Business Personal Finance

Wednesday 19 December 2018

Time to make sure the Help to Buy scheme does what it says on the tin

The Help To Buy scheme allows a taxpayer a refund of up to 5pc of the purchase value of the qualifying residence subject to various terms and conditions (stock picture)
The Help To Buy scheme allows a taxpayer a refund of up to 5pc of the purchase value of the qualifying residence subject to various terms and conditions (stock picture)

Tom Maguire

You've heard the expression that help is given to those who help themselves. Not so with the Help to Buy (HTB) scheme. Sometimes you can help yourself 'out' of the relief. A recent decision of the Tax Appeals Commission demonstrated that. So it's time to look again at this law, particularly given the housing crisis.

The HTB scheme allows a taxpayer a refund of up to 5pc of the purchase value of the qualifying residence subject to various terms and conditions. When it was announced on 2015's budget day it was to apply to persons who had mortgages with a minimum 80pc loan-to-value (LTV) ratio.

The Central Bank indicated to then Finance Minister Michael Noonan that a sizeable number of first-time buyers took out mortgages with a LTV ratio of less than 80pc. Noonan then decided to amend the scheme in the Finance Bill so that first-time buyers didn't "feel compelled to borrow larger amounts in order to qualify" for the relief and set a required minimum LTV ratio for the scheme at 70pc. This allowed more first-timers to qualify.

A recent decision of the Appeal Commissioners (given on an anonymous basis) 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 ratio of 69.89pc and not 70pc. The relief was denied. The taxpayer said that her bank's loan offer letter confirmed the LTV ratio as 70pc as the bank rounded that ratio up to the nearest percentage. Fair enough. You have to remember the LTV ratio requirement in the law was purposefully reduced to 70pc so that more first-time buyers could qualify and didn't feel under pressure to borrow larger amounts to be in the running for the relief. This taxpayer fulfilled that purpose by borrowing less than she could.

Why? 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 "all things being equal". Gasp!

In this instance, the amount of HTB relief would put the offending €300 to shame given the benefit to the taxpayer. So is this a proportionate legislative response? You'll guess that's rhetorical.

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 70pc". Rounding it up would have met the 70pc requirement, but the Commissioner couldn't do that either because of the view that the law matters and he felt bound by certain legal interpretative rules.

So it's time to look again at the law for two reasons (1) this law let down a first-timer who was prudent in her borrowing (her financial situation was not discussed in the decision) and (2) should the Appeal Commissioners have to decide on such matters, given their huge workload, where the purpose of the law is to facilitate first-timers? Readers will know my previous columns commented on the thousands of cases involving €1.6bn in disputed tax on their desks with more than two hundred appeals coming through their letterbox each month adding to the pile.

Tax law allows for "percentage rounding" to be used in other areas. For example, a tax defaulter is required to be published where a certain tax amount (currently €35,000) is defaulted upon; the Finance Minister is allowed amend that amount by reference to the Consumer Price Index and critically "rounding the resulting amount up to the next €1,000".

A similar rounding provision in the law here could have removed the taxpayer's necessity to appeal the case.

So why not amend or indeed reduce the 70pc requirement for the relief, given its designed to get people onto the housing ladder? Of course, it would be argued that a person who has the ability to fund a property in cash without resort to borrowing shouldn't be allowed avail of the relief, but there are others who have saved their "hard-earned" in order to avoid borrowing significant amounts in the first place. The relief is designed to assist first-timers in putting the required deposit together. Reducing the 70pc LTV requirement could assist with that purpose.

The question arises as to whether this decision brings about a bigger and starker warning for all taxpayers. For example, a self-employed individual has to pay either 90pc of his or her current income tax liability or 100pc of the previous year's liability as preliminary tax with the balance payable as part of their tax return in order to meet their obligations. Failure to meet these percentages brings interest and penalties. Arguably, this decision may have an impact for such taxpayers, so press your calculator buttons carefully and avoid rounding to full percentages on spreadsheets when calculating tax payable.

I'm a big fan of the requirement for certainty of application of tax law so that the taxpayer knows where they stand before they write any cheque for tax. You know the line from the movie A Few Good Men where Tom Cruise admonishes Demi Moore with "It doesn't matter what I believe, it only matters what I can prove, so please don't tell me what I know and don't know. I know the law". That's certainty of application and in this appeal case the law's purpose didn't match with the actual result for the taxpayer as it should.

It's time to change the HTB and indeed tax law generally to bring additional certainty so that "insubstantial" (Appeal Commissioner's reference to the offending €300) matters don't interfere with substantial ones. Put another way, in the end, tax law shouldn't sweat the small stuff.

  • Tom Maguire is a tax partner in Deloitte

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