View this in PDF form here.
1.1. Mark Davies & Associates Limited (MDA) is pleased to be able to comment on the consultation document (condoc) titled ‘Ensuring the Fair Taxation of Residential Property Transactions’ issued in May 2012.
1.2. As a firm of professional tax advisors we are hugely troubled by the tone of the current debate around tax avoidance and the largely inaccurate comments which are being uttered in the public domain.
1.3. This consultation document is but one aspect of that debate. In recent times we have also had the consultation the General Anti Avoidance Rule (GAAR), the Chancellor’s branding of avoidance as “morally repugnant”, scrutiny of IR35/personal service companies and the media reports around “K2” .
1.4. The common thread running through each topic is the use of subjective terminology around fairness and morality. It is our opinion that neither concept has any place in this debate as both are ill-defined and emotive. They are detracting from the debate as a whole and, as we will elaborate upon below, they are presenting the UK as a jurisdiction hostile to wealth and entrepreneurial talent.
1.5. Coupled with the Government’s amendments to the tax code, which we might add seem to be at odds with statements on simplification made by the Chancellor in 2010 , we fear that the current path is obstructing the Government’s stated objective of ensuring a UK economic recovery.
1.6. Turning to this condoc, I would bring your attention that the title does not specify from whose perspective the taxation of these transactions ought to be considered fair. There is no ultimate measure of fairness, no standard unit, against which the fairness of a transaction can be measured. If such a title is to be chosen then we would expect it to be qualified otherwise it is meaningless.
1.7. In our experience, much of the tax planning involving UK property and non natural persons is not undertaken for SDLT avoidance. Furthermore, we believe that this is the broad consensus amongst practitioners that we have spoken to. The motivation therefore behind this current change in legislation is not clear to us.
1.8. We do note however that back in January 2012 there were media reports that the Budget 2012 would contain a “mansion tax” on properties valued at over £2 million.
1.9. In spite our misgivings towards the policies themselves, we would like to take this opportunity to commend the proper, staged consultative process that is being conducted in respect of the Annual Charge and the extension to Capital Gains Tax (CGT).
1.10. Our response looks at each of the chapters in the consultation document and makes comments following the order of the condoc below, also giving answers to the questions raised in the condoc in Appendix 1. We have in the process of this review come across a number of areas of uncertainty and concern and have raised these in this response.
1.11. Despite the number of points made, our comments are intended as constructive input aimed at bringing this exercise to a better conclusion and, we hope, tempering the language used in the course of the wider debate on tax avoidance.
2. Introduction (Chapter 1)
2.1. Our comments on the use of “fair” are outlined above. While we do not wish to labour the point, as the word is used so prevalently throughout the condoc, we feel it deserves a proper rebuttal.
2.2. Our view is that the tax code is an arbitrary set of rules designed to extract funds from persons to meet the State’s expenses.
2.3. We feel there is no inherent “fairness” at play in the legislation and that any appeal to ensuring the fair taxation of residential property transactions is a futile one.
2.4. There are plenty of examples in the Taxes Acts where this lack of “fairness” is evident ranging from the double taxation of the same economic income to the imputation of income onto a taxpayer not in receipt of said income. There is also plenty of case law supporting similar results. As a recent example, the First Tier Tribunal has found that a taxpayer should be taxed on income he effectively paid to himself . The tribunal accepted it was an “absurd conclusion” but that they were constrained by the wording of statue.
2.5. It is not necessary to go into the minutiae of the legislation to identify the arbitrary nature of, and indeed the lack of “fairness” in, our tax system; it suffices to consider a very basic and simple concept: the taxpayer who invests for capital growth rather than income. The result of his conscious decision to opt for capital growth is that he pays tax at a rate of 28% rather than 50%.
2.6. The distinction between income and capital is a largely artificial construct to which case law will testify. So the significant difference, being in this case almost double, between the tax levied on a capital return versus that levied on an income return results exclusively from an arbitrarily man made concept; an arbitrarily drawn line in the sand.
2.7. Is it “fair” that as a result of this arbitrary distinction the taxpayer in our example contributes considerably less to meet the country’s needs than the taxpayer who invested for income? Even though this result accords with the Law as laid down by Parliament and so (we assume) is classified for the current purposes as “fair”, it is not clear to us in any sense of the word that this result would be recognised by the man on Clapham Omnibus as a fair result.
