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Chamber and committees

Finance and Constitution Committee

Meeting date: Wednesday, June 12, 2019

Agenda: Medium-term Financial Strategy, Structural Fund Priorities (Post-Brexit Funding), Additional Dwelling Supplement


Additional Dwelling Supplement

The Convener

Under item 3, we will take evidence on the additional dwelling supplement from Kate Forbes, the Minister for Public Finance and Digital Economy. The minister is joined by her Scottish Government official Ewan Cameron-Nielsen. I welcome our witnesses to the meeting and invite the minister to make an opening statement.

The Minister for Public Finance and Digital Economy (Kate Forbes)

Thank you for the invitation. I know that the committee is here to quiz me, but I am interested in seeing the committee’s scrutiny when it comes to ADS.

Looking back to the introduction of ADS, members will be aware that that was done partly in response to the UK Government’s decision to introduce the higher rate of stamp duty land tax and the obvious impact that that would have on the housing market and BGAs.

Although ADS has generally been successful in raising revenue, I recognise that, during the past few years, concerns have been expressed, particularly with regard to specific individual cases. I have two points to make about the calls for change, many of which I am sympathetic to. First, they highlight the need for us to think more generally about how we make changes to devolved taxes. Secondly, in terms of the changes that are called for, we need to think about how we balance specific individual situations with the potential for unintended consequences in a complex tax.

The Convener

The committee has heard a number of concerns, including in a useful paper from the Law Society of Scotland. Beyond those concerns, other issues have been raised about the operation of ADS and about house buyers who were not intended to be subject to the tax having to pay it, and then being unable to reclaim it through the process that is available to others. Is that the case? What does the Government intend to do about it?

Kate Forbes

When it comes to that particular example, one of the challenges that came through to the committee when it took evidence was the challenge around the evidence base.

Our main source of evidence is Revenue Scotland, which takes evidence that is applicable only to its requirement to collect taxes. The impact on the private rented sector, which faces a host of different challenges, has remained steady at 15 per cent. The SFC’s evidence suggests that any foregone revenue is being replaced by the policy objective, which is to encourage first-time buyers into the market. When it comes to supporting the build-to-rent sector, we have the exemption that was called for in the committee’s stage 1 report on the Land and Buildings Transaction Tax (Amendment) (Scotland) Act Bill to ensure that there is an exemption on six properties or more.

Our general analysis is that the private rented sector, build to rent, and the housing market more generally remain strong.


The committee received written evidence from an individual about a specific issue, in which Murdo Fraser had a particular interest. Is that the issue that you want to raise, Murdo?

Murdo Fraser

Yes. We could probably put the different issues that we raised during the round-table discussion into two groups. One group of issues is to do with the distortion effects of the tax. That relates to the issue that you talked about in the private rented sector, and is one basket of issues to be looked at.

Another group of issues concerns anomalies with the tax. One specific anomaly came up. Committee members will remember the Land and Buildings Transaction Tax (Amendment) (Scotland) Act Bill. The Government introduced the bill to deal with a specific anomaly that had been introduced by the original legislation, which I think everyone recognised was not an intended consequence of that legislation. The anomaly was that a couple, if they had bought a property in joint names but the previous property that they had occupied had only one name on the title, were not able to reclaim ADS and faced a penalty. That was not in the spirit of the original legislation. That anomaly was cured by the change to the legislation.

It has now come to light that another anomaly has arisen relating to slightly different circumstances, in which a couple who are living at separate addresses buy a property together. If only one of them has previously owned a property, they cannot reclaim ADS. Consequently, people who are, for example, not living together but who get married and move into a property that they own jointly are being penalised. I assume that the Government does not intend that to be a consequence of the legislation and that it did not set out to penalise people in that situation. Do you recognise that that is an issue? Do you have any plans to deal with it?

Kate Forbes

On the evidence about those inconsistencies, we look at a range of things, including my correspondence, where such issues have been raised. As I said, I am very sympathetic to a number of the issues that were raised at the round-table discussion and which are raised with me in correspondence. We start from that position, so the issue is then how we fix it.

