date of the transaction—a pretty fundamental thing, which one would have thought the Government would have got right to start with. We have to look at chargeable consideration—in other words, how much these things cost in the first place. We have to look at general provisions relating to leases. We have to look at rent reviews. We have to look at the assignment of agreements for leases and we have to look at lease agreements. We have to look at commencement.

Then in part 2 we get to the really juicy bit where we are amending amendments—where we are amending regulations under section 109 of the Finance Act 2003, which were designed to deal with the problems in the first place. There we have to deal with introduction and revocation—if only we were revoking the whole thing, it would save us a lot of time. We have to look at the meaning of taking possession. We have to look at relief for sale and leaseback arrangements—a fundamental point. To stay in business in a competitive market, an awful lot of businesses finance themselves by sale and leaseback, and we now discover that the provisions were wrongly drafted and some people are being unreasonably penalised and the Treasury is not getting what it thinks it should get.

We have to look at relief for acquisitions of residential property that were never meant to be captured by this thing in the first place; there is a very complicated new piece on that. We have to look at acquisition by a property trader from personal representatives. We have to look at the chain of transactions point that my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) rightly highlighted. We have to look at relocation of employment cases. We have to redefine what a property trader is, which is pretty fundamental, as property traders are the people who are most likely to be tied up in these knots regularly.

We have to look at the meaning of "refurbishment" and "the permitted amount" because there are exemptions for that kind of practice under the legislation. We have to look at the particular position of unit trust schemes, which have been caught out in a way that the Government obviously did not intend. We have to look at linked transactions. We have to look at declarations by persons authorised to act on behalf of others. We even—and this is my favourite—have to change the meaning of "lease". One might have thought that when the Government set out to tax leases, they would start off with a definition, go out to consultation on it, agree it and stick with it. But no, apparently they even got that wrong, and we now need a new definition of a lease.

Mark Prisk (Conservative, Hertford and Stortford)

rose—

John Redwood (Conservative, Wokingham)

I see my hon. Friend has a thirst for knowledge.

Mark Prisk (Conservative, Hertford and Stortford)

My thirst for knowledge is unquenchable, so I have been interested to hear the range and scope that my right hon. Friend is highlighting and which I have had to deal with directly. Is he aware that the most sinister aspect of all this, which is in another large tome, the Red Book, may be that the Government expect a 25 per cent. increase in the yield of the tax—£1.9 billion in one year? Does he share my concern that tucked away behind this panoply of nonsense is a much more worrying issue?

John Redwood (Conservative, Wokingham)

My hon. Friend is ahead of me in my argument. I had done the Minister the justice, or the injustice, of assuming that most of the schedule dealt with bungles, but my hon. Friend is right—some of it is an intentional tightening up, almost tantamount to a new tax in some cases, which the Minister should highlight if she wishes to intervene in this important debate.

We are invited to legislate anew on "Treatment of leases for indefinite term", on "First rent review in final quarters of fifth year", on "Adjustment where rent ceases to be uncertain", on "Rent for overlap period in case of grant of further lease", and on "Cases where assignment of lease treated as grant of lease". Then there is more on agreement of leases under the amending amendments; more on assignment of agreement of leases; and more on increases in rentals and the abnormal rent business that we were discussing just before the stand part debate. That, as we saw in that moderate debate of some one hour's duration, posed a great many problems in its own right, most of which the Minister did not care to answer when she replied to the points that my hon. Friend and I had made.

The schedule needs rather more time and attention. It would be a courtesy to the Committee if the Minister, when replying to the debate, could make an honest declaration of which paragraphs of the schedule are being amended because there were errors, problems and drafting difficulties, and which are being amended because those who have to pay the tax have succeeded in making representations to the effect that it is was unworkable or unfair and one or two aspects are moving in the direction of the users, as with unit trusts in some cases. Most important, I hope the Minister will highlight to the Committee where the definitions and the text are being deliberately strengthened in order to increase the amount of revenue that the Government are raising, in the light of experience in the first year of the introduction of the tax.

That is what most matters to the Committee and the House. It is wrong that all these changes are being slipped through in the schedule in the hope that there will not be much debate. It amounts to revisiting a new tax in a pretty fundamental way, and I hope the Minister will illuminate our debate by confessing to the errors, highlighting any good news that may be hidden in the schedule for people who currently have to pay the tax, and above all highlighting in an open way to the Committee where the burden will increase. It is not clear to the lay reader where that £1.5 billion or more will come from. Some of it will clearly come from changes to drafting, rather than from the expansion of the economy.

John Gummer (Conservative, Suffolk Coastal)

The complexity of the changes, and the extensive nature of the amendments and the amendments to amendments may be construed as a fundamental criticism of a taxation system that is supposed to be understood by pretty ordinary people. We are discussing leases, which are often an important subject for businesses that are not huge and do not have vast arrays of advisers, helpers and people with detailed knowledge.

I much honour the Minister who is to reply. I sit on a committee with her and I hear her express ideas simply, coherently and cogently. Indeed, I often agree with her, and I do not think I have ever disagreed with her, on that committee. [Interruption.] This may be very dangerous for her career, but I have certainly understood what she has had to say. It must be extremely embarrassing for her to appear before this Committee faced with a series of amendments on which she must have spent a great deal of time with her civil servants, going through each of the details to ensure that she could explain not only to our satisfaction but to her own what they really meant.

That is an unacceptable position. Of course, there are complicated matters that need complex legislation, but such legislation itself demands that one gets things right in the first place. I think that the tax that we are considering is unacceptable. I suppose that I have a sort of interest in addition to what I have set out in my declaration of interests, to which I refer the Committee, in that I write on matters of property. I find it difficult to see that this is a very helpful tax. It affects me directly, but I do not see that it is helpful as far as the economic future of the country is concerned. Even if it were helpful in that context, the fact that it is incomprehensible to the ordinary person brings into considerable doubt the taxation system as a whole.

I plead with the Financial Secretary to recognise the seriousness of what we are discussing. Yesterday, I made a short intervention about a proposal aimed at very small companies that had only recently been incorporated. Anyone who listened to that debate would have recognised that what was happening was totally incomprehensible to anyone who was likely to be running a small company. We are now seeing a series of amendments to the system that must be utterly incapable of being understood by the very people whom we are supposed to be encouraging. It is not fair that the most difficult thing in running a business is dealing with the Government. That should not be the situation. The most difficult thing in running a business should be making a profit; that is what people should be concentrating on and concerned with. This Government are making it more difficult to run a business by insisting on a taxation system that is as opaque as they can make it.

There are three points with which I would like the Financial Secretary to deal. First, is it not true that the tax is being introduced because the Chancellor did not dare introduce a sensible, direct tax that everybody knew about? Is this not one of those examples of the Chancellor trying to invent a tax that is so complex and so particular in its incidence that people will not notice it enough to say, "There you go again; taxes are going up"? We know who will pay the price; it is not the businesses who pay the tax in the first instance, but the customers of those businesses. The Financial Secretary is shaking her head, but it is true. She is paying for it, as am I. Indeed, we are all paying for it in the goods and services provided by the businesses that are now taxed by what I understand to be an additional £1.7 billion, or an amount of about that size.

Mark Prisk (Conservative, Hertford and Stortford)

It is £1.9 billion.

John Gummer (Conservative, Suffolk Coastal)

It is £1.9 billion that the Chancellor is taking out of the pockets of the people of this country. That is what this is about. It is all right for the Financial Secretary to shake her head so elegantly, but the truth is that she knows very well that there is no one else to pay the money. In the end, all taxes are paid by the consumer and the customer. If £1.9 billion is taken out of the system it is taken not from a mythical collection of rich people or a series of property speculators who can be cut off from the rest of the community, but from the pockets of the purchasers of goods and services. This tax is complicated in order to uphold the fiction, which the public increasingly recognise as a fiction, that the Government are not a tax-and-spend Government. Of course they are a tax-and-spend Government, however polite and charming their front may be. The Financial Secretary must defend this tax in terms of its being a straightforward imposition that we can all understand.

My second question, which my right hon. Friend the Member for Wokingham (Mr. Redwood) raised earlier, arises in the stand part debate because this is the moment at which we give credence to the amendments. Will the Financial Secretary distinguish between the amendments to obtain more money and the amendments that were made because she got the provision wrong in the first place? I do not blame her for getting the provision wrong, and, unlike certain Ministers of the Crown, I am not prepared to blame civil servants. I was brought up in an old-fashioned way, so I blame Ministers—I expected to take the blame when I was a Minister.

I shall blame the person who is really responsible, the Chancellor of the Exchequer. He must explain, through his voice, the Financial Secretary, which is the mea culpa bit and which the "mea grab-a bit." Which bits is he apologising for, and which bits is he preceding with the word "sorry" before taking some more? That distinction is not included in any of the explanatory memorandums, and I am sorry that that should be so. I have read the explanatory memorandums carefully, because it is difficult to read the Bill, and one needs the explanations. None of the explanatory memorandums states, "We got these things wrong, and we are now going to get them right. We are also introducing this provision, which means that we will raise a great deal of money. We want to explain the Red Book properly."

Thirdly, will the Financial Secretary explain to whom my constituents affected by this gobbledegook should apply—at no cost, because it is not their fault—for specific advice on how the changes will affect them and their businesses? If she does not introduce free help, she will act as a recruiting sergeant for those overpaid people—I nearly called them a profession—chartered accountants. The Government have given more money to chartered accountants than any Government in the history of mankind. Ministers do not need to include that point in their declaration of interests, but they ought to—members of the chartered accountancy profession have more treasure than is imaginable, because they have earned so much, and, given recent events and examples, I doubt whether one can trust them.

The Financial Secretary must explain who will advise those who do not want to spend money, in addition to the tax that is being extorted, to make sure that they do not break the law. The problem is that one seeks professional advice not only to minimise the tax that one legally ought to pay, but to ensure that one does not get caught in a taxation system that is so complex and irrational that one would not imagine that one was doing wrong, and that proposition is central to our argument.

It is wrong to put people in the wrong by introducing legislation that is so irrational and unconnected with anybody's natural assertions and thoughts that people would not imagine that they are doing something incorrect. It is wrong to set out to have a taxation system that is designed to hide the fact that anybody is being taxed, to design the mechanism to be as complex as possible so as not to have to admit to raising taxes, and to promise the nation that taxes will not go up, then get into a mess and have to do it anyway.

That has an immoral effect on the public. It puts people in the position of being lawbreakers by accident because the complications and hoops are such that no sane person can possibly imagine what questions they should ask and what issues they should consider when they enter into the perfectly reasonable activity that is the purchase, passing on or sale of a lease—a simple matter that, since before mediaeval times, people have done in a simple way. It took this Government to make it an act worthy of a senior wrangler from the University of Cambridge: only someone of that quality could read and understand the changes in the Bill and still carry on a business.

One of the sad aspects of this Government is that very few of its members, including the Treasury team, have ever run a business. Nowadays, it is increasingly difficult for those of us who run businesses to be able to say so with pride, but I do. I run a business, and I know how difficult it is to get these things right. The Government are introducing into our business life complications that make people spend more time trying to handle the problems placed upon them by the Chancellor of the Exchequer than trying to win a profit out of a marketplace on which he depends.

