[2012] UKFTT 176 (TC)
TC01871
Appeal number TC/2010/1482
S162 TCGA
1992 – availability of incorporation relief on the incorporation of a lettings
business – whether or not there was sufficient activity to constitute a
"business" – Appeal Dismissed
FIRST-TIER TRIBUNAL
TAX
ELIZABETH
MOYNE RAMSAY Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS ("HMRC") Respondents
TRIBUNAL:
IAN WILLIAM HUDDLESTON, TRIBUNAL JUDGE
TONY
HENNESSEY FCA (MEMBER)
The Appellant was represented by her son, Mr. Richard
Ramsay
The Respondents were represented by Mr. P. O'Reilly,
Officer for HMRC
Sitting in public in Belfast on 25 July 2011
© CROWN COPYRIGHT
2011
DECISION
The Appeal
1. The
appeal in this case raises a question of whether relief under Section 162
Taxation of Chargeable Gains Act 1992 ("TCGA") arises on the transfer
of a property letting business previously conducted by the Appellant and her
husband to a company set up by she and her husband for that purpose.
2. In
particular, the essential question is whether the activities of the Appellant,
as a landlord, are sufficient to distinguish the property letting business
carried out by her from a normal Schedule A taxable concern.
3. Section
15 and Schedule A of the Income and Corporation Taxes Act ("ICTA")
1988 defines income assessable under Schedule A where (broadly) it relates to
the letting of property as distinct to income from a trade or business which
otherwise would be assessable under Schedule D.
Summary of Facts
4. The
property in question, Moat House, Moatlands, Old Holywood Road, Belfast
("the Property") consists of a sizeable Victorian Property which has
subsequently been converted into ten flats of which five at the operative time
were occupied by tenants.
5. In
1987 the Appellant, Mrs. Ramsay, inherited a one third share in Moat House from
her father which she continued to hold in conjunction with two of her brothers.
6. In
2002 Mrs. Ramsay took over the administration of the Property from the then
instructed letting agents.
7. On
the 4 February 2003 Mrs. Ramsay gifted 50% of her then one third share to her
husband.
8. On
the 27 February 2004 Mr. & Mrs. Ramsay purchased the remaining two thirds
in Moat House from Mrs. Ramsay's brothers with the assistance of a bank loan.
9. On
the 16 September 2004 both Mr. & Mrs. Ramsay transferred Moat House,
subject to a then existing bank loan, into a corporate vehicle, TPQ
Developments Limited ("the Company") in exchange for shares in that
Company.
10. On the 1 August
2005 both Mr. & Mrs. Ramsay then gifted their entire shareholding to their
son Richard Ramsay who at the date of the Appeal was the sole director and
shareholder of the Company.
11. The Appellant
submitted her tax return for the year 2004 / 2005 (ie. the year in which the
transfer to the Company was effected) on the 26 January 2006 and incorporated
in that return was a claim under Section 162 TCGA in relation to the transfer
to the Company.
12. HMRC raised an
enquiry notice on the 9 September 2007.
13. There then
followed considerable discussion and dialogue between HMRC, two sets of
accountants and Mr. Ramsay, who in that chain of correspondence and before the
Tribunal represented his mother's interest. It is trite to say that HMRC and
the Appellant / Mr. Ramsay took diverging views on how the factual
circumstances outlined above applied to the law and to the availability of
incorporation relief under S162 in particular.
14. HMRC concluded
its investigations on the 29 October 2009 by issuing a closure notice pursuant
to the provisions of Section 28A of the Taxes Management Act 1970 on the
grounds that the relief under Section 162 TCGA did not apply.
15. It is that
closure notice and the assessment which, upon review, was upheld, that is the
subject of this Appeal.
The Appellant's Argument
16. The Appellant,
throughout the correspondence leading up to the closure notice, and in front of
this Tribunal, contends that the actions carried out by her in connection to
the letting and administration of the Moat House constitute more than passive
receipt of rents such as would fall to be assessable under Section 15 /
Schedule A ICTA 1988, and that the activities (all of which are detailed below)
constitute a business which formed the substance of the transfer to the
Company, thus qualifying for incorporation relief in accordance with Section
162 TCGA 1992.
17. The activities
which are directly in point were elicited through the chain of correspondence
passing between the Appellant and HMRC and also formed the focus of a site
visit carried out by an officer of HMRC in the company of Mr. Ramsay.