There is a difference between the Land and Buildings Transaction Tax (Amendment) (Scotland) Act 2016, which changed the previous unintended anomaly, and the Land and Buildings Transaction Tax (Tax Rates and Tax Bands etc) (Scotland) Amendment Order 2018. The former changed the position in cases in which two people who are living together, only one of whom is on the title, go on to buy a property. However, in that scenario it is possible to point to a single property and deem that both buyers have disposed of their previous main residence when that was sold. I mention that because the legislation has a test about identifying a main residence that is then replaced. That change was quite a minor one. Although there are similarities between that and the anomaly that you are talking about, the latter goes right to the heart of the purpose of the legislation, which is about identifying a main residence that is then a secondary residence to a new main residence.

I am sympathetic to the individuals who find themselves caught up in the situation that you described, but making changes in that regard would undermine the main purpose of the legislation, which is about someone having an additional dwelling. There are a range of different scenarios with which you could illustrate the scenario—for example, one person is renting and the other owns a property, or two people own properties. Either way, there is a previous residence and then there is another new residence. Therefore, the new residence would be an additional residence. If the committee were to provide evidence of that issue being a problem, and were to recommend how to resolve it, I would be open to considering that. However, such a change would be a far more significant change to the main test in the additional dwelling supplement legislation than the previous amendment that was made.

That may sound like a cop-out, but I am making a specific point. When Revenue Scotland was before the committee, it talked about having more than 70 worked examples in its guidelines to provide advice and support for people in identifying whether they are eligible for ADS. Making changes to the legislation would make it more complicated. Where we need to make changes, we should make changes, but I would want to know how extensive the problem is and to be very careful that making changes would not take away the main test in the legislation, which would open it up to tax avoidance.

Murdo Fraser

Thank you. That was a very helpful answer. On your final point about the extent of the problem, I recognise that there might be only a very few isolated examples of what we are talking about. However, you will appreciate that, for the individuals involved, it might represent a very significant cost that they were not expecting. The previous example that I highlighted, which with other cases led to the 2016 act, involved a couple who ended up with an additional tax bill of £13,000. That is a huge additional burden for a young couple. I appreciate that the situation might impact on only a very small number of people, but for those individuals, it is a very substantial issue, so I ask you to reflect on that.

The committee has talked quite a bit about the appropriateness of introducing an annual finance act to allow us to sweep up such issues every year, instead of having to rely on new primary legislation either every year or an ad hoc basis. Would that be sensible?

Kate Forbes

As you will know, our consultation on the future of devolved taxes closed last week, and we are analysing the responses to it. I am very sympathetic to the idea of mopping up changes on an annual basis, but the matter would need to be taken forward with the close involvement of the committee and Parliament. With any such changes, there will always be a tension between scrutiny and efficiency.

The UK Government has been able to improve and amend the higher-rate additional dwelling element of SDLT in a number of ways, but we have made only this one change which still, although it was expedited, had to go through three stages and a considerable number of amendments at stages 2 and 3. I suggest that our legislative timetable does not allow for multiple changes of that kind.

Again, I say that I look forward to the committee’s report, but I think that there is consensus on where we could make changes to improve ADS. However, the question is what the process would be; ADS illustrates the need for a means of mopping up, in a way that does not absorb time unnecessarily, changes that are, although required, minor and agreed by everyone.

The Convener

That was quite useful, minister. Whether we would be talking about an annual tax bill or an annual care and maintenance bill—which are, in effect, the same thing—I suggest that even though required changes might be minor, the Government would still have very much to bear in mind the potential for unintended consequences if such a bill were subject to significant amendment.

Kate Forbes

Yes—I go back to my point about the need to weigh up scrutiny and efficiency against any such changes. We would want the changes to be of the kind that are frequently raised with me and other members by stakeholders—changes that appear to be quite obvious and which would improve the tax.