We should vote against the schedule and say to the Government: "For goodness' sake get real. Get yourself into the marketplace, understand what you're doing, and don't clog this House up with the unmentionable, the inconceivable, the incomprehensible and the absolutely unnecessary. If you want to tax us, do it publicly, clearly and simply; and admit that your big fault was to promise that you wouldn't increase taxation, then find that you've got to hide the taxes because you dare not face the electorate."

Ruth Kelly (Labour, Bolton West)

I welcome you to the Chair, Sir Nicholas.

I very much enjoyed the contributions made by right hon. and hon. Members on the Conservative Benches. Let me reassure them that the schedule is framed in the language of the tax law rewrite. That fundamental point has been much examined by Conservative Members, who will be reassured by that comment.

The right hon. Member for Suffolk, Coastal (Mr. Gummer) told me to get real. I would argue that if most people looked at the old stamp duty regime, under which all residential transactions bar hardly any paid full stamp duty, and half of all large commercial transactions paid full stamp duty while half paid none at all, they would realise that that was completely unacceptable. When they realised that the old regime was not compatible with e-conveyancing, they would find that unacceptable, too. When they considered the fact that the old regime had no proper enforcement and penalty powers, they would not think that in line with the principles of modern taxation.

Mark Prisk (Conservative, Hertford and Stortford)

The Financial Secretary talks about the need to modernise and the importance of electronic conveyancing. Can she explain how electronic conveyancing is helped by the requirement to complete tax return forms by hand in black ink?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman will know that those forms are available on people's computer screens. Every effort has been made to ensure that they are as user-friendly as possible, but of course the Inland Revenue is continuing to work on making the system as compatible with e-conveyancing as possible.

John Gummer (Conservative, Suffolk Coastal)

rose—

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman has made so many contributions to this debate already. Perhaps he will let me answer a few more of his questions before he rises again.

The provisions will have absolutely no effect on the vast majority of transactions. In particular, residential purchasers and their advisers will notice virtually no change. Indeed, despite the dire prophecies of Conservative Members, stamp duty land tax was successfully implemented on 1 December 2003. Since then, nearly 500,000 certificates have been issued. Most residential purchasers have seen little difference. By contrast, references to stamp duty land tax in the professional press suggest that the regime has been successful in significantly reducing the avoidance opportunities that were available under stamp duty for commercial transactions. Indeed, in the first quarter of 2004, yield from land transactions was up nearly 20 per cent. on the corresponding period last year, almost certainly because of the reduced scope for avoidance.

Mark Prisk (Conservative, Hertford and Stortford)

I am fascinated by the Minister's statement that residential buyers are not seeing any difference. All the solicitors I have spoken to have talked about the change from a one-page tax form to a 12-page document plus 37 pages of explanatory notes—there are always a lot of explanatory notes with this tax. In what way does that change make no difference to residential buyers? Most of the solicitors told me that they expect to have to charge about another £50 for their time in order to deal with this new tax arrangement.

Ruth Kelly (Labour, Bolton West)

I am arguing that the purchaser of a property undertaking a residential transaction will probably see no difference whatever. I understand and respect the fact that the hon. Gentleman has many friends in the community of solicitors, who are arguing at every opportunity that completing a form that they are not used to completing is a huge additional burden. I hope that the majority of solicitors will get used to completing it. They do not have to fill in every page, and it should not take them very long. The provisions are not onerous; I have seen them myself and they are entirely reasonable. I am sure that solicitors will adjust to the new form in due course.

The avoidance industry has not been idle, however, and that is partly the reason the provisions in this year's Bill are needed. Clause 282, which introduces the schedule, makes a number of amendments to stamp duty land tax legislation. Although the schedule might appear daunting, I can reassure hon. Members in two respects. First, most of the length of the schedule arises from the fact that it re-enacts in primary legislation regulations that were made last November. We have already debated those regulations at length, and many of the comments made today reflect subjects that have already been debated in the House.

John Gummer (Conservative, Suffolk Coastal)

I agree with the Minister about stopping avoidance, but, given that that will mean a great deal more money coming into the Treasury, will she tell me what tax cuts are being made in order for this not to be a tax-increasing measure? That is the issue. The provision will increase the amount of money coming into the Treasury. Where will cuts be made to ensure that this does not represent an increase in taxation?

Ruth Kelly (Labour, Bolton West)

I can correct the right hon. Gentleman by saying that many of the measures before us today have been suggested to us by practitioners, and they will close tax avoidance routes that were leading to a loss of revenue on which we had already counted, and which we would not have been able to secure if these measures had not been introduced.

Many of the provisions in the schedule are technical, and we have already debated several of them today. I do not intend to run through them all, but I shall deal with the specific point about chain-breaking raised by the hon. Member for Hertford and Stortford (Mr. Prisk). I understand that he has not had the opportunity to table an amendment on the subject. He argues that the conditions on chain-breaking are over-restrictive, but that is certainly not the case. I should perhaps remind hon. Members that we have already extended the relevant period from one year, as set out in the Finance Act 2003, to two years. I certainly think it reasonable that relief should be available only where there is evidence that the property is genuinely the individual's residence, not where, for example, the main use of the property has been to generate income.

Clearly, it is important in that situation to have, for example, restrictions on the time that an individual would need to have occupied the property. If there were no limits, any property dealer could say it was a chain-breaker. We believe that we have completely fulfilled the Chief Secretary's commitment in that regard. For all those reasons, I urge all members of the Committee to support the schedule.

Question put and agreed to.

Schedule 37 agreed to.

Clause 283 — Notification, Registration and Penalties

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 16, in clause 283, page 237, line 16, leave out

'the land consists entirely of residential property and'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 15, in clause 283, page 237, line 18, leave out '£1,000' and insert '£5,000'.

Mark Prisk (Conservative, Hertford and Stortford)

Amendment No. 16 would remove the restriction in clause 283(2)(b)(b) and narrow the application of the new notification procedures to residential property. On the whole, and despite our previous discussions, the clause is welcome in that it seeks to reduce compliance costs and the burden by relaxing the notification procedures for the taxpayer. Despite our reservations about previous elements of the legislation, in this instance the clause will probably help the taxpayer and, indeed, the tax collector. Under current drafting, however, the land must consist "entirely of residential property". That seems somewhat illogical, I suspect that it may prove self-defeating and there is a danger that it could prove impractical. Let me run through those points briefly.

I believe that the measure could be illogical because, if the purpose is to cut the compliance burden, why apply the matter of the kind of use—the type of property use—in this instance? I believe that it could be self-defeating, because if the Revenue hopes to reduce its administrative costs, would it not be wiser to include all kinds of property? What is the relevance of the type of property? Doing so could be impractical because the clause relies in part on a definition under section 116 of residential property. I have to say that that is not one of the clearest elements. Let me cite one example that relates to that.

Under current drafting, it is necessary to distinguish between two transactions under which a householder's garden was expanded—on the one hand, where the land forms part of a neighbour's garden, when the provision will apply, and, on the other, where the land is part of a field in an adjoining farm, when it will not. I am grateful to Mr. Jeremy de Souza of White and Bowker for highlighting that instance. He is one of several people to have done so. Does the Minister recognise that that is a potentially needless restraint on the clause? In the interests of compliance, will she accept our amendment?

May I now move amendment No. 15?

Mark Prisk (Conservative, Hertford and Stortford)

I am extremely grateful to you for that clarification and assistance, Sir Nicholas. I must confess that after four joyous hours of strip stamp debates in Committee yesterday and about three hours spent on related subjects, my recollection of the details is beginning to diminish.

Amendment No. 15 refers to another restriction of £1,000 for those transactions that do not require the stamp duty land tax land transaction return No. 1. That is the rather infamous 12-page special that miraculously seems to be meant to simplify matters.

As I said, the purpose of clause 283 is welcome—it seeks to provide more relaxed notification procedures—but the maximum value of £1,000 seems to negate the purpose. Our amendment adjusts that to a more realistic figure: £5,000. At £1,000, few if any transactions will be helped. At £5,000, we suspect that both taxpayers and tax authorities would, if nothing else, benefit administratively. At £1,000, it is unclear whom the Financial Secretary is trying to help. Perhaps she will tell us how many transactions would be exempted at £1,000, and for that matter, how many might be helped at £5,000. When linked to the residential condition, the clause is further weakened, so the relationship between the two is important.

Amendment No. 15 is a probing amendment, and I hope that the Financial Secretary will respond accordingly. If she cannot agree to the proposed figure—£5,000 may be inappropriate, and £3,000 may be more appropriate—I am open to positive suggestions from her, and I hope that she can propose a figure that will better reflect the realities of the property market.

John Redwood (Conservative, Wokingham)

I support these two excellent, modest amendments, which would represent a small win for those of us who would like to simplify the situation for some people and reduce the burdensome compliance costs of this legislation.

My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) is right—I doubt whether there will be many transactions of less than £1,000 in this inflationary property environment that the Government have created and are creating. There will be more transactions at under £5,000, and for that reason I welcome amendment No 16. I also welcome the idea in amendment No. 15 that the provision should be widened from applying just to residential property.

In the previous truncated debate, the Financial Secretary answered few of the points—obviously, she truncated it because she had no answers. The one answer that she did attempt, however, was on the issue of the compliance burden, which we are now debating. She confirmed what my hon. Friend well knows—that a 12-page form must be filled in to comply with the tax. Her defence was extraordinary. She said that most people who have leases need not worry, because they will not have to fill in the form themselves, as it will of course be filled in by their lawyer.

The Financial Secretary went on to say, knowing rightly that many lawyers are talented, hard-working, fast-moving, alert people, that they would soon get into the swing of things and realise that having to deal with another 12-page form was not too difficult, and that they might even be able to skip the odd page if they were lucky—or unlucky, depending on their point of view—with their transaction. What she should also know about lawyers is that, in my experience, they charge for such things. Most lawyers would see the provision as another good little bit of business. As my hon. Friend said, I am sure that a reputable provincial firm of solicitors might put another £50 on the bill for filling in a 12-page form, whereas top London lawyers, being so much more talented and even more imaginative with their bills, might come up with an even higher figure. Therefore, of course there is a compliance burden on the person trying to take on a trading property, or whatever, because they would have to employ a lawyer, whose bill they would have to pay.

I hope that the Financial Secretary will apologise to the Committee for her odd view that because one can employ an agent to do something, that is not a burden, someone's time is not involved, and that time will not be billed for. Anything that she can do at this 11th hour, on this sorry piece of legislation, to make it a little cheaper and easier for people trying to go about their small business duties, and needing property to do so, would be welcome.

My hon. Friend has been remarkably modest in his demands. If I had been drafting the amendment, I would have put on a bigger figure than he proposes, but it gives me great pleasure to support his modest request. If the Minister is so heartless that she even turns that down, we shall have further confirmation that this Government do not give a toss about small business, and do not understand how damaging these interventions and costly devices in the property marketplace will prove to be. It will demonstrate that the Government's only interest is in grabbing as much money as possible from the business community and from people as they go about their normal business.

I have declared my interests in the register, but today I speak on behalf of all small business people and all those embarking on property transactions. I say, "Enough is enough. This is rip-off government. The money is being wasted. Give us a break."

David Laws (Liberal Democrat, Yeovil)

We on the Liberal Democrat Benches also understand what the Government are trying to achieve in clause 283. A reduction in the compliance burden would obviously be welcome, but we support the amendments because we feel that the reduction is pretty modest. I agree with the right hon. Member for Wokingham (Mr. Redwood) that the hon. Member for Hertford and Stortford (Mr. Prisk) has been quite modest and moderate, particularly in amendment No. 15, in proposing an alternative threshold within which there will be no requirement for an SDLT return.

