Retailers rail at '3,000%' hike in duty

Britain's largest retailers have lashed out at plans to reform stamp duty that they claim could lead to a tax hike of at least 3,000 per cent.

The British Retail Confederation (BRC), which represents companies such as Marks & Spencer, will this week write to the Treasury to warn that the little-known Inland Revenue proposals could endanger hundreds of UK businesses.

The BRC has said that, if implemented, the stamp duty bill for a medium-sized retailer would rise from £85,000 to nearly £3m.

David Stathers, head of property at Boots and chairman of the BRC's property committee, said: "The implications are very serious. This will place a huge tax burden on small and medium-sized retailers – companies that support our communities."

The Revenue wants to close a number of loopholes that allow property companies to buy buildings without paying the full 4 per cent rate.

As part of this, the Revenue wants to change the way companies pay the duty when leasing property. At present, they pay tax based on the first year of their lease. It is understood the latest proposals would force them to pay the duty across the entire length of the lease, and at a higher rate.

Philip Martin, a tax expert at Marks & Spencer and a member of a committee invited by the Revenue to examine the reforms, said: "The Revenue wants to prevent companies avoiding paying the duty, which is fine. But the leasehold proposals are like using a sledgehammer to crack a nut."

There are also worries that the proposals could inadvertently tax other businesses which are not directly involved in property trading.

One area is the Private Finance Initiative. Tim Stone, chairman of the private finance group at KPMG, said: "There is a real danger that, as drafted, stamp duty could apply to the PFI. This would be a complete administrative burden and would further compromise the PFI in the current debate. The Revenue needs to think through the full range of consequences to make sure there are no unintended economic effects."

On top of this, the Confederation of British Industry (CBI), headed by Digby Jones, is worried that the Revenue's attempt to close loopholes could create an inadvertent "takeover tax".

The tax dodge of choice among property groups is the use of specially formed company shells to trade properties. Stamp duty on company sales is just 0.5 per cent, against 4 per cent for buildings worth over £500,000.

Under the Revenue's plans, if more than 70 per cent of a company's gross assets are in property, then large share trades would be subject to 4 per cent tax.

However, the CBI is worried that the rule could also catch out large share trades in asset-rich quoted property, hotel and retail groups.

In briefings with the industry, the Revenue has insisted that it has no intention of establishing a takeover tax. However, tax experts believe that as the proposals stand, many quoted companies would be caught out.

Sebastian Hordern, senior tax adviser at the CBI, said: "Such a tax would act as a major disincentive to companies expanding by taking over other companies. In the current state of the market, this is certainly not welcome."

The draft proposals will be published along with Chancellor Gordon Brown's pre-Budget statement, due later this autumn.