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

by Mark Alexander

20:43 PM, 9th October 2016
About 3 years ago

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

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


“Section 24” of The Finance Act (No. 2) 2015  isn’t actually a tax change. It is an amendment to GAAP (Generally Accepted Accounting Principles). It changes the way that profit is calculated and then introduces “tax relief”.

Let us be clear what Generally Accepted Accounting Principles are.

If a business has income of £1,000 and has £1,000 of expenses then its profit is zero.

If a business makes a profit then those profits are subject to tax at varying levels depending on the structure of the business and the amount of profit made.

Another generally accepted accounting principle is that if a person borrows money to buy something for personal use they can’t offset the costs of financing that purchase against other income. That applies to pretty much any product you can think of, e.g, a bucket and sponge to clean windows, a computer, a vehicle or a property. However, if a business borrows money to buy any of these things with the intention of generating an income the costs of financing those investments are a legitimate business expense.

Section 24 changes everything, but only for individual landlords. Generally Accepted Accounting Princples are only being amended for individual landlords by Section 24. The legislation does not apply to any other business, not even to incorporated landlords!

When Section 24 is in full force £1,000 of income minus £1,000 of finance costs to purchase income producing assets = £1,000 of profit for private landlords only.

I can probably guess what any sane human being would be thinking when reading this for the first time and I agree. Bonkers isn’t it?

To add to the madness a new tax relief of 20% of finance costs will become available for individual landlords to deduct from the tax bill on their new fictitious profit. Presumably Government will seek to remove this at some point too on the premis that homeowners don’t get the same tax relief! (you’re  perfectly normal if you are shaking your head in disbelief at this point)

On 6th October 2016 Section 24 was challenged legally with a permission hearing for a Judicial Review. The grounds were human rights, discrimination and contravention of EU State Aid Law. Permission for a Judicial Review to proceed was denied on all three grounds.

Having sat through the hearing I can understand why. In my humble opinion, nobody addressing the Judge actually fully grasped that Section 24 had nothing to do with tax relief. There was no mention of Generally Accepted Accounting Principles whatsoever!

I thought Cherie Blair was very elequent at explaining why the consequences of Section 24 were unfair.  I also though she made a good job of playing to the gallery, the people who had funded her presence of course. The bottom line though was that she failed to achieve what she had been paid to do.

Having got all of that off my chest, you may be shocked to read that I think the refusal of permission for a Judicial Review to proceed could be a blessing in disguise.

If permission had been granted around £600,000 would have been needed to be raised in order to fund the full Judicial Review. That would have been a mammoth task and diverted attention and resource away from lobbying and looking for solutions. Even if the £600k had been raised we would be no further forward and with no more guarantees than we have today.

Many were disappointed because the prospects for a full Judicial Review provided hope. However, as the emotion of disappointment fades over time I think people will realise that a strategy of hope isn’t a good fit for property investors. This is because people like you and me need to feel in control of our own destiny.

So where do we go from here?

Two days after the permissions hearing was declined Property118 made the largest donation to date to Axe The Tenant Tax to date. We hope this will inspire others to commit to contribute to ongoing fundraising. We also wanted to send out a clear signal that we will continue to support positive action to reverse this wicked policy. At the same time though we will continue to help landlords who, like me, want to be in control of their own destiny. This is still possible but there isn’t a one size fits all strategy. For those affected by s24, those of us you who prefer to take control of your own destiny, please see the linked page below …



Tom Andrews

0:24 AM, 11th October 2016
About 3 years ago

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.

Mark Alexander

1:22 AM, 11th October 2016
About 3 years ago

Reply to the comment left by "Tom Andrews" at "11/10/2016 - 00:24":

Thank you for taking the time to explain that Tom, you have certainly put some Demons to rest in my mind.

michael fickling

13:17 PM, 11th October 2016
About 3 years ago

The argument is not whether a government can do these things.They have. The argument is whether in this gross form and extent and in all these circumstances such as misguiding the parliament and its processes and based on incorrect information ..and more...can a legal challenge be brought..after the event...
Comparisons to other previous taxes are perhaps only partially similar. Did they deceive parliament in those other cases.?....did it operate at 80%?.... of THE major cost? for the enterprise concerned...was it based on fundamentally and provably incorrect information.?....did it concern something so central to our country and its peoples future as housing?...... Were the other taxes based on sound facts.?.....This wasnt..Was it specifically presented to parliament as a revenue raising and levelling measure ? when in fact its background and true intent was to drive out small players....? ...and ACTUALLY encourage/help larger players....?.etc etc. etc The law is not just about technical precedent and limited or partial scope..its also about protecting us and parliament itself from things that when taken as a whole... given all their elements combined.. become an aberration and misuse of power..and process..especially when based on falsehood . Are those who disagree with this view really saying that a government can come up with a faulty rationale...and based upon that make huge levy upon any reasonable legitimate and essential service business... driving it out of existence using "income tax" as the means and charged at massive level..and squarely aim that ONLY at the small enterprise...is it really suggested that there can be no legal challenge in any set of extended and gross circumstances / amounts and in fact in gross error in various regards ? and in all its facts and circumstances of rationale?
Mmmmh thats beginning to sound like a divine right. People have lost their heads in the past attempting to excercise such rights....Parliament must be protected from deception and distortion or it can not properly discharge its functions..and indeed also be protected from its own errors not being corrected......especially where it has been deceived..So must the citizen. There must be a process for reviewing these errors after the fact of their occurrence...The law must and does provide possible remedy.