18. If I could
summarise that chain of correspondence and the assertions made on behalf of the
Appellant, they are as follows:
(1)
that upon taking over the administration of the Property in 2002 Mr.
& Mrs. Ramsay arranged to meet each of the then five tenants to explain
that the rent must be paid on time and to the accountant (who then was
responsible for dividing the income between she and (at that point) the other
co-owners);
(2)
that they took responsibility for the checking and payment of quarterly
electricity bills for the communal areas;
(3)
that upon acquisition of the Property outright they took responsibility
for cancelling previous insurance policies and arranging a new policy in Mr.
& Mrs. Ramsey's sole names;
(4)
that the Appellant attended the Property to unblock the drains (five in
number);
(5)
that the Appellant / the Appellant's son oiled and re-attached steel
wires on some of the garage doors belonging to the flats, and cleared the
debris from previous tenants which had accumulated in other garages;
(6)
that they took responsibility for returning post for previous tenants to
the various senders;
(7)
that they confirmed with Belfast City Council compliance with fire
regulations and installed / replaced fire extinguishers where applicable;
(8)
that a post and wire fence and hedging was erected at the rear of the
Property to segregate it from adjacent land;
(9)
that a flower bed was created in front of the hedge;
(10)
that the shrubs around the property were pruned and leaves swept up and
discarded in the local refuse tip;
(11)
that the back garden and car park were weeded on a regular basis;
(12)
that the flagstones to the rear of the building were bleached to ensure
the removal of algae;
(13)
that the communal areas were vacuumed and dusted on a regular basis and
the mahogany staircase polished;
(14)
that Mr. & Mrs. Ramsay frequently, when passing the property,
checked the security of the windows and doors at the rear of the building;
(15)
that on an occasion the Appellant found rubbish dumped in the car park
of the building which she took the Council tip;
(16)
that vacated flats were cleaned and cleared of furniture abandoned by
previous tenants in preparation for new tenants;
(17)
that additional assistance was provided in particular to one elderly
tenant, including dealing with telephone calls from the tenant regarding alleged
faulty electricity supply, replacement of a broken window and even liaising
with social services in relation to her care package.
19. Overall, the
evidence put to the Tribunal was that the Appellant had assessed that she and
her husband spent approximately 20 hours per week carrying out the various
activities. It was accepted by HMRC that neither Mr. nor Mrs. Ramsay had any
other occupation during the relevant period, and that the running of Moat House
was, in effect, their sole business activity.
20. Prior to
purchasing her brothers' interest in the Property, Mr. & Mrs. Ramsay
instructed a surveyor to conduct a survey of the Property and took the advice
of a local estate agent.
21. Mr. & Mrs.
Ramsay then embarked upon a process of redevelopment and refurbishment by
instructing Wayne Storey Associates, a firm of surveyors, to prepare an
appropriate plan for refurbishment and to obtain the appropriate listed
building consent and planning permission for an extension / redevelopment of
the Property. As part of that endeavour Mr. & Mrs. Ramsay also secured the
funding they required from the Ulster Bank both to purchase the remaining two
thirds shares, but also to carry out the proposed refurbishment.
22. At all times
both Mr. & Mrs. Ramsay returned the income on their returns as Schedule A
income subject to the appropriate deductions.
23. The Appellant
did not appear in person, but the Tribunal had the benefit of the considerable
correspondence passing between both the Appellant and HMRC and the Appellant's
son and HMRC – in particular the Appellant's letters of the 11 September, 28
November 2007, and 11 December 2009 and Mr. Richard Ramsay's letters of the 17
December 2007, 14 September 2008, 30 April, 24 June, 15 October and 17 November
2009 with HMRC's responses in each case.
24. The Tribunal
also had the benefit of the appeal notice which was prepared by the Appellant's
instructed agents, Messrs. Powrie Appleby LLP, together with correspondence
from Messrs. M.B. McGrady & Co., Accountants, and correspondence passing
between Messrs. Fitch & Co., Accountants, and HMRC.