Many would consider that even the Government concession is modest. Some would call it pitiful, and indeed some have done so. Transactions of less than £60,000 on a residential basis and of less than £150,000 on a commercial basis will still need to be reported, although there will be a zero tax return. The information required in the self-assessment return places a considerable burden of compliance on taxpayers and their advisers, and the tax itself represents a significant shift in the costs of compliance from the Revenue to the advisers. That needs to be rectified.

I hope that this proves to be one of the occasions that the Minister can make us consider worth while, by taking account of the concerns that have been expressed. If she does not accept the amendments, I hope that she will think about returning at some stage with a slightly more generous provision of her own, so that she can declare that the Government planned it all along and are not making a concession to the Opposition. We ourselves would be generous and welcome that.

Ruth Kelly (Labour, Bolton West)

I am always heartened when I hear the right hon. Member for Wokingham (Mr. Redwood) say that he has a small win on his hands.

I believe that this is a deregulatory measure. I urge Members to cast their minds back to the days when every transaction had to be notified. We are now proposing that some need not go through the process, in response to a specific representation about people who are generally unrepresented.

David Laws (Liberal Democrat, Yeovil)

How many entities does the Minister believe will be exempt as a consequence of the Government's concession?

Ruth Kelly (Labour, Bolton West)

I am not sure that it is possible to put a figure on it, but I do not think there will be many. I will outline the sorts of people who will fall into the category.

The relaxation of the notification requirements is intended to help purchasers in the case of small residential transactions. The example given to us is that of the purchase by a tenant with a long leasehold of his or her own freehold. It will allow registration of the transaction at land registries by completion of a simple self-certification form rather than the submission of a stamp duty land tax form. Purchasers who are likely to benefit from the provision are often unrepresented, and representations are being made on their behalf. In cases seen by the Inland Revenue, £1,000 is sufficient to exempt them. Land registries have agreed to the concession because it does not impose an unnecessary burden on them.

In certain circumstances, a large company will buy a leasehold and sell it back to individual tenants for a few hundred pounds. They are unrepresented: they do not employ a solicitor to conduct the transaction. It is in the light of that that we have made the concession.

Amendment No. 15 would raise the limit to £5,000. That is unnecessary to deal with the specific situation that I have outlined. I think that we have different policy intentions. The Government's policy intention is to relieve that category of people—

David Laws (Liberal Democrat, Yeovil)

I can understand the specific concern that has caused the Financial Secretary to introduce clause 283, but what is her argument against amendment No. 15? Is it a cost argument, or does she believe that it will complicate the administrative job of the Government? What is the argument against that modest amendment?

Ruth Kelly (Labour, Bolton West)

The argument against an increase in the limit is basically the difficulty that it would cause for land registries, which would have to decide whether a self-certificate is appropriate, or whether a full Inland Revenue certificate should be issued on each occasion. They have suggested to us that a £1,000 limit would be acceptable to them, but that the risk is that the burden would increase were that limit to increase.

Mark Prisk (Conservative, Hertford and Stortford)

I may have missed a point but I am unclear as to why, in issuing a certificate, there is a difficulty in distinguishing between £1,000 and £5,000. I am not quite clear. Can the Financial Secretary expand on that? It seems hazy.

Ruth Kelly (Labour, Bolton West)

The fact is that a lot fewer transactions will be covered with a £1,000 limit, which is appropriate to exempt the transactions that we are concerned with in this case. Clearly, we will keep that limit under review. If representations are made in due course, we may consider whether it is still appropriate, but I am convinced that it is.

Mark Prisk (Conservative, Hertford and Stortford)

I think that the Financial Secretary is saying not that it is difficult to distinguish between the two categories, but that a much greater number of cases will be applicable under the £5,000 limit, and that it is the administrative burden for the Land Registry that we are talking about. Will she confirm that?

Ruth Kelly (Labour, Bolton West)

As far as I understand it, the land registries are telling us that it would put a much greater burden on them if the limit were increased, because the scope of the exemption would greatly increase. We think that a £1,000 limit is appropriate for the policy aim of excluding that particular category of unrepresented person, although, as I say, if different situations are put to us, we will consider them in due course, always with the aim of improving the Bill as and when we can. However, there is a case that that group of people, who are unrepresented, should not have to fill in the full stamp duty land tax form, of which I know the hon. Gentleman is a great fan. For that reason, I ask the Committee to reject both amendments.

Mark Prisk (Conservative, Hertford and Stortford)

I am unconvinced on the question of the number. It seems entirely acceptable to apply the ridiculous compliance burdens under schedule 37 of a six-step, three-formula, two-page application in respect of abnormal rents, but when the Land Registry is asked to distinguish between a £1,000 set of certificates and an owner who will perhaps try £5,000, it is insurmountable. It is a peculiar argument.

It is a disappointment that the Government's arguments are remarkably weak. That is unusual. Usually, the Financial Secretary is far more robust and persuasive. On these two amendments, she has not been.

My purpose in tabling the amendments was to put on record the genuine worry of those in the real world whom we are here to represent. I have done that. It is important that we continue to do that. However, on balance, I shall withdraw amendment No. 16. I believe that you will wish me, Sir Nicholas, formally to present amendment No. 15 in due course.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I think that this is an example of that awkward situation where I need formally to present an amendment, only in due course to have to withdraw it. We have debated the whole issue. The amendments are interrelated; therefore, I would wish, having formally presented the amendment, formally to withdraw it.

Clause 284 — Claims not Included in Returns

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 17, in clause 284, page 238, line 26, after 'for "', insert 'for'.

Mark Prisk (Conservative, Hertford and Stortford)

The amendments are small but not unimportant. They are designed to correct the meaning of the clause. I am grateful to the Law Society for highlighting the errors. My only anxiety about the amendments is that I suspect they will reinforce to friends and colleagues alike my reputation as a parliamentary pedant when it comes to stamp duty land tax. These are none the less matters of substance, so I hope that the Minister will accept the amendments.

Ruth Kelly (Labour, Bolton West)

To be brief, I urge the Committee to accept the amendments.

Amendment agreed to.

Amendment made: No. 18, in page 238, line 30, after 'for "', insert 'for'.—[Mr. Prisk.]

Clause 284, as amended, ordered to stand part of the Bill.

Schedule 38 agreed to.

Clause 285 ordered to stand part of the Bill.

Clause 286 — Charitable Trusts

David Laws (Liberal Democrat, Yeovil)

Hard on the heels of the great triumph of the hon. Member for Hertford and Stortford (Mr. Prisk), I hope to induce the Financial Secretary to make further changes in this important area, but on this occasion I invite her to come up with her own proposals.

The clause extends charities relief to charitable trusts, and relief is available when the charity intends to hold the property acquired either for use in furtherance of its charitable purposes or as an investment. I understand that the Inland Revenue interprets that as denying relief when a property or part of the property acquired is to be sold off by the charity, on the basis that the purchase for resale is not an investment.

Furthermore, we understand that when a property is acquired partly for use by the charity for its own purposes and partly to be sold off, the latter part causes relief to be denied on the whole acquisition, on the basis that an acquisition is either entirely chargeable or exempt. Clearly, there are circumstances in which a charity has to acquire a particular site or building in its entirety, but then has to sell on the part that is surplus to requirements. In those circumstances, the apparent current interpretation could produce a capricious result. If there is a delay before resale, that might indicate an investment activity, but it would not be possible to foresee that at the time of the acquisition by the charity. It would seem particularly unfair for the charity to bear the whole 4 per cent. stamp duty land tax on the entire acquisition where only a small part had to be resold.

We understand that the principle underlying the Revenue's interpretation is to deny relief for trading transactions by charities that would enjoy an unfair advantage in competing with commercial organisations. However, I suggest that the condition on which the Government are basing clause 286 should be reversed so that relief would be denied where the main purpose of the acquisition was dealing in property, but it would still be possible to have the relief where the main purpose was investment and a portion of the property was being sold on.

I do not know whether the Financial Secretary can offer us any reassurances on that point now, but at the very least I hope that she might consider it during the course of the Bill, and consider coming back with clarifications or Government amendments.

Ruth Kelly (Labour, Bolton West)

I am grateful to the hon. Gentleman for the way in which he has raised this issue today and for giving me some notice of his point. I hope that I can give him some reassurance, if not the full reassurance that he seeks.

Charities certainly will not lose relief if they dispose of properties. Provided that they have used a property for charitable purposes, its disposal should not cause any clawback of relief. However, the hon. Gentleman is right to point to the fact that relief is not available if a charity acquires property intending to dispose of it—in other words, when it is in effect speculating on the property. I think that he will agree that it would not be right for a charity to be exempt from the tax if it were to engage in pure speculation.

The hon. Gentleman raised the case of a property that is bought and part sold on. That could cause a degree of difficulty, but I should like to think that in practice it is possible to distinguish between the two parts of the transaction, so that one part of it, which is concerned with the charity, benefits from the relief, and the other part is charged to stamp duty. I would be willing to discuss that with him further during the later stages of the Committee, or to discuss it with charitable bodies if they feel that that is not a reasonable solution. However, it strikes me that what I have suggested is probably a fair compromise.

David Laws (Liberal Democrat, Yeovil)

I understand the Financial Secretary's intention to consider the point. Will she clarify whether amendments to existing legislation are required to achieve the desired effect that duty will be payable only on the part of the property that is sold on? Is that currently her interpretation of the law as it would be if the Bill was passed unamended, or does she believe that it is necessary for us to discuss the matter further and to table amendments to achieve that effect?

Ruth Kelly (Labour, Bolton West)

I understand that that is the current intent of the legislation, but I shall write to the hon. Gentleman to make that point clear. If further amendments are needed, he will of course have an opportunity to put those to the Committee. In the light of that clarification, I hope that he will support the clause.

Question put and agreed to.

Clause 286 ordered to stand part of the Bill.

Clauses 287 and 288 ordered to stand part of the Bill.

Schedule 39 — Stamp Duty Land Tax: Application to Certain Partnership Transactions

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 19, in schedule 39, page 548, line 36, at end add

'which constitutes a chargeable interest'.

Amendment No. 19 applies to new paragraph 12 in schedule 39. Under the provision as drafted, stamp duty land tax will be applied to the transfer of a partnership interest that holds land; however, it should be limited to partnerships holding United Kingdom land. The amendment would restrict the charge to UK property held by partnerships, and it assumes that UK land interests held by a partnership that are not subject to stamp duty land tax—I am thinking probably of licences or mortgages—are not caught.

Paragraph 12 could affect "every interest in land", presumably anywhere in the world. I suspect that that cannot be the intention, and the amendment seeks to correct what is probably an oversight. If it is not, will the Financial Secretary explain the reasoning and how the law could be enforced?

Ruth Kelly (Labour, Bolton West)

I understand the reasoning behind the amendment—that the charge should apply only to UK land—and I emphasise that at no point has anyone sought to claim that stamp duty land tax will apply to land other than that in the UK. However, parliamentary counsel are aware of this issue and we are currently debating whether the definition is sufficient. We will fully consider it while the Bill is in Committee, and if an amendment is needed I shall certainly table one. On that basis, I hope that the hon. Gentleman will withdraw his amendment.