Tom Andrews

23:00 PM, 11th October 2016
About 3 years ago

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. http://www.theyworkforyou.com/pbc/2015-16/Finance_Bill/03-0_2015-10-13a.7.0

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.

michael fickling

10:23 AM, 12th October 2016
About 3 years ago

Reply to the comment left by "Tom Andrews" at "11/10/2016 - 23:00":

Osborne put this clause to parliament as the removal of a tax perk..in fact specifically stating that "wealthy" landlords were obtaining 45 pence in the pound advantage etc. He went on to say he was reducing this in stages to 20%. A deliberate ploy. so that many ordinary people listening and considering those words would likely imagine something very different to the truth as a direct and intended result...See his budget speech which is still on the net...........45% to 20%..mmhh...thats what he spoke around.....not 100% allowable to 20% allowable !...
In fact all landlords and all business ( in general ) were and in the majority of cases still do receive 100% tax allowance on finance interest costs. Thats the norm and he knew it but failed to mention that norm..... at all... in any way whatsoever. Was he being "level" certainly not.
With rental returns around 5% of value or thereabouts typically...the rental property market must be treated in similar ways to other businesses..indeed it is even more important that it is as leverage through finance is what makes it doable and possibly worthwhile. Would you buy a small business for say 200k that was working on a gross margin of 10k per annum??..I doubt it.. .Very few businesses can make a profitable return on 5%..most operate upon much higher margins AND also in addition use finance to leverage that and have the interest allowed as a tax deduction/allowance as well.Whilst we landlords operating on a smaller margin are also to be now treated differently and taxed upon a cost. Osborne did not describe that did he ?
...If finance wasnt so important to our involvement in this business of ours then why did the Irish situation get so bad so soon..?..The figures about the numbers of landlords using significant borrowing that Osbornes team trotted out are just not correct....Why did he make no mention of corporates in that same speech ?,,the very "wealthiest" landlords ???..again a deliberate omission and an error in fact as they are the wealthiest...pay less in tax %s already than us private landlords and under HIS clause can still deduct 100% of finance interest.They are part of the same domestic dwellings rental "playing field"..... he deliberately chose not to mention this in his speech.. and it is a playing field he has actually tilted further to those wealthy companies advantage!
Osborne deliberately chose to ignore all this and the capital gains taxes..and yet he was also speaking about things being level or not level?? ..well , again,he was not being level himself was he...His choice of the words "wealthy landlords".and.focusing on comparisons to ordinary home buyers was a ploy to give a perception that landlords are treated in an especially advantages way when in fact they were treated in the same way as the great majority of all other businesses.His misquoting of the existing allowance figure itself ( in fact 100% )...and linking his presentation to wealthy ..45% tax payers...and..apparently under his clause.. just dropping to 20% etc..apparently to the listener...it. was clearly intended to add to the myth that landlords are wealthy and landlords enjoy special perks..it was a deliberate encoding of the real workings of the clause he had created...thats the impression he intended and gave....a modest reduction in a rich persons tax perk...when in fact it was a reduction from a perfectly normal 100% allowance to 20% .If thats not a deception then what is ?. Im staggered that any rational person could think his comments fair handed or intended to do anything other than delude ordinary people and the house itself as to what the real position is and was (100% allowable) and what the real workings of his clause and the general workings of the tax system are.He also made no mention whatsoever of the failed use of a very, very similar policy in Ireland...now that was either A>>> a huge neglect by him and his researchers in not finding it.... or ...B.. a deliberate choice to hide that extremely important fact from both parliament and the public. Take your own pick of the two......neither is acceptable in a chancellor advising and informing parliament and the electorate.

Dr Rosalind Beck

17:40 PM, 12th October 2016
About 3 years ago

Ireland has now recognised it was a failed experiment and is reversing it so that within 4 years finance costs will once more be fully deductible:


Mark Shine

19:38 PM, 12th October 2016
About 3 years ago

Reply to the comment left by "Tom Andrews" at "11/10/2016 - 23:00":

@ Tom Andrews

The weblink that you chose to share in your post contains ‘house prices’ no less than 11 times. HMT believe that S24 will NOT actually reduce house prices. Mr Gauke also mentioned this point to my face during conversation on a few occasions in such a manner that it was able to to genuinely convince me that he genuinely believed that S24 would have no effect on house prices. BTW I am not usually easily convinced.

Tom, given that their belief is that S24 will have no effect on house prices, am very interested to hear your thoughts on the following:

(1) Do you agree with them that S24 will have no effect on house prices?
(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%?

James Fraser

21:03 PM, 12th October 2016
About 3 years ago

Reply to the comment left by "Tom Andrews" at "11/10/2016 - 23:00":

'Nothing requiring remedy...' - except tax in excess of 100% on what is a supposedly 'fair' tax system. Do you think any other business would consider it fair? I'm fairly certain that the 26 families I shall be evicting won't find it fair, nor will the taxpayer when they're paying 3x as much for a Travelodge hotel room for each of those families.

Gareth Wilson

23:21 PM, 12th October 2016
About 3 years ago

This was not a failure. Irrespective of the verdict, the hearing has significantly publicised the issue of Section 24 and focused minds in opposition to it.

We will never stop, and in time the Government will have to eradicate the measure as it ravages the rental sector, just like their equivalents in Ireland yesterday: http://www.irishtimes.com/business/economy/budget-2017-main-points-1.2825145

"The level of interest relief for landlords is to be increased to 80 per cent. The full 100 per cent will be restored over a number of years through annual 5 per cent increases."

Mark Shine

22:25 PM, 13th October 2016
About 3 years ago

@ Tom A

The 2 questions I asked above were not rhetorical, so am very interested to hear your thoughts?

'(1) Do you agree with them that S24 will have no effect on house prices?
(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%?'

BTW the LTV across my portfolio is now less than Grainger's (UK's largest resi LL). Grainger have no need to increase rents due to S24, so will be interesting to see whether they and other corporates try to take further advantage of the situation...

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