Property Tax Reforms Analysis

Critically analyse the effectiveness of three recent reforms to the area of Property Tax. Your answer should cover one reform from each of the following areas: Stamp Duty Land Tax, Taxation of Rental Income and Capital Gains Tax. To what extent have these reforms resulted in a fairer system of taxation of property?

Introduction: Reform of property tax is always considered as an effective mechanism to control country’s economy and people’s standard of life. Tax is “a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions”[1]. Whereas property tax is levied on property and it is well source of  revenue which contributes to the fiscal economy of local government. The founding principle of English tax law can be found in the seminal judgment by Lord Tomlin in IRC v Duke of Westminster[2] which states that ‘Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be[3]’. In the UK tax system, there are main four types of governmental revenue which are such as income tax, national insurance, value added tax and corporation tax. Apart from this there are many sources (Property Taxes) where government collect taxes.

There are a numerous types of taxation that the state can apply, but property taxes have been identified as some of the fairest and most efficient because it is the most transparent of potentially taxable assets[4]. Tax reform is the way of changing the way how taxes are levied by the  government or local councils on the people or property to mitigate government expenditures and rationalise tax system.

This paper will evaluate the features of property law within the context of the recent tax reforms through the legislation, case laws and General Anti-Abuse Rules (GAAR), because through the explanation of these  there would be argument that the substantive features  of property tax law can be met through stamp duty land tax, taxation of rental income and capital gains tax.

Significance
of Property tax: Taxation is imposed on property in order
to redistribute of wealth[5]and it also
enables the state to collect taxes in order to govern the state and mitigate
the expenditures. In the Mirralees Report it was found that property tax is the
set of the ‘tax base in most advanced economies’[6]. This has been identified
in two bases, which are: (i) the redistribution of wealth; and (ii) provision
of funding for the state to provide security and justice in the state, as
required by the social contract between the state and the citizenry[7].In the UK, Income taxes
and VAT are considered the major sources of government revenue but revenues
from property tax are increasing gradually. Suggestion is that there should be
a framework in place which will allow for fair taxation to cope with the needs
of the state and right of the individuals to manage their property.

 This can be found in Smith’s harm principle in operation in the context of tax law (i.e. the state has to take initiative and implement taxation reforms, providing that the state is wilful to operate).  In spite of that , there is a potential problem exist when we tend to deal with the balance between the rights of the individual and the needs of the state because that might result in chaos situation, basically  when the people take shelter of subterfuge in the taxation to ‘evade’ their liability for tax. The result is that there can be a case of abuse, but this has not always given rise to legal liability, unless there is a case of purposeful tax evasion[8]. In other words, tax abuse or avoidance has traditionally been seen as allowable, because it is an example of the individual managing their own affairs[9]. There is always a debate within English law that there should be the development of a general anti-avoidance rule similar to the United States and Canada[10], which provides a deliberate approach to determine long if one or more transactions are deliberately applied to avoid taxes[11]. The main problem that arises is that the GAAR in the UK is greatly diluted, especially when it is identified as anti-abuse rather than anti-avoidance. GAAR identifies which was implemented to “discourage taxpayers from entering abusive arrangements, and to discourage potential promoters to promote such agreements … but if not abusive fall outside the scope of GAAR”[12]

The distinction can be difficult to predict, but
one must consider the principles of tax law on a sliding scale from minimal
intervention to the high intervention where anti-abuse rule is closer to a
minimal intervention to the anti-evolution rule. Therefore, there are
principles at stake in the context of tax law. As Lee says, “the tax is
often seen as an ephemeral space, as part of the law without principle, and
subject to the whims of politicians …. However, the basic principles
remain.”[13]

The underlying principles of English common law
have experienced a bumpy road due to willful refusal of the traditional
approach to tax law. This is illustrated in the application by the Ramsay doctrine[14].
In fact, the support of the Ramsay doctrine to an intentional

 approach is
particularly important in the context of the taxation of the property that has
been identified in the area of ​​the property is right for the individual to
manage his business[15].