HMRC's Case
25. HMRC, throughout
the correspondence referred to above, and before this Tribunal, contend that
Section 162 TCGA 1992 requires that, for incorporation relief to apply, a
person, transferring to a company, must transfer:
(1)
a business as a going concern;
(2)
the whole of the assets of the business; and
(3)
that the business is exchanged wholly or partly in exchange for shares
issued by the Company to the person transferring the business.
26. It is accepted
by HMRC, and indeed by the Appellant and Mr. Richard Ramsay, that there is no
statutory definition of the word "business".
27. HMRC, therefore,
contend that the word must take its every day meaning (a contention to which,
again, I do not think that Mr. Ramsay objected).
28. HMRC's view,
however, is that all of the activities and explanations provided throughout the
period lead them to conclude that when the Property was transferred to the
Company it was an investment property, the principal purpose for which the
receipt of rental income and therefore was not a business to which the
provisions of Section 162 TCGA would apply.
29. In short, HMRC
take the view that the activities cited are, in the main, those which any owner
of an investment property would undertaken and, in addition assert that some of
the tasks are of a one off nature and do not represent regular ongoing
activity.
30. As regards the
potential redevelopment / refurbishment proposals, HMRC contend that the
principal motivation was to improve rental returns and to enhance the value of
the investment, rather than to pursue an active business.
31. In short, they
contend that the onus of proof is for the Appellant to produce evidence to
establish an active business was being undertaken and that she has failed in
that endeavour and that, accordingly, the denial of relief under Section 162
TCGA should stand and that the closure notices are, in effect, valid.
The Law
32. The legislation
covering this issue is, obviously, Section 162 TCGA 1992, which provides as
follows:
"Roll-over Relief on
Transfer of Business
(1)
This Section shall apply for the purposes of this Act where a person
who is not a company transfers to a company a business as a going concern,
together with the whole assets of the business, or together with the whole of
those assets other than case, and the business is so transferred wholly or
partly in exchange for shares issued by the company to the person transferring
the business."
33. Section 15 ICTA
1998 read in conjunction with Schedule A provides as follows:
(1)
"Tax is charged under this Schedule on the annual profits
arising from a business carried on for the exploitation, as a source of rent or
other receipts, of any estate, interest or rights in or over land in the United
Kingdom.
(2)
To the extent that any transaction is entered into for the
exploitation, as a source of rents or other receipts of any estate, interest or
rights in or over land in the United Kingdom, it is taken to be entered into
the course of such a business."
34. The issues which
are the subject of this Appeal have been considered in a number of cases to
which the Tribunal were referred, namely:
(1)
American Leaf Blending Co. Sdn Bhd v Director General of Inland
Revenue (1978) 3 All ER 1185;
(2)
Irshad Mahmood Rashid v M. Garcia SpC 348;
(3)
Salisbury House Estates Limited v Fry 15TC266;
(4)
Croft v Sywell Aerodrome 24TC126;
(5)
Webb v Conelee Properties Limited 56TC149;
(6)
Griffiths v Jackson & Griffiths v Pearman 56TC585;
(7)
Town Investments Limited v Department of the Environment AC359;
(8)
CIR v The Korean Syndicate Limited 12TC181;
(9)
Land Management Limited v S P Fox SpC306;
(10)
Executors of Moore (Deceased) v IRC 1995 SpC2.
35. The case which
was most cited in the correspondence passing between the parties was American
Leaf Blending Co. Sdn Bhd vs Director General of Inland Revenue (cited
above) and in particular the judgement of the Privy Council as delivered by
Lord Diplock.
36. At paragraph 21
Lord Diplock states as follows:
"In the case of a
private individual it may well be that the mere receipt of rents from property
that he owns raises no presumption that he is carrying on a business. In
contrast, in their Lordship's view, in the case of a company incorporated for
the purpose of making profits for its shareholders, any gainful use to which it
puts any of its assets prima facie amounts to the carrying on of a business."
37. Paragraph 22
carries on:
"The carrying on of a
"business", no doubt, usually calls for some activity on the part of
whoever carries it on though, depending on the nature of the business, the
activity may be intermittent with long intervals of quiescence in between. In
the instant case, however, there was evidence before the Special Commissioners
of activity in and about the letting of its premises by the Company during each
of the five years that had elapsed since it closed down its former tobacco
business."
