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Bland Unsight

The World According to G.A.A.P.

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TL;DR - If you want to be taxed like a business, don't set up a mad leveraged empire with millions of pounds of mortgages which pays its tax via the personal income tax self-assessment form.

_____

The four or five of you who don't yet have me on ignore will be aware that I've had a thrilling conversation with another poster about GAAP already here and have also (here on the Scum thread) reported elements of a temperate and well-mannered exchange of views with "Home Provider" in the now closed comments section of a recent Guardian article.

My take on things is pretty much consistent with the position mapped out by the ICAEW in their 7 September 2015 briefing on "Finance (No. 2) Bill 2015 Clause 24: Relief for finance costs related to residential property businesses", which is now usually referred to as section 24.

Here's what are in my opinion are the key passages (with emphasis added):

Quote

We appreciate that there is an inequality of treatment when tax relief is available where a loan is taken out to buy property to let when such relief is not available for the purchase of other investments, for example to purchase quoted shares. While this policy position has been the case for many years, it is reasonable for the Government to consider whether it is justified. However there is a difference between a person buying one or two properties as an investment and a person buying a large portfolio run as a commercial business. A comparison can be made with tax relief on loan interest paid on a loan to buy shares: if the shares are, say, a quoted company then no tax relief is available on any interest paid but where a person buys shares in a family trading company they do receive tax relief on their loan interest paid.

and

Quote

It is a long established principle of taxation that expenses incurred wholly and exclusively for the purposes of the business are deductible when calculating the taxable profit. This proposal contravenes that principle and will result in proprietors of property businesses being liable to tax on an economic loss. 

Now, somewhat unsurprisingly, when these ideas are encountered in the wild they tend to lean in a rather different direction and all seem to rest on this quote from the wonderful "The compelling case against Section 24" from the Axe The Tenant Tax Coalition.

Quote

“Section 24 contravenes the Generally Accepted Accounting Principles (GAAP) that HMRC will continue to use for every other enterprise in the country.”

Nicholas Hopkin, retired Senior Partner, PwC

As posted on the Scum thread, my new leveraged landlord pal directed my attention to an HMRC internal manual BIM31005 which says (emphasis added)

Quote

Tax and accountancy: introduction


The basic principles for computing the taxable profits of a trade and the relevant statute are set out at BIM30500 onwards. As discussed there, the statutory rules (S25, S26 Income Tax (Trading and Other Income) Act 2005 and S46, S47 Corporation Tax Act 2009) require a two-stage process, as follows:

  1. Ascertain the profits of the trade for the period computed in accordance with generally accepted accounting practice.
  2. Adjust the accountancy profits in accordance with any tax rules or principles which differ from generally accepted accountancy practice.

and also says

Quote

Profits computed in accordance with generally accepted accounting practice form the starting point for the computation of taxable profits. Adjustments to those profits may, however, need to be made to conform to tax law. As well as those required by specific statutory principles adjustments may also be needed to give effect to more general tax principles, best seen as being derived from the requirement in S7(1) Income Tax (Trading and Other Income) Act 2005 and s8(3) Corporation Tax Act 2009 to tax the `full amount’ of the profits of the trade, laid down by the courts. 

Long and short of it, I think the leveraged landlords are offering a 'have your cake and eat it' argument

  • There's generally accepted accounting practice (GAAP) and there are principles of taxation, and they are not the same thing
  • A portfolio landlord can make a reasonable case that a prinicple of taxation is being set aside when they are not allowed to deduct mortgage interest expenses when determing taxable profits
  • The idea that GAAP is being contravened is laughable horsehit (so much so that the quote attributed to the PwC partner strikes me as odd, to say the least)
  • Buy-to-let mortgages were marketed to consumers to allow them to invest some money in housing
  • The tax code as it stood in 1996 (when the marketing of this novel mortgage product began) did not countenance people trying to operate unincorporated property businesses with balance sheets of tens or even hundreds of millions of pounds and be paying their tax via personal income tax using a self-assessment tax return
  • Any business structured in this way was always liable to be affected by changes to the personal income tax framework, and the personal income tax framework is liable to continual revision.
  • Even leveraged property business themselves have seen repeated change. As per the ICAEW briefing "prior to 1998/99 interest paid on residential property lets was relieved as a charge on income". The idea that people's holdings of residential property represented a business was somewhat formalised in the ITTOIA 2005, but what one chancellor brings to pass another can reverse.