In Ayrshire Pullman Motor Services & Ritchie v CIR[16], it was stated that:

No man in this country is under minimal, moral or other effort, so to organize your legal relationships to your business or to your property as to enable the Tax Agency to put as much head as possible in their stores.The taxpayer, as a way, the right to be adroit to avoid, as far as they can honestly, the exhaustion of their resources by the Tax Agency[17].

The principle of this operation demonstrates that
there is a view that it should be the commitment to a law and policy in the
field of taxes, in order to develop legal principles that support a framework
of teleological interpretation. The logic of this is that, in the light of the
Ramsay doctrine, the courts have dismissed the intentional framework, since it
undermines the principle that the individual can determine his / her tax
affairs. Therefore, the next phase of this discussion is to examine the Ramsay
doctrine, the GAAR principle and how to create a more effective system of
property rights.

Implications of Property Tax and It’s Reform Through GAAR:

Property tax is an annual tax on property by the owners to the
government or their councils and property tax is basically imposed on all
tangible property, real property and many more such as Stamp
Duty Land Tax, Taxation of Rental Income and Capital Gains Tax etc. The requirement for a boost tax system not to insist
that the course of action of the procedures and people has an inclination of
sumptuous in achieving the objectives of the tax. On the other hand , there is
a requirement for a working framework that enhances the operational capability
of fiscal policy in place. The tax system consists of Directors of audit
procedures and the imposition of taxes, revenue management, etc. All parts of
the system must interact effectively for tax purposes to reach goal. Exuding
from this is the way that expense approach is relentlessly explored so that it
addresses the surviving financial directs and difficulties with a view to
accomplishing the financial advancement It can be said that the step that follows  the principle of flexibility guideline.
Review of fiscal policy is basically called tax reform. Tax reform is essential
to bridge the gap between the needs of development and financing needs.

Potential areas for reform property taxes are
related to the current fee structure, and not with the tax authorities. There
are three main issues related to property tax reform. The first question is
whether the property tax can and should be used as a tax benefit. The second
issue concerns the effect of property tax, that is, if it really is a
regressive tax. The third issue is discretionary tax purposes, which are a
direct result of differences in effective tax rates.

Right
to land is a paramount division in which the court must consider property tax.
This is confirmed in Pitt v Holt[18],
in which the expectation and the reference framework are indissolubly linked,
because there have been instances where there may be a zealous structure in
mind that sees tax evasion when In fact there is no tax evasion. As Pitt and
Holt said,

In some cases, artificial tax evasion, the judge may think that it is right to deny the exemption, both because those acting candidates, undoubtedly a presumably expert advice, should be considered as accepting the risk that the Plan is ineffective or on the grounds that   discretionary suspension should be denied for reasons of public policy[19].

The
presumption is that there must be a clear parliamentary intent to allow
intentional interpretation[20], although in the area of
​​property rights there has been a greater degree of flexibility within the
interpretative model[21]. The controversy in court
has finally forced the legislator to act with GAAR, which can be identified as
a diluted version of the Ramsay principle.

GAAR was introduced under s. 206 of the 2013 Finance
Act (FA 2013), based on a value (for example, it assures that there is no
anti-evasion principle that allows courts to actively challenge the
individual’s traditional path of determining his / her tax undertakings[22]).
The purpose of GAAR is clear, of which s. 206 (1) FA 2013 provides that
“this Part shall take effect with the aim of countering the unfair tax advantages
of fiscal provisions”[23].

This might be seen as akin to the Ramsay principle[24].
As stated in IRC v McGuckian[25].
This case found that there are two fundamental principles at the center of
Ramsay’s doctrine, namely: (i) respecting the right of individuals to determine
their property issues (for example, the traditional principle of customary
law); And (ii) the government’s right to apply fair and adequate tax laws,
including tribunals, allowing deliberately to interpret the legislative
framework to ensure that there is an effective tax model that meets the dual
purpose of enforcing property. Lord Steyn criticized the retention of the
traditional approach in IRC v McGuckian[26],
who argued that the “literal interpretation of tax rules and formal insistence
to examine the steps of a program implemented separately allowed tax evasion
schemes Prosper at the expense of the taxpayer’s genera body … the courts
have been accustomed to this narrow vision of his role”[27].
“The implication is that there is a problem with a minimalist approach,
which has allowed to get a fragmented pattern of confusion[28].
Therefore, it is necessary to ensure that there is a choice structure that
effectively develops a law that is associated with the Prevention of tax
evasion schemes[29].

