Our second item of business is to take oral evidence as part of our stage 1 scrutiny of the Land and Buildings Transaction Tax (Scotland) Bill. I welcome Alan Cook of Pinsent Masons; Elspeth Orcharton from the Institute of Chartered Accountants of Scotland; and Nick Scott of Brodies. Good morning to you all.
We looked at the behavioural response to rate changes across all taxes in the United Kingdom; I am sure that Her Majesty’s Revenue and Customs could provide that evidence. For example, when income tax rates change, there is an acceleration of income into a lower tax-rate period and a deferral of income out of a higher tax-rate period.
Mr Scott, you raised similar concerns in your submission, which states:
There is a difference between residential and commercial property. With residential property, decisions to move house are often dictated by personal drivers for the individual. For example, people move because they have had a new child, they have retired or their job has changed.
I agree with Nick Scott’s comments. It is also worth bearing in mind how the transitional arrangements will work for the introduction of LBTT compared with how transitional arrangements typically work when SDLT rates change, for example. SDLT rates can potentially change at the drop of a hat on budget day, if the UK Government decides to do that, but typically there is a carve-out from the effect of the rate change that says that any contracts that were in place before the rate change was announced will be subject to the old rates. That gives certainty to people who have already entered into commitments and contracts that the rates that they expected will continue to apply to them.
The Scottish Government has made it clear that it expects the tax to be revenue neutral, so there will not be any massive increase in taxes. Obviously, rates might change, but there is no great leap into the unknown, is there?
The aspiration is for the tax to be revenue neutral overall, but that means that there will be winners and losers. I am speculating on the precise policy that will underpin the rates that are finally hit, but if, for example, a decision is made to favour the residential property market and assist the lower ends of it, the difference will have to be made up somewhere else to achieve revenue neutrality, and it is entirely conceivable that that would be made up out of the higher end and commercial transactions. Investors and developers will be looking at that, expecting that that might happen and therefore expecting that they could end up with a higher tax rate than the current SDLT position would give them.
I go back to the ICAS submission, with which I opened. Paragraph 10 of that submission says that there should be
Let us go to the comment that addressed simplicity and removing the opportunity for tax avoidance. Tax avoidance arises when there are more and more reliefs and exemptions, some of which may no longer have the policy need that they had when they were introduced. Tax legislation often emerges as layer upon layer, and it is the interaction of many of the reliefs and exemptions that gives rise to avoidance opportunities.
One of our major concerns about the bill relates to sub-sale relief. It is probably worth explaining the effect that removing the relief might be perceived to have. The property industry breaks down into those who use property and those who are willing to invest in and develop property. A developer often bridges the gap between the people with capital who wish to invest in property and those who use it. The job of developers is to identify a building or a site that they think might have an end user and to join the two dots together—to get planning, make the thing financeable and build it, ensuring that it gets built to cost and on time and so on. Developers hope that they will make a profit at the end of the process.
I entirely agree with all those sentiments. When the bill was published, it was a serious concern of ours as well that sub-sale relief was deliberately excluded from the tax. It has been a feature of the tax system and the stamp taxes system from time immemorial. It underpins what is regarded as genuine commercial activity; it is not there for tax avoidance reasons.
Mr Scott, paragraph 14 of your submission, which is about proposed exemptions under the bill, says:
The position depends on the type of licence that is being referred to. Some of the concern is that there is uncertainty about what class or category of licence would qualify. For example, in a shopping mall or high street that has a variety of shops or units, most of them would be occupied under a lease, but there is no reason why a person occupying a unit could not be rented a licence to occupy the premises. That is as much a conveyancing distinction as anything else. There is still an economic activity in paying a sum of money for the right to use the premises and run a business from them. There is no logical reason for treating such activity differently under SDLT and LBTT.
The Pinsent Masons submission says:
We are in grave danger of falling foul of the law of unintended consequences by having a blanket inclusion of licences in LBTT’s scope. In our submission, we gave a couple of examples. For instance, group company occupation is a typical feature of a commercial lease that is granted to a company; it means that companies that are in the same group as the tenant company are allowed to occupy the premises.
Does anyone else wish to comment?
I do not think that there is anything to add.
That is fine. Not everyone has to comment on every question; if they did, we would probably be here all morning.
I cannot comment on the tax that would or would not be raised by that. From our perspective, an arbitrary distinction has been drawn that does not appear to have any policy driver behind it. The decision to structure a company as a Scottish limited partnership, rather than a normal corporate vehicle or anything else, will be driven by particular reasons of a business, family or anyone else for organising their affairs. It seems to us that there is no policy reason why, if an umbrella entity owns various subsidiary companies, transfers of property between them should be treated differently according to whether the parent is a company or an SLP. That was the driver for our submission.
Mr Cook, you comment on section 47 of the bill in your submission, which states:
Over the past few years, both pre and post-crash, much policy thought has been given UK-wide to ensuring that there is enough housing stock in the UK. Housing stock has taken a good knock over the past five years and it is therefore important that we allow every opportunity for residential development and the development of housing stock to take place.
Each of you has said that you want to ensure that the taxation rates are kept quite low so that there is no disincentive to invest relative to the rest of the UK. However, at the same time, each of you has called for exemptions and reliefs, which clearly, if implemented, would reduce the revenue. If the revenue that the Scottish Government is to receive from the tax is to be broadly neutral, surely that means that the overall rate needs to go up to cover all those exemptions. Incidentally, no one has quantified in any of the submissions what the impact of an exemption would be.
A lot of the things that we have talked about are not about looking for exemptions over and above what people are used to, although there may be examples of that. The things that we have talked about are cases in which it is proposed to expand the scope of LBTT beyond that of SDLT, such as by taxing licences, taxing sub-sales and taxing corporate-wrapper arrangements. We are talking about mitigating the effect of expanding the envelope of the tax rather than trying to improve the taxpayer’s lot as against the current situation under SDLT.
