Don’t mention the L-Word

Introduction

Gordon Ramsay was so prone to using the ‘F-word’ that one of his TV programmes was given that very title.

Not to disappoint, the airwaves were as sprinkled with expletives as a #saltbae £600 steak was with sodium.

Similarly, we have seen the same type of garnish cooked up by financial journalists in their coverage of the UK tax system. However, rather than the ‘f’ word, we instead we see their copy liberally seasoned with the ‘L’ word.

That is “loophole”.

 

What is a loophole?

“But you’re a grizzled old tax adviser, does it really matter” I hear you say.

Of course, you are right about the first point. Exceedingly grizzly.

However, when it comes to the second, I think language is important in the debate over ridiculous tax system.

Language is important when much of the discussion about our tax system is often couched in terms such as ‘avoidance’, ‘aggressive tax planning’, the ‘right’ amount of tax, ‘fair shares,’ ‘broad shoulders’ and, of course, ‘loopholes’.

Now clearly, in this area, many terms are in the eye of beholder (and also, perhaps, beholdee!?)

But a loophole seems to me to indicate that there is a ‘gap’ or ‘inadequacy’ in the legislation.

This might be given the more academic description, ‘lacuna.’ Another L-word, but one we will leave to the dullards.

It certainly is negatively charged. It my view it carries slightly sinister overtones but, for obvious reasons, will usually be sandwiched between two slices of “there is no suggestion of wrongdoing blah blah”.

But why do journalists use this term at all?

 

Lack of understanding and “Sexing up” exemptions and reliefs

Firstly, I think a lot of this comes from a lack of understanding. That is no disgrace as we have a preposterously complex tax system. I won’t say much more about this.

What is clear that journalists use this word to ‘sex up’ perfectly simple exemptions and reliefs in the legislation.

A little while ago, I commented on an article in the Telegraph entitled ‘Three entirely legal ways to cut your family’s inheritance tax bill’ which followed an All Party Parliamentary Group looking at IHT reform.

The article describes this as:

“the abolition of almost all the existing legal loopholes used to avoid the widely disliked tax”

OK, perhaps we could give them that one. It’s pretty vague. But it goes on:

“[a reader] resorted to a legal loophole to rewrite his late father’s will. He used a ‘deed of variation’ to divert a seven-figure inheritance…”

Come on now, this is nonsense.

This is an explicit, statutory provision and was specifically introduced for this kind of situation. Whether you think it’s right or wrong is a completely different matter.

This is not an example of a loophole.

Along similar lines I saw a video by a property investor who now markets himself as a property guru and, seemingly, a property tax guru. He was sharing a video called something like “The top 6 tax loopholes for a property investor”.

I clicked on the file and watched it, metaphorically, from behind the sofa wondering what elements made up this undoubtedly secret sauce.

The first example of one of these marvellous ‘loopholes’ was the taking advantage of the Furnished Holiday Letting (“FHL”) rules….

I stopped watching.

Although, perhaps he has been hoisted by his own loophole petard, as FHL status is to be abolished.

 

Flagging up complex but intended distinctions that many people don’t like

The Blairs

Setting aside, the stories of Kleptocrats squirrelling away ‘their’ wealth around the world (and particularly London) the most talked about story in the Pandora Papers of a couple of years ago appeared to be about the Blairs.

Our former prime minister was criticised for acquiring the shares in an offshore company which held a property that he would eventually use for his business dealings.

As he purchased the shares, as opposed to the bricks and mortar directly, he would have undoubtedly saved SDLT on the acquisition.

This is because shares only suffer a much lower rate of 0.5% on purchase consideration – and there is no duty AT ALL where the Company is incorporated outside of the UK (which would be the case here  it being in the Pandora Papers and all).

Of course, the ‘L’ word pops up.

“Wasn’t Mr Blair critical of those who exploited loopholes?”

But hang on a moment. Such a glaring gap in the legislation could hardly be said to be an oversight can it?