While there are solid hypothetical contentions of
imposing some forms of wealth, it is broadly concurred that the current wealth
taxation system in the UK is defective, creating a lot of inconsistencies and
inefficiencies. This part describes how stamp duty land tax,
taxation of rental income and capital gains tax , highlight the purpose and the shortcomings of any
tax. The outcome of GAAR principle must be carefully evaluated, particularly
when there are cases where the court confirms the interest of the State because
of a restrictive interpretation without examining the purpose of the
legislative framework that upholds it. In 
Project Blue
Limited v HMRC[30]
the operation of 
s.75A Financial Law 2003 (FA 2003) where there is a possible violation
that is related to a number of operations that may fall under the Ramsay
Doctrine operation if there is a general anti-evasion[31]
action in which it exists. There is a formula for the operation of the
over-evolutionary approach principle because it has been accepted that a number
of single transaction related transactions are sufficient to determine how an
act of abuse / circumvention can be elaborated by HMRC[32].
The stamp duty has a long history in the UK tax system, being the first time in
1694[33].
It is derived from a period when few other potential taxes were simple to
implement, while tax-settled transactions were easy to classify and measure.
But in the modern era of large base taxation, the case of keeping stamp duty is
very fragile. Transaction fees are particularly ineffective[34].

SDLT introduced in the 2003 Finance Law replaced the
stamp duty on a land from December 1, 2003[35].
The anti-evolution of the government’s introduction of the tax led to key SDLT
provisions have been designed throughout structuring systems Of specific tax
reduction. This starting point has led to the extraordinary complexity of
tariff arrangements for ordinary transfers and contractual arrangements[36].
In addition, in revising the Expenditure and Autumn Declaration 2015, the
Chancellor announced that from 1 April 2016, the highest SDLT rates will be
applied for purchases of additional residential property, homes, for example,
and real estate purchase. The higher rates are 3% above current rates and SDLT
will be applied for purchases of additional residential properties in England,
Wales and Northern Ireland, is not Scotland[37]. SDLT debilitates
commonly useful exchanges.

There
is an effect of variations in SDLT lease transactions that were presented by
the 2013 Finance Act. The new rules provide that 2013 FA[38]

                 (A) when a new lease agreement
is made within one year of the grant on the date of expiry of the original
lease, the new lease will be treated as if it had been granted on the day after
the original lease term expired; is

                  (B) When a new lease within one year is not
granted from the date of expiration of the original lease, no extension notice
of any additional tax is required up to 30 days after completion[39].

The excessively equation based approach makes irregularities ,for
example running the place of residence of principle and whether the individual
uses his residence for business income. Capital gains tax (CGT) is not paid on
a property if it proves to be their main place of residence[40]. This
principle was used when people split their land into plots[41] for
development, which means that an always non-taxable important income is allowed
and where it turns out that property development is not the business of the person
under the Part 2 of income tax (trade and other income) Act 2005 (ITTOIA 2005)[42] (ie if
the individual is considered a property promoter under Article 264 ITTIA 2005
the income tax or capital gains will be For a fee). In most cases, the
individual division of their home did not discuss traditional commercial
companies[43],
which means that there will be derogation, provided that the division of human
lands has lived in the property as the principle of residence[44]. In
fact, the main residence site has led to a high degree of abuse, which was
confirmed by Mr PA Ellis against HMRC[45]. The
main problem is that this has led to per mutable permits of residences in order
to avoid capital tax on income (especially when there is going to be the sale
of a secondary residence). However, in recent years the courts have indicated
that such actions should lead to suspicion[46]. Income
Tax (Trade and Other Income) Act 2005 (ITTOIA) Part 3 imposes income tax on the
benefits of a real estate business, which includes isolated or casual lease
rentals, furnished housing leases[47]. ITTOIA 2005 s 264
provides: “One person’s real estate business in the United Kingdom shall
consist of: (a) all the activities that the person undertakes to generate land
income in the United Kingdom; and (b) any transaction that the person held in
such In the course of such a business[48].However,
without GAAR being intentionally interpreted, there is a fundamental failure in
creating a fair property tax system.