I understand that, but surely the overall rate will have to go up if the exemptions are implemented.
The provisions that we have commented on are in existing legislation, so they are included in the revenue figure. It is the revenue-neutral position to carry them forward, almost by definition. If the exemptions or reliefs are withdrawn, that will increase the revenue take—
Unless the rate is reduced overall.
The opportunity to do that might be provided. We are trying to inform the decision on the policy choices. The revenue will increase only if the activity follows. It is the activity consequences that we are getting to.
Indeed.
I repeat the point that the rate applies only if there is a transaction that triggers an LBTT charge. The concern is that, if the rules are set so as to discourage people from doing the transaction in the first place, there will be less revenue overall.
Indeed—it is a question of where the balance is to be struck.
Some of my points build on issues that the convener has raised already. I will start on what Mr Scott has just said, on the theme of not wanting to discourage development and on the idea that putting tax up will discourage development. First, how do Scottish land and building prices compare to those in England? I assume that they are lower than prices in London, but are they comparable to other places?
It differs. It depends on demand and supply. Some parts of some Scottish cities will be more expensive or valuable than those in an equivalent English city. Development is less about the absolute cost than about the return on the capital that is invested. In a sense, it does not matter whether or not an investment is made developing a property in central London, where residential values are far higher than they are in Edinburgh; it is a question of how much money is put in, how long the money is tied up in the project before a profit is crystallised and what profit will be generated by carrying out the development.
The tax part of that is very small, relatively speaking.
It depends on who is involved and on which part of the process they are in. As I said earlier, the groups or people who use the property generally do not want to invest their capital in it. They might simply be trading businesses—they just want to run a business from a shed or office or whatever it might be. The categories of investors that will have money to invest in the property include those such as pension funds. The developers are the engine in the middle. Their job is to try to marry those two sides and to drive the project. Being taxed through LBTT on the land value for that transaction is quite a material part of the profit that they might generate.
Is the result of that not just that they pay it? If someone has £1 million to spend and the tax is £50,000, and we make the tax £60,000 instead, does that not just mean spending £10,000 less on the actual building, to compensate?
It might, but it depends on whether or not it is possible to have that negotiation with the landowner, the building contractor and so on. We employ a lot of lawyers and we have a broad range of clients. We talk to them and we note their attitude and the perceptions that are created.
But your potential client cannot build something in Newcastle for students in Edinburgh.
These projects can take years of time, effort and speculation before they bear profit. Moreover, I point out that there are students in Newcastle, Manchester, Birmingham and everywhere else. If there are two ostensibly identical propositions but one is in a jurisdiction where the client in question will be taxed more than it would be in the other, you will inherently encourage it to spend its time where the net return from the exercise, which might well serve many beneficial purposes, will be greater. I am not here to defend developers making lots of money as some absolute thing, but such developments create accommodation that students can go into, construction activity and all the rest of it.
I agree with all that, but if I were that person’s accountant I would be saying, “Right—the tax is higher in Scotland, so just offer a certain percentage less than what you would pay in Newcastle.” I still do not understand how it will affect commercial decisions.
Some of this is about negotiation—ultimately, there needs to be a vendor who is willing to sell you a site for you to develop it—but feedback from clients suggests that a genuine issue is their perception of the Government’s attitude to what they do.
You mentioned the slightly related issue of hotels, which, as I understand it, are international concerns. Most of the submissions that we have received make comparisons with England, but what about Holland, Denmark or elsewhere? Presumably companies such as Hilton are used to dealing with umpteen tax regimes around the world. We are talking about the differences between Scotland and England, but I suggest that every European country is different.
Indeed, and we all compete in attractiveness for that international capital. All that we are saying is that you are potentially creating a situation in which setting up these businesses and investing in these premises will cost more in Scotland than it will in other parts of the UK.
How does the situation compare with other European countries? Do we know?
I cannot comment specifically on that, but each of those countries will have different regimes.
Does anyone know whether the UK is losing out or winning because of tax regimes around Europe?
Tables have been produced, mostly by the Organisation for Economic Co-operation and Development, showing the UK’s relative competitiveness compared with the rest of Europe. The difficulty is that they are at a very high level and distinguish between taxes on, say, profits, employment and capital and wealth. There are so many different tax systems and structures across Europe—and indeed beyond—that it is very difficult to have one measure of competitiveness. However, there are ways of looking at the issue and I am sure that, for a particular tax, something might be available. I will see what I can find.
It would be interesting to see the wider picture.
There are differential property rates or equivalents of stamp taxes across Europe but I am afraid that I cannot recount them off the top of my head.
It is worth making a positive point; I do not want to sit here and just complain about particular proposals in the bill. With LBTT, we have an opportunity to encourage particular types of development that the Government might wish to see. For example, a UK-wide income tax relief called the property renovation allowance encourages the regeneration of tired secondary buildings in areas that have been identified as disadvantaged. In the city centres of Scotland that qualify, we have seen that the creation of that relief and its targeting at specific economic activities has encouraged people who would not otherwise have spent their time pursuing those activities to do so. Hotels are one example of the kind of project that it encourages the financing and construction of.
You have taken me on to an issue that I was going to ask the next panel about. I will ask you folk about it now. Energy efficiency is given as an example of what relief is intended to help with, but the examples that you give are relevant, too. Is it better to give tax relief, or just to charge everyone the same tax, which keeps it simple, and then give separate grants for such purposes?
Our experience shows that tax reliefs encourage people to spend their time analysing and trying to make such projects work.
But are tax reliefs more effective in doing that than giving people a grant?
That is not something that I can comment on, but if it would help, I can give you clear examples of where projects have worked because—
I believe that relief helps. My question—which I will put to the next panel, as well—is whether a grant is better and more targeted than a relief.
As a starter, just for the avoidance of doubt, there is nothing wrong with people making a profit on activity. It is essential that people can do so.
