Tom Andrews

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Monday 10th October 2016

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Total Number of Property118 Comments: 5

Tom Andrews

1:14 AM, 18th October 2016
About 3 years ago

What is Section 24 and Why Was Permission For A Judicial Review Declined?

Reply to the comment left by "James Fraser" at "17/10/2016 - 20:20":

@James Fraser

Checking the Companies House data, there are nearly 8,400 companies who reported an accounting loss before tax but still recognsied a tax charge in their most recent accounts. Quite a few household names: Vodafone, Sainsburys, Rio Tinto, RBS, Tata Steel.

E.g. Bristow Aviation Holdings Limited in 2015 had a loss before tax of £34 million but incurred a tax charge of £16.5m.

UK GAAP requires in the notes to the accounts a reconciliation between the total tax charge recognised and the amount calculated by applying the standard rate of UK corporation tax to the profit/loss before tax. Many more profitable companies will have tax charges in excess of the standard tax rate where their taxable profits exceeds their accounting profit before tax. Common reasons include accounting expenses not deductible for tax purposes, impairment expenses and interest on loan relationships.

To be honest, I think the incorporation route offers only short term protection to highly leveraged landlords when we look at the overall political landscape and the other changes on the horizon. It's clear to me that the political support to reverse the s24 or SDLT changes. The only legal argument that would even considered by the courts was tried by Cherie Booth and predictably failed given the extremely high thresholds that must be met when challenging primary legislation.

Sinking further time, energy and money into these efforts simply isn't justified by the likely return. Hence my preferred strategy now is to dispose of properties and use the proceeds to eliminate the LTV on the remaining properties. Properties are going to a mix of leveraged BTLs, cash BTL and owner occupiers.

The tax is paid either way but this way there's still a profit left afterwards and it reduces the exposure of the portfolio to further limits on mortgage financing. It also provides the flexibility to keep long term good tenants in place at current rent and avoid the increased risk of voids caused by raising rents to the levels that would be required by s24 and mortgage ICR requirements.

I've seen too many landlords go bankrupt to risk putting myself in that position. As a businessman, I have always watched which the winds were blowing and adapted to changing markets. That's why I am focusing my energies on new opportunities outside property.... Read More

Tom Andrews

1:53 AM, 14th October 2016
About 4 years ago

What is Section 24 and Why Was Permission For A Judicial Review Declined?

@ Mark Shire

"(1) Do you agree with them that S24 will have no effect on house prices?"
I think any effect due to s24 will be immaterial in the context of Brexit, the devaluation of the pound, proposals for mass housebuilding and tightening lending standards. Any one of those will dwarf the limited impact of s24 on the housing market.

"(2) You seem a logical guy, so wondering if you could provide some plausible logic as to why ‘private’ residential property landlords should lose 80% of existing finance cost relief whilst ‘corporate’ residential property landlords should lose 0%?"
The Treasury has been consulting on changes to the tax deductibility of corporate interest expense. Logically, individual residential property landlords are a bigger issue in the income tax landscape than corporate landlords in the corporation tax environment. I fully expect further restrictions on tax deductibility of corporate interest expense in line with OECD Base Erosion Profit Shifting (BEPS) Action 4. It is simply taking longer to implement as multinational group tax is significantly more complex than individual income tax and has to be a co-ordinated international effort.

These proposals are actually mentioned by Grainger in their 2016 Half Year report. They expect the effect to be immaterial although looking at most recent annual report that appears to be more because interest expense is a comparatively small in relation to turnover compared to the average individual BTL landlord.

An economist would point out that the Modigliani–Miller theorem states that the capital structure should not impact the value of a firm and so a firm should not express a preference for equity or debt over the other. In reality, tax deductibility of interest means the value of the firm increases in proportion to the level of debt financing due to the taxes saved. We should therefore expect to see equity funding make a comeback as the tax deductibility of interest is reduced.

@ James Fraser
Tax in excess of 100% accounting profits is not unusual. Indeed, there are many businesses out there with accounting losses but a significant current tax expense. It is not an indicator of the fairness of the system and certainty not grounds for legal challenge.... Read More

Tom Andrews

23:00 PM, 11th October 2016
About 4 years ago

What is Section 24 and Why Was Permission For A Judicial Review Declined?