Conclusion:
Since tax is still a good source of income generation, fiscal policy and a real
tool for achieving fiscal policy goals, the implementation of reforms must
remain the cardinal goal of the legislature. The GAAR will conceivably make a
reasonable tax assessment framework, particularly if it is interpreted purposively.The
purposive interpretation will make adjust inside the property tax framework,
the length of it is connected in the positive and the In this manner, the GAAR
is the initial step to make a fair framework of property tax system, the length
of it is purposively connected.

References:

• Bhandari, M (2011) ‘Unravelling for Tax Purposes: Rescission and Rectification’British Tax Review 1(83)
• Duff, DG ‘Lipson v Canada: whither the Canadian GAAR?’ (2009) British Tax Review 2(161),
• Editor ‘The General Anti-Abuse Rule (the GAAR)’ (2014) Property Law Bulletin (S&M) 70,
• Evans, S ‘It’s ‘clean hands’ again: the dirtiness of not paying tax considered in the Supreme Court’ (2015) The Conveyancer and Property Lawyer 61,
• Gammie, M ‘Moral Taxation, Immoral Avoidance – What Role for the Law’ (2013) British Tax Review 4(577)
• GOV.UK, “Stamp Duty Land Tax Manual”, HMRC 2016, Available at
• <https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm00030> accessed at 19April 2017
• Gordon, K, Manzano, XM, Cannon, P, Barcroft, C, Arrowsmith, P and Fairpo, A Tiley and Collisions UK Tax Guide 2012-2013 (30th Ed, Tolley, 2012)
• HMRC’s Guidance with Effect 15^th April 2013 retrieved from: http://www.hmrc.gov.uk/avoidance/gaar-part-abc.pdf accessed April 17, 2017
• HM Revenue and Customs, “Stamp duty land tax: leases simplification”, HMRC 2015, Available at < https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/179254/stamp_duty_land_tax_leases_simplification.pdf.pdf> accessed at 17April 2017
• Institute for Fiscal Studies, “Tax By Design”, IFS 2011,  Avaialble at <http://www.ifs.org.uk/docs/taxbydesign.pdf> Accessed at 19 April 2017, p.403-4
• Lee, N Revenue Law: Principles and Practice (32^nd Ed, Bloomsbury, 2014)
• McLaughlin, M ‘The Ramsay Principle’ Taxation Web May 1^, 2000 available at: http://www.taxationweb.co.uk/tax-articles/general/the-ramsay-principle.html accessed December 21, 2015
• Mirrlees, J, Adam, S, Besley, T, Blundell, R, Bond, S, Chloe, R, Gammie, M, Johnson, P, Myles G and Poterba, J (2011) Tax by Design: the Mirrlees Review OUP available at: http://www.ifs.org.uk/mirrleesReview/design accessed April 2017,
• Oxford Dictionaries, Oxford University Press <http://plato.stanford.eduhttp://www.oxforddictionaries.com/definition/english/tax> Accessed at 15 April 2017
• Popplewell, N ‘Finance Act Notes: Section 194: pre-completion transactions: existing cases; section 195 and Schedule 39: pre-completion transactions’ (2013) British Tax Review 499
• Prabhakar, R, Rowlingson, K and White, S How to Defend Inheritance Tax (Fabian Society, 2012)
• Smith, A (1776) The Wealth of Nations (Digireads, 2004)
• Stephen Green, “SDLT: simplification to the lease regime”, Landlord & Tenant Review 2014, Available at <http://login.westlaw.co.uk.lawdbs.law.ac.uk/maf/wluk/app/document?&srguid=ia744d0640000015415f881a6d96ba7a2&docguid=IA6206F50BEAD11E3B31ABE8402DF1B33&hitguid=IA6206F50BEAD11E3B31ABE8402DF1B33&rank=12&spos=12&epos=12&td=26&crumb-action=append&context=17&resolvein=true&return=true> Accessed at 19 April 2017
• Taxation of Chargeable Gains Tax Act 1992 (TCGA 1992)