2.8. Similarly, in the current context is it fair that a person who choses to invest through a corporate envelope in residential property in London may have to pay taxes which a person with identical overall wealth (and probably a larger property) living in a less affluent area does not? Unfortunately, this change in the legislation has the hallmarks of a capricious tax on the wealthy who chose to spend their wealth on residential property in affluent areas and a tax on aspiration for those who chose to take on additional debt to secure the lifestyle they desire for their families.
2.9. We, based on our experience and knowledge of the tax code, are left with little option but to conclude that fairness, in what we would perceive to be the general sense of the word, is not something which can be ascribed to tax in general and so should be withdrawn from the discussion.
2.10. Although not explicitly mentioned in the condoc, recent developments have projected morality, alongside fairness, into the limelight. We therefore feel that it would be remiss of us not to address ourselves to the topic of morality, bound up as it is with that of fairness.
2.11. We would ask whether the taxpayer in the example above, in opting to invest for a capital return carrying a lower tax burden, has committed a “morally repugnant” act.
2.12. It is true: he has chosen not to arrange his affairs in such a manner that the resulting tax is the largest possible amount. In many ways this is similar to a taxpayer who decides to purchase shares in a company owning UK property (which was described by the Chancellor as a major source of abuse) rather than purchasing the property direct.
2.13. In both cases there are two routes to the same objective. In both cases the route with the lower tax burden is chosen. There is no aggressive planning in point in either case and in choosing to purchase shares all the taxpayer has undertaken is a simple choice of vehicle; the taxes and the applicable rates are both applied as prescribed by the legislation. It would appear to us that if purchasing a company which owns a property is “a major source of abuse” it is no more so than investing for capital growth over income.
2.14. To quote Lord Clyde (our emphasis), “No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue”
Fairness and Retrospective/Retroactive Legislation
2.15. We would also take this opportunity to highlight what to us is a glaring inconsistency, namely the constant appeal to fairness in the condoc coupled with the threat of retrospective legislation from the Chancellor. We do not accept that there is ever a case for retrospective legislation.
2.16. On this point we welcome the Treasury Committee’s report which highlighted the need for the Chancellor’s statement in respect of retrospective legislation to be clarified.
2.17. In a similar vein, we also question how the introduction of retroactive legislation in the form of the Annual Charge accords with the Government’s notion of fairness.
2.18. Our main concern with the use of such emotive language (i.e. the constant appeal and emphasis on fairness) aside from the fact that we do not think it is relevant in a tax context, is that we feel it is being deployed in a political manner. In reading the condoc, the implication achieved through the constant reference to fair taxation is that purchasing property via a “non natural person” is in some way an unsavoury sleight of hand designed to cheat the public purse i.e. not fair.
In fact nothing of the sort is happening. As outlined above the Law is very clear that SDLT is not payable on the sale of shares. The “L” in SDLT refers of course to the word land and not to a paper instrument of ownership.
2.19. Reading the condoc one could be forgiven for assuming that this “unfairness” has only recently come to light. Of course this is nonsense but it does beg the question as to why this “unfairness” was allowed to continue for so long and is only now being addressed. No doubt, the media scrutiny of SDLT in the run up to the Budget helped set the issue in stark relief.
2.20. The original genesis of this story seems to have been the development at One Hyde Park which was described by Lord Oakeshott, the Liberal Democrat Treasury spokesman, as “..a shameless scheme to cheat the taxman out of many millions of pounds”. He continued: “’Why should honest British taxpayers get stung for four per cent stamp duty when the members of the international jet-set get off scot-free (sic)?” One could be forgiven for viewing this as a politically motivated “Mansion Tax” introduced under the guise of targeted anti-avoidance legislation.
2.21. The unfortunate consequence of priming this debate about tax avoidance with emotive language is that the debate has become misdirected. Considering that the tax lost through evasion, by HMRC’s own estimates far outweighs the tax which is not due as a result of avoidance, it is truly staggering that avoidance is the topic de jour and not evasion.
2.22. Fuelled as it is, by much misinformation in the public domain, any sort of sensible debate on the topic of avoidance is now all but impossible.
