The Ros Report: the Treasury defends the indefensible

Last week Property118 published the response from HM Treasury to my comprehensive report on Section 24 of the Finance (No. 2) Act 2015 “the unjust legislation that will make the UK housing crisis much worse.” The report has become widely known among landlords as “The Ros Report”

“The Ros Report” – reply to The Treasury response …

To whom it may concern

I refer to your letter to me dated 15 November 2016.

Naturally, I am very disappointed that the Treasury is still repeating falsehoods about Section 24 of the Finance (No. 2) Act 2015. Also, despite being told that my comprehensive report into this has been read by Treasury staff, I very much doubt that as any reasonable person reading the report would see immediately that the measure to disallow unincorporated landlords’ finance costs is ‘absurd’ (the Telegraph and the Institute of Chartered Accountants of England and Wales), ‘doesn’t make sense’ (the Institute of Economic Affairs), is ‘plain wrong’ (the IFS) and that it is an ‘Alice in Wonderland tax’ befitting a ‘lunatic dictator’ from a third world country (the Telegraph).

I provide the link once more to my report:

https://www.property118.com/wp-content/uploads/2016/10/6G0YKMd1Wf.pdf

Nevertheless, despite my disappointment and the dismay of landlords with whom I have shared your letter, I will once more point out why the Treasury has this so wrong, covering the points made in the letter to me, point by point. When you reply to me I would be grateful if you could answer each point in order.

1.Section 24 will categorically NOT affect landlords with the ‘largest incomes’ but rather those who owe the most in finance costs as it consists of a tax on finance costs and not actual profit. How it can be suggested that a large turnover in ones business means one has a high ‘income’ (implying that this is net profit) is downright dishonest and insults our intelligence. Handing back 20% ‘relief’ is a ludicrous idea, as it does not compensate for the fact that those of us who provide a large amount of essential housing to millions of tenants in this country will be taxed on our considerable finance costs as though costs were profit.
In a letter sent to a colleague of mine on the same day that you sent your letter to me, ‘the Treasury contradicted itself and say that the landlords with the largest incomes (the ‘cash-buyers’) won’t be affected. I think you need to get your story straight.

2. Phasing in a bizarre and unjust tax regime over 4 years will not allow people to ‘adjust;’ we are not stupid. We know that this is a euphemism for increasing rents, evicting, selling up and/or going bankrupt. Strangling a person slowly to death is not that much more preferable to delivering a swift blow to their head. Landlords have invested in most cases for the long-term and are often tied into mortgage agreements, CGT liabilities and so on from which it is not a case of simply extricating oneself. Business decisions have been made by landlords over a period of many years and they did not, quite reasonably, expect that a ‘bonkers’ tax would suddenly be thrown into the works, whereby revenue got reinterpreted as taxable profit. As the Institute of Chartered Accountants of England and Wales (a body completely unaffiliated to landlords and one which in fact stands to gain from the chaotic and confusing tax measure) has stated:

‘The idea that landlords will be taxed on the profit of their businesses, but not be allowed to offset the costs of creating that taxable profit is absurd, unjust and unsustainable. It overturns a fundamental, centuries-old principle of taxation.’

Can you please give me your response to that statement?

3. I also don’t know why you mention that ‘relief’ is not available to ‘ordinary homebuyers.’ We are running a business on which we are taxed. Would you say a letting agency or a Housing Association providing identical services to ours should be equated with ‘ordinary homebuyers’? And why should incorporated landlords and/or large institutions be exempt? No justification for this has been given by the Treasury. You also point out how holiday lets enjoy a different tax structure but you offer no justification for why they should be able to offset the costs of producing their taxable profit, but we should not. If you would like us to be treated like ‘ordinary homebuyers’ please stop taxing us. You don’t tax them – so don’t tax us. I look forward then to being able to sell my properties as these ‘ordinary homebuyers’ can completely free of Capital Gains Tax. To say that disallowing our finance costs is ‘aiming to reduce these distortions’ is sophistry of the worst kind. In fact, the measure further distorts things in favour of owner-occupiers, as Paul Johnson at the IFS so clearly stated to the Treasury Select Committee following the Summer Budget.

4. Also, with regard to holiday lets, I would like your response to what the following landlord has to say:

‘My business model facilitates workforce mobility in the UK – which we are told on the one hand – by the government is of vital importance – (especially in the healthcare sector). Some of my tenants, include Junior Doctors, Nurses, PHD scientists, IT professionals, Interns, on placements etc. on 3-12 month contracts. I also follow very stringent rules & regulations and my properties are available for lettings for 365 days of the year & I offer pretty much all the facilities of Holiday Lets – (Except hair-dryers).

This is a landlord who will immediately face infinite tax rates once s24 has been fully introduced.

5. Furthermore, IF Section 24 ‘only’ affects 1 in 5 landlords, we estimate that to be about 400,000 landlords and these are those who own the most properties. One survey estimates this means 4.6 million tenants. The Treasury is still refusing to say that even one tenant will suffer adverse consequences. This is ludicrous.

6. Case studies such as those in my report are not rare as you aver and I can provide you with further similar case studies if required. I would therefore like the Treasury to evidence that statement. Also the case studies showed how if interest rates remain unchanged, these portfolio landlords will face effective tax rates of 83% and 93%. A small interest rate rise will mean they are taxed on a loss. This has been confirmed by Megan Shaw at HMRC. This is outrageous. How can the Government defend the indefensible – taxing people ‘infinite’ rates of taxation on losses? Tax is supposed to be levied on profit; not on thin air.

7. You also do not seem to understand what happened in Ireland. You say that they introduced a more extreme version of s24 but they did not. The incarnation of this absurd tax regime in Ireland was far less extreme between 1998 and 2001 because it WAS NOT RETROACTIVE AND APPLIED TO NEW PURCHASES ONLY; in its later incarnation it was retroactive but only 25% of finance costs were disallowed, not the 100% to be disallowed in the UK (with an arbitrary 20% ‘relief’ returned). If the Chancellor changes s24 so that it applies to new purchases only it will not devastate the private rented sector. It is true that it will stop landlords from making any new purchases, as landlords would be stupid to buy with s24 in place, but at least it would not bankrupt currently successful businesses and cause devastation to millions of tenants. It is the retroactive nature of s24 in the UK which is so iniquitous and means that the consequences will be so much more severe here than in Ireland. Incidentally, what is the Treasury’s view on how the far milder Irish experiments led to massive rent rises and ended in failure and their repeal? Why will s24 not result in the same scenario?

8. Name one country in the world where this has worked.

9. Also, please stop saying the Government is ‘levelling the playing field.’ Personally, as I have mentioned, I would love to be placed on a level playing field with owner-occupiers as I would have to pay no income tax on my rents and no CGT. Please, please bring in the level playing field.

10. And also please don’t try to say that rents will not go up as a result of this when we can give you the evidence that they have already gone up and will continue to do so. I personally increased most of my rents as a result of s24 in November 2015 and will be doing this again in April 2017 so that tenants know that it is as a direct consequence of the Government’s punitive new tax regime . How else would a business pay effective tax rates not seen before in a civilised country?

11. Also, as portfolio landlords ‘adjust’ as the Treasury likes to put it, when this results in us selling our rental properties, entailing in most cases, vacant possession (as business people we know that that is the best way to maximise our returns), where do you expect the evicted families to go?

12. What impact assessment have you done on the numbers of evictions and what provision are you making for housing these families?

Yours faithfully

Dr Rosalind Beck

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