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to the Financial Secretary for her very positive response. This is an important issue and although a degree of pedantry can be involved in these matters, it is important to ensure that the primary legislation is crystal clear. We are dealing with a very complex area, and the danger of—dare I say it?—avoidance, loopholes and so on exists, particularly where international partnerships are concerned. In the light of what the Financial Secretary has said, I hope that she will ensure that such an amendment is tabled. On the basis of that assertion, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 20, in page 549, line 7, at end insert—

'(c) any interest in land wholly or partly situated in disadvantaged areas which would be exempt from charge if disposed of at market value'.

Amendment No. 20 again refers to paragraph 12 of schedule 39, into which it seeks to insert a sub-paragraph (c). I understand from a wide range of professionals—including organisations such as the British Property Federation—that the Inland Revenue said during the consultation process that where land held by a partnership is situated in a disadvantaged area, disadvantaged area relief will apply to the transfer of an interest in a partnership, to the same extent that the underlying land would attract DAR if the land itself were transferred.

I suspect that the tax authorities feel that paragraph 22 achieves that purpose, but I and many professionals in the marketplace are concerned that the argument is not clearly accepted by legal opinion in the United Kingdom and, therefore, by those who advise our enterprises.

Eric Forth (Conservative, Bromley and Chislehurst)

I admire greatly my hon. Friend's desire, as shown in the previous amendment, to establish these matters beyond doubt; that is very important in a Bill such as this. In that spirit, is he satisfied that the term "disadvantaged", as used in his amendment, is a sufficient term of art to be accurate? Does it not require a capital D? As it stands, could it not be more widely interpreted than my hon. Friend intends? I should be grateful if he enlightened me on that point, and I shall keep my other question in reserve for just a moment.

Mark Prisk (Conservative, Hertford and Stortford)

I am very grateful to my right hon. Friend for making that intervention, because in doing so he highlights a particular problem. We have to use the language of the legislation, and, of course, the term "disadvantaged" is embedded in it and does not necessarily have the wider meaning about which my right hon. Friend is perhaps concerned. It is specific to the Bill, and my right hon. Friend may decide whether that is a good or a bad thing.

Eric Forth (Conservative, Bromley and Chislehurst)

I shall ponder my hon. Friend's reply. Will he help me further, because I am even more concerned about the "wholly or partly situated" provision in his amendment? That strikes me, if I may say so, as strikingly and alarmingly vague. Let us suppose for the sake of argument that the land in question was 1 per cent. situated in the so-called "disadvantaged" area and 99 per cent. outside it. In those circumstances, would my hon. Friend be satisfied that it should still be covered by the terms of his amendment?

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to my right hon. Friend for helping me and, indeed, the Committee to identify weaknesses not only in the Bill but in the amendments tabled to it. It is always important that more recent arrivals in the House should listen with due care to their elders and betters. I am certainly happy to do so on this occasion.

There is a danger that a corner of an office block, for example, could be caught within the Government's definition of a disadvantaged area and be appropriate for relief. However, I understand that it is the whole address rather than any part of the hereditament that counts. I am therefore reasonably convinced that the concerns expressed by my right hon. Friend are needless. I am, of course, grateful to him for his contribution.

Will the Financial Secretary confirm that disadvantaged relief would be available in respect of a transfer of a partnership interest to the same extent as it would be if there were a transfer of the underlying property by the partnership? This is a probing amendment, with all the strengths and weaknesses rightly identified by the Committee, and I hope that the Financial Secretary will be able to provide sufficient clarification.

Eric Forth (Conservative, Bromley and Chislehurst)

I accept the spirit of the amendment tabled by my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) and which stands in the name of many other eminent colleagues; I hope that they all read it before they signed it. Probing amendments are an honourable part of our proceedings—long may that remain so—but I hope that, as well as probing, they help to tease out the original intention of the provisions.

I must admit that I always worry when I see the word "disadvantaged". It may now be well established for all I know, but I worry that we should be giving such apparently wholehearted support to that concept in a Bill as important as this one. I am very much an even playing field sort of man and I have always had the gravest doubts about the philosophy that lies behind discrimination of almost any kind—whether it be in regional policy, local policy or whatever.

It is my hope that this great Conservative party, believing in—as I hope, in the 21st century, it still does—the virtues of capitalism, the ebb and flow of capital and other economic factors, would have at least some doubts about concepts such as "disadvantaged". Instead of accepting and embracing such a concept and building it into a probing amendment, I would hope that, even at this stage, we would be in the business of challenging it from time to time. For every plus to that sort of policy, there may be even more minuses or negatives. Has my hon. Friend given any thought to that? My first worry about the amendment is that we seem all too readily to be accepting the philosophy behind the term "disadvantaged", and then going even further by building it into our own amendments.

My second worry, as I implied in my earlier intervention, which my hon. Friend graciously accepted, is the rather loose terminology of "wholly or partly situated". I know that, in an attempt to satisfy me, my hon. Friend made a brave attempt at explaining it. However, you, Sir Nicholas, and I both know—and my hon. Friend also knows it—that, when we are dealing with amendments to something as important as the Finance Bill, words matter. Were this amendment to be accepted—the flaws that have already been identified leave me unconvinced that it should be—I should be worried about the interpretation of the phrase "wholly or partly", which seems to me to be loose in the extreme.

There is a risk, to put it no more strongly, that accepting the amendment into statute would lead to a beanfeast for the tax lawyers. The members of that group in society need little help from the House, as they get enough help as it is. I need to be convinced that the use of the phrase "wholly or partly" would do more than provide ample scope for endless arguments and disputes that would require expensive legal opinion and might even end up in our courts.

I came here full of good will for my hon. Friend, but it has ebbed away rather more quickly than either of us would have wished. Whether or not the amendment is a probing one, if there were the slightest risk that it might be accepted we could find ourselves in very dangerous territory. I look to the Financial Secretary to help the House and say whether the amendment holds water. If she persuades me that it does not, I hope that my hon. Friend will have a stiff word with those other Conservative Members who put their names to the amendment, and ask them to do better next time.

Ruth Kelly (Labour, Bolton West)

I shall endeavour to help the House at the end of what has been a surprisingly entertaining debate on disadvantaged area relief.

The amendment would mean that interests in land that is wholly or partly in a disadvantaged area would not form part of the partnership property for the purpose of the charge on a transfer of interest within a partnership. The effect would be that a transaction undertaken by an individual to obtain a part-interest in several land interests, and a similar transaction undertaken through the vehicle of a partnership, would be treated differently for stamp duty land tax purposes. That could arise because the amendment takes land in a disadvantaged area fully out of consideration for a partnership, even though it is not taken out of consideration for an individual. That could mean that land that is partly in a disadvantaged area could be chargeable on an individual, or that it could change the rate of tax applicable to a composite transaction, but that there would be no effect in a partnership.

As the hon. Member for Hertford and Stortford (Mr. Prisk) will understand, our proposals on partnerships are an attempt to increase transparency: we want to bring the treatment of tax for partnerships more into line with that for individuals. I am sure that the hon. Gentleman has also taken note of the comments from the right hon. Member for Bromley and Chislehurst (Mr. Forth), who pointed out the extraordinary possibility that the amendment could mean that an entire property might be exempt from tax even if only 1 per cent. of it was situated in a disadvantaged area. However, the hon. Gentleman asked a specific question about transfers of an interest within a partnership. I can assure him, and the Committee, that disadvantaged area relief will apply to such transfers.

I hope that that assurance, and the wise words of the right hon. Gentleman, will cause the hon. Gentleman to see fit to withdraw the amendment.

Mark Prisk (Conservative, Hertford and Stortford)

As the Financial Secretary pointed out, this has been an extended debate—

Eric Forth (Conservative, Bromley and Chislehurst)

Extended? We have hardly started.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Do not provoke him.

Mark Prisk (Conservative, Hertford and Stortford)

I will not provoke my right hon. Friend, as there have been refreshingly open and supportive comments from both sides of the House to ensure that we get the right legislation. However, I must say that, in terms of Back-Bench support, I feel wholly disadvantaged.

I listened to what the Financial Secretary said about partnerships and property. She made a fair point, but I hope that she will bear in mind the underlying thesis of the amendment—which will certainly be emblazoned on my memory, as the comments of my right hon. Friend are still ringing in my ears.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 21, in schedule 39, page 549, leave out lines 8 to 16.

Mark Prisk (Conservative, Hertford and Stortford)

These amendments affect paragraph 12 of schedule 39 and they have the aim of making the chargeable consideration equal to the actual consideration. Paragraph 12 makes the transfer of an interest in a partnership a chargeable transaction for stamp duty land tax purposes if the partnership property includes an interest in land. Without the specific provision, the acquisition of an interest in a partnership would not constitute a land transaction and so would not be within the scope of the tax.

Paragraph 12(4) and (5) would fix the amount of the chargeable consideration for the transfer of an interest in a partnership by reference to a proportion of the market value of the underlying land held by the partnership. During the consultation that has underscored the Bill and other elements related to it, a wide range of property experts have referred a specific problem to me. They have argued that an interest in a limited partnership should be equated to shares in a company or to shares in other collective investment vehicles. The purchaser or investor would be acquiring an interest in an investment vehicle rather than a direct interest in the underlying assets of the partnership. That would mean that tax should be levied on the consideration given for the partnership share and not a deemed consideration fixed by reference to the market value of the gross assets of the partnership. That of course ignores any loans taken out by the partnership for acquiring property. The official Opposition believe that amendment No. 21 would probably make the Bill not only clearer but fairer, and suspect that it better reflects real commercial practice.

In our view, amendment No. 23, which would amend paragraph 13(2) of the schedule, is required because otherwise it might be argued that, to take the best example, ordinary tenants' covenants contained in a lease could be deemed consideration and therefore could be deemed to be liable to tax.

Ruth Kelly (Labour, Bolton West)

During the debate on amendment No. 20 there was some discussion of the principle of transparency, which I believe applies equally to this amendment. Amendment No. 21 would apply stamp duty land tax to the consideration paid for the transfer of an interest in a partnership rather than the market value of the underlying land forming that interest. To return to the principle of transparency for a moment, that, I would argue, dictates that the market value is the correct measure to use because that looks through to the underlying substance of the transaction. The price paid by a partner for a share or an increased share also takes account of any loans or other assets in a partnership and cannot be taken to be a suitable measure of any transaction involving land. Were we to move from a definition based on the substance of the transaction to one based on the price paid, we would, I believe, be issuing an invitation to people to structure quite ordinary transactions through a partnership vehicle and thus pay stamp duty land tax on a lower consideration than would have been used.

Mark Prisk (Conservative, Hertford and Stortford)

The Financial Secretary referred to market value. Would she clarify that for the Committee's benefit? Does she mean open market value and if so, what is the basis of that valuation?

Ruth Kelly (Labour, Bolton West)

I can indeed clarify that I do mean open market value and, as the hon. Gentleman knows, that will be valued in the same way as any other market value.

Amendment No. 23 alters the first condition for a lease to be excluded from the definition of partnership property as a market rent lease. It achieves this by amending the definition of consideration paid for a lease to make it only chargeable consideration that would exclude the lease from the definition of market rent lease. It is again easy to conceive of circumstances where consideration had been given for the grant of a lease that was not chargeable consideration. The market rent of such a lease may well then be below that which would be payable, had the other consideration not been given. For these reasons, I request that the hon. Gentleman withdraws his amendments.

