Taxing situations

Registered social landlords are cutting out the middleman and going it alone on mixed-tenure estates, cross-subsiding the affordable by selling off the private housing. Several are already out there. The trouble is, no one seems to have told the Inland Revenue that the Cabinet Office and Office of the Deputy Prime Minister are backing the initiative. Our fly on the wall listens to a puzzled chief executive talking to the senior partner of her law firm …

Chief executive: So the Inland Revenue says that if the council gives us the site at a discount and we transfer part of it on to a housebuilder at a profit, that profit isn't taxable.

Senior partner: Yes.

CE: But if we sell it on at a profit and take overage – a further share of the development profits – we could be caught by Section 776 of the Income and Taxes Act 1998 on the "slice of a profit" rule and be taxed. On just the overage or the whole lot?

SP: It could be the lot since section 776 catches the entire gain if the transaction was undertaken to realise, indirectly, development profit. Maybe the Inland Revenue wouldn't press that because public and voluntary sector bodies are advised, to protect tax payers and charitable monies, to have "excess profit" clauses. It might regard overage here as a deferred payment rather than participation in profit although it is something of a fiction.

CE: Fiction! What comes next is Wonderland. If the charitable body, the one with all the assets, acquires with no stamp duty, then develops the private housing part itself, the profit is taxed and it doesn't matter a fig that we are ploughing all the money back into the rest of the estate. It doesn't matter that the council gives us the site for nothing on the requirement that we plough back the profit.

SP: The Inland Revenue thinks the trading for primary purpose exemption doesn't apply (although there is tax counsel and accountants' advice to the contrary) because the primary purpose isn't building for sale. It ignores the means-to-an-end argument and the converting-land-subsidy-into-cash argument.

CE: But it is quite clear that if we do this through a subsidiary and the subsidiary gift-aids the profit to the charity, no problem – right?

Many difficulties the social housing sector faces can be dealt with administratively without recourse to the law housing is a place of last resort

SP: Yes, that's the fiction. By a happy chance the charity's non-charitable subsidiary decides to gift-aid its profit to the charity. Elsewhere in tax law history the tax authorities successfully argued that you look at the beginning and the end and ignore all the steps in between – you follow the money.

CE: It all adds to costs and delays in the process because non-charitable subsidiaries pay stamp duty and they cost money to set up and administer, so they often have to be bankrolled.

SP: You can avoid stamp duty by taking the land in the charitable RSL first and then transferring on (pepperpot estates are a problem) but there are confused areas: the sell-on price – nil or at value for section 9 purposes. Can there be on-lending for the development? Is it a qualifying loan? It's a muddle that needs to be sorted.

CE: Mention a test case and you'll get my latte in your lap. It's all confident advice then mysteriously the sky-rocket becomes an expensive damp squib. The only test case I'll sign up to is one where the lawyers are on a contingency fee.

SP: I agree we need a political push for quick administrative action. Many difficulties that the social housing and regeneration sector face can be dealt with administratively without resort to the law and without primary legislation. Tax authorities have power to give concessions and strike deals. Other quick fixes include: the right-to-buy profiteers on estate regeneration, restricting staircasing to keep low-cost home ownership available without high rent, reconciling service charges to partnering agreements with contractors, and stamp duty – none of these need primary legislation. Then there are the employment problems …

CE: Stop! Perhaps we should link politicians' pay to modernisation? Trouble is, so many of them are lawyers.