2.23. The result is that in our view the UK may be perceived by the outside world as a jurisdiction which is hostile to wealth and wealth creation or at the very least a jurisdiction which regularly changes its tax law making long term inward investment uncertain. In our own experience as practitioners we have come across clients who are even afraid to claim non-domiciled status (in circumstances where they are clearly domiciled outside the UK) as they feel this will lead to an enquiry from HMRC and some form of persecution.
2.24. While this no doubt sounds far fetched a quick search of the World Wide Web should satisfy any lingering doubts: see headlines on Naming and Shaming Tax Avoiders and comments stating that claiming non domiciliary status constitutes tax avoidance.
2.25. What is particularly disappointing is that on the one hand the Government is happy (and rightly so) to make the UK’s corporation tax regime more competitive to attract multinationals here. On the other hand however, it has decided to openly pursue tax policies which seem designed to deter wealthy individuals from moving to the UK. To our mind, the benefits of attracting wealthy individuals into the UK are similar to the benefits of attracting multinationals. Consequently, we can only conclude that the divergence of policy is motivated by politics rather than a consideration of what is in the best interests of the country.
2.26. As we truly hope this is not the case, we would welcome a statement as to clarify the policy rationale behind this divergence.
3. The Annual Charge (Chapter 2)
3.1. As mentioned above the Annual Charge is to our mind a retrospective tax. The condoc speaks of the Annual Charge as being an incentive to de-envelope. However, there is no mechanism in place to facilitate this without triggering adverse tax consequences. If the Government is serious about this being an incentive to de-envelope there needs to be a mechanism to release the property from the structure.
3.2. Consider for example a UK residential property purchased in 1930 by an offshore company which is in turn owned (for simplicity’s sake) by a UK resident and domiciled taxpayer. Undoubtedly the property is standing at a significant gain in the company’s books. There is currently no straight forward method of getting that property out of the company and into personal ownership without triggering a significant capital gain in the company and which will then be attributed to the shareholder under s.13 TCGA 1992.
3.3. One potential solution would be a rebasing election.
3.4. We welcome the acknowledgment that the 2 year requirement for property developers is an unrealistic requirement. As commercial practice, most developments tend to be undertaken via newly incorporated Special Purpose Vehicles which would not qualify.
3.5. If the 2 year requirement is a necessity then perhaps the solution is some form of group test whereby it is necessary for a related/parent entity to have been trading for 2 years.
Leasehold and Freehold
3.6. The condoc contains proposals to apply the Annual Charge to both leaseholders and freeholders of the same property.
3.7. It is unclear why it is felt necessary to levy two Annual Charges. As there is one immoveable property it would seem logical that there be one charge.
3.8. Perhaps clarification on what sort of avoidance this double (or multiple charge) is aimed at would be helpful.
3.9. It seems contrary to the principles of a self-assessment tax system that use of a professional valuer would protect the taxpayer against penalties while a self-assessment would not.
3.10. The analogous situation would be for a taxpayer to be subject to higher penalties on an under assessment of tax for failing use the services of a qualified tax advisor when filing his return.
3.11. We feel that this would undermine one of the fundamental pillars of self-assessment and we do not believe it should be contained in the final HMRC guidance.
3.12. Alternatively, if professional valuations are felt necessary, then the cost of the valuation should be deductible from the Annual Charge levied. After all, this policy is openly promoted as a deterrent rather than a revenue raising measure.
3.13. We would also welcome confirmation as to what resources if any will be provided to the VOA to assist in the validation service. The reduction in staff numbers at HMRC have been widely publicised and we would welcome confirmation that additional resource will be made available to the VOA.
3.14. In respect of the appeals process, we would welcome clarification of what additional resource will be provided to HM Courts and Tribunals Service.
Annual Tax Return
3.15. As almost by definition the Annual Charge will be targeted at non resident entities confirmation of how the charge will be enforced in cases of non compliance would be welcome.
3.16. The condoc states that the beneficial owners will be jointly and severally liable. Confirmation as to how this will operate in the case of assets sitting under an offshore discretionary trust where there may be a class of beneficiaries (even persons who may not know they are beneficiaries) would be appreciated as would confirmation as to how enforcement would be applied in the case of beneficial owners who are non resident.