Mark Prisk (Conservative, Hertford and Stortford)

I am glad we have clarified the meaning of market value. The Financial Secretary seemed to assume that open market value was taken to be the same as market value, but hon. Members who have been engaged in the market will understand that a market value with a number of covenants on it that may restrict the value is not the same as open market value. I am grateful that the Minister has put the matter clearly on the record. It is a small but important point. I am therefore willing to beg to ask leave to withdraw the amendment, which was, after all, a probing amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 22, in schedule 39, page 549, line 20, leave out 'three' and insert 'two'.

Mark Prisk (Conservative, Hertford and Stortford)

The three amendments are closely related. Their aim is to reduce the compliance burden by amending paragraph 13, which is designed to ensure that leases that were granted to a partnership and which had no capital value at the time of the grant are excluded from being partnership property. That would typically include premises in which a partnership carried on a business. The purpose of the Government's provision is to reduce the compliance burden for trading and professional partnerships that may otherwise have to carry out lease valuations whenever a partner retires or a new partner is admitted.

The concept is welcome, but one of the concerns is that the detail is unduly restrictive. Amendment No. 22 would amend the language of the paragraph in order to allow amendments Nos. 24 and 25 to take effect. Paragraph 13(4) would mean that only leases that have a rent review mechanism could be excluded from partnership property. Therefore fixed price leases, leases of less than five years and leases where the rent is increased in line with the retail prices index would not be excluded. It is unclear that there is a good policy reason for this. The purpose of amendment No. 24 is to delete that sub-paragraph.

Paragraph 13(3) requires the rent payable under the lease to be a market rent—meaning an open market rent—at the time of grant, which ought to be the only concern of the Revenue. A lease with no provision for the rent to be reviewed would tend to carry a higher initial rent. Amendment No. 25 would delete sub-paragraph (6). I am grateful to a number of experts in the field, which I confess was not one with which I was professionally familiar beforehand. These are important matters, and I hope the Minister will clarify the Government's purpose and intent.

Ruth Kelly (Labour, Bolton West)

Market rent leases are excluded from the definition of what is partnership property for the purposes of determining the land interests that are chargeable to stamp duty land tax on transfers of partnership interest. Amendments Nos. 22, 24 and 25 seek to remove one of the conditions for a lease to be identified as a market rent lease. Taken together, they would substantially change the definition of market rent lease, and could be used to take out of account leases that were not at market rent. I am sure the hon. Gentleman did not have that intention.

The exclusion of market rent leases in paragraph 13 is, as he recognises, a deregulatory measure, ensuring that such leases do not have to be valued when there is a transfer of partnership interest. The amendments remove the condition that such leases should have a rent review to market rent within five years of the start of the term of the lease. From the consultation on taxation of leases, it became apparent that most commercial market rent leases have rent reviews every five years, and a relaxation was requested by industry representatives. Removing the condition would allow leases that were initially granted at market rent, but on which rent was subsequently reduced, to be excluded from land interests included in the partnership property for stamp duty land tax charge purposes. Such leases could have a very substantial market value, and I think that the hon. Gentleman would agree that it would be anomalous to exclude from consideration any leases that genuinely have a market value. He raised the particular case of fixed-rent leases. A fixed-rent lease would acquire a market value over time, so it should not be ignored.

I believe that this is a deregulatory measure. It is intended only to reduce the compliance burden for genuine market rent leases, so I recommend to the hon. Gentleman that he seek to withdraw his amendment.

Mark Prisk (Conservative, Hertford and Stortford)

I am intrigued by the Financial Secretary's response on fixed rents. I am not entirely sure whether it concurs with what I admit is a somewhat hazy recollection of my land management course at Reading university some 20-odd years ago, but I understand the underlying point that she makes, although I think that there is a genuine worry that the way in which the legislation is affecting the market is not entirely as the Government and the industry anticipated. I hope that the Government will closely monitor the situation. In those circumstances, I would consider seeking to withdraw the amendment, but perhaps she could confirm on record that they will do so.

Ruth Kelly (Labour, Bolton West)

I can of course confirm to the hon. Gentleman and to the Committee that we will continue to monitor the stamp duty land tax measures very closely over coming months and years.

Mark Prisk (Conservative, Hertford and Stortford)

Having received that gracious response, it is only right and proper that I should not press the amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 31, in schedule 39, page 550, line 12, at end add—

'(4) The provisions of sub-paragraph (1) do not apply where the provisions of paragraph 10 apply'.

The amendment relates directly to the question of provisions about exchanges. Paragraph 14(1) of the schedule has been designed to apply where A—this is the usual terminology in such cases—transfers an interest in the partnership to C, who is not a partner, in return for their having transferred land to A. Paragraph 5 of schedule 4 of the Finance Act 2003 would ensure that A and C each paid stamp duty land tax at 4 per cent. on the open market value of the interest received. However, as currently drafted, paragraph 14 of schedule 39 would also apply where A contributes the property to the partnership. Paragraph 10 sets out special rules that apply in those circumstances. Stamp duty land tax is charged on the acquisition of the land transferred to the partnership by reference to the open market value of the proportion of the interest transferred to the other partners. The incoming partner does not pay stamp duty land tax on the proportion of the market value of the underlying land represented by an interest in the partnership that is acquired.

It therefore appears that paragraph 14 does not fulfil what I understand to be the Government's stated aim. The purpose of the amendment is to correct that error. I am aware that the matter is open for discussion, so my principal purpose is to tease out the detail from the Financial Secretary so that those seeking to implement the legislation can do so properly.

Ruth Kelly (Labour, Bolton West)

I understand that the amendment is inquisitorial and has been tabled to probe the Government's intention.

The amendment would disapply the exchange provisions where land was transferred into a partnership in exchange for the acquisition of an interest in a partnership from an existing partner. If a partnership interest so acquired included an interest in land, the acquisition of the interest in the partnership would not be treated as the acquisition of a major interest in land, so the market value rules for such acquisitions would not apply.

We recently debated the principle of transparency, which also applies in this situation. It dictates that, for transactions in partnerships, stamp duty land tax is paid on the land interest acquired. As partners are connected to each other, market value must be imposed to ensure that the transaction undertaken is subject to similar duty as a transaction undertaken by an individual, otherwise partnerships would be an attractive vehicle to reduce stamp duty land tax on transactions.

Mark Prisk (Conservative, Hertford and Stortford)

Does the Financial Secretary not see the peculiarity that individuals who engage in that activity are treated one way by the tax system, while those in partnerships are treated entirely differently?

Ruth Kelly (Labour, Bolton West)

Let me put a different anomaly to the hon. Gentleman: it would be particularly invidious to penalise a person who enters into a transaction whereby they obtain a partnership share for cash and pay stamp duty land tax on the market value of the underlying land in the partnership, but to exempt a person who enters into the same transaction but who, instead of paying cash, transfers land to the partner from whom they receive the partnership interest. It is more sensible to treat each transaction similarly. We are, after all, trying to identify the substance of the transaction, and to treat partnerships in essentially the same way as we treat individuals who are not in partnerships.

The amendment also allows for the possibility of avoidance when the interest in the partnership does not itself constitute a major interest in land. That would disapply the market value rule for transfer of partnership interest where the land under consideration is given for that interest. I therefore ask the hon. Gentleman to withdraw the amendment.

Mark Prisk (Conservative, Hertford and Stortford)

We are beginning to get to the heart of the problem, which is that the tax system treats individuals in one way and partnerships in another, and I am sure that we will re-examine the issues on both sides of that argument very shortly. I am particularly grateful for the Financial Secretary's comments on the application of market value, because some professionals are unclear about the true applicability of market value. In the light of those comments, and given that the amendment is, indeed, inquisitorial and probing, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 26, in page 552, line 19, leave out "20th October 2003" and insert "8th April 2004".

Mark Prisk (Conservative, Hertford and Stortford)

The five amendments concern paragraph 18 of schedule 39 and the potentially retrospective character of the legislation. Paragraph 16 deals with a transfer of land from a partnership to a partner, an outgoing partner or, for that matter, a person who is connected with either such person. Paragraph 16(3) states:

"The chargeable consideration . . . shall . . . be equal to the chargeable proportion of the market value of the interest transferred."

Paragraph 18, with which we are principally concerned, provides for how the chargeable proportion is then calculated.

Broadly speaking, paragraph 18 operates to fix the chargeable proportion as 100 minus the purchaser's partnership share. For example, if A, B and C are equal partners, and a property with a market value of 100 is transferred to C, C would pay stamp duty land tax on 67—in other words, 100 minus 33. However, the benefit of those provisions is obtained only where the transfer of land into the partnership occurred before 20 October 2003.

If the land was transferred after 20 October 2003, the instrument of transfer would have been stamped with an ad valorem stamp duty or stamp duty land tax would have been paid on the transaction.

Most people accept that the concept of excluding from tax the proportion of the market value of the underlying land represented by the purchaser's interest in the partnership is fair. However, excluding from the benefit of those rules land that was transferred into the partnership on or before 20 October 2003 unless stamp duty is paid is objectionable, because it introduces an element of retrospectivity.

Eric Forth (Conservative, Bromley and Chislehurst)

I am sure that we will want to explore retrospectivity in some detail and at some length. It always merits that treatment.

I am grateful to my hon. Friend for citing a simple example, because I was just about able to follow it, but has he considered what would happen in a complicated case involving the transfer of land with considerable variations in value among a large number of partners?

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to my right hon. Friend. I tried to interest the Committee in a simple example, but he is right that matters may be more complex. Particularly in larger partnerships of 500 or 600 members, there is a danger that a very complicated series of transactions might be taking place before 20 October, on 20 October, in the period after 20 October or after Royal Assent. As it is necessary to deal with a series of periods, retrospectivity is the crucial issue. Some people suspect that the date was selected because it is the publication date of the original draft legislation. However, these provisions did not form part of that original draft, certainly not during the consultation process. Many experts in the field believe that a better reference date would have been the publication date of the Finance Bill.

The amendment would remove the element of retrospectivity. I do not claim that the date that it specifies is ideal—it is primarily a probing amendment—but it would be useful for us to hear the Financial Secretary's views on the matter.

Eric Forth (Conservative, Bromley and Chislehurst)

I am left wondering whether my hon. Friend has gone remotely far enough. If I followed his argument, as I hope that I did, his amendment leaves an element of retrospectivity that I would have hoped to challenge. As it stands, the Bill is clearly retrospective in that the relevant date is 20 October 2003, but am I not right in supposing that if my hon. Friend's amendment were accepted and we ended up with the date of 8 April 2004, that would still be retrospective by the time the Bill received Royal Assent? We must always strike a balance between preventing individuals from being tempted to pre-empt the provisions of such a Bill by conducting certain transactions as it goes through Parliament and introducing an element of retrospection.

In the 21 years since I came to this place, Sir Alan—of course, I am a mere newcomer compared with yourself—I have always been led to believe that retrospection in legislation is to be avoided. That is the political milk of my elders and betters on which I was raised. Here we have a double example of that, because not only is there retrospection in the original draft of the Bill, but blow me down if there is not retrospection in my hon. Friend's amendment. I am therefore trying to probe my hon. Friend—and, by implication, the Minister—in trying to establish whether, by seeking to introduce this element into the Bill or to reinforce it or alter it, we would be materially better off using my hon. Friend's date of 8 April 2004 than we would be if we used 20 October 2003.