Cases:

• Astall v HMRC [2010] STC 137
• Ayrshire Pullman Motor Services & Ritchie v CIR (1929) 14 TC 754
• Azam v Commissioners for Revenue and Customs [2011] UKFTT 50 (TC)
• Furniss v Dawson [1984] STC 153
• Harte v Revenue and Customs [2012] UKFTT 532 TC
• Helvering v. Gregory, 69 F. 2d 809 (2d Cir. 1934) (per Hand J)
• IRC v Burmah Oil Co Ltd [1982] STC 30
• IRC v Duke of Westminster(1936) AC 1
• Lipson v Canada [2009] SCC 1 (Sup Ct (Can))
• Manzur v Commissioners for Revenue & Customs [2010] UKFTT 580 (TC)
• Marson v Morton [1986] STC 463
• Metcalfe HMRC [2010] UKFTT 495 (TC)
• Moore v HMRC [2010] UKFTT 445 (TC)
• Mr PA Ellis v HMRC [2013] UKFTT 003
• Pitt v Holt [2013] UKSC 26, para 135
• Project Blue Limited v HMRC [2013] UKFTT 378
• Salt v Chamberlain [1979] STC 75
• WT Ramsay Ltd v IRC [1982] AC 300

[1] Oxford Dictionaries, Oxford
University Press <http://plato.stanford.eduhttp://www.oxforddictionaries.com/definition/english/tax> Accessed at 5 April 2017

[2]Smith, A (1776) The Wealth of Nations (Digireads, 2004) 439

[3] Bhandari, M (2011) ‘Unravelling for Tax Purposes: Rescission and
Rectification’British Tax Review 1(83),
84

[4] Mirrlees, J, Adam, S, Besley, T, Blundell, R, Bond, S, Chloe, R,
Gammie, M, Johnson, P, Myles G and Poterba, J (2011) Tax by Design: the
Mirrlees Review OUP available at: http://www.ifs.org.uk/mirrleesReview/design accessed April 7, 2017, 386.

[5] Ibid, 386

[6] Ibid, 386

[7] Ibid, 386

[8] Lee, N Revenue Law: Principles and Practice (32^nd Ed,
Bloomsbury, 2014), 10

[9] Editor ‘The General Anti-Abuse Rule (the GAAR)’ (2014) Property
Law Bulletin (S&M) 70, 71

[10] Duff, DG ‘Lipson v Canada: whither the Canadian GAAR?’ (2009)
British Tax Review 2(161), 165

[11] Lipson v Canada [2009] SCC 1 (Sup Ct (Can)); Helvering v. Gregory, 69 F. 2d 809
(2d Cir. 1934) (per Hand J)

[12] HMRC (2013) HMRC’s Guidance with Effect 15^th April 2013 retrieved from: http://www.hmrc.gov.uk/avoidance/gaar-part-abc.pdf accessed 17th April, 2017

[13] Lee, N Revenue Law: Principles and Practice (32^nd Ed,
Bloomsbury, 2014), 9

[14] WT Ramsay Ltd v IRC [1982] AC 300

[15] McLaughlin, M ‘The
Ramsay Principle’ Taxation Web May 1^, 2000 available at: http://www.taxationweb.co.uk/tax-articles/general/the-ramsay-principle.html
accessed April 14, 2017

[16] Ayrshire Pullman Motor
Services & Ritchie v CIR (1929) 14
TC 754

[17] Ibid, 763

[18] Pitt v Holt [2013] UKSC 26, para 135

[19] ibid, para 135

[20] Gordon, K, Manzano, XM, Cannon, P, Barcroft, C, Arrowsmith, P and
Fairpo, A Tiley and Collisions UK Tax Guide 2012-2013 (30th Ed, Tolley, 2012)
1940