That is absolutely right. The question is how we tax it.
The tax is a tax on the acquisition of land interests. That is what a land transaction is—it is the acquisition of an interest in the land.
Your argument is that if someone does that almost immediately in one go, only one lot of tax should have to be paid. If someone buys all the land, sits on it for 10 years and then sells it, they will be taxed twice.
That is right. No one would expect to be relieved of the tax in those circumstances whether they sat on it for a day or for 10 years because, as you said, they acquired the property in its own right. Under the current regime, they would not expect to benefit from sub-sale relief.
That was helpful.
I have a couple of questions arising out of the evidence thus far. First, I am intrigued by the tables of comparative international competitiveness to which Ms Orcharton referred. I think that she suggested that she would provide them to us. We look forward to receiving them. Before we get them, will she tell us what they are? Are they just measures of the tax levels or do they also set out the rates of activity in each country?
Gosh, you are asking me to summarise what is set out in about 20 pages of OECD analysis. However, the tables set out the rates country by country on an attempt at an adjusted and comparable tax base.
Will the tables tell us whether the tax rates in Denmark or Holland affect the decisions taken by Hilton, for example? Is Hilton not building in Denmark or Holland? Is it choosing to build somewhere else?
That is Hilton’s European strategy. I would be making a bit of a guess.
It is perhaps an unfair question, but the point that I am trying to get at is that, if we get a list of the taxation levels alone, it does not tell us much other than what the taxation levels are. Surely the measure of competitiveness is the effect of those taxation levels. After all, you are all here to give us evidence on how LBTT will affect decisions made by investors.
The short answer to that is yes, the tables contain data that is helpful, but they do not explain the full rationale of the decisions that are made.
The information will be useful, but I suspect that we might need to look at some other data to really dig into the matter.
I am sorry to interrupt you, Jamie.
That is one of the other challenges of the tables—the context in which they are seen. As we have said before, if we are examining a tax system, we have to examine how it integrates with the political, social and economic aspects of the country. We offer evidence on a particular aspect but, no doubt, you will apply wider considerations and consider the wider factors.
I am no expert on the relative tax rates of different European countries, but I know that the investment decisions that a company such as Hilton makes in different parts of Europe are based on an overall equilibrium that the company discovers in each individual country. Tax rates might be higher or lower in one place, but that might be countered by any number of other factors that result in the company being prepared to make an investment in that country. If we change one element of that overall equilibrium, we risk having an adverse effect on the investment decisions that such companies make.
Back to you, Jamie.
Thank you, convener.
I was saying that all that the policy memorandum says to explain why sub-sale relief has been excluded from the bill is that it underpins avoidance activity. That is the only justification that is given for excluding sub-sale relief. There is no attempt to suggest that the sort of economic activity that we have talked about and that benefits from sub-sale relief is inappropriate.
I think that yes is a fair synopsis of what you said.
I suppose that the starting point here, without getting too jurisprudential about it, is the question of what we mean by tax avoidance. There is a whole spectrum there. On the one hand, there is the right of every taxpayer to order their affairs in a tax-efficient manner, which I do not think anyone would dispute as a matter of broad principle.
I do not know whether the tax professionals that you are talking about are reasonably minded people, but I presume that that is what you were talking about when you said that some activity would be frowned upon. Let us focus on that. What is the activity that would be frowned upon?
With the SDLT, and with stamp duty before it, there was a bit of a tradition of people wanting to try to avoid it. When the SDLT was introduced, its raison d’être was to do everything possible to clamp down on the avoidance that was occurring under stamp duty. However, because that inheritance is there, there have been continued efforts in certain quarters to find ways to avoid having to pay the SDLT.
I am not really getting a sense of what that might involve. Will you tell us, without naming names—I am not asking you to whistleblow—the type of initiative that might be frowned upon, as you put it, by a tax professional?
I will give you an example of a loophole that has been closing in the past year or so: sub-sale relief was combined with the grant of an option to purchase the house from the person who ostensibly bought it. I do not want to get too far into the technicalities of it because I will probably get stuck in the mud and I do not think that you need to be terribly interested in the precise detail—
I am not sure about that. Surely we need to get stuck into the detail. If you are saying to us that what the Scottish Government is proposing, which is that there should be no form of sub-sale relief, is not correct and that elements of it should be allowed, the detail will be important, whether we like it or not. I might not understand it, but as long as it is on the record, that is fine.
If someone wants to buy your house, they find somebody who is prepared to co-operate with them to put together an overall scheme. The first person agrees to buy the house from you. As far as you are concerned, you are selling the house to someone and you are getting paid the price that you want, so everything is fine. However, the person who has contracted with you is agreeing to grant an option to buy the house, on certain terms, to a friendly party. The grant of the option, under the rules as they were before the loophole was closed, arguably constituted a sub-sale. Because it was a sub-sale, the purchase of the property in the first place did not attract SDLT. The option was granted on the terms that no SDLT was triggered by doing so, and there were mechanisms within the option documentation that would allow the onward sale of the property, if it were decided to sell it, in a tax-free manner.
Were people avoiding paying the tax in those circumstances?
I believe so. It was probably more common in England, particularly in the higher-value areas, where more is at stake. If you engage in aggressive tax planning, there is a risk that it will not work and that the tax authority will investigate your affairs, decide that you should have paid the tax and charge you the tax plus interest and, potentially, impose penalties for having done what it thinks was the wrong thing in the first place. Therefore, it has to be worth while engaging in it in the first place, which is why the schemes really only apply to higher-value properties. They were marketed primarily at property over £500,000, where the 4 per cent SDLT—
My home would not count then.
Neither would mine.
That was a helpful explanation.
You might argue that, but the reality is that there is no expectation around Scotland or the rest of the UK—that I am aware of—that there will be any change in the approach of HMRC, the Charity Commission or the UK Government to the definition of a charity. The law has stayed pretty stable since 16-something, if my tax history serves me right. I am therefore not sure that a worry about any change that HMRC might come up with is a cause for much practical concern.