I am grateful to my hon. Friend for pointing out that he speculates that the original date was in the provisions because that was when the Bill first saw the light of day. I hope that that is a reasonable interpretation of what he said. He went on to suggest that a better reference point would be the publication date of the Bill. That leaves me mystified, because I am not sure that I can see a material or helpful distinction between what he described as the date of the "original draft legislation"—I altered that slightly when I described it as the Bill's first seeing the light of day, because that is a more comfortable phrase for me—and the date in his amendment.

The reason that I make this distinction is that, if we are concerning ourselves with people who might wish to pre-empt the legislation, either of those dates is invalid. If I became aware of the Bill on the date of the original draft's publication, that would be one thing, but I would also become aware of it on its publication date. In either case, by the time that we reached Royal Assent, I would have been able to avoid its provisions. I do not see how the amendment materially alters the retrospective element in the Bill, with which I thought we were taking issue. All that I am saying is that I need my hon. Friend to help me by explaining why the amendment makes a material difference.

In case the Minister thinks that my hon. Friend is bearing the brunt of my critical remarks, I am not leaving her out of this. I hope that she, too, will seek to justify to the Committee why the date on the Bill was chosen. What was the justification for that date among all other dates? Is it tied to anything in particular? Has it been conjured out of thin air with no apparent rationale, as are so many dates that appear before us? I would have thought that most unlikely, but it is incumbent on the Minister to share with the Committee the provenance of her preferred date of 20 October 2003. Similarly, I remain unconvinced of the validity of the date suggested in my hon. Friend's amendment.

I am left in a cloud of uncertainty and I am sure that the massed ranks of the Committee will want to be reassured that the rationale behind the dates before us is beyond doubt, so that those who are to suffer the penalties or advantages of the provision will be able to do so with certainty and confidence. That is all I ask and it is not an unreasonable request. I hope that the Minister, and perhaps my hon. Friend, will be able to set my mind at rest.

Ruth Kelly (Labour, Bolton West)

The amendments change the dates in paragraphs 18 and 19 of schedule 39. Those dates determine when ad valorem stamp duty or stamp duty land tax, rather than just the £5 fixed stamp duty, has to have been paid to benefit from a reduced charge on a transfer of land from a partnership to a partner or former partner. The amendments seek to move the date from 20 October 2003 to 8 April 2004. I do not accept that the use of 20 October 2003 introduces an element of retrospectivity, as the right hon. Member for Bromley and Chislehurst (Mr. Forth) suggested. It will not affect any partnership transactions undertaken before the Bill receives Royal Assent. What it may affect is the stamp duty land tax paid when land is transferred from a partnership to a partner after Royal Assent. The date of 20 October 2003 is well chosen as the date when the public consultation on application of stamp duty land tax to partnerships was announced.

At that time, the Inland Revenue published draft legislation for consultation, and clauses similar in nature to clauses 18 and 19 were included in that draft legislation. That was considered expedient to forestall the £5 fixed stamp duty being used to frank land transactions in partnerships after the draft legislation was announced, thereby reducing any stamp duty land tax on an eventual transfer of that land out of the partnership to a partner.

I would consider changing the date now to 8 April 2004, or indeed any other date, a retrograde step. It would be seen as penalising those taxpayers who, having a choice as to how to structure a transaction, chose to structure it in such a way that they paid ad valorem stamp duty in the expectation that they would then benefit from the reduced charge when that land was transferred out of the partnership. Retrospectively to give the same benefit to those partners who chose to pay £5 fixed duty on or after 20 October 2003 would be seen as grossly unfair.

As this date has been in the public domain since 20 October, I see no valid reason for changing it and therefore recommend that the hon. Member for Hertford and Stortford (Mr. Prisk) withdraw his amendment.

Mark Prisk (Conservative, Hertford and Stortford)

We have had another surprisingly eventful and positive debate. One of our concerns in tabling probing amendments of this character is teasing out the answer to questions such as why the Government chose a particular date. Fortunately, we have had that answer in the debate, yet it was not clarified before.

I am extremely grateful to my right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth), who has added to the debate in many respects. Although I appreciate that his mind was not at rest at the beginning of these deliberations, the cloud may have lifted an inch or two, but no more—I am but a modest man, so I would not hope to achieve more than that—in clarifying the Government's thinking in terms of the date chosen.

Our amendments are by no means perfect; I wish that they were, Sir Alan, as how easy things would be then. I hope that we have been able to establish exactly the thinking behind the Government's principles. Our purpose in choosing the date that we did relates to the final publication of the Bill, the essence of which is before us. We felt, rightly I think, that the draft Bill was indeed merely a draft. However, I am encouraged in many ways by what the Minister has said. On that modest basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 32, in page 554, leave out from beginning of line 31 to end of line 44.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss amendment No. 33, in page 555, leave out from beginning of line 1 to end of line 38.

Mark Prisk (Conservative, Hertford and Stortford)

These amendments would delete paragraphs 23 and 24 of the schedule, which retain the stamp duty charge on instruments transferring interests in partnerships. That is in addition to the imposition of stamp duty land tax in relation to landowning partnerships. Further to that, paragraph 24 modifies the calculation of any stamp duty charge to remove from charge any land value also taken into account in arriving at the stamp duty land tax liability.

All the professional bodies involved in the consultations with the Revenue and the Treasury have reported to me considerable concern about those two paragraphs, especially paragraph 23. Following the introduction of stamp duty land tax, stamp duty was retained as a temporary measure in relation to partnership transactions. It was understood by all those concerned that once the partnership provisions were implemented, stamp duty would apply only to transactions of stock or, for that matter, marketable securities.

All the professional bodies involved have therefore expressed surprise to me that the old rules are being retained with no warning or signal from the Revenue that that would be the case. I have done my best to ensure that this is indeed the view of the whole profession. I have to say to the Minister that it is and that there is a genuine feeling that the proposal has come forward without warning. I am sure that Ministers appreciate that that can be damaging to the process involved in the relationship between the Government and business.

Retaining the stamp duty charge in this way has been described adversely by many professionals, but I shall quote just one, Kevin Griffin of Ernst and Young, who uses the phrase

"unheralded, unreasonable and ultimately unproductive".

There is much merit in that point. I shall briefly explain why.

Retention is unheralded because the businesses involved were given no warning, and no indication during the consultation process that it would happen. Paragraph 2.6 of the Government's consultation document stated:

"The Government's intention is to apply stamp duty only to transactions related to UK land, and to transfers of shares and securities".

Nothing has been said since that document was issued to suggest any change of heart. No warning was given, and no information provided. By acting in this way, the Government are undermining what remaining confidence business has in engaging in a dialogue with the Treasury.

Last year, we had the fiasco of the business lease consultation. Now we have this about-face. I appreciate that it is U-turn season for the Government, but surely the Financial Secretary will recognise how this kind of approach undermines people's confidence in any consultation in the future.

The policy is unreasonable because it is difficult to see a real policy reason for charging duty on transfer of non-landowning partnerships. The main assets of such partnerships are likely to consist, for example, of good will, stock in trade or receivables. Such assets are inherently outside the charge to stamp duty on transfer. An interest in a business comprising such assets could therefore be purchased from an individual free of stamp duty. If it was transferred in the form of a partnership interest, however, a charge could arise. The charge to stamp duty land tax on underlying assets, on the transfer of an interest in a partnership, effectively treats the partnership as transparent. Charging stamp duty on the transfer of an interest in a partnership effectively treats it as opaque—we return to the issue of transparency on which we touched in earlier debates. Surely it is unreasonable to tax the same entity twice by treating it in two contradictory manners.

In practical terms, there are some potentially serious impacts for family partnerships. The Law Society has highlighted one example whereby a father might enter into a partnership with his son on a 50:50 basis. If it were a farming family, he might contribute, say, farmland worth £500,000 to that partnership, so a charge to stamp duty land tax would arise on his half, £250,000. If the partnership is subsequently dissolved, and the land is distributed in equal shares to father and son, it appears that a further charge will arise on £500,000 after the paragraphs in the schedule are applied. The aggregate amount charged to would therefore be £750,000. As I said, that is not simply my view or the view of my party, but the view of the Law Society experts in the field. If, however, the father had merely gifted half interest in the land to his son, outside of a partnership, there would be no stamp duty land tax to be paid. The Committee, and all Members of the House, will realise that that gives an absurd result, and it will be a severe disincentive to farming businesses and any other business with a significant land asset to engage in or carry on within a partnership.

Thirdly, and perhaps most importantly, the result could well prove unproductive because the amount of stamp duty land tax currently collected on transfers of partnership interests is, by all professional accounts, tiny. That is because it is often possible to avoid the need to pay significant stamp duty, perhaps by transferring interests without the need for a stampable document, or by minimising the value of partnership interests through debt finance.

We fully understand, from all the information that has come through, that this has been retained at the last minute to clamp down on avoidance. Tackling avoidance is the watchword of this Bill. But the original purpose of the tax—as the then Economic Secretary, now the Financial Secretary, told us—was to reflect modern commercial practice. This arrangement does nothing of the sort. Retaining what is basically a fruitless stamp duty charge makes it necessary to retain a whole raft of pages of legislation that would otherwise come close to being redundant.The decision to retain the charge has dismayed a large number of professionals. It undermines confidence both in future consultations and in the commitment of the Government to modernising the duty.

We believe that neither paragraph should be included, particularly paragraph 23. That is the view of the outside experts, of the thousands of professionals in partnerships affected by it, and of Conservative Members. It would be wrong to proceed with the paragraphs as they stand, and I hope the Minister will accept that we should vote against including them.

David Laws (Liberal Democrat, Yeovil)

We support the amendments. The hon. Member for Hertford and Stortford (Mr. Prisk) explained very clearly why the two paragraphs had caused so much concern to all the professional bodies, and I shall not repeat all that he said. However, I should like to quote from the Law Society's representations to the Treasury. Like many other professional bodies, it pointed out that the Government seemed to be treating certain assets inequitably, depending on whether they were in or outside partnerships. It said of paragraph 23

"This could have the absurd result that in the case of a partnership holding assets the transfer of none of which would be subject to stamp duty, SDLT or stamp duty reserve tax, the transfer of a share in that partnership would be subject to stamp duty at rates of up to 4 per cent. whereas the transfer of the underlying assets of the partnership would have given rise to no charge to stamp duty whatsoever."

PricewaterhouseCoopers has raised a point made by the hon. Member for Hertford and Stortford—that whereas business goodwill, for example, would normally be exempted from stamp duty altogether, it would appear to be charged stamp duty if it is in a partnership. The Financial Secretary smiles warmly: perhaps she is going to reassure us that we have misunderstood, and that the Government do not intend that the same assets should be treated differently depending on whether they are in or outside a partnership. That, however, seems to be the effect of the legislation as it stands, not just in our view but in that of the professional bodies. We believe that stamp duty on the transfer of partnership interests should be abolished with effect from the operative date of the SDLT partnership provisions.

I hope that the Financial Secretary will either accept the amendments or tell us that she intends to table amendments of her own.

Ruth Kelly (Labour, Bolton West)

The amendments would remove clauses 23 and 24—

David Laws (Liberal Democrat, Yeovil)

Paragraphs 23 and 24.

