Clause 72 - Lease premium relief

Finance Bill – in a Public Bill Committee am 3:00 pm ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

With this we will discuss that schedule 26 be the Twenty-sixth schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Clause 72 and schedule 26 limit lease premium relief available to a trader or intermediate landlord where leases are of more than 50 years’ duration. The measure will take effect if the lease is granted on or after 1 April 2013 for companies, or 6 April 2013 for individuals or partnerships. The change follows a recommendation from the Office of Tax Simplification that the lease premium relief regime was an area that could benefit from simplification. The aim is to simplify  the regime so that relief will no longer be available to a trader or an intermediate landlord who pays a lease premium on a lease that is deemed to be short because of the operation of rule 1. I will not go into the technicalities, as I am sure the Minister will explain those to the Committee.

The Chartered Institute of Taxation in its response to the informal consultation on the proposal pointed out that the documents relating to the rationale behind the change are not easy to locate. It said:

“There is no link to the text of the consultation on the HM Treasury or HM Revenue and Customs website.”

However, it continued:

“The justification for such a change is that, in HMRC’s experience, it is generally only used—where the landlord is not within the charge—to tax the time involved in applying the provision for both HMRC and tax agents and apparent disputes that can arise between landlord and tenant in the application of those rules.”

It went on to state:

“We do not believe the reasons for the proposed change have been fully explained and appear to indicate an element of discrimination between tax-exempt and taxable landlords for which we see no obvious rationale. To set the proposed change in context it would be helpful to have further information on all leases with tax exempt landlords (number and value), and the number and value of leases which take advantage of the relief to reduce the effective duration of the lease for tax. It would also be of assistance to know what proportion of the latter are considered abusive and why such abuse cannot be tackled with existing legislation.”

The tax information and impact note clearly indicates that the measure is one of simplification, with operational savings expected to HMRC and the Valuation Office Agency. It says:

“Initial HMRC operational impact is estimated to be less than £2 million resource savings. Includes a saving of 25 per cent of Valuation Office Agency specialist technical team resource.”

Will the Minister clarify whether, as the CIOT suggested, concerns have been expressed about potential abuse of the scheme? If so, what action has been taken to address those concerns? Does the Minister have the information and the figures that the CIOT requested in its consultation response? The tax information and impact note suggests that the number of businesses affected is unknown. It is difficult to know how effective a simplifying measure will be when no information is available about how many businesses it might affect.

Photo of David Gauke David Gauke The Exchequer Secretary

The clause and schedule remove lease premium relief where a long lease is treated as a short lease for tax purposes. The measure will simplify the complex area of lease premiums; it will help businesses reduce the need for costly and long negotiations; and it will protect tax revenue.

In 2011, the Office of Tax Simplification recommended lease premium relief as an area that might benefit from simplification, but it acknowledged that the relief aspect of the regime could not be reviewed in isolation and that a review of the entire regime would be required. The preferred solution of the OTS involves following the commercial accounts for tax purposes. However, given the current possible changes in accounting for leases, such a review must be one for the future.

The Government announced at Budget 2012 that they would consult informally on the potential implications of amending a complex element of lease premium relief  rules concerning the tax treatment of long leases as shorter leases, which is one of the areas that the OTS review highlighted. Analysis shows that that part of the regime is used only where the landlord is tax-exempt, so the premium received is not taxed. Relief is consequently obtained, often after detailed valuation and legal considerations, on a payment for which there is no matching taxable receipt.

Current law taxes a lease premium payment, made on granting a lease of fewer than 50 years, on the recipient landlord and relieves it on the tenant where the tenant is a trader or a subsidiary landlord. The premium would otherwise be a capital payment for tax purposes. Where the payment relates to a lease of more than 50 years, the premium is not charged to tax as income. However, the premium for a lease of more than 50 years is also treated as a taxable receipt in certain circumstances where the lease is deemed to be shorter than 50 years, and that is where the complexity lies. As a result of the clause and schedule, relief will no longer be available to a trader or intermediate landlord who pays a lease premium or a lease that is deemed to be short only because of specific tax legislation. The measure will be effective for leases that are granted from the beginning of the tax or financial year.

The hon. Member for Newcastle upon Tyne North asked how many individuals companies would be affected by the changes. We estimate that the number is not significant, and the consultation responses do not suggest otherwise. The consultation respondees did not supply any figures, although they were asked that question. She asked what proportion of cases were abusive and were not covered by the existing rules. The existing rules do not cover cases where the recipient is tax exempt. There are no checks and balances if the recipient is exempt; there is no figure to match the relief against.

As for CIOT’s comment that the consultation paper was not easy to locate, officials sent a copy to the CIOT. On the issue of discrimination between tax-exempt and taxable landlords, the tenant is not affected by the status of the landlord. If the landlord is tax exempt, he is not charged on the sum received; if he is not tax exempt, there is no change for him. I hope that that provides some clarification.

The clause and schedule address a complex area of lease premiums. Although the time is not right for a wholesale review of the regime, as requested by the OTS, an interim change on a specific complexity is appropriate. The clause and schedule will simplify a complex area of tax, will help business reduce the need for costly and long negotiations, and will protect tax revenues.

Question put and agreed to.

Clause 72 accordingly ordered to stand part of the Bill.

Schedule 26 agreed to.