I will come to that in a minute, but the point that I was making was not to do with the specific charitable test. In essence that is different, to a degree. Do not ask me what the difference is, but I understand that we have a different standard in Scotland.
There are very few differences, but yes.
The issue that I was concerned about was the fact that we cannot compel HMRC to say which bodies it currently understands to be charities. It might well say, “Here’s a list,” if we asked it, but the point that I am making is that we could not compel it do so, as we have no jurisdiction over it. Is there not a danger in that?
I am not sure that you would be seeking that. Would you not be seeking evidence from the body itself about its individual status? I think that your engagement would be with the body that would be seeking a charitable exemption, and that you would not need anything from HMRC directly.
That is helpful.
If it does not meet the charitable conditions, as set out in the Scottish charities legislation, it cannot register with OSCR as a Scottish charity.
You do not say that it cannot register as a Scottish charity; you say that it cannot register with OSCR.
My understanding is that it cannot go on OSCR’s register, which is the register of Scottish charities.
OSCR told us that those bodies could voluntarily register with it under—I think—section 14 of the Charities and Trustee Investment (Scotland) Act 2005. Is that news to you?
It would be, because my understanding is that any body could apply to register with OSCR, but it would have to clear a further hurdle in terms of the constitutional powers, purposes and aims before it could be admitted to the register.
But this involves a separate register. It is a register that is only voluntarily engaged in. Our understanding, from OSCR, is that those charities could register with OSCR.
That is not my understanding of the position, but I do not claim to be an expert on every aspect of section 14.
The submission from Brodies says:
The answer is much the same as the points that have been touched on already. You can see why, at a practical level, we would go to OSCR, because that is the body that we know and it will have done the testing for us. The point is that it would be for the charity to claim an exemption or relief and to justify why it meets the criteria. It strikes us that that is a better and more legitimate approach than to have a criterion that says that the charity must be registered with X, Y or Z.
To be fair, you have given two examples—HMRC and the Charity Commission—and I freely accept that we are talking about a minute number of instances, if any, but the circumstances could arise, so we had better get it right at the start. If organisations say that they are charities but perhaps do not fulfil the criteria, how will we check them? You said that they will have to prove it, but how will they do that?
That is a fair concern. I do not think that it is the biggest concern in the overall scope of the bill.
I accept that.
However, I take your point.
I understand that similar issues have arisen in the tax system at a UK level and HMRC maintains a list of bodies that are the equivalents to OSCR in different parts of the world, although not every part of the world has the equivalent of charity tax exemptions and reliefs for charities as countries have different structures. It may be that that approach could be followed. Under it, there is an exercise to be undertaken, however. It is an administrative burden for a Government or tax authority to do that work.
Okay.
I am afraid that I want to go back to sub-sale relief and tax avoidance. The bill has been generally welcomed by everybody who has come in to give evidence on the ground that it is much clearer and it simplifies things, yet when we come to the detail, there seems to be nervousness in each area that we might change things too dramatically and that business might be asked to pay too much, which would be off-putting. That nervousness about the bill has been a large element in your evidence today.
My observation would be that this is a great opportunity to simplify, to clarify and to sort out the distinctions between English property law and Scots law. If the drafting, as the bill proceeds, can preserve reliefs and exemptions in commercial circumstances where they support economic activity for a good policy reason, that is fine.
I agree. It is correct to say that the principles and aspirations behind the bill are supported fairly universally. Simplification is also supported—that is why, for example, the intention is to simplify the partnership arrangements, which are one of the most complex bits of the SDLT legislation. We are not talking about that today because we do not know what the legislation will look like for LBTT, but that is an example of an area in which simplifying the legislation is supported across the board. However, there is a distinction between simplifying the legislation and cutting out bits that taxpayers feel are important in underpinning economic activity.
Nobody wants to discourage business, but thinking about entrepreneurialism and so on, is the tax really a priority in terms of what makes companies develop business opportunities with pieces of land or properties? It is not the first thing on their minds, is it?
It is pretty high up in the minds of people in the property industry. SDLT is quite a straightforward tax in the sense that it is pretty easy to see at a simple level what percentage of the price that you are paying for land will be creamed off in tax through SDLT—it is 4 per cent at the top level. To give a comparison, when stamp duty was replaced by SDLT, it generated a vast amount of heat in the property industry, and a vast amount of interest. That is indicative of the high profile that stamp taxes—including LBTT—have within the property industry. Anything that is seen as a significant change to the rules will be quite high profile in the minds of people in the property industry.
It also depends on which participants in the property industry we are talking about. For someone who is thinking about buying a house, the LBTT rate might not be the biggest determining factor in whether they do that. The rate will not necessarily have a bearing on where they choose to live or which property they go after. The LBTT rate might also not be the most important determining factor for an investor who is buying a £50 million office block. However, uncertainty about what the rate will be can be a discouraging factor.
There was a bit of a stushie when stamp duty changed to SDLT. What was the outcome? Were many of the concerns realised? Did business stop? Was there a dramatic change in how people bought property or developed commercial ventures?
Life always goes on, and commercial activity always goes on. When SDLT was coming in, just to pick one relevant example, sub-sale relief was not initially a feature of the SDLT legislation, but there was such concern about the whole thing that it was accepted that sub-sale relief would be a feature of SDLT. I am not suggesting that history will repeat itself—although I rather hope that it will—but that is an example of a level of concern being generated and of the tax authorities or the Government of the day accepting that an issue is genuine and accepting the argument that an impact would be felt in relevant cases.
The authorities listened, but they made so many exemptions that their tax collection regime has been faulty for quite a long time, which has involved millions, if not billions—quote, unquote.