Despite the rules being somewhat arbitrary (and SDLT is full of arbitrary distinctions) the system must have been designed like this. It has certainly been permitted to carry on like this.

It is interesting to note that, many years ago, draft legislation did appear that would impose a stamp duty charge on property rich companies. But this legislation never ultimately saw the light of day. One can assume accordingly that Parliament did not intend for such property rich stamp duty provisions to apply

You might not like it, but it’s not a loophole.

Non doms

In addition, historically, the UK’s non-domicile rules – and particularly the remittance basis of taxation – has been a popular target for the  ‘loophole’ mafia.

This was clearly demonstrated in the feeding frenzy two years ago around Akshata Murty who, amongst other things, was (and still is, I think) married to Rishi Sunak. At the time, he was Chancellor.

The following quotes are taken from a BBC report on the matter:

Liberal Democrat Treasury spokesperson Christine Jardine said: “Sunak now needs to come clean about which country his family pays tax in abroad and if it is a tax haven” and referred to the status as a “loophole”.

Worse was to come from Sir Keir Starmer who should, and likely does, know better. He used the S(cheme)-word:

“If it now transpires that his wife has used schemes to reduce her tax, while he’s been increasing taxes on working people, that’s breathtaking hypocrisy”

However, despite being fiendishly complex these were not loopholes and definitely not tax schemes.

These were specifically built in to our legislation for centuries. They have been reviewed numerous times and underwent two substantial overhauls from 2008 onwards.

They are precisely what Parliament intended…

…until they vote on the proposed abolition of the status, surprisingly unveiled at the Spring Budget 2024.

Then, omce the legislation has passed, Parliament has then, and only then, signalled its change of intention, hasn’t it?

However, even the abolition of the non-dom rules has managed to grease up the Loophole gatling gun.

Shadow Chancellor Rachel Reeves explains in a report published yesterday in the Mirror:

“It will probably come as no surprise to Mirror readers but when the Tories do something like close the non-dom tax loophole they actually leave a load of loopholes in their policy whereby any current non-doms will be able to get out of paying the taxes that they should be paying and would be paying under Labour plans.

Here, Reeves is talking about the Government’s clear position that excluded property created by non-doms prior to the changes will continue to remain outside the scope of UK IHT as explicitly dictated by the legislation.

More loophole hogwash.

Labour may not like the policy proposals as they stand. They can vote against the proposals (they won’t). They can change them, with the agreement of Parliament, when they get into power.

 

Loophole think tanks and pressure groups

It isn’t just politicians and journalists who use the L-Word with merry abandon.

It is often used by think tanks and tax pressure groups to describe things they simply don’t agree with.

Take the Tax Justice Network.

Back in November 2023, they suggested that the government should ‘close 5 tax loopholes  to raise over £7bn a year’. I must admit, I counted more than 5, which perhaps brings into doubt their claims but never mind.

The suggestions were as follows:

“1. End fossil fuel subsidies for oil and gas companies to raise £4.4 billion a year”

Not a tax or taxes.

“2. End classic car exemption to raise £130 million a year

3. End video games tax relief to raise £197 million”

Of course, neither of these are loopholes. They are simply policies that Tax Justice does not agree with (rightly or wrongly)

4. Close capital gains tax loopholes to raise £1.1 billion a year 

This looks more interesting, they are, after all, using the L-word again. However, it goes downhill:

‘Business Asset Disposal Relief’ is a tax break that lowers capital gains tax from 20% to 10% on the first £1 million of gains, when a person sells their company. This loophole has come under repeated criticism, including from think-tanks The Resolution Foundation and the IFS. There is little evidence that this tax break affects entrepreneurial activity, and the prospect of slightly lower taxes at the end of a person’s involvement with a business is not well-targeted in a business’ lifecycle, according to The Resolution Foundation.