As the PRS has grown and owner-occupation rates amongst younger cohorts have fallen it was always likely that BTL would catch a bullet, and the straws in the wind were obvious to anyone paying a blind bit of attention, way back in 2014.

 

Edited by Bland Unsight

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2 hours ago, Bland Unsight said:

TL;DR - If you want to be taxed like a business, don't set up a mad leveraged empire with millions of pounds of mortgages which pays its tax via the personal income tax self-assessment form.

_____

The four or five of you who don't yet have me on ignore will be aware that I've had a thrilling conversation with another poster about GAAP already here and have also (here on the Scum thread) reported elements of a temperate and well-mannered exchange of views with "Home Provider" in the now closed comments section of a recent Guardian article.

My take on things is pretty much consistent with the position mapped out by the ICAEW in their 7 September 2015 briefing on "Finance (No. 2) Bill 2015 Clause 24: Relief for finance costs related to residential property businesses", which is now usually referred to as section 24.

Here's what are in my opinion are the key passages (with emphasis added):

and

Now, somewhat unsurprisingly, when these ideas are encountered in the wild they tend to lean in a rather different direction and all seem to rest on this quote from the wonderful "The compelling case against Section 24" from the Axe The Tenant Tax Coalition.

As posted on the Scum thread, my new leveraged landlord pal directed my attention to an HMRC internal manual BIM31005 which says (emphasis added)

and also says

Long and short of it, I think the leveraged landlords are offering a 'have your cake and eat it' argument

  • There's generally accepted accounting practice (GAAP) and there are principles of taxation, and they are not the same thing
  • A portfolio landlord can make a reasonable case that a prinicple of taxation is being set aside when they are not allowed to deduct mortgage interest expenses when determing taxable profits
  • The idea that GAAP is being contravened is laughable horsehit (so much so that the quote attributed to the PwC partner strikes me as odd, to say the least)
  • Buy-to-let mortgages were marketed to consumers to allow them to invest some money in housing
  • The tax code as it stood in 1996 (when the marketing of this novel mortgage product began) did not countenance people trying to operate unincorporated property businesses with balance sheets of tens or even hundreds of millions of pounds and be paying their tax via personal income tax using a self-assessment tax return
  • Any business structured in this way was always liable to be affected by changes to the personal income tax framework, and the personal income tax framework is liable to continual revision.
  • Even leveraged property business themselves have seen repeated change. As per the ICAEW briefing "prior to 1998/99 interest paid on residential property lets was relieved as a charge on income". The idea that people's holdings of residential property represented a business was somewhat formalised in the ITTOIA 2005, but what one chancellor brings to pass another can reverse.

As the PRS has grown and owner-occupation rates amongst younger cohorts have fallen it was always likely that BTL would catch a bullet, and the straws in the wind were obvious to anyone paying a blind bit of attention, way back in 2014.

 

Could you add this and other nuggets in a sequel to the Blockbuster "A Goodbye to All that Buy to Let?"

There will  be a sequel, right?

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Surely you are splitting hairs here! Some guy said "GAAP" rather than "principles of taxation" so what, many people don't have an accountancy background (or and expensive education).

The fact is that the tax system does (or used to) be alligned to the concept of economic surplus or profit i.e. if you tax this "bit" then people carry on their economic activity without disruption and there is limited impact on overall output. To this extent the confusion between accounting profit and tax charged is understandable because the BTL tax changes (as you note on the Bootle Thread) obviously do not allign to this principal - their objective is not to raise tax but to shut down the BTL sector.