Ruth Kelly (Labour, Bolton West)

Clauses 23 and 24, I believe, although the hon. Gentleman may be right. They retain stamp duty on partnership transactions and modify the consideration where that partnership has land assets. The amendments would effectively abolish stamp duty on partnership transactions.

It has been pointed out that the original draft legislation had that effect, and that that would create opportunities to structure transactions so that, through use of a partnership vehicle, stamp duty on stock and multiple securities, and stamp duty reserve tax on chargeable securities, would not be due. It became apparent that partnerships would be used to avoid stamp duty and stamp duty reserve tax on shares and securities. In view of the late stage at which we became aware of this avoidance scheme, we decided to retain stamp duty; however, we also reduced the charge to stamp duty for the SDLT charge by taking out of account land that has been taxed to SDLT.

Mark Prisk (Conservative, Hertford and Stortford)

I think I heard the Financial Secretary say that the provision was reintroduced because of the Government's late awareness of the avoidance. That is a most peculiar statement. Could she explain it?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman is no doubt aware that avoidance schemes in a variety of sectors come to our attention all the time. When they do so, we tend to take action in respect of that avoidance.

Mark Prisk (Conservative, Hertford and Stortford)

I understand all that but why was there no discussion with the professions? All of them reported to me that they went through the whole process of consultation, yet suddenly the provision was reintroduced, with no word, no signal, no e-mail—and, heaven knows, e-mails formed a part of consultations on the legislation, unfortunately, as the Financial Secretary knows. It seems peculiar that suddenly we were told, "We have had to put this in because there was a last-minute tax avoidance scheme. We did not manage to mention it to the profession." Surely that undermines any hope that there can be meaningful dialogue between the profession and the Government.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman well knows that, not these particular measures, but stamp duty land tax reform has been under discussion with the industry for many years. It is complex legislation. It completely overhauls the previous stamp duty regime to bring it up to date, and to ensure that it is compatible with e-conveyancing and that a fair share of revenue is paid by the industry. Clearly, there are always going to be teething problems with the introduction of such a major change. I should perhaps—or perhaps I should not—point out the many examples of late changes to complex tax legislation under the previous Government. He will no doubt appreciate the complexities of these issues. Of course, it would be preferable to give the industry plenty of time to examine particular issues. It has made its representations to him and he is putting those before the Committee. I argue that this is a tax-avoidance scheme and that we should ensure that that tax-avoidance opportunity is not available. We should take action.

Mark Prisk (Conservative, Hertford and Stortford)

I have no doubt that Governments of all hues have made mistakes, or discovered information that led them to amend legislation, but we had the Budget in March. The Bill was published on Maundy Thursday. Surely the Financial Secretary, who is normally very reasonable, will recognise that it was not a good idea not to send information to those consultees, who have been playing a part in the development of the legislation, perhaps on the day or the day before the Bill was published. Does she not accept that that was a bit of a mistake and that it would have been more helpful to give them that information?

Ruth Kelly (Labour, Bolton West)

I do not accept the hon. Gentleman's view that this is a significant change. It replicates the system under the old regime. It is regrettable if people did not interpret our intention and made such representations to him. However, because of tax-avoidance opportunities that have become apparent to us, it is necessary to retain elements of the old regime. For that reason, I recommend that the Committee resist the amendments.

Mark Prisk (Conservative, Hertford and Stortford)

That was a disappointing response. The Financial Secretary is normally better able to provide a persuasive argument. The purpose of amendment No. 33 is primarily to probe, but amendment No. 32 is important. I have listened carefully to what the hon. Lady said. I regret, and I suspect that the industry will regret, that she was not able at least to admit that it would have been wiser for the Government to involve its consultee partners. Therefore, we wish to press amendment No. 32 to a vote.

Mark Prisk (Conservative, Hertford and Stortford)

I beg to move amendment No. 34, in page 555, line 46, after the first 'the', insert

'capital profits or (if no separate allocation is made of capital profits) the residuary allocation (after prior charges and allocations)'.

Amendment No. 34, which is concerned with the treatment of income and capital in partnerships, would change paragraph 25(2) of schedule 39. It is a probing and somewhat technical amendment, but I shall endeavour to explain it to the Committee; I am sure that I shall receive its rapt attention.

The issues underlying the amendment have been brought to my attention by a number of expert solicitors and by the Country Land and Business Association. Stamp duty land tax is to be paid on the land value of transfers into or out of partnership, and in respect of changes in partnership share. The problem is that the legislation provides that in ascertaining that share, regard should be had only to the income-sharing proportions. That ignores two problems, as Members are doubtless particularly interested to learn.

First, the division of income between partners is rarely done by reference to a predetermining percentage, as Members will appreciate, let alone by reference to one that is then linked to capital subscription. Furthermore, a prior charge on trading profits frequently arises in the case of most family businesses. That is especially so when one partner devotes his full time to the business while the others do not, or when one partner has an expertise or qualification that the others do not. In both circumstances, which are certainly very common in family firms, it would not be appropriate for other than super-profit-sharing ratios to be taken into account.

The second problem occurs when certain partners have contributed most of the assets, which then have to be segregated on an event such as death. In that case, the appropriate measure of the partnership share would be the capital-profit-sharing ratios. It is thought by many legal experts, who are far more knowledgeable about these matters than me, that as drafted the Bill will produce a stamp duty land tax charge on 90 per cent. of the land value. That applies where a farmer has put in 90 per cent. of the assets and is entitled to only 10 per cent. of the income. He may then decide to withdraw from the partnership. The question to which the Financial Secretary should respond is whether, in those circumstances, he should pay on the 10 per cent. rather than the 90 per cent.

The problem seems to be compounded where the land is either put into partnership after Royal Assent or injected into the partnership between 20 October and Royal Assent, where paragraph 18(2)(b)(i) asserts that the injecting partner has not thereby increased his share "in" the partnership, whatever the income entitlement.

To conclude this technical but important point, the danger is that parallel partnerships might then have to be formed in order to own the land. That is not simply my view, but that of many of the leading professionals in the field, and of the Country Land and Business Association, which advises many people on such matters. It is an important issue, if somewhat technical and remote to the uninitiated. I do not profess to be an expert on the specific matters, but the concerns seem legitimate. This is a probing amendment and I hope that the Financial Secretary will provide some assurance that the issue either has been or will be dealt with either during the passage of the Bill or immediately thereafter.

Eric Forth (Conservative, Bromley and Chislehurst)

I am most grateful to my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) for giving the Committee time to dwell on this matter, which has the potential to create some problems. We are always reluctant in this place to embark on even a brief analysis of matters as complex as those he has brought to our attention, particularly when the provenance is outside expertise. Having said that, it must be beyond dispute that it is our duty to do so. After all, that is why we are here—the experts on these matters do not have the same privileges as we have. It must be our duty to seek to draw out and elucidate any problems.

As I followed my hon. Friend's argument, I saw that it stemmed from the fact that the basis on which the benefits within partnership arrangements are distributed is not always as clear as it should or could be. I deliberately use the word "benefits" in a generic and rather general sense. It is those benefits of the partnership that may be shared from time to time. That is where my hon. Friend started his argument.

One has only to glance at the original words in the Bill and then the wording of my hon. Friend's amendment to see immediately that the Bill refers to the "income profits" of the partnership, whereas the amendment refers not only to the "capital profits", but to

"the residuary allocation (after prior charges and allocations)".

Even I as a layman can see immediately the difficulties that might arise from that.

One has to distinguish within a partnership between the concept of income profits as opposed to capital profits—and there is the added complication of residuary allocations. That is further complicated when the timing of the different elements in schedule 39 is introduced. We see the potential for considerable complexity. I am not sure from the wording of paragraph 25(2) on page 555—and nor is my hon. Friend—whether a rather simple reference to share in the "income profits" could be adequate to cover all the different possibilities that might arise from the complexity of partnerships.

My hon. Friend mentioned another element that needs to be taken into account. We are not talking only about large, professional partnerships, but about family partnerships. They can sometimes be relatively simple, but the ramifications of any given family can also make them more complicated, as the relationships inside a family can be laid on top of the partnership relationship. That is not true of more conventional professional partnerships.

The amendment could improve the Bill, and it would certainly make clear the different possibilities that could arise. The Financial Secretary faces a problem if the Government's case rests on the very simple concept of a partnership's income profits, as that appears to be inadequate for the purpose of the schedule. The amendment could therefore be of considerable help, as the aim is to clarify the Government's intention. It will also ascertain whether the words used in the Bill fulfil that intention, and whether the schedule can be implemented properly.

I hope that the Financial Secretary will say whether she thinks the distinction between income profits and capital profits is relevant. The same applies to the allocation—explicit or not—of those profits. Moreover, does she agree that the time factor must be relevant as well? I confess that I am not totally familiar with the concept of residuary allocation, but I can see that it could become crucial in some circumstances.

This apparently straightforward and innocent provision could contain a large number of traps and complications. We would not want to leave them unchallenged, and I hope that the Committee will be grateful to my hon. Friend for tabling the amendment, which seeks to clarify matters. I shall be interested to see whether the Minister can give us that clarification, or whether the matter will remain an unsatisfactory element in the Bill that requires much more examination at a later stage.

Ruth Kelly (Labour, Bolton West)

This probing amendment is interesting. It attempts to clarify the economics of a transaction, and I emphasise that the Bill's underlying principle is that the treatment of a transaction should be as transparent as possible. Moreover, our aim is to ensure that the treatment of taxation and stamp duty land tax follows as closely as possible the substance of the underlying transaction, and that it reflects the transaction's economic or commercial reality.

The correct taxable measure reflects the economics of the underlying transaction—in this case, the right to receive income from the land. When the land, and the right to receive income from it, is transferred, the tax follows that transfer of right. That is an example of the transparency principle at work. When the right, as shown by income, has been sold to the partnership, buying it back is another taxable transaction.

Therefore, I believe that the correct principle is enshrined in the schedule. An entitlement to capital profits does not reflect participation in the use of those land assets in the business of a partnership. In any event, arrangements could be entered into that meant that the capital profits of a partnership might never be realised. Although I understand that representations have been made on these issues, I would recommend to the hon. Gentleman that he withdraws his amendment.

Mark Prisk (Conservative, Hertford and Stortford)

Unfortunately, the Minister might have inadvertently forgotten a couple of elements. I mentioned the transitional aspect—the question whether the land was put into partnership after Royal Assent, or was injected into the partnership between 20 October and Royal Assent—in the distinction between income and capital profits, which my right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth) accurately highlighted. It is a crucial part of the issue, and I hope that the Minister will feel able to clarify that, either by intervening or by making a speech. I hope that she can enlighten us, if not today then shortly.

I take it from the Minister's reply that the Government have no plans to make adjustments or reflect the concerns expressed. Is that the case? She remains in her seat, so we take it that the Government have no plans to adjust the paragraph. The representations of the Country Land and Business Association and many others have much sense, so I am disappointed that she has not chosen to respond more positively. I hear from my right hon. Friend and a number of others a concern that not only have we ignored the question of income and capital, but the mix of the two is awkward. Surely the Minister will understand that in a family business—the obvious example is farming—the interplay between the capital assets and the profits from income must be recognised more clearly. At the moment, paragraph 25(2) does not achieve that.