38. The case of Rashid
v Garcia, a Special Commissioners case, had factual circumstances not
dissimilar to the present appeal, insofar as the Appellant, either directly or
though his family, spent some sixteen to twenty four hours per week in relation
to the letting of four properties, let to both residential and commercial
tenants.
39. What slightly
distinguishes the case is that it was a national insurance case where the
Appellant was in fact trying to argue that he was involved in a business for
the purposes of certain social security benefits.
40. In that case,
the Special Commissioner, Dr. John Avery Jones, was of the view that whether a
property rental was an investment or a business, was a matter of degree and, in
that case, having considered all the evidence, he was of the view that there
was insufficient activity for the property letting conducted by the Appellant
in that case to constitute a business. Rather, he felt it was an investment which,
by its nature, required some activity to maintain it and, on that ground,
dismissed the appeal.
41. That trend was
adopted in Salisbury House, Sywell Aerodrome Limited, Conelee Properties
Limited, Griffiths v Jackson and Griffiths v Pearman (where the subject
business involved the letting of furnished rooms and provision of services) and
the case of Martin & Another v IRC – a case involving the
availability of business property relief under Section 105 Inheritance Tax Act
1984, again in circumstances where the deceased had been letting occupied
premises which the executors argued constituted a business – and failed.
42. In short, the
weight of the case law to which the Tribunal was addressed is against the
Appellant insofar as it, firstly, very firmly establishes that where an
individual asserts that a business arises, there is a presumption that unless
proof of sufficient activity is established, that it is not a business. That
onus of proof rests on the Appellant.
43. Secondly, that
the activities which are required are those which are over and above the ones
which one might be required or expected as incidental to the ordinary
maintenance, repair and development of an investment property.
Decision
44. In the present
case, I think it is helpful if one looks at what was actually being transferred
to the Company.
45. In essence what
was being transferred was a large former residence which had been converted
into ten flats and, from the evidence before us, was ripe for redevelopment /
refurbishment.
46. At the point of
transfer, the Tribunal takes the view that business property relief would not
have been available to the Appellant applying Section 105 of the Inheritance
Tax Act 1984 and the principles enshrined in Moore (cited above).
47. The Tribunal
finds that the activities which have been cited by the Appellant are those
which are normal and incidental to the owning of an investment property. They
are not of a unique nature and applying the principles set out in the Rashid
v Garcia are those which arise by necessity when one owns a property, such
as this, which is let out in flats.
48. In terms of
historic treatment, it is informative to note that Mrs. Ramsay and then Mr. and
Mrs. Ramsay both returned all of the income as Schedule A income (with
appropriate deductions for expenses where they arose).
49. At no time was a
suggestion made that they were carrying on a Schedule D trade or business.
50. HMRC, during its
course of correspondence, suggested some of the additional factors which may be
required to justify concluding that a business existed.
51. This Tribunal
does not need to comment on that view, but would express reservations that the
items quoted in HMRC's letter, of themselves, would have been sufficient to
convert the factual circumstances outlined in this scenario into a business.
52. In relation to
the Appellant's assertion that the actual number of flats and therefore scale
was instrumental in converting the activities into a business, the Tribunal
does not agree. The reality was that the Moat House was a single investment
property – albeit comprised of ten apartments – and the Tribunal finds that the
scale of activities simply were commensurate with that size of property and the
number of occupied apartments.
53. The scale of the
building, of itself, this Tribunal concludes, does not convert the ownership of
a property into a business.
54. In relation to
the proposals for refurbishment and/or redevelopment of the Property this
Tribunal finds that in the main these were carried on by the Company after
incorporation. Admittedly they were commenced by Mr. & Mrs. Ramsay at an
earlier stage, but we find that they were undertaken to maintain or enhance an
existing investment property and to thereby enhance the available returns by
increased rents and have less vacancies than previously.
55. Having so found,
and despite Mr. Ramsay's eloquent presentation of the Appellant's case, it
logically follows that the appeal is dismissed.
56. No order as to
costs.
57. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to "Guidance to accompany a Decision from the First-tier
Tribunal (Tax Chamber)" which accompanies and forms part of this decision
notice.
IAN WILLIAM HUDDLESTON
TRIBUNAL JUDGE
RELEASE DATE: 25 January 2012