The SDLT legislation is not exactly the finest example of parliamentary drafting—it is unclear and technical. Tax legislation that is unclear and technical lends itself easily to tax avoidance, because people can pick many potential loopholes in it. That happened with SDLT.
The tax rates and bands are due to be published in September 2014 and the tax is to go live in April 2015. In the view of your organisations and the people whom you speak for, when should the tax rates and bands be published?
My perspective and that of our client base is that the sooner that happens, the better. If specific rates cannot be published, guidance about the intentions and an indication of the top rate would be welcome. As I have said, the issue is uncertainty in buying a property today and not knowing what the value will be once the rates are announced, because the rates will affect the value when the property is sold on. That discourages people from investing and affects their ability to make sane and rational decisions about investing in property.
I echo that. I understand that it is proposed that the bill be enacted this summer. ICAS has always taken the view that it is for the Parliament to enact what it intends should happen, but I must admit that we have an intellectual problem with a tax being introduced without the details of its structure being set out as the bill is considered. I completely understand that rates might need to be flexed according to the perception of the revenue that would be raised, but key decisions of principle will be in the act.
I agree. As I said, by virtue of the way in which the transitional arrangements will work for the introduction of LBTT, contracts are being entered into and deals are being negotiated now that will be subject to LBTT because they will complete post April 2015. The people who are entering into those arrangements do not know what tax they will pay on the transactions. One might argue that, as LBTT is intended to be revenue neutral overall, the amount of tax might be expected to be roughly in the same ballpark as would be expected under SDLT. However, it may be that the tax on higher-value transactions and commercial transactions needs to go up to compensate for a favouring of the residential market. That might end up being the case to a greater or lesser extent, but the point is that we do not really know. Investors and developers do not know to what extent they might be expected to shoulder a greater tax burden, and that produces some uncertainty. Therefore, any guidance or indications that can be given now as to the broad direction that the balance will take would be very helpful for people.
We have had a lot of discussion on sub-sale relief, so my questions on the issue will be brief, but I want to follow up one point.
The reason why sub-sale relief under SDLT has provided such rich pickings for the tax avoidance industry is that it does not work in the same way as other reliefs. People do not really have to claim sub-sale relief. It just disappears under the radar because it involves a disregard of the first stage in the sub-sale process. Other reliefs need to be claimed by submitting a return form and ticking a box that says that a particular relief is being claimed, so the transaction is firmly on the radar and it is open to the tax authority to investigate whether people are really entitled to claim the relief.
Do other panellists have similar thoughts?
I agree. It is perfectly within the capability of the draftsman to do a far better job than the combination of reliefs that currently sits in the legislation. Other pieces of legislation use, for example, targeted anti-avoidance provisions and bona fide commercial reasons tests.
Often, it was not so much sub-sale relief itself as the combination of sub-sale relief with other reliefs that gave rise to many of the concerns that were raised. I do not think that there is a fundamental problem with including a sub-sale relief that will have the effect that we all want it to have and encourage the economic activity that we have all been talking about.
I have one final question on sub-sale relief—unless Michael McMahon has lots of questions on the same issue. Would the amendment that the UK Government is about to introduce be a good model to follow, or might there be some flaws in that approach as well?
The UK Government’s proposal involves people claiming sub-sale relief in the way that I described, which would mean their claiming it just like any other relief, where a return has to be submitted, so the transaction is on the radar. The UK Government has combined that with several pages of legislative drafting to define in intricate detail all the possible circumstances that it can see in which the relief might be used, not used, abused and so on. In the interest of trying a simplified approach, I suggest that what is missing in that approach is the impact that a general anti-avoidance rule has on attempts to manipulate the rules inappropriately.
Thanks for that. That leads me on to the comment that was made a moment ago about SDLT not being the finest example of parliamentary drafting. The Pinsent Masons submission suggests that, to some extent, the bill copies some of those problems. An example is given—which I will not even attempt to describe—about the relationship between section 10(5) and section 37, but the submission also makes the more general comment that that and several other points in the bill will need to be clarified by guidance. That is one concern.
Section 67 allows for reliefs and the like to be adjusted through subordinate legislation, which will be subject to parliamentary process. I will not comment on whether the affirmative or the negative process is appropriate for individual cases, other than to say that it is a common feature of tax legislation to provide a facility for making fine adjustments without having to wait for primary legislation. I suppose that we take the view that, whether the affirmative or the negative process is used, the checks and balances in the parliamentary process should ensure that there is no abuse.
ICAS is more worried about the secondary legislation point.
Yes. Perhaps I am worrying but, as I read the bill, the powers that are being taken relate to the structures of the tax in terms of rates and bands—I completely accept that an adjustment to make the rate 3.5, 3.6 or 3.7 per cent would be within the normal budgetary process that we might expect—but they also extend to all the reliefs and exemptions. We have spent a considerable amount of time this morning discussing reliefs and exemptions and whether we should or should not have them. The ability to make changes by regulations to what has been perhaps the biggest area of discussion seems slightly generous.
That is useful, although I can think of the counterarguments.
I found a few examples as I read through the bill, but my point is more on the principle. If the bill is to be Scottish legislation by the Scottish Parliament, I wonder why it has definitions that we do not control. The Corporation Tax Act 2010 is not controlled by the Scottish Parliament. If a change in the definitions in that act was enacted by the UK Parliament, that would change the impact of the LBTT legislation without the Scottish Parliament doing anything. It seems perfectly acceptable for some of the definitions that are not controversial simply to be copied in their current form. That would make them part of an act that the Scottish Parliament controls rather than part of something that it does not control.
I am sure that you will do this, but it would be useful if you suggested amendments for stage 2 on a lot of the points in your submission. That is certainly true of the Pinsent Masons submission, which has a lot of detail that is appropriate for stage 2.
That would certainly be helpful. The detail on the point is in our written submission. It is probably fair to say that there has been a general pushback from the property industry on the notion that someone will not be able to register their title until they have not only submitted their return but paid the tax, whereas at present people have to submit the return, but they do not have to pay the tax.
