NO, RESTRICTING INTEREST RELIEF IS NOT UNFAIR AT ALL!

BLOG 207

NO,RESTRICTING INTEREST RELIEF IS NOT UNFAIR AT ALL!

I have just read an article, “Taxes on Britain’s landlords are complex, unfair and counterproductive”.  It was written by Rory Meaking, a Research Fellow at the Taxpayers Alliance.  I do not know what a research fellow does, but it does not appear to involve research or, indeed, thinking.  The article bemoans the fact that five years ago George Osborne took what seems to me to be the very modest step of restricting income relief for interest paid by landlords to the 20% basic rate, with a phased introduction to give landlords the opportunity to rearrange their affairs.

Or what the article calls “gradually replacing the old, neutral system with one that is far more punitive towards landlords”.  I would argue it actually replaced an old unfair system with one that is a little bit fairer to those who choose to invest in things other than rental properties.  Mr Meaking’s proposition on neutrality is that if A pays interest to B and the government taxes B on its receipts, A ought to be entitled to a corresponding tax relief.

That argument seems to me to fall down very quickly.  When I eat a sandwich, the baker is taxed on the money I paid for the bread, the dairy on my cost of the butter, and the butcher on the meat I bought to put inside it.  I doubt that even Mr Meaking believes that I should get tax relief for eating my sandwich, yet that is the logic of his argument.  A more direct comparison is of course that the government gives me no tax relief when I borrow to invest on the stock exchange, it gives me no tax relief when I borrow to invest in a tech start-up (which seems to be the government’s current flavour of the month) and it gives me no tax relief if I invest in somewhere to live.  All of these things are as important, if not more important, to the country than a healthy residential letting market.  If Mr Meaking values neutrality, it would be helpful why he seems to believe that this concept should apply only to one type of investment.

The article does not address that question.  It does however suggest that allowing interest relief to the landlord is quid pro quo for not taxing a householder on his occupation of his house.  The answer surely lies in the word “income”.  Income tax is a tax on income, not a tax on pretences.  If Mr Meaking thinks that having invested my money in my house as a place to live ought to attract income tax on pretend income, why not also investing my money in my car, or my TV, or, indeed, my sandwich?  I do not expect Mr Meaking to remember 1962.  I do, because that is when I was serving my articles (the old expression for a training contract).  In 1962, we did tax people on pretend income from their houses.  I doubt that it raised much money though.  Virtually the only tax I did during my articles was maintenance claims.  If a person is to be taxed on notional income, fairness surely requires that he should be able to reduce that notional income by the expenditure on maintaining the house.  For most of my then firm’s clients, the maintenance claim largely eliminated the tax charge.

Of course, the real political problem with rental properties is that the investor in a rental property is in competition to buy it with a potential owner-occupier.  A government needs to strike a balance between the undoubted need for a healthy residential rental sector and the aspiration of a large part of the populace to own their own home.  Many people, including me, think that landlords are unfairly advantaged.  Owner-occupiers have to buy their houses from a combination of taxed income and borrowings the interest on which has to be met out of taxed income.  Landlords (after the first property) can buy properties out of a combination of untaxed income (because relief for interest on borrowings for earlier properties frequently eliminates the tax on current rents) and unrealised gains on other properties (by re-mortgaging them, which not only releases tax-free money to buy more property, but creates extra interest charges to reduce taxable rents still further).  Very few people have become multi-millionaires out of living in their own house.  Quite a lot of people have become multi-millionaires by building up a residential property portfolio, which suggests to me that the balance is weighed far too heavily in favour of the landlord.

Mr Meaking of course sees it differently.  He thinks “the government opted to tax a politically unsympathetic group to scapegoat”, instead of addressing the actual cause of the housing crisis, “a housing shortage caused by planning restrictions”.  Whilst the planning system can undoubtedly be much improved, I doubt that many other than Mr Meaking believe that abolishing the planning system would somehow mean that millions of new houses would be erected.  Mr Meaking thinks that blaming landlords for the housing crisis, “relies on the specious logic which claims that because owner-occupiers cannot set their mortgages against their tax, it gives landlords an unfair advantage for them to be able to do so.  This is nonsense (he says) because owner-occupiers are already exempt from tax for the value of their home (to themselves) as the owner …  But it was clearly a much easier option for politicians rather than dealing with the resistance to building more homes than we currently do so that housing supply increases and prices and rents fall”.

Of course, if prices and rents fall, some of the people hardest hit will be residential landlords with long-term borrowings.  Curious, because the special case that Mr Meaking seemed to be pleading in the rest of his articles seemed to be aimed at defending those he now seems to want to bankrupt!

