What would I do for budget 2020? Ensure the law does what it says on the tin
The Budget, or Oscar night for accountants as I call it, is almost upon us. The detail of that “lights, camera, action” night is subsequently contained in the Finance Bill where rhetoric morphs into law. That night determines what the next year will look like, financially at least, for the rest of us. So what to do on Budget night.
I’m a huge Bruce Lee fan. He said “Adapt what is useful, reject what is useless, and add what is specifically your own”. There are many tax reliefs already in the law but do they work as they’re supposed to? You’ll guess that I’m thinking negatively here so let’s add something of our own for Oscar night.
There’s a court-made rule that when there’s a doubt in a law resulting in tax charge then the benefit of the doubt goes to the taxpayer; when there’s doubt in a tax relief then the benefit of that doubt goes to the Revenue Commissioners. Okay, the courts put it more eloquently than that and it’s been amended over the years by allowing resort in certain instances to the purpose of the law and recent court decisions say you can do that. Let’s be clear there are many books on this whole subject so it’s not that simple really.
So why not simplify it? Why not make it law to say that where there is a doubt in interpreting or applying a tax relief then the benefit of the doubt should go to the taxpayer once the taxpayer is using the relief the way it’s supposed to and is not engaged in tax avoidance or evasion. Put another way the safeguard would be that if the taxpayer is “taking the Michael” then the benefit of such an approach would not be open to them. Tax scholars will be coughing into their muesli at the idea but “bear with”.
The Tax Appeal Commissioners (a tax court) published a decision in connection with Inheritance Tax on their website a couple of weeks ago with a victory for the taxpayer. Generally these decisions are published on an anonymised basis and this is no different. The taxpayer’s uncle passed away some time ago. By his will the deceased bequeathed an amount of his estate to be divided in equal shares between his two nieces and two nephews for their own use and benefit absolutely.
The taxpayer has two children. The decision explains that both children suffer from a rare condition as did the taxpayer’s wife which is described in the decision as an “early-onset neurological condition and is progressive in nature”. The condition greatly restricted the children’s mobility which means that they must frequently be carried. Both children wear orthotics and receive intra-muscular injections to give relief from the increased muscle tone and stiffness caused by their condition. They also undergo serial casts in plaster boots, which restricts their mobility further. Both children also require extensive physiotherapy which the taxpayer and his wife have largely had to source privately and pay for themselves.
The couple bought a house which they could modify. They installed in their new home a downstairs bathroom, a downstairs bedroom and a larger kitchen, which could accommodate the wheelchair and walker of their child. The purchase and modification of their new house was funded by the sale of their former home (which had been in negative equity), the above-mentioned inheritance and a loan from their Credit Union. The taxpayer and his wife indicated that the remainder of the inheritance would be used to fund additional private therapies and treatments for their children, such as physiotherapy in a rehabilitative treatment centre.
There is a relief from inheritance tax which says that an inheritance “taken exclusively” for the purpose of discharging expenses of a permanently incapacitated individual is, to the extent that it has been or will be applied to such purpose, exempt from tax. So in this instance the inheritance was clearly used by the taxpayer for the benefit of his incapacitated children. Slam dunk right? Not so much. It was argued against him that the exemption would only be available where there was evidence from the deceased that he provided the benefit exclusively to discharge the qualifying expenses. In other words, and among other arguments, one had to determine that the deceased wanted the inheritance to be used for the benefit of the incapacitated children.
In the end it came down to the fact that the inheritance had been correctly “taken” and it discharged the medical expenses, so the taxpayer won. Unfortunately the taxpayer had to go to tax court to resolve the matter. If there was a rule that, once the taxpayer was not engaged in avoidance and where there is a doubt in interpreting or applying the law relating to a tax relief then the benefit of the doubt should go to the taxpayer, then a court trip wouldn’t have been necessary. Here, the couple would have benefitted from the relief from the start.
Separately, I’ve previously written about the Help to Buy (HTB) scheme which also came before the Tax Appeals Commission. That dealt with a taxpayer who purchased her home in 2016 for €279,000. She drew down a mortgage on the property of €195,000 resulting in a loan-to-value (LTV) ratio of 69.89% and not the required 70%. The relief was denied. The Appeal Commissioner said that "had the appellant's mortgage been €195,300 as opposed to €195,000, she would have qualified" for the relief. This was one of those times where the Appeal Commissioners said he didn't have the authority to depart from the statutory LTV requirement of "not ... less than 70%". Rounding it up would have met the 70% requirement, but the Commissioner couldn't do that either because he felt bound by certain legal interpretative rules.
Here, the law let down a first-timer who was prudent in her borrowing (her financial situation was not discussed in the decision). Like the first case, should the Tax Appeal Commission have to decide on such matters, given their huge workload, where the purpose of the law is to facilitate first-timers? If my suggested rule regarding a doubt in applying a tax relief going to the taxpayer existed then the Commission wouldn’t have had to be involved. Was it intended that the HTB law be denied by a mortgage which was €300 short over its lifetime (not individual repayments)?
The law should be allowed what it’s supposed to and not stop genuine claims used for genuine purposes so that a court doesn’t have to get involved. Solution: Follow Mr Lee’s dictum and add what is our own to change the law.