Okay. I will not go into licensing and charities except to ask two brief questions. Nick Scott gave the example of licensing a music gig for a night, which rather surprised me. Are you suggesting that that will somehow be caught by the bill?
That is our reading of the legislation. There is a concern that removing the exemption of licences from LBTT will accidentally sweep into LBTT all sorts of things that to date have not been covered by SDLT. I gave my example to ask whether that is what is intended. There are more meaningful and legitimate examples to concern ourselves with, but we need to be clear about what the intention is.
Thanks. Finally, on the issue of charities, into which I will not go in great detail, I was intrigued by the reference to Scottish Natural Heritage in the ICAS submission. I did not quite understand the reference.
Scottish Natural Heritage has charitable status granted by HMRC, but it does not meet the conditions of the Charities and Trustee Investment (Scotland) Act 2005 in order to be recognised as a charity in Scotland by OSCR. If the LBTT bill applies only to properties acquired by bodies that are approved by OSCR as Scottish charities, SNH’s situation will change. If it acquires land in a transaction under SDLT, it is within the charitable exemption, but that will not be the case under LBTT.
I find that really interesting, because I did not realise that that was the case. It opens up the question whether lots of bodies that are registered with HMRC are in the same position as SNH in that regard. I do not know whether SNH has tried to register with OSCR or on what grounds it cannot register.
My understanding is that there is a particular provision in OSCR that has something to do with ministerial control.
That is true.
My understanding is that that is likely to be the test that is being failed.
I did not think that Scottish Natural Heritage was covered by that.
I am not aware that a huge number of charities are involved in that way, which could lead me to conclude that you will not cause a big problem if you do not include them. However, it is sometimes useful to think of examples and, if there are not a big number, ask whether we should just include them. Nevertheless, the current policy decision is as I have stated.
Okay. That is interesting—thank you.
I apologise for not being in my place when you kicked off the meeting, convener.
That was pointed out initially as an inconsistency between the policy memorandum and the bill. I was not sure whether the inconsistency arose from the SDLT wording being cut and pasted into the bill as something that would be revisited along with, for example, the partnership rules. I forget whether the trust rules are being looked at as well. I was not sure whether that inconsistency would be picked up as the bill went through the parliamentary process.
Okay. I think that we will need to get clarification of that, convener. The issue has not been raised before, so I thought that it would be interesting to see whether it needs to be addressed.
Okay. Thanks very much for that.
We continue our oral evidence session on the bill. I welcome to the meeting Elaine Waterson, from the Energy Saving Trust, and Chas Booth, from the existing homes alliance. We will not have opening statements and will go straight to questions. I may as well kick off—I usually do. I will not ask a lot—[Interruption.] Of course, I would get on a bit quicker if the deputy convener did not heckle me. [Laughter.]
Thank you very much for the opportunity to give evidence. I want to clarify that I am giving evidence on behalf of the existing homes alliance, which is an alliance of lots of different organisations. I work for the Association for the Conservation of Energy—ACE—which is a trade association. Our members are companies with an interest in energy efficiency and are major manufacturers and installers of energy saving equipment. We are members of the Scottish fuel poverty forum, the existing homes alliance—under whose remit I am giving evidence to you—and Stop Climate Chaos Scotland.
Yes. Chas Booth is absolutely right. We know from the research that we have done that people say that energy efficiency and fuel bills are really important to them when they make decisions about purchasing properties, but when it comes down to it, that is not the case. Other things are much more important to them, such as the location of the property, the size of its garden and the number of bedrooms that it has. Energy efficiency makes very little difference when people purchase properties.
I am interested in pursuing the detail of that. You have both said that there should be reliefs. The Energy Saving Trust’s submission says that the bill should include
As I said, we accept that perhaps there needs to be more discussion about how it could work. The existing homes alliance has made the specific proposal that the rebate would be based on the energy performance certificate band. For example, a property rated A or B might receive a 50 per cent reduction in the levy or tax that would be due. That would reduce to, for example, 30 per cent for a C-rated property and 20 per cent for a D-rated property, and there would be no reduction at all for the least energy efficient properties. We have done research that estimates that the impact could be between £80 million and £170 million if reliefs alone were introduced.
Say an MSP decides to buy a house in Edinburgh. They might have decided to buy it because they might have a good salary and all the rest of it, and it is likely to be energy efficient. A young person who is starting out may be on a low income. A couple of weeks ago, my assistant bought a house that was built in 1898. Surely what you propose would have an adverse impact on people at the lower end of the income scale rather than people who have money. The proposal would be regressive in some ways in respect of people’s incomes.
I agree that it would have that effect if it was introduced in isolation. However, we have the benefit of the Scottish Government’s excellent energy assistance programme, which provides grants to people in fuel poverty. The Scottish Government will soon introduce the national retrofit strategy, which will provide grants to improve energy efficiency and for other measures. There is also finance from the UK Government’s green deal, which people can use to install energy saving measures in their homes at no up-front cost. In the context of all those measures, including the Scottish Government’s boiler scrappage scheme and the many other initiatives to promote energy efficiency, the overall impact would not be regressive—it would be quite progressive.
I agree with Chas Booth. The Scottish Government has indicated that it is seriously considering regulating energy efficiency, possibly from 2018. Getting people used to upgrading their home’s energy efficiency at the point of sale is an important precursor to introducing such regulation in future.
Is there not an issue about whether the cost of bringing a property up to those standards is higher than the amount that people would make on the relief?
Yes, I think that that is true. Any relief will be an incentive, but it will not necessarily offset the entire cost of the measure. That is the purpose of the green deal finance and the national retrofit strategy. Someone who is in fuel poverty and who is eligible for various reliefs will get lots of measures for free under the Scottish Government’s national retrofit strategy. Those who are not eligible to get those measures for free can still get green deal finance, which will allow them to install energy efficiency measures at no up-front cost. The up-front cost of energy efficiency measures has been a significant barrier in the past, and that is part of the problem that the green deal seeks to address. The benefit of an energy efficiency relief on the land and buildings transaction tax would be an added encouragement.