Whilst I welcomed the tax change (in the overall context), I think my personal view is that the tax system should not be used to achieve political objectives because this is how we have ended up with the ludicrous tax system we have.  I'd rather a hardcore tax on economic profits.

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29 minutes ago, Growlers2 said:

Surely you are splitting hairs here! Some guy said "GAAP" rather than "principles of taxation" so what, many people don't have an accountancy background (or and expensive education).

The fact is that the tax system does (or used to) be alligned to the concept of economic surplus or profit i.e. if you tax this "bit" then people carry on their economic activity without disruption and there is limited impact on overall output. To this extent the confusion between accounting profit and tax charged is understandable because the BTL tax changes (as you note on the Bootle Thread) obviously do not allign to this principal - their objective is not to raise tax but to shut down the BTL sector.

Whilst I welcomed the tax change (in the overall context), I think my personal view is that the tax system should not be used to achieve political objectives because this is how we have ended up with the ludicrous tax system we have.  I'd rather a hardcore tax on economic profits.

Except rent on land is itself a tax, and not an economic profit.

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I find this debate quite sinister. 

It's like a weird kind of scholasticism, where the priests determine the correctness of the law not by its moral principles or economic impact but by its adherence to a holy book.

Generally accepted by whom?

I don't give a damn what the accounting establishment thinks, I'm sure sure they're perfectly happy with throwing families out on the street and exploiting the poor.  

If the argument is that section 24 is not aligned with 'generally accepted accounting principles', the correct response is that Landlording is not consistent with generally accepted ethical principles, get a ******ing job and stop sponging off the rest of us. 

Edited by DrBuyToLeech

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2 hours ago, Growlers2 said:

Surely you are splitting hairs here! Some guy said "GAAP" rather than "principles of taxation" so what, many people don't have an accountancy background (or and expensive education).

What an appalling attitude. The implication seems to be that if you've not been blessed with an expensive education you should be forgiven for talking crap (when in my experience it works the other way, the more expensive the education, the greater the speaker's confidence when talking crap). Also, whilst an education may or may not be expensive, literacy and precision in language are won by dint of effort. It's principle, not "principal".

I think there's something really interesting here. First up, the actual supposed source of the quote is not "some guy" who doesn't have an "accountancy background", it's supposedly an (ex) PwC partner, which is a point that Crouch made straight off the bat. (I'm unaware as to how much he paid for his education - I paid nothing for mine, BTW. Aren't you part-qualified? Somebody paid me to take and pass my ICAEW exams)

Now the lengthy post is to illustrate that the concepts of GAAP and principles of taxation are wholly separate. Hence what interests me is the way in which a somewhat problematic quote from somebody with some authority gets taken up by a bunch of people who don't understand it and then regurgitated. Why?

If these guys were saying "It's a general principle of taxation that interest expenses are allowed" then they'd open themselves up to the argument that the ICAEW briefing makes, which is that the supposedly general principle already doesn't hold for passive investments taxed under income tax. For some investments the interest expense has been deductible (property) for other it hasn't (ordinary shares). Then they'd be forced to make a different argument which is "I've got so many houses that I am no longer a passive investor". At that point the portfolio guys would be separating themselves from the much greater number of investors with one or two BTLs.

The reality is that even though the 4+ leveraged portfolio guys probably have about half the 2 million BTL mortgages they only account for about 10% of the population of leveraged landlords. They are not representative. 62% of leveraged landlords have only one property (on the December 2016 CML report sample).

As I've previously suggested elsewhere, there must be two populations of leveraged landlord moaners out there. Those who know this talk about GAAP is horseshit, and those who don't. I think both are interesting, which is why I started the thread. Now, you on the other hand have made your contribution by adding "so what?" and tacking on a poorly veiled ad hominem. Now, I don't think it's wild to interpret "so what" as registering a lack of interest, and therefore the first point you set out to make is to clarify that the thing that is interesting to me is not interesting to you. Guess what - that's not interesting to me.

