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  • The ‘L’ Word

    9 October 2021

    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.

    As we have come to expect, we have seen the same type of garnish cooked up by financial journalists in their coverage of the Pandora Papers. 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, and you are splitting hairs” I hear you say.

    Of course, you are right.

    But language is important in the debate over tax.

    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’ 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.’

    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.

    “Sexing up” exemptions and reliefs

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

    Last year, 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 refrom.

    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 rules….

    I stopped watching.

    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 appeared to be about the Blairs.

    Our former prime minister is 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).

    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 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.

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

    Non doms

    In addition, historically, I’ve often seen the UK’s non-domicile rules – and particularly the remittance basis of taxation – referred to as a ‘loophole’.

    However, despite being fiendishly complex these are not loopholes. 

    These have been specifically built in to our legislation for centuries. They have been reviewed numerous times and have undergone two substantial overhauls since 2008. They are precisely what Parliament intends.

    You might reasonably think this is wrong or anachronistic. But that is a different argument.

    The cleaner pays more tax…

    We have seen the same recently with Annelise Dodds and her statements about the tax treatment of certain private equity gains (on carried interest) being subject to capital gains tax rather than the higher rates of income tax.

    But again, this distinction in treatment was agreed in a memorandum of understanding between HMRC and the British Venture Capital Association.

    So, you might think this is not the correct way to manage the tax system. It might not be ‘fair’. But it is not a gap in the legislation.

    Further, like capital gains on residential property, the rate of tax for certain gains of carried interest was left at 28% – rather than the reduced higher rate of 20% for all other gains. This was decided by Parliament.

    No loopholes to see here.

    Other reasons

    Of course, journalists may simply have a lack of understanding. They don’t know where to look to see the specific code for, say, non-doms or the anti-avoidance rules surrounding the use of non-UK trusts, ahem, reside.

    As such, they might not understand whether the ‘favourable’ treatment stems from an act or omission.

    Finally, there might be instances where they get it spot on. I can’t think of any recent examples where this is the case. In fact, at the rate our tax legislation is vomited out, there are far more examples of overlapping and redundant provisions than clear deficiencies in the code. However, I accept there must be some genuine loopholes.

    The Redwood defence

    The importance of language flows both ways.

    I have made the same points about what is, and what is not, tax avoidance.

    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 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.

    But that does not mean we should explain away any of its shortcomings as ‘loopholes’. 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.

    Phew. Sorry about that.

    Just like Gordon Ramsay, I feel I’ve gotten something off my chest…

    If you have any queries or comments about this article, or tax matters in general, then please get in touch.

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