I do not want to hog the session, so I invite colleagues to ask questions.
You might not want to hog the session, but you have already asked some of the questions that I wanted to ask.
You always say that.
The answers that have been given allow us to ask for a bit of further explanation, however. I refer to the existing homes alliance’s specific suggestion about properties that are sold, which is that
I go back to my previous response. We accept that there might need to be some discussion about the detail of our initial proposal and are happy to discuss with Scottish Government officials whether such levels are appropriate. Of course, the greater the rebate or relief you give, the more impact it will have.
That tallies with previous evidence that we have heard. I suppose that the advantage of your proposal is that every home put up for sale will have to be rated.
In terms of people wanting to take up the offer?
In terms of whether it would be an incentive for people to buy and sell homes.
The only research of which I am aware is UK-wide work that we did about eight years ago and which is therefore quite dated. We spoke to householders about possible reliefs linked to stamp duty land tax and found that they were fairly enthusiastic about the idea. I think that something like 26 per cent of householders with unfilled cavity walls said that they would take up such an incentive. However, as I said, that is quite old research, which was based on specific rebate levels.
Which were what—if you can remember?
I can, but I should caveat my response by pointing out that we were encouraging people to install cavity wall and loft insulation. Now we would be looking more at solid wall insulation, which is much more expensive and disruptive to install. We had suggested something like £300 to encourage the installation of loft insulation and something like £500 for cavity wall insulation, but that included discounts that people would already get from their energy suppliers for installation.
The Scottish Government’s consultation found that two thirds of respondents wanted an energy efficiency rebate. That suggests that consumer demand exists for such a measure.
I am not necessarily saying that this is my perspective on the matter. I have to say that I was surprised by what we were told. However, the cynic in me would say that it is easy for people to say that but, when push comes to shove, how much of a priority will it be? That said, you seem to accept the point and are looking at how we can make it a priority.
If people know that regulation is coming, they might see this as a really good opportunity to look for support from an incentive to get something done instead of waiting until the regulation kicks in and finding that the big incentives are not available any more.
I note what appears to be a slight contradiction in paragraph 11 of the existing homes alliance’s submission—although to be fair I think that you have posited it as a contradiction with your use of “Alternatively”. You say that the introduction of your proposed relief scheme
It is important that we develop an energy efficiency premium for housing to ensure that energy efficiency itself rises up the list of factors that people take into account when they buy properties. We have suggested two possible ways of doing that. If there is a tax relief, that property becomes cheaper than it would otherwise have been; it is, however, possible that the seller will want to reclaim some of that, especially if they have invested significantly in the property’s energy efficiency. I do not see that as a problem as long as energy efficiency rises up the list of factors that people take into account. If a seller is more likely to invest in energy efficiency because they think that they can get a marginally higher sale price, that is a good thing. It is an incentive for them to invest in energy efficiency.
Does that not wipe out any incentive for the buyer through the reduction in stamp duty—or what will be LBTT?
The buyer will have a number of incentives for purchasing that property, not least of which is the fact that their fuel bills will be much lower.
But that comes back to the point that I think we have all accepted, which is that that does not seem to be a priority at the moment. I have to be honest with you—I did not consider energy efficiency when I bought my home and the evidence that we have received is that other people feel the same.
Indeed. Anyone who says that they can predict where fuel bills are going to go is on to a loser, but there is no doubt that they will be volatile in future. In order to protect themselves from that volatility, sensible home owners will become more and more aware of the energy efficiency of their properties. You might not have looked at your house’s energy performance certificate when you moved in, but I would hazard a guess that you will start to look at these things when you get your next fuel bill and find it significantly higher than you expected. People who are buying properties will become increasingly aware of these issues as fuel bills increase. If our proposed relief scheme were to be introduced, it might prove to be a significant factor in people’s calculations.
Thank you.
In general and in principle, I am sympathetic to the idea, simply because I realise that our existing homes are a massive problem for our climate change objectives, and I think that the proposal is worth taking seriously. However, we need to accept that it will have revenue consequences and that, if we are going to take that route, we will need to be absolutely sure that it is targeted on the right actions. I suppose that that is what I am interested in exploring.
Thanks. [Laughter.]
However, I might have a problem if the person who bought it from you also got a premium; after all, they did not take the action. If we put the proposed relief scheme in place, should it be focused on recent actions—or indeed the kind of prospective actions that the Energy Saving Trust focused on in its research—rather than something that might have been done 20 years ago? Why should those sellers get the premium? In other words, should the relief be focused on the property’s rating or on the actions that have been taken to deal with the problem?
I see where you are coming from, but I do not have an immediate answer to your question. I can consider it and discuss it with colleagues and then come back to you with a response.
But the Energy Saving Trust research really focused on the buyer doing some work. Is that idea still attractive?
It is, in principle, because we would not want to pay people who have not done the work. We want to use the tax system to encourage people to do something; that makes sense. However, since we did the original work, the wider policy environment has changed. As Chas Booth said, we now have the green deal, and the liability for that will stay with the property. The people moving into that property will have to carry on making the repayments on that loan through their fuel bills. That changes the situation slightly and so it needs more thought.
I am not sure whether your original proposal would have meant that there would be a rebate after the work was done or that a person who said that they were going to do the work would therefore not have to pay all the tax in the first place. I am not sure which it was. Either way, it leads to my next question. How does your proposal differ from just giving someone a grant to do the work?
When we spoke to householders, we found that they felt differently about taxes and grants. People got quite excited when they were talking about tax and liked the idea of avoiding it. They were more keen to do something if they believed that, rather than getting a grant, it would mean that they could avoid paying tax.