What is interesting to me is the way in which the campaign keep having to hide the reality of their problem (millions of pounds of mortgages) and recruit others to their cause (investors with just one buy-to-let, people concerned with tenant welfare, for example) because they know that if they had to plead their case on its merits they'd get laughed at by everyone the same way that they get laughed at by us.

 

Edited by Bland Unsight

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1 hour ago, DrBuyToLeech said:

I find this debate quite sinister. 

It's like a weird kind of scholasticism, where the priests determine the correctness of the law not by its moral principles or economic impact but by its adherence to a holy book.

Generally accepted by whom?

I don't give a damn what the accounting establishment thinks, I'm sure sure they're perfectly happy with throwing families out on the street and exploiting the poor.  

If the argument is that section 24 is not aligned with 'generally accepted accounting principles', the correct response is that Landlording is not consistent with generally accepted ethical principles, get a ******ing job and stop sponging off the rest of us. 

I think you're a bit off the mark there. Take a segment of the present UK GAAP bible for unlisted entities, FRS 102

Quote

An entity shall measure investment property at its cost at initial recognition. The cost
of a purchased investment property comprises its purchase price and any directly
attributable expenditure such as legal and brokerage fees, property transfer taxes and
other transaction costs. If payment is deferred beyond normal credit terms, the cost is
the present value of all future payments. An entity shall determine the cost of a
self-constructed investment property in accordance with paragraphs 17.10 to 17.14.

The idea of landlording being consistent with GAAP makes no sense. If you own property you can draw up accounts to describe the asset position of the business and the way money is flowing in and out. At its heart GAAP is a way of ensuring that everyone draws up accounts in pretty much the same way so that if a set of accounts is drawn up honestly, with the practices being applied as intended, then someone reading financial statements will get a picture of the business which has been drawn with familiar rules and is therefore comprehensible.

"Generally accepted ethical principles" is an intriguing invention of your own. Also there's no debate here. I'm just pointing out that the leveraged muppets are full of shite, as usual.

Edited by Bland Unsight

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3 hours ago, Tapori said:

Could you add this and other nuggets in a sequel to the Blockbuster "A Goodbye to All that Buy to Let?"

There will  be a sequel, right?

and-then-what-happened.jpg

:D

Edited by Neverwhere

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1 minute ago, Digsby said:

How do you actually say G.A.A.P, Bland? Is it like "Gahp", or do you say "Gee Ay Ay Pee"?

You say gap.

(And when I personally say gap it rhymes with tap not tarp; I'm from down South, but I'm not rah-rah.)

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Just now, Bland Unsight said:

You say gap.

(And when I personally say gap it rhymes with tap not tarp; I'm from down South, but I'm not rah-rah.)

Obviously that means the John Irving joke doesn't work properly; sue me.

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1 minute ago, Bland Unsight said:

You say gap.

(And when I personally say gap it rhymes with tap not tarp; I'm from down South, but I'm not rah-rah.)

Also, "generally" generally means "in most cases". Presumably then, some don't accept them? Who doesn't accept them, and on what grounds?

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7 minutes ago, Digsby said:

How do you actually say G.A.A.P, Bland? Is it like "Gahp", or do you say "Gee Ay Ay Pee"?

Also you write GAAP. It had to make it G.A.A.P. to defeat the way the forum settings handle capitalisation. I think they would have made it "The World According to Gaap"

And for anyone not already as bored with this thread as growler2 was/is, we're just getting started.

 

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1 hour ago, Bland Unsight said:

I think there's something really interesting here. First up, the actual supposed source of the quote is not "some guy" who doesn't have an "accountancy background", it's supposedly an (ex) PwC partner, which is a point that Crouch made straight off the bat.