3.17. We would welcome publication of the details and assumptions of HM Treasury’s costing of the Annual Charge and especially the Static Exchequer Impact published alongside the Budget 2012 which shows a net take by the Exchequer of £160m in 2012/13 rising to £395m in 2016/17.
4. CGT (Chapter 3)
4.1. While we can understand the logic behind the 15% super rate of SDLT on current and future property acquisitions through a “non natural” person and the Annual Charge on past acquisitions through a “non natural” person, we do not understand the rationale for extending CGT in such a manner.
4.2. If the extension to CGT is to be supplemental to deterring SDLT avoidance, it makes very little sense to us that the non natural persons to whom the extension may apply are not the same persons to whom the 15% rate and the Annual Charge apply.
4.3. Put another way, we do not understand how applying a CGT charge to a non natural person who is not caught by the 15% rate and the Annual Charge will deter SDLT avoidance?
4.4. The condoc is silent on who will be responsible for collecting the tax due i.e. we assume some form of withholding will be applied.
Indirect disposals of Property
4.5. While in theory this seems like a logical extension, how this will work in practice is not clear. For example, if shares in a non resident company are sold by a non resident to a non resident, how will the charge be enforced and who should report the transaction to HMRC?
4.6. As the extension to CGT is targeted at non resident entities, it will interact with the existent anti-avoidance legislation found at ss.13, 86, 87 Sch 4B/C TCGA 1992 and probably the Transfer of Assets Abroad legislation. We would welcome clarification as to what deficiencies HM Treasury has identified in the existent legislation? To put it another way, what class of transaction has been identified which the current legislation doesn’t cover?
4.7. Perhaps in identifying the perceived current weaknesses the framing of this extension can be better managed.
4.8. We look forward to seeing the draft legislation on how these various aspects will interact. As this is likely to be a highly complex area, it may be worthwhile considering a deferral to the extension to CGT to 2014 or indeed indefinitely.
MARK DAVIES & ASSOCIATES LIMITED
22 August 2012
APPENDIX 1 – Responses to specific questions
Question 2.1 Do you think that the current criteria for the 15 per cent SDLT rate should also apply to the annual charge? If not, what exclusions or additions would you make to the coverage of the annual charge? Why would you recommend such changes?
Question 2.2 Is the exclusion for property development businesses sufficient both to address the risk of avoidance and to ensure bona-fide businesses are excluded from the charge? If not, what changes to the exclusion for property development businesses would you recommend and why? How could such changes be policed?
No. The 2 year criterion is too restrictive given the commercial practice employed by the Industry. We would envisage some form of group test whereby SPVs are not excluded if the parent(s) has/have been trading for 2 years.
Question 2.3 How might it be possible to develop an exclusion from the annual charge for collective investment vehicles which distinguishes between widely-held funds and quite narrowly held ones (that might potentially be used for avoidance)?
Similar legislation already exists in the form of the Personal Portfolio Bond legislation. Perhaps an analogous test would suffice based on how much control the investor has over the investment.
Question 2.4 Should the definition of ‘residential property’ be the same as that used for stamp duty land tax? (See Annex B). If not, what amendments or exclusions (in addition to those set out above) need to be made and why?
Question 2.5 What, if any, policy issues do you see with the proposed application of the annual charge to properties which either move into or out of liability or to multiple property ownership interests? What rules for valuation and submission of returns of annual charges in these circumstances do you think will be most appropriate?
Question 2.6 Do you think a prior agreement service along the lines described will be helpful to property owners? If so, what would be the best way for it to operate from a stakeholder point of view?
Yes but we will have reservations about how it will be resourced until HM Treasury clarifies the position.
Question 2.7 Are there any other aspects of the valuation proposals that will cause difficulties or require further clarification?
See our comments above on the use of professional valuers offering protection against penalties. We feel this undermines one of the central pillars of self-assessment. If it is necessary then the cost should be offset against the Annual Charge levied.
Question 2.8 What length of time do you think is reasonable for submitting the annual charge return and why? Would monthly payment instalments be a more preferable option?
We feel it would be appropriate to amend the existing tax return to capture this information and utilise the existing filing and payment dates in a similar manner to how the Remittance Basis Charge is collected.