Was that the original proposal? Were you basically saying that people who did the work would not have to pay all the stamp duty?
Yes. The buyer would undertake the work and they would get a stamp duty rebate at some point in the future when they had proved that the work had been done.
I just want to check the figures from the existing homes alliance. I do not see them in the paper but you gave them verbally. What did you think would be the cost of your proposed relief? You gave a range of figures, but can you remind me what the cost was?
I apologise. The figures are not in our evidence to the committee; they are in our response to the Scottish Government’s consultation.
That would be helpful. I thought that those were the figures that you gave. I ask because, according to the financial memorandum, the receipts in 2010-11—the most recent set of figures—for residential properties in Scotland were £165 million. Even if the cost is £80 million, which is at the lower end, the proposal would effectively chop in half the amount that is collected. It would be helpful if you could revert to the committee and say whether that is an overall figure or an annual figure.
I will check that and get back to you. However, I stress that that is one proposal that we have made as the basis for a conversation; it is not necessarily our recommendation. An alternative would be a revenue-neutral approach that included a reduction for the most energy efficient properties and an increase for the most energy inefficient properties. We recognise that perhaps that might be more attractive to the Scottish Government, particularly given its desire for a reliable income from the tax.
Following on from Malcolm Chisholm’s questions and his observations about who benefits, do you agree that a tax allowance would be the least attractive way of realising our ambition for houses?
Given that new build represents such a small chunk of the overall housing stock and the majority of carbon emissions are from existing homes, if we are looking at how the tax system could improve energy efficiency, it makes sense to focus on existing homes. That is not to say that a system could not be developed that would encourage improvements across the board, from G-rated homes through to A-rated or zero-rated new-build homes.
I will expand on Elaine Waterson’s point. Over the past six months to a year, energy companies offered a lot of cavity wall insulation for free and a number of people did not take that up. There will have been a number of reasons for that. They may have been unsure about what they were being offered; they may have thought that the deal was too good to be true; and they may have had concerns about the technical aspects of installing cavity wall insulation, despite the fact that those concerns have been comprehensively addressed and cavity wall insulation is no longer considered to be a risk to the property, as long as it is properly surveyed beforehand.
I will risk going over the same ground a little bit more, but this is the area that interests me. I asked the previous panel of witnesses about it, but they could not answer me, so I thought that I would ask you.
As I said before, we need a range of policies. There are grants available at the moment, but recent work by WWF Scotland suggests that we need increased investment in energy efficiency. That should probably be in the form of increased grants for a wider national retrofit programme, for example.
We have limited money, so we have to choose priorities—not us personally, but the Government. It would be nice to provide relief on council tax, this, that and the next thing, but where will we get most bang for our buck? Are you totally convinced that an energy efficiency rebate is one of the best places to put it?
I am convinced that it is an important place to put it. We must bear in mind the fact that moving home is the point at which people do not care about energy efficiency; it is really low down on the priority list. An energy efficiency rebate could help people who would not otherwise do work to improve the energy efficiency of their home to undertake it. It would reach people who are not being reached at the moment.
It would surely also miss a lot of people. I have lived in my flat for 23 years and have no plans to move, so it would be no incentive to me at all.
Absolutely. I do not know the figures—you probably have a better handle on them than I do—but a relatively small proportion of people stay in their homes for more than 20 years. The majority move before that.
Nevertheless, we are talking about quite a long time before some people would get any kind of feedback. The other thing is that I live in an estate with 270 flats, none of which is worth £100,000. The measure is of no incentive at all if the house is worth less than £180,000, is it?
That is why we need a range of policies. It is why we need the national retrofit programme and still need the supplier obligations. Those measures catch the people who would not be caught at the point of home sale.
Your question was where we would put your £200 million—
It was £20 million.
Oh well, perhaps I was being a bit more optimistic.
I take that point.
I will take off my existing homes alliance hat and put on my Association for the Conservation of Energy hat. Obviously, the existing homes alliance is concerned with existing homes. New build represents a small percentage of the market, but it is the easiest part to get right.
Can I confirm that we are talking only about residential properties and not about any relief for commercial properties?
Yes.
You said that your scheme would be progressive but, looking at the figures, I have to disagree. Under SDLT, someone who buys a house for £100,000 does not pay any stamp duty. Under your incentive scheme—your A, B, C, D scheme—they would gain nothing, but someone who bought an A-rated house for £200,000 would save 50 per cent; in other words, they would save £1,000. Someone who bought a house for £2 million would save £87,500, which is a big tax relief, given that such a person is not likely to burn much more carbon than someone who buys a house for £100,000 and who gets nothing. Your proposed system appears to be highly regressive. Although the figures for LBTT will not be the same as those for SDLT, the wealthiest people who buy the biggest houses must be the ones who will gain, however you design the system.
The Scottish Government’s grant scheme—the energy assistance programme—already exists. From memory, the Scottish Government has committed around £65 million to it in the current financial year. Going forward, that will become the national retrofit strategy. Money has been committed to that in the budget. Eligibility for that existing scheme is specifically related to the benefits that a person is on, so the poorest people will be eligible for 100 per cent grants for a lot of this.
For homes that were valued at a level at which LBTT did not have to be paid, there might be ways of including them in the scheme and giving them a rebate anyway. You are frowning.
Yes, but that would cost money. The issue is that the bill is to be revenue neutral, but you are saying that we could have rebates and grants in addition to what is already being done. It is clear that that would cost more, which would have to come from other areas of the Scottish budget.
Absolutely. It would cost more.
Of course, there is also green deal finance. Those people who have an income can apply for green deal finance, which allows them to install such measures at no up-front cost. Those who are in most need will be able to apply for the existing programmes—the energy assistance programme and the national retrofit programme—while people who are not eligible for those will be able to apply for green deal finance, which will give them access to such measures at no up-front cost.
Okay.