That is why I started off my remarks by setting out how ADS was introduced, because it illustrates my point. I am able to sit here and defend ADS as a good idea, but policy preferences aside, the fact is that our hand was forced and we had to do something because of the UK Government’s introduction of the higher-rate additional dwelling element and the impact on the market and on BGA. As a result, the process for introducing ADS was expedited, which illustrates how we are having to respond to external forces. It is far better to do such things well first time, but there should be some way of making it easier to change and improve things later, if we have to move quickly to do so.

Alexander Burnett

First, I refer members to my entry in the register of members’ interests with regard to construction.

I note that you said that Revenue Scotland is able to provide data only on sales that actually happen, but this is actually more about sales that do not happen and the impact on land and buildings transaction tax and other aspects of the sector. I appreciate that collecting such data is complex work, but is it not false to conclude that everything is all right just because the revenue figure has remained constant? Does that not miss out the sector’s potential?

How might we go about collecting better data? Should we recognise that this is an issue that is faced by the sector? Given the complexity of the sector, the data that is coming in and the impact on our economy, is this not actually part of a wider problem?

Kate Forbes

I will answer the question about data first, and then the question about the sector in general.

As I think I have explained, we rely on the data that is collected by Revenue Scotland. With ADS, there is a one-page form that asks for very limited information. I can supply the form to the committee if it would be of interest, but I point out that it does not ask the questions that would provide the qualitative data that we might be more interested in, such as whether the property is being used as a holiday home, is a buy to let, or whatever. We cannot necessarily demand these things through Revenue Scotland. It is that organisation’s business to decide what information to ask for.

I, too, have consistently asked stakeholders for specific evidence, but—I am not saying this to undermine it—a lot of that evidence is very anecdotal. That is fine, because there are individuals who are in difficult circumstances, and if we were looking to make a significant change that could have unintended consequences and open up tax-avoidance issues, we would want to know whether the problem is extensive and not just something on the periphery. That kind of evidence from stakeholders is of significant value: to an extent, we have to depend on it as much as we depend on the quantitative data from Revenue Scotland.

As for the impact on the housing market more generally, I certainly cannot claim that any success with regard to that market—or, indeed, the proportion of first-time buyers in the market—is down to ADS, nor can I say that it has been single-handedly responsible for challenges. Again, we look to SFC data as well as to responses from stakeholders for that sort of thing. As I said to the committee in January on the changes to land and buildings transaction tax, stakeholders regularly tell me that wider economic considerations are far more likely to be a factor in their decision making. If we look at the overall figures, we see that the private rented sector, which I appreciate is just one example, accounts for a steady 15 per cent of households.

I am interested in how we can better support the small to medium-sized enterprise house-building market, but I think that there are better ways of doing so than through ADS, although it is a consideration. At the moment, we have different conditions for SME applicants for housing support from, for example, the building Scotland fund, which has a lower threshold with regard to project size. That is probably a better and more flexible way of ensuring a thriving SME house-building market than tweaking ADS would be.

Willie Coffey

Is there a case for simplifying the information that is available to the public, so that people do not feel that they have to walk into a lawyer’s office to discover the consequences of, say, purchasing a house? Can we offer them something simpler or some helpful advice to assist their decision making before they embark on transactions?

Kate Forbes

Yes—and that takes us to the heart of this entire debate about how we ensure that the system is sufficiently nuanced to deal with specific individual circumstances, while reducing the complexity of the tax itself. The tax is complex because it takes into account personal circumstances rather than transactional values and so on. I know that Revenue Scotland has tried hard to address the issue by providing more than 70 worked examples, but that just shows how incredibly complicated it is.

The figures for inclination to reclaim ADS are actually more heartening. When you register your inclination to reclaim ADS, advice will be available at that point, particularly through Revenue Scotland, but if there are ways of simplifying things, I would be delighted to hear them.

The Convener

No one else has indicated that they wish to take part. I thank the minister for coming along and giving evidence, and I close the public part of the meeting.

12:14 Meeting continued in private until 12:17.