Right, so I get this right, this guy - https://profile.theguardian.com/user/id/17623718/replies?page=1 -is the Ex PWC partner who is confusing GAAP with tax policy? Is that right? Crouch's quote references an EX PWC partner being among the 118 crew gernally but I couldn't see a quote there.

1 hour ago, Bland Unsight said:

What an appalling attitude. The implication seems to be that if you've not been blessed with an expensive education you should be forgiven for talking crap (when in my experience it works the other way, the more expensive the education, the greater the speaker's confidence when talking crap). Also, whilst an education may or may not be expensive, literacy and precision in language are won by dint of effort. It's principle, not "principal".

I'm just speaking for myself, the difference between taxation principles and GAAP accounting would not be obvious to me without having done my accountancy training. It seems a reasonable point to make to me i.e. the "guy" in question (Home Provider) didn't appreciate the distinction and that the misunderstanding was understandable given that GAAP and tax policy are generally alligned in the concept of economic profit (execpt when governments want to shut down a sector and apply taxes in excess of economic or accounting profit).

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51 minutes ago, Digsby said:

Also, "generally" generally means "in most cases". Presumably then, some don't accept them? Who doesn't accept them, and on what grounds?

I wouldn't get too hooked on the name. It just means "the agreed reporting rules". There's more detail than you could ever want here, and it'll get you started. Hence a listed group might have an auditor's report stating "The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union" as per this specimen audit report.

It's not really a question of accepting them or not. If you have investors and they are looking at your audited accounts then it will have to be flagged if the company hasn't followed GAAP. If it was significant then the accounts might be issued with a qualified audit report (which basically means the auditors are saying the accounts are unreliable/b0llocks). With qualified accounts you might struggle to obtain new investors or secure loans - even trade credit.

Of course accounts can be prepared under GAAP, and be audited and still be b0llocks (e.g. Enron) and cases like Enron show that there is considerable room for the application of judgement when applying the rules.

If you don't have investors you could prepare your accounts according to any rules you want. That might eventually bring you into conflict with the taxman if your crazy accounting meant that you were making money hand over fist but not declaring any profits.

Finally many large companies are listed in more than one country where the relevant bodies (e.g. SEC in the US) insist on different reporting standards (e.g. US GAAP) and therefore companies prepare their accounts according to both and file different accounts with different regulators.

(Whilst googling around for links stumbled on this in the FT "Anti-GAAP’ reporting proves a growing menace" (link for subscribers), which is a bit of extra context on your question)

Edited by Bland Unsight

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4 hours ago, Bland Unsight said:

The idea that people's holdings of residential property represented a business was somewhat formalised in the ITTOIA 2005, but what one chancellor brings to pass another can reverse.

From the ITTOIA 2005 explanatory notes:

Quote

1047.The term “property business” is not entirely straightforward. The term used in the source legislation – “Schedule A business” – was introduced as part of the 1995 reform of Schedule A. That concept was helpful in providing a vessel to contain all the income from land previously charged under Schedule A and to which the rules for calculating trade profits could be applied. But the concept of a Schedule A business – and a UK property business - is rather more complex than that of a trade. That is reflected in this and the other sections that, together, define the range of income that is assessed as income of a property business.

1048.First, the income has to be defined by reference to land law. There are only limited possibilities for simplifying terms which have to link directly with the concepts and language of current land law.

1049.Second, the concept of the “property business” is, to a certain extent, an artificial one. Unlike the term “trade” it may not always correspond to an activity organised in a way that the proprietor would necessarily describe as a business. As such, the term has to cover:

    “real” businesses where the lettings are organised in a professional way;

    lettings which are not so organised; and

    casual and one-off transactions which may have very little of the qualities normally associated with a business.

Then all of these lettings of different types must be treated as part of the same, single business.

And the ITTOIA 2005 itself:

Quote

272 Profits of a property business: application of trading income rules

(1)The profits of a property business are calculated in the same way as the profits of a trade.

