The loophole includes the use of offshore vehicles to avoid paying full stamp duty tax on property transactions, normally in excess of 500,000 pounds up to a few millions of pounds.
Chancellor of the exchequer, George Osborne, in his recent 2011 budget speech to the House of Commons emphasized that “there’s one area that needs extra work in the coming months, and that’s on the taxation of very high value property, where evasion and avoidance are widespread and some of the wealthiest are not paying their fair share. We will be redoubling our efforts to find ways of ensuring that owners of high value property cannot avoid paying their fair share. Unfortunately, not enough has been done in recent years to tackle this injustice. Her Majesty’s Revenue and Customs (HMRC) estimate that 14 billion pounds were lost through avoidance and evasion in 2008. We will close down three forms of stamp duty land tax avoidance, tighten capital gains rules for companies — and end the practice of disguised remuneration, which sees highly paid employees offered tax-free, lifetime loans that are never repaid.”
There have been some ill-informed reports in the British media a few days before the budget speech on March 23 warning that the Shariah is being used by Muslims to dodge SDLT for Islamic mortgages. Suffice to say that the loopholes have nothing to do with the Shariah or Islamic financial law, because the UK does not recognize this in its finance legislation. Any enabling legislation in successive finance bills over the last few years dealing with Shariah-compliant financial products does not refer to anything Islamic. These products are classified as alternative financing schemes, whether mortgages or financial investment bonds (sukuk) and come under the provisions of the UK banking laws.
The loopholes in the SDLT are exploited by savvy lawyers and tax accountants whether for conventional or Alternative Islamic property transactions and HM Treasury have been aware of these for some time but hitherto successive Chancellors have failed to act to plug the loopholes.
According to HM Treasury, the new tax avoidance measure will affect those who seek to avoid paying SDLT on the purchase of an interest in land. As such, legislation will be introduced in finance bill 2011 to make three changes to ensure or put beyond doubt that certain SDLT avoidance schemes are ineffective. The changes affect the relationship between the rules on sub-sales and the alternative (Islamic) finance reliefs; the definition of a “financial institution” for the purposes of the SDLT alternative (Islamic) finance reliefs; and the way the consideration is determined where land is exchanged.
The measure, maintains HM Treasury, supports the government’s objective of a fairer tax system by ensuring that SDLT is not avoided. Due to the risk of forestalling, HM Treasury did not embark on a formal consultation with the market. However, a limited, confidential discussion has taken place with some external stakeholders.
“The changes will have effect on or after March 24, subject to the details of the commencement provisions. If transactions or arrangements span March 24 then careful consideration of the commencement provisions will be necessary, but, broadly speaking, where transactions or arrangements were entered into before 24 March 2011 but completed afterward, the old rules will apply,” said a Treasury explanatory note.
The Treasury does not anticipate any adverse equalities or financial inclusion impact. Two of the proposed changes relate to reliefs for “alternative finance” products i.e. financial products designed to be compliant with Islamic law. However, HM Treasury stresses that the changes will not restrict the availability of the reliefs except where they are being misused to avoid tax.
The Treasury may have put any UK debut sovereign sukuk origination on ice, but one area it continues to consult and refine is tax matters relating to Islamic finance. As shown above, this deal with both neutrality issues to ensure that there is a level playing field for equivalent Islamic financial products and to make sure that the UK taxpayer and HMRC are not put at a disadvantage through any potential loopholes or peculiarities of Islamic financial structures.
In fact, the SDLT on alternative property financing and refinancing was amongst other things discussed at the last Islamic finance tax technical working group meeting on Oct. 6, 2010 at HM Treasury. The included the draft capital gains legislation, an update on the position with regards to capital allowances; purchase and resale arrangements and linked purchase and resale arrangements relating to property transactions.
The meeting revealed that:
a) There are no plans to issue further guidance on VAT rules for Islamic finance products at this time.
b) An EU working party is in the process of reviewing VAT and financial services. In respect of Islamic finance, this was being considered within the negotiations of the draft directive and regulation text but was not considered directly as a subject matter (although that may change going forward).
c) The value for money (VFM) case for not issuing a UK debut sovereign sukuk is poor (conceded the Treasury) but that the situation is under review.
d) Market players offered to provide HM Treasury with further evidence in support of a UK sovereign sukuk and the likely demand from investors.
In fact, HMRC put its latest draft of proposed changes to income and corporation tax to cater for the Shariah-compliant equivalent of a variable rate loan and also a regime to cater for the developing market in Islamic finance derivatives out for consultation with the deadline of 31 March 2011 for any responses.
These relate to purchase and resale arrangements in Murabaha contracts including linked ones and where returns are in foreign currency; and those involved in Islamic finance derivatives.
“Islamic finance derivative products,” according top the draft, “are a developing area, and often use arrangements such as Murabaha or other combinations of Islamic finance products to bring together the desired product. In order for these arrangements to benefit from the rules contained within Part 7 Corporation Tax Act 2009, some modifications are needed to certain provisions. Our aim is to create a regime for Islamic finance derivatives by creating the concept of an “alternative hedging arrangement”. This would be an arrangement in addition to the existing forms of derivative product catered for in Part 7 Corporation Tax Act 2009, but which is broadly equivalent to the conventional products already provided for within the rules.”
In fact, the document uses the term “alternative hedging arrangement” instead of the previous “alternative derivate arrangement” as it is closer to the wording used in the ISDA/IIFM Ta’Hawwut Master Agreement.