ROBERT MAAS

GOODBYE SAJID JAVID

BLOG 206

GOODBYE SAJID JAVID

We will probably never know if Sajid Javid would have made a good Chancellor.  His brief tenure of the job from 24 July 2019 to 13 February 2020, combined with the effect of Brexit and the enforced General Election on the parliamentary budget, meant that he never managed to deliver a Budget – the yardstick by which Chancellors can be judged.

His resignation, reportedly because he refused to replace his special advisors with people more in tune with those in the Prime Minister’s office, suggests that he is too headstrong to have made a good Chancellor.  He himself described the prospect of acceding to the Prime Minister’s wishes as “no self-respecting minister would accept those terms”.  This has generated a great deal of press comment, mainly directed against the Prime Minister.  One that amused me is Private Eye’s front cover proclaiming “New Cabinet Announced” and featuring photos of 14 poodles each with a cabinet post listed under it.  But personally I think Mr Javid’s resignation astonishing.

It seems to be based on a premise that he believes that a Chancellor of the Exchequer should be independent of the Prime Minister.  Surely, that cannot be right any more than the Finance Director of an FTSE 100 company should be independent of the Chairman or the Chief Executive.  Special advisors are a comparatively recent phenomenon.  Their role seems to me to provide a counterbalance to the “institutional” views expressed to Ministers by their top Civil Servants.  There is some logic in that.  It is obviously also not unreasonable for a Minister to want special advisors whose advice he feels he can rely on.  But, subject to that, it is hard to see why No 10 should not want to be confident that the Chancellor’s advisors are in tune with the Prime Minister’s.  It is equally hard to see why a Chancellor should not want that too.  Although we will never know what went on behind closed doors, it seems unlikely that Boris Johnson said, “Sack all your advisors or resign”.  It seems far more likely that if Mr Javid had accepted the principle, there would have been some scope to negotiate on the people.

Of course if Mr Javid has no confidence in the Prime Minister’s advisors, that is different.  But if that is the case he resigned for the wrong reasons.  It is Mr Johnson’s government.  He is the only member appointed by the Queen.  He chooses his cabinet.  He should surely choose people he believes he can work with, because the business of government is a joint enterprise.  The Prime Minister ought not to be there to co-ordinate the separate policies of his Ministers.  The Ministers ought to be there to help to help to deliver the policies of Mr Johnson; they should govern from a common perspective.

This is particularly so of Chancellor and Prime Minister.  Indeed, there is no formal title of Prime Minister; Boris’ formal title is First Lord of the Treasury.  This suggests that he, not the Chancellor, has prime responsibility for the Treasury.  That is surely as it ought to be.  The principle role of the Treasury is to manage the economy.  But managing the economy ought not to be an end in itself.  The economy cannot be managed independent of the policies of the government.  It needs to be managed so as to enable the government to deliver its policies.  That means that, far from having the “first amongst equals” status that Gordon Brown in particular usurped for the Treasury, the Treasury’s role ought to be to help deliver the policies that other Ministers are pursuing.

I am not suggesting that the Treasury should be downgraded.  It is right that it is needed to temper government policies with financial realities.  But its role is not to challenge the government; it is part of the government.  It is not the most important part.  That is No 10.  But a powerful government surely requires that Nos 10 and 11 Downing Street work together.  Why else should there be an internal connecting door between the two?  And if a Chancellor is to use Special Advisors, working together surely requires that his Special Advisors are in harmony with the Prime Minister’s.

It is equally unreasonable to suggest, as much of the press has done, that, by acceding to this close working ideal, Rishi Sunak has revealed himself as too weak to be an effective Chancellor.  Weakness is not something that most people would ascribe to a Goldman Sachs alumni.  Working to deliver the policies of the Prime Minister and his cabinet is not weakness.  It restores the Treasury to its traditional role of financial guardian.  That is a crucial role.  I expect Mr Sunak to be able to meet its needs.

As an aside, I read something else recently that I found extraordinary.  Google is appealing a 2.4bn euro fine before the EU’s General Court.  The Irish judge on the panel apparently urged Google’s lawyer to imagine he had savings of 120 euro in his back pocket and was fined 2.4 euro for dropping some litter.  “Would you miss the 2.4 euro”, the judge asked.  I find that a strange notion of the rule of law.  His premise seems to be that Google has so much money that it should not waste the Court’s time over a 2.4billion euro fine, rather than challenge whether it had indeed done something that warrants a fine at all.  I find that an extraordinary concept.  He seems to be saying that justice should not be universal, if you are ultra-rich you should not worry about being unjustly fined, but simply pay up.

The fact that this judicial intervention has hardly merited any press comment as compared with Mr Javid’s resignation makes me wonder not so much what the role of the Chancellor is but what, if any, the role of the press is!

ROBERT MAAS