(2)But the provisions of Part 2 (trading income) which apply as a result of subsection (1) are limited to the following—

So it seems that even there the term "property business" is acknowledged to be applied as a matter of convenience to cover a wide range of activity which may or may not constitute a "real" business, and limitations on the degree to which it is treated in exactly the same way as a trade are already established.

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8 minutes ago, Growlers2 said:

Right, so I get this right, this guy - https://profile.theguardian.com/user/id/17623718/replies?page=1 -is the Ex PWC partner who is confusing GAAP with tax policy? Is that right? Crouch's quote references an EX PWC partner being among the 118 crew gernally but I couldn't see a quote there.

Either read the thread, or don't.

However, out of the goodness of my heart, and for the further amusement of people who are reading the thread, I offer you this:

Quote

“Section 24” of The Finance Act (No. 2) 2015  isn’t actually a tax change. It is an amendment to GAAP (Generally Accepted Accounting Principles). It changes the way that profit is calculated and then introduces “tax relief”.

Let us be clear what Generally Accepted Accounting Principles are.

If a business has income of £1,000 and has £1,000 of expenses then its profit is zero.

If a business makes a profit then those profits are subject to tax at varying levels depending on the structure of the business and the amount of profit made.

Another generally accepted accounting principle is that if a person borrows money to buy something for personal use they can’t offset the costs of financing that purchase against other income. That applies to pretty much any product you can think of, e.g, a bucket and sponge to clean windows, a computer, a vehicle or a property. However, if a business borrows money to buy any of these things with the intention of generating an income the costs of financing those investments are a legitimate business expense.

Section 24 changes everything, but only for individual landlords. Generally Accepted Accounting Princples are only being amended for individual landlords by Section 24. The legislation does not apply to any other business, not even to incorporated landlords!

I don't think anyone will need three guesses at the author. It appears on the Property118 website.

You see, it's not even a tax change, apparently. Now where's the full retard flogging a dead horse gif again...

giphy.gif

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8 minutes ago, Neverwhere said:

So it seems that even there the term "property business" is acknowledged to be applied as a matter of convenience to cover a wide range of activity which may or may not constitute a "real" business, and limitations on the degree to which it is treated in exactly the same way as a trade are already established.

You know, sometimes I wonder whether there might be some subtlety here?

I wonder if, when all is said and done and the subtlety is acknowledged, just screaming "I will NOT pay that tax! It is an abomination against my business in the eyes of GAAP!" might be a sign that the person screaming is, in fact, a tw@t.

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11 minutes ago, Bland Unsight said:

You know, sometimes I wonder whether there might be some subtlety here?

I wonder if, when all is said and done and the subtlety is acknowledged, just screaming "I will NOT pay that tax! It is an abomination against my business in the eyes of GAAP!" might be a sign that the person screaming is, in fact, a tw@t.

:lol:

I think you might be onto something there...

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3 hours ago, Bland Unsight said:

I think you're a bit off the mark there. Take a segment of the present UK GAAP bible for unlisted entities, FRS 102

The idea of landlording being consistent with GAAP makes no sense. If you own property you can draw up accounts to describe the asset position of the business and the way money is flowing in and out. At its heart GAAP is a way of ensuring that everyone draws up accounts in pretty much the same way so that if a set of accounts is drawn up honestly, with the practices being applied as intended, then someone reading financial statements will get a picture of the business which has been drawn with familiar rules and is therefore comprehensible.

"Generally accepted ethical principles" is an intriguing invention of your own. Also there's no debate here. I'm just pointing out that the leveraged muppets are full of shite, as usual.

You think I invented ethics?!  Not sure how to react to that.  

Anyway, I do understand what you are saying, I think you miss my point.

Debating whether or not a law violates some accounting principle, requires tacit agreement that accounting principles matter, and that is an ideological position.  

I think that people's welfare matters more than accounting principles.  They clearly don't.

I'm not criticising you, but this needs to be pointed out.

 

 

 

 

 

Edited by DrBuyToLeech

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