I am fully aware that my amendment is by no means perfect. It has many elements that might create confusion if they appeared in the Bill. The purpose of this probing amendment was to draw from the Minister a clearer answer, but so far, unless she wishes to respond further, I have been very disappointed by her response. That is a great shame and unfortunately it suggests that the Government are deaf to reason. Given that there are, as I am well aware, a number of legal problems with my amendment, I shall withdraw it, by leave of the Committee, but I do so with the deepest disappointment that the Minister has not chosen to be more positive and more helpful in dealing with the issue. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, that the schedule be the Thirty-ninth schedule to the Bill.

Mark Prisk (Conservative, Hertford and Stortford)

We have had some very strong and useful interventions and discussions on the schedule as a whole—it is a very significant schedule—and I wish to consider the broader implications of the Government's tax policies on partnerships. The schedule covers transfers of land to partnerships, transfers of partnership interests and transfers of land out of partnerships, all of which are to be charged with stamp duty land tax.

First, we accept that stamp duty land tax should be charged where the relevant partnership is a property investment partnership, but trading partnerships should not be treated as though they were the same. The compliance burden on trading partnerships—particularly professional partnerships, which regularly change partners on introduction and on retirement—would be disproportionate to the tax collected.

Secondly, many professionals are concerned that consultations on partnerships have not accurately reflected the concerns of business. I have received many representations from professional bodies, and from professional practices and partnerships. Let me briefly quote but one from the practice, Grant Thornton, which says:

"We are particularly disappointed that the measures to introduce stamp duty land tax on partnership transactions have not been substantially revised. We understand that there is an anti-avoidance motive behind these measures, but a commerciality test could have dealt with this issue."

It concludes:

"Our view is that it is unacceptable for 'grapeshot' legislation to be introduced which penalises innocent gifts and commercially driven transactions, under the guise of preventing tax avoidance."

Our third concern is that the stamp duty land tax provisions have been introduced since last year's Finance Bill, and in a way that confirms the need for a single piece of legislation for stamp duty. Instead, the Government have adopted a piecemeal, ad hoc approach to their legislative programme. I shall quote but one organisation, of which I am a professional member—the Royal Institution of Chartered Surveyors. Its comments provide for me and for many organisations the best summary of the way in which the tax has been implemented. It states:

"If the Government had not hurried the implementation of stamp duty land tax, then the need for extensive, further SDLT legislation in three concurrent Finance Bills would have been mitigated and the tax law would have been better shaped, more transparent and less burdensome to the taxpayer."

That is the view of the professionals affected by the provisions, and it is shared by the Opposition and the country at large.

Eric Forth (Conservative, Bromley and Chislehurst)

I recognise that, where a measure brought before the House is aimed at tax avoidance or evasion, a difficult balance must be struck between consultation and a pre-emptive strike. Listening to my hon. Friend the Member for Hertford and Stortford (Mr. Prisk), and hearing what so many respectable and legitimate bodies and organisations have said, it strikes me that the Government have probably got the balance completely wrong; today's debates have reflected that.

Of course the Government must take a view. As the primary collector and dispenser of taxpayers' funds, they bear the main responsibility, but we in the House share that responsibility—a responsibility that I hope we have been discharging today and will continue to discharge by examining whether the Government are acting properly. When the Government have such a large majority, and in a unicameral environment—which is what we are in matters of tax and finance, because we do not have the safety net of the other place—we are responsible for ensuring that taxes are properly and fairly levied, and properly and fairly collected, and that evasion does not occur. I hope that that would be unarguable.

It is equally incumbent on the Government, especially one with such a large majority in this place, to make sure that what they do is reasonable and based on a knowledge and understanding of the circumstances. In today's debate—my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) should take the credit for this—we have tried to identify whether that process has properly been observed. From my brief and superficial participation in events today, I remain to be convinced of that. Indeed, I would go further and say that it does not appear to me that the Government have properly discharged their responsibilities. Surely they would want to make sure that their tax policies are seen to be fair and viable.

Mark Prisk (Conservative, Hertford and Stortford)

As usual, my right hon. Friend is giving a powerful exposition of the Government's weaknesses. Does he share my bemusement at the fact that the Government fill a 574-page Finance Bill with the aim of trying to close down tax avoidance, yet they make it so complex that it must encourage further such activity?

Eric Forth (Conservative, Bromley and Chislehurst)

That is always a difficult judgment for the Government of the day to make, and it was an argument about tax rates—if he can, my hon. Friend will have to cast his mind back to when we had penal rates of taxation—that encouraged the tax avoidance industry and caused many upper income people to flee the country or to employ expensive experts to avoid tax. We brilliantly found the answer by cutting tax to what was regarded as a fair and reasonable level, and, lo and behold, tax revenues went up. Of course, that argument is an eternal verity, and it still applies now.

Mark Prisk (Conservative, Hertford and Stortford)

We are getting to the heart of the point. The problem is a pincer movement. The Government are not only stealthily increasing the tax burden, but adding complexity. I think that it was Monsieur Colbert—I would be grateful if my right hon. Friend confirmed this—who decided that the best way of taxing a goose was to pluck the maximum number of feathers without it hissing. Am I right in saying that the current Chancellor is indeed trying to pluck the goose while generating the least possible amount of hissing?

Eric Forth (Conservative, Bromley and Chislehurst)

I do not often do this, but I am prepared to pay a reluctant tribute to the current Chancellor, in this case for his skill in implementing stealth taxes. After all, that is the modern expression for the phenomenon that my hon. Friend has just described. However, we will not go into that issue in detail because, as ever, Sir Alan, your extremely expressive face and eloquent body language warn me that, if I were to attempt to say much more about it, I would get into some trouble, and you know that I will go to any lengths to avoid that.

John Gummer (Conservative, Suffolk Coastal)

Will my right hon. Friend return to his point about fairness? Fairness is possible only if the tax system is clear enough for people to see why it applies to them. Is that not the fundamental explanation of why much of what is before us is so unfair?

Eric Forth (Conservative, Bromley and Chislehurst)

I am grateful to my right hon. Friend. Like me, he will have studied the schedule, and he will know that it is lengthy and complex, and that it is, sadly, occasionally opaque, as has been identified in the debate.

The schedule deals with the very difficult issue of partnerships, and we have considered the different sorts of partnerships that may exist, examined the complex relationship between income and capital, taken a sideways glance at implementation dates and dwelt very briefly on the rationale behind the dates set out in the Bill. My conclusion is that the Minister has been unable to satisfy us, try though she has, on many of those points.

I return to the point about fairness made by my right hon. Friend. Not only are legitimate outside interests unhappy about the direction in which we are being taken and about the fact that they feel that they have been inadequately consulted in many cases, but we are getting the sense that this very important measure is being introduced on the hoof. We get a sense of constant adjustment to the principles that are being applied in the details, and the impression that that will lead to the phenomenon on which he touched: a sense of injustice and unfairness.

Nothing could be worse in the world of taxation than that very feeling among those who are being taxed. We heard earlier from my right hon. Friend the Member for Wokingham (Mr. Redwood) that it is anticipated that the measure will yield an additional amount approaching £2 billion. That is a lot of taxpayers' money. When such moneys are involved, I do not think that we can allow the Chancellor to repeat the exercise that he carried out in 1997, when he skilfully removed £5 billion from the pensioners of this country, as he has done in every subsequent year. We do not want to see that repeated under the guise of schedule 39. We want a measure of fairness, transparency and, it is to be hoped, comprehensibility.

The other worry that has haunted this debate and that lurks behind the schedule is our old friends the tax lawyers. I use the word "friends" in the loosest possible sense. To the extent to which the Financial Secretary is unable to convince us, legitimate outside interests and the individuals from whom £1.9 billion more is apparently going to be extracted, and to the extent to which none of the arrangements is as clear as it should be or can be easily implemented, all we are doing is creating yet another opportunity for tax lawyers, whom I concede are a necessary part of our society, to grow rich on the back of schedule 39 and the £1.9 billion.

All in all, a number of points—sadly, few of them are positive, and too many of them are negative—have been raised in the debate, and we are left in an unhappy state. We are reaching the end of today's proceedings, which point the way ahead and should encourage outside interests to look even more closely at the provisions. Perhaps hon. Members on both sides of the House will take an even closer interest than they have hitherto in improving the Bill. Even if we cannot reduce the £1.9 billion extra tax burden that will be thrust on taxpayers, at least we can make the process more transparent and, if possible, fairer. That must be our objective.

My closing thought is that when the Conservative party is in government, we seek ways to reduce tax. I favour reducing tax evasion—avoidance is a different matter—but I hope that our aim is to reduce tax, not to increase it. I leave that thought with my hon. Friend the Member for Hertford and Stortford.

Ruth Kelly (Labour, Bolton West)

Stamp duty land tax was successfully implemented on 1 December 2003, replacing stamp duty on land transactions within the United Kingdom. One commentator has been quoted as saying that that increased the percentage of property deals on which tax is paid at the full rate from 40 to 80 per cent.

We have had a full consultation on the clauses and schedules before the House. Indeed, to provide suitable time for consultation on how stamp duty land tax should apply to certain transactions undertaken by partnerships where interests in land form part of the partnership's assets, such transactions were specifically excluded from stamp duty land tax by part 3 of schedule 15 to the Finance Act 2003.

Mark Prisk (Conservative, Hertford and Stortford)

On that specific point, if the consultations were so successful, why have most of the representations made to me by those self-same consultees been negative about the outcomes?

Ruth Kelly (Labour, Bolton West)

I shall go on to discuss the principles that inform schedule 39. People do not always like paying tax, and often argue that it should be levied in a different way from that considered appropriate by the Government and Parliament.

Following the consultation announced on 20 October 2003, the transactions will be brought within stamp duty land tax by the schedule. I have heard much talk today about fairness and transparency, which is exactly what the schedule is about. The schedule ensures that the stamp duty land tax treatment of partnerships mirrors the treatment for other taxpayers, and most people would consider that fair.

The schedule will apply the principle of transparency to transactions undertaken by and within partnerships, and will therefore equalise the tax treatment of land transactions undertaken by an individual and by a partner in a partnership so that neither one enjoys a different stamp duty land tax treatment compared with the other.

The charge will be on the proportional market value of any land forming or underlying these partnership transactions, and we have listened to consultees on that point. Market value is used for partnership transactions to replicate the bargain struck by an individual with an arm's length seller. The proportion is equal to the underlying change in ownership as represented by a partner's share in partnership income for transactions moving land into or out of a partnership or on the increase in share of partnership income for those transactions involving changes in partnership share. As that reflects the underlying proportional change in ownership, it is consistent with the transparency principle.

As a result of those measures, the commentator whom I referred to earlier has been quoted as saying that the number of transactions on which full duty is paid will rise from 80 to 90 per cent.

Geoffrey Clifton-Brown (Conservative, Cotswold)

On the principle of transparency, paragraph 24(6) defines net market value as market value less the loan outstanding. Does, or can, the loan outstanding include accrued interest on the loan?

Ruth Kelly (Labour, Bolton West)

I believe that the loan outstanding is treated as it generally is in tax legislation. If the hon. Gentleman wants an exact definition, I shall of course write to him with it.

For the reasons of fairness and transparency that I set out, I urge hon. Members to support the schedule.

Question put and agreed to.

Schedule 39 agreed to.

Clause 289 ordered to stand part of the Bill.

Bill (Clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and Schedules 1, 3, 11, 12, 21 and 37 to 39) reported, with amendments; to lie upon the Table.