Question 2.9 What will the impact of the annual charge be on (i) the high value residential property as a whole, and (ii) landlords and tenants? What evidence do you have to support your view?
We would welcome a proposed mechanism to assist in de-enveloping without triggering adverse tax consequences. Until we see this we cannot assess the impact as it is unclear whether the policy will be viable without this mechanism. Put another way, if de-enveloping will trigger a gain of £2million then the sensible option for a taxpayer will be to retain the property in the vehicle and the policy will have failed.
Question 2.10 To what extent do you think the impact of the 15 per cent SDLT charge will differ from that of the annual charge? Should the Government continue with both measures once the annual charge is in place? If not, why not?
We think the 15% is the deterrent. In the absence of a mechanism to de-envelop tax efficiently then the Annual Charge is simply retroactive legislation designed to generate revenue. If the Government’s policy aim is de-enveloping then it is the Annual Charge which can be phased out in time assuming a gateway to personal ownership is provided to property already enveloped.
Question 2.11 Do you think there are any equality issues that arise for people with protected characteristics as a result of the proposed annual charge?
Capital Gains Tax
We find both the Annual Charge and extension to CGT to be highly discriminatory in the following regard:
• Property prices are higher in the South East meaning that taxpayers already faced with a higher cost of living will be subject to an additional tax;
• Many taxpayers aspire to an improved lifestyle and are willing/forced to take on larger mortgages to attain that lifestyle. No account is taken of the level of equity held in the property.
• The policies themselves are targeted at transactions most likely to be undertaken by foreign nationals. Contrary to popular belief, purchasing a property via a “non natural” person is generally protection against UK IHT rather than SDLT avoidance. HMRC’s manuals list only 10 Double Tax Treaties covering IHT. Failure by a foreign national to protect against UK IHT could lead to a double charge.
• We also have reservations that the policies are not Sharia compliant as they will penalise certain structures which are specifically set up to be Sharia compliant.
Question 3.1 Are there entities or forms of ownership whose status as an individual or non-natural person requires clarification?
For completeness we would suggest that all the foreign entities listed here are clarified: http://www.hmrc.gov.uk/manuals/intmanual/INTM180030.htm
Question 3.2 Are there entities or other forms of ownership, other than charities, which should either be relieved from or included within the charge?
Pensions (if not already relieved).
Question 3.3 Would the introduction of a £2 million threshold create any particular difficulties or adverse behavioural effects? If so, what are these likely to be?
As outlined above, we find it discriminatory in that it seems specifically designed to target those who have made a lifestyle choice or aspire to a certain lifestyle.
In addition to our comments above that the policies also target non residents and non domiciliaries disproportionately, we would also take this opportunity to make the point that foreign nationals have a choice in where they invest. If they choose not to invest in UK residential property there are two consequences:
• Property prices will become less stable, certainly in the short term forcing prices down across the board; and,
• They are less likely to visit the UK. This has a knock on effect on consumption and VAT receipts and is we suspect an unforeseen consequence of the policy.
Finally as the condoc is so concerned with fairness, we would expect to see graduated Annual Charges irrespective of the property value rather than a cliff edge at £2 million.
Question 3.4 Would a limit to properties valued at over £2 million create any particular complexities? If so, what are these likely to be?
See above Q3.3
Question 3.5 Would this cause any compliance difficulties for collective investment arrangements or where share ownership is heavily diluted? If so, please explain what these would be.
Question 3.6 Does the adoption of the SDLT definition of ‘residential property’ (in Annex B) create any problems? If so, what amendments or exclusions (in addition to those set out above) need to be made and why?
Question 3.7 Are there any other issues concerning the design or delivery of the policy that need to be considered?
We are disappointed to see an absence of any discussion on how the extension of CGT will interact with existent anti-avoidance legislation.
Question 3.8 Do you think there are any equality issues that arise for people with protected characteristics as a result of the proposed extension of the CGT regime?
Unfortunately there is so little detail about the extension to CGT it is difficult to offer any comment. We would note again however that the policy seems to be discriminatory in that it targets the wealthy only. If we truly believe in progressive taxation then we would like to see the extension to CGT applied to all disposals not just those with consideration over £2 million.
We would mention again that the policy does seem to penalise certain Sharia compliant structures used to purchase property.