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TWEd looks at yet another slug of bad legislation, coming your way soon...

I recently joked with a fellow practitioner that I had developed a phobia of new tax legislation. But, dear reader, it was not really a joke; nor is it a laughing matter. Legislitis is a real and degenerative disorder, for which only the prompt excision of diseased parts offers any tangible hope of a cure.

Symptoms of coming into contact with the pathogen include:

• Nausea
• Headaches
• Edged teeth
• Raised hackles
• Mood swings, characterised by hysterical laughter followed by deep despondency
• Muttering. Lots of muttering.

Whether I have just been unfortunate in my choice of legislation to browse in the recent past, I am not sure. But my perception is that the quality of much new tax legislation is very poor. In particular, it appears to be drafted by people with little appreciation of the history of the sections they are messing with, or the consequences. A lack of appreciation of how things are connected.

(As an aside consider, for example, the taking of legislation designed to address the fact that Capital Allowances are not available to landlords of normal residential properties and then smashing it against a wall. Repeatedly. For several years. Dear Draftsman, it’s not Lego. Since when were repairs to items proscribed by Capital Allowances legislation? A rare thing for me to be left literally speechless, dumbfounded by the draftsman’s inability to grasp what his or her tinkering had wrought. And another symptom to add to the list: mutism.)

Plaudits to the Corporation Tax Sub-Committee of the Tax Committee of The Law Society of England and Wales , who are obviously made of sterner stuff, and thereby able to stomach the new clauses 75-78 in the draft Finance Bill. They have pointed out that, when the draft legislation imposing the conditions for invoking the supposedly anti-avoidance legislation that will tax what would otherwise be a capital gain as if it were income, says the following:

“the main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land”

It might actually mean that the anti-avoidance legislation will be invoked if:

“the main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land”

Or, to put it another way:

“If HMRC thinks that, when you bought the land or property, you hoped or intended ultimately to make a gain or profit on its eventual disposal, then they can now subject it to (the much higher rates of) Income Tax.”

The Law Society also points out that the draft legislation could have a wider reach than the government suggests, and criticises the method of introduction-by-prestidigitation. (The Law Society is far too polite to say so itself, of course).

Oh dear. This government really, really, really does not like landlords. Or perhaps more accurately, sees them as being politically safe to squeeze. (If the government is so bent on taxing property investors as traders, why not just re-categorise property letting as a trading activity..? Now that would be interesting.)

We have been here before. Many readers will be aware of HMRC’s Capital Gains Manual at CG65210:

“Private residence relief: purpose of realising gain

TCGA92/S224 (3) denies relief when the dwelling house has been acquired for the purpose of realising a gain from its disposal, or there has been subsequent expenditure for the same purpose. The Section is very widely drawn. It also applies where the acquisition or the expenditure was only partly for this purpose.

Anyone who buys a dwelling house is likely to hope that, in the fullness of time, they will make a gain on its disposal. One house may be chosen over another because its value is more likely to appreciate over time. These cases could be said to fall within the words of the statute but relief should not be restricted.

It would be unreasonable and restrictive to apply the legislation in this way. The subsection should only be taken to apply when the primary purpose of the acquisition, or of the expenditure, was an early disposal at a profit.”

I don’t read this as giving today’s draftsmen carte blanche to do the same thing. I read that as HMRC being forced to take a practical – but very narrow (and that's being charitable) – interpretation of legislation that it realises was so widely drafted as to be practically unenforceable, if applied literally (which is, I think, how legislation is supposed to be applied). In other words, a mistake, for which HMRC has had to make a kind of public apology. A mistake that looks like it’s about to be repeated. Cue grinding teeth. Another symptom...