You could try bringing a legal challenge on these grounds but it will end in failure and at significant cost to anyone foolhardy enough to do so.

1. Parliament was not deceived. The intention of s24 was expressly stated as making the tax system fairer.

2. The size of a tax is irrelevant. Parliament can levy taxes in excess of 100% if it sees fit. In any event, s24 does not change the tax rate, it simply restricts the deductions made against income when calculating taxable profits. Mortgage interest is only a major cost in the case of highly leveraged landlords, which is a choice of business model. Even then, being a "major cost" is irelevant to whether or not it can be treated as a deduction against income for tax purposes.

3. Many taxes are aimed at specific industries, areas or sectors of the economy. E.g. oil and gas taxes mentioned in my previous post. Some North Sea fields are taxed at a rate of 81%.

4. Parliament is constitutionally entitled to enact taxes and the doctorine of parliamentary sovereignty means that the law does not allow judicial review of primary legislation except in a few cases where primary legislation is contrary to EU law (hence why Cherie Blair et al tried this route in the JR). No court in the land is going to consider this an aberration or misuse of power as just demonstrated.

So the process you're asking about exists: it has just been attempted. Your problem is simply that in this instance there is no error in law or fact and therefore nothing requiring remedy in the eyes of the law.... Read More

Tom Andrews

21:07 PM, 11th October 2016
About 4 years ago

Common Law versus Statues - an answer to S24?

It's a delusional freeman on the land argument and would only serve to further tarnish the name of landlords.

Imagine if one of your tenants tried this on with you.... Read More

Tom Andrews

0:24 AM, 11th October 2016
About 4 years ago

What is Section 24 and Why Was Permission For A Judicial Review Declined?

I'm afraid posters here have made a number of fundamental errors here. Section 24 is not amending UK Generally Accepted Accounting Practices (UK GAAP) because accounting profit is not the same thing as taxable profits.

Income Tax (Trading and Other Income) Act 2005 s25 states:
"The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes."

Corporation Tax Act 2009 s46 makes similar provision for entities subject to corporation tax:
"The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes."

Although these specific tax statutes are recent, the above principles have been established in case law for more than a quarter of a century. Even before that, Parliament has always had the power to require or authorised adjustments for tax calculation purposes. To be clear, tax computations begin with the profits per the accounts, which are then adjusted to arrive at the taxable profits.

The tax statutes contain many, many examples of rules that restrict deduction of expenses in the computation of taxable profits. ITTOIA 2005 chapter 4 lists some of them - e.g. s45 states "the general rule is that no deduction is allowed in calculating the profits of a trade for expenses incurred in providing entertainment or gifts in connection with the trade." Just as Parliament can enact reliefs for specific circumstances, it also has the power to restrict deductions in others. Indeed, there are many businesses whose accounts show considerable loss under UK GAAP but also significant taxable profits on which they pay tax.

Restricting finance costs is not even unique to unincorporated landlords. The Supplementary Charge is an additional charge on the ring fence profits of a UK oil and gas exploration and production company (it's an additional 20% tax on top of the 30% Ring Fence Corporation Tax they pay). The supplementary charge is calculated in the same way as for RFCT but without deductions for financing costs.

That's no deduction whatsoever, not just a restriction of relief to 20%. The Supplementary Charge has been in place since 2002 and in all that time no UK oil and gas company, with all their funding and access to legal expertise, has ever overturned it. Indeed, I doubt any company wasted their time trying to do so. So any argument based on unfairness fails here too.

Taxes and duties have never been merely tools for raising revenue; Parliament has often enacted taxes and duties to reduce certain behaviours or consumption of goods with effects considered harmful to society. Tobacco duty is a high profile example of such a "sin tax". Constitutionally, Parliament can levy any tax it wishes to enact at any rate and with any relief/restriction it wishes. There was never any prospect of the High Court overturning primary legislation like this.

The arguments proposed here by posters were not pursued by the barristers in court because they are fundamentally flawed in law and fact.... Read More