[21] Evans, S ‘It’s ‘clean hands’ again: the dirtiness of not paying tax
considered in the Supreme Court’ (2015) The Conveyancer and Property Lawyer 61,
62

[22] Gammie, M ‘Moral Taxation, Immoral Avoidance – What Role for the
Law’ (2013) British Tax Review 4(577), 584

[23] S. 206(1) FA 2013

[24] Gammie, M ‘Moral Taxation, Immoral Avoidance – What Role for the
Law’ (2013) British Tax Review 4(577), 584

[25] IRC v McGuckian [1997] 1 WLR 991

[26] ibid

[27] ibid

[28] Astall v HMRC [2010] STC 137; Barclays
Mercantile Business Financial Ltd v Mawson [2004] UKHL 51

[29] Prabhakar, R, Rowlingson, K and White, S How to Defend Inheritance
Tax (Fabian Society, 2012), 9

[30] Project Blue Limited v
HMRC [2013] UKFTT 378

[31] IRC v Burmah Oil Co Ltd [1982] STC 30

[32] Furniss
v Dawson [1984] STC 153

[33] Institute
for Fiscal Studies, “Tax By Design”, IFS 2011, 
Avaialble at <http://www.ifs.org.uk/docs/taxbydesign.pdf>
Accessed at 19 April 2017, p.403-4

[34] Institute
for Fiscal Studies, “Tax By Design”, IFS 2011, 
Avaialble at <http://www.ifs.org.uk/docs/taxbydesign.pdf>
accessed t 18 April 2017, p.403-4

[35]
GOV.UK, “Stamp Duty Land Tax Manual”,
HMRC 2016, Available at

<https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm00030>
accessed at 19April 2017

[36] Natalie
Lee, Revenue Law: Principles and Practice
(^33rd Edition, Bloomsbury Professional 2015)p.1376

[37] Institution
for Fiscal Studies, “Tax Without Design: Recent Developments in UK Tax Policy”,
IFS 2014, Available at< http://www.ifs.org.uk/uploads/publications/wps/wp201409.pdf>
accessed at April 2017, p18

[38] Stephen
Green, “SDLT: simplification to the
lease regime”, Landlord & Tenant Review 2014, Available at
<http://login.westlaw.co.uk.lawdbs.law.ac.uk/maf/wluk/app/document?&srguid=ia744d0640000015415f881a6d96ba7a2&docguid=IA6206F50BEAD11E3B31ABE8402DF1B33&hitguid=IA6206F50BEAD11E3B31ABE8402DF1B33&rank=12&spos=12&epos=12&td=26&crumb-action=append&context=17&resolvein=true&return=true>
Accessed at 19 April 2017

[39] HM
Revenue and Customs, “Stamp duty land tax: leases simplification”, HMRC 2015,
Available at <
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/179254/stamp_duty_land_tax_leases_simplification.pdf.pdf>
accessed at 19April 2017

[40]
S. 222 Taxation of Chargeable Gains Tax Act 1992 (TCGA 1992)

[41]
Moore
v HMRC [2010] UKFTT 445 (TC); Metcalfe HMRC [2010] UKFTT 495 (TC)

[42]
S. 2 ITTOIA 2005

[43]
Salt v
Chamberlain [1979] STC 75; Marson v Morton [1986] STC 463

[44]Azam v
Commissioners for Revenue and Customs [2011] UKFTT 50 (TC); Manzur v
Commissioners for Revenue & Customs [2010] UKFTT 580 (TC)

[45]
Mr PA Ellis v HMRC [2013] UKFTT 003

[46] Harte v Revenue and
Customs [2012] UKFTT 532 TC

[47] Natalie
Lee, Revenue Law: Principles and Practice
(^33rd Edition, Bloomsbury Professional 2015)p387

[48]
Section 264, Income Tax (Trading and Other Income) Act 2005