Again, this is simply a policy that TJ does not agree with and argues its badly targeted. But it isn’t a loophole and repeating that it is does not make it so.

Loophole is being used to describe ‘bad things about the UK tax system’.

Indeed, the criticism referred to actually resulted in the lifetime cap being reduced from £10m to £1m.

5. Close inheritance tax loopholes to raise £1.7 billion a year 

“Inheritance tax has a multitude of loopholes that enable wealthy estates to engineer their finances to avoid paying their fair share. This is evidenced by the fact that estates worth over £10 million pay an effective average tax rate of just 10% despite a headline IHT rate of 40%.

Again, loopholes galore here. We even have a reference to financial ‘engineering’.

But, again, the report makes the error of equating relief with loophole. Although, some might ‘engineer’ their finances and crow bar wealth into a relief (the use of AIM shares to generate IHT savings from BPR – see below) I would imagine most of this relief stems from family business and private company ownership. But that’s not quite so emotive.

6. The Chancellor should also reform ‘business’ and ‘agricultural property’ inheritance tax reliefs, which could raise £1.5 billion a year.

Evidence shows a small minority of very wealthy estates use these loopholes to avoid paying their full rate of inheritance tax. While abuse of agricultural property relief is pushing up the price of agricultural land, pricing poorer farmers out of the market. 

I have some sympathy over whether retail investors should qualify for BPR after investing in the AIM market for two years (or less if they have just sold other property that qualifies for BPR). It seems contrary to what, I assume, the policy reasons were when BPR was introduced.

But that’s by the by. Just because I don’t agree with the policy, doesn’t mean I should have a hissy fit and describe it as a loophole. Its not. The legislation clearly dictates this treatment.

 

Loopholes and double cab pickups

Back in February this year, HM Revenue and Customs (HMRC) announced that double cab pickup trucks will no longer be classified as vans for company car tax purposes starting 1 July 2024.

As you can guess, this was reported as the closing of a loophole.

But I don’t think this stands up to examination either. In actual fact, the change to long term practice actually came about following a Court of Appeal ruling which turned long term practice on its head.

In any event, HMRC performed a rapid volte face and announced the plans were to be withdrawn. This meant that the benefit in kind position remained as was previously understood –  that the significantly more favourable van basis where the payload is 1 tonne or more.

So, can this be described as a loophole – at any stage of the time line above?

 

The Redwood-Bone defence

The importance of language flows both ways.

I have made the same points about what is, and what is not, tax avoidance. We can call this the ‘A-word’.

This is particularly relevant when it comes to the ‘defence’ often meted out that ‘everybody is at it (tax avoidance, that is)’.

A pension contribution here…and an ISA investment there.

I call this the John Redwood[1] / Peter Bone[2] defence.

However, this is bunkum as well.

As with my comments above, these are statutory exemptions used as nature intended.

Taking advantage of them is not tax avoidance.

 

Conclusion

Let’s face it, the UK tax system is an abomination. It is overly long and overly complex.

As such, it invites commentary that is half-baked…or even quarter-baked… maybe still in the mixing bowl.

It does not mean that we should explain away any of its shortcomings or provisions we simplay disagree with as ‘loopholes’. This is a term specifically chosen to froth up the masses rather than enter in to any proper discussion of what a better system should look like.

That said, if we look at some of the examples above – whether it be FHLs, non-doms or BADR we have seen these statuses ‘abolished’ or seriously curtailed in recent times.

So maybe it is a useful tool for those who are seeking changes to tax system?

Phew. Sorry about that. I think I need a lie down

However, just like Gordon Ramsay, I feel I’ve gotten a few things off my chest…

 

If you have any queries about this article, then please get in touch.

 

[1] https://johnredwoodsdiary.com/2010/07/13/tax-evasion-and-tax-avoidance/

[2] https://www.express.co.uk/news/politics/876200/Paradise-Papers-Labour-Party-tax-John-McDonnell-Peter-Bone