An Un-Islamic Tax Loophole

by Mary Jackson (April 2008)


This piece discusses a specific example of “Islamic economics”. It should be read in conjunction with Rebecca Bynum’s
comprehensive article of March 2008.

 

Close to where I once lived was a now defunct Indian Takeaway called Curry in a Hurry. This was no Veeraswamy. Edward, Prince of Wales, Charlie Chaplin and Marlon Brando almost certainly never visited. As the name suggests, it was quick and convenient; the portions were good, as was the price.

 

On the subject of the price, Curry in a Hurry displayed a large sign in the window:

 

FREE DELIVERY!!!
20% DISCOUNT ON COLLECTION!!!

 

Observant readers will have spotted the catch. If there is a discount for collection, the delivery isn’t really free, is it? But if the sign said, more accurately, “25% delivery charge”, potential customers might be put off. You may enjoy your lamb roghan josh or chicken tikka masala more if you think it was delivered free or bought at a discount. But there is no logic to this. The delivery is no more free than a rock band's amplifier that “goes up to eleven” is “one louder”.

 

Turning from curry to cars, a few years ago a lot of car showrooms seemed to be offering “0% finance”, or “interest-free credit”. This, too, is illusory. It simply means that you can’t negotiate a discount as you could if you paid cash. But “interest-free” sounds good, and it makes people feel good.

 

This is the essence of Islamic banking. The prohibition on interest (riba) is circumvented by calling it something else, for example “rent”, "premium on repurchase" or “extra capital”. Everyone knows that money today is worth more than money tomorrow. Omar Khayyam preferred to “take the cash and let the credit go”. Muslims know this too, and if you pay them tomorrow they will make you pay – one way or another – more than you pay today.

 

Islamic banking is a trick, partly to make Muslims feel better, but also, more dangerously, to gain a foothold for Sharia in the West. As such, it should be challenged and ridiculed at every opportunity. As Rebecca Bynum argues in her article Voodoo Economics (New English Review, March 2008), the dangers of Islamic economics are political rather than financial: it is a vehicle for Islamisation. Financially non-Muslims are not necessarily disadvantaged. In Malaysia, for example, more non-Muslims than Muslims use Sharia-compliant products. Nothing stops a non-Muslim from using an Islamic product. Nothing, that is, except principles, but principles do not generally loom large in the minds of commercial property dealers, especially when they can see a tax loophole. From The Times:

 

The Chancellor is expected […] to close a loophole in Sharia finance rules that have allowed commercial property investors to avoid paying stamp duty on more than £1 billion of deals, The Times has learnt.

Alistair Darling is expected to tighten the rules on mortgages that comply with Sharia – or Islamic law – in his inaugural Budget after commercial property developers discovered a quirk in the legislation that allowed them to escape stamp duty. The Government brought in changes to the stamp duty regime three years ago amid concern that homeowners opting for Sharia-compliant mortgages were paying stamp duty twice.

The 2005 Budget brought in measures to correct this anomaly but inadvertently created a tax avoidance opportunity that property developers have rushed to exploit. More than £1 billion of commercial property deals over the past two years have escaped stamp duty at 4 per cent.

Peter Beckett, the tax director for Ernst & Young, said: “This loophole has existed since 2005 but has been used more widely following the closure of previous stamp duty tax planning schemes.”

[…]

Sharia prevents Muslims from charging or paying interest. Under Sharia-compliant property finance deals, the bank buys the property from the seller, rather than simply providing finance for the buyer to own the property directly.

The buyer then rents the property back from the bank for, typically, 25 years – equivalent to the term in a conventional mortgage – eventually buying the property from the bank for a prearranged price higher than the original sale.

Before changes to stamp duty regulations, Sharia-compliant property deals would have attracted stamp duty twice for home sales and three times for commercial building sales because stamp duty is payable on commercial leases. The changes should have meant that stamp duty was payable only once, in line with conventional mortgages. Commercial property investors have discovered a loophole under which the bank includes an option for the original seller to buy back the property. This technical detail means that, for tax purposes, there has been no transfer of land and, therefore, no stamp duty falls due.

One senior City property agent, who said that he had been involved in four London office sales over the past six months, each worth more than £100 million and using Sharia-compliant deals, said: “There has definitely been over a billion pounds’ worth of deals – it is only worth doing on the larger deals. There is nothing illegal but it has only become fashionable over the past six months.”

The Treasury said: “The tax system is constantly kept under review to ensure legislation is operating as Parliament intended. Where evidence is found that it isn’t, the Government will move quickly to close loopholes.

Closing tax loopholes is a good thing for Muslims and non-Muslims alike. Few tears will be shed for the City property agent mentioned above, who is sure to find another tax loophole before you can say “Ferrari”. I should emphasise again that Muslims were not getting favourable treatment either before or after the loophole was closed.

The striking aspect of “Islamic” mortgages and their tax treatment is just how un-Islamic they are. Far from being a concession, the tax treatment is a public acknowledgement, both by the Government and by Muslims themselves, that the deal is a sham.

For non-UK readers I should explain that Stamp Duty is a tax payable by the purchaser of a property. In an “Islamic” arrangement, there are two purchases, the first by the bank and the second (generally by means of rent and a deferred consideration) by the client, that is the Muslim. If these purchases were genuine; if they were separate transactions, rather than inextricably linked, then two lots of Stamp Duty would be correct. Muslims do not want to pay extra tax – who does? – but by not doing so they are acknowledging that there are not two purchases, but merely one, financed by the bank with an interest-bearing loan secured on the property. Like Esau selling his birthright for a mess of pottage, Muslims are selling their Islam for a tax break.

Furthermore, for the transaction to be two genuine purchases and a rental, rather than a secured loan, the bank would need to bear the risks and rewards of ownership of the property. Does the bank bear the risk of a fall in the property’s market value, or the rewards of a rise? No. The price paid by the Muslim client is fixed in advanced, or, ironically, the rent fluctuates with interest rates. The sum of the rentals is greater than the original purchase price paid by the bank, but it need not bear any relation to the market value at the end of the “rental” period. When the loan – sorry, rent – has been paid, the Muslim has an asset that he can sell at market value, just as if he had taken out a conventional - infidel - mortgage.

Do Muslims know this? Some do; I suspect most do not. As long as the form is in place and Sharia is getting established, they neither know nor care about the fine detail. But we should.

It is strange that the hollowness of Islamic piety, and the territorial aspirations of Islam, should be exposed by analysing a tax concession. Tax law is at best dull and at worst unpleasant. A less likely weapon in the fight for civilisation is hard to imagine, but we need all the weapons we can get.


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Mary Jackson contributes regularly to The Iconoclast, our Community Blog. Click here to see all her contributions, on which comments are welcome.

 


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