Helena Housing Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 February 2010 |
| Neutral Citation | [2010] UKFTT 71 (TC) |
| Date | 01 February 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 71 (TC)
Michael Tildesley OBE (Chairman)
Christopher McCall QC, David Milne QC, Matthew Smith and Thomas Chacko counsel instructed by McGrigors solicitors for the Appellant
Philip Jones QC and William Henderson counsel instructed by the Solicitor's office of HM Revenue & Customs, for HMRC
Corporation tax - assessment - deduction for expenditure - was the expenditure incurred wholly and exclusively for its Schedule A business - no - was the appellant a charity - no - appeal dismissed
The taxpayer company was a registered social landlord which had acquired the housing stock of St Helens Metropolitan Borough Council in Merseyside. The taxpayer was run on a not for profit basis with its principal activity being the letting, management and maintenance of rented housing with income of almost £43 million for the year ending 31 March 2008. Since 2002 the taxpayer had spent over £200 million on refurbishing its housing stock, which had been funded through external loans. It was registered as a charity with effect from 1 December 2004.
The taxpayer appealed against assessments for corporation tax for the accounting periods 1 July 2002 to 31 March 2003, and 1 April 2003 to 31 March 2004. The amounts under appeal were £2,674,819.39, and £3,457,667.10 plus interest. At issue was the availability of a corporation tax deduction for expenditure incurred by the taxpayer on the refurbishment of its housing stock. The taxpayer advanced two separate arguments in support of its appeal: first, that it was entitled to a corporate tax deduction for the refurbishment expenditure; secondly, it was a charity from its inception, in which case it had no liability at all for corporation tax.
For VAT reasons the transfer of the housing stock was structured in the following way. The taxpayer agreed, under a transfer agreement, to purchase the housing stock subject to a development works agreement (DWA) under which the taxpayer undertook to refurbish the housing stock (termed qualifying works) for the Council in consideration of payment of £104 million plus VAT. The transfer agreement stated that the price to be paid was £133,058,361 including £28,888,361, representing the agreed value of the property in its then condition, and £104,000,000, representing the value of the Council's covenant contained in the transfer agreement to carry out the qualifying works in respect of the housing stock. The transfer agreement provided for the set off of the payment of the £104 million which represented the value of the Council's covenant against the payment due from the Council to the appellant under the DWA. The taxpayer issued the Council with an invoice for the £104 million under the DWA plus VAT of £18.2 million. The Council set off the £104 million payable under the invoice against the £104 million due from the taxpayer as part of the purchase price under the transfer agreement. Thus the Council paid the taxpayer the £18.2 million for the VAT on the invoice. The taxpayer in turn paid £30.1 million under the transfer agreement. The Council reclaimed the £18.2 million as input tax.
HMRC's case was that the agreements could not be ignored and that on a proper construction of the agreements the taxpayer ran two businesses: a Sch. A business and a Sch. D business. The latter business related to the provision of services to the Council under the DWA. The sums paid by the taxpayer for the refurbishment works constituted expenditure incurred in its business of providing building services to the Council. Thus the expenditure was incurred in the course of its Sch. D business not in its Sch. A business. The taxpayer submitted that HMRC was wrong to refuse relief for the refurbishment expenditure. Even if the taxpayer performed the repairs because it was under an obligation to the Council that would not prevent its costs from being deductible expenses.
Whether the expenditure incurred on the refurbishment of the properties was a deductible expense for the purpose of the taxpayer's Sch. A business; whether the taxpayer was a charity from its inception.
The tribunal (Judge Michael Tildesley OBE) dismissed the appeal.
The Schedular framework for income tax did not permit flexibility with the interpretation of purpose in respect of deductions. The expenditure had to be allocated to the same category of the income source which gave rise to the expenditure. The receipt under the DWA and the payment under the transfer agreement could not be ignored for corporation tax purposes. The result of that analysis was that the taxpayer had two sources of income, its rental business and its sub-contracting business. The expenditure incurred on refurbishment arose from the taxpayer's obligations under the DWA. Thus the refurbishment expenditure was incurred for the purposes of its Sch. D business not its Sch. A business. HMRC had decided not to assess the taxpayer's profits of its Sch. D business. HMRC accepted that the receipt of £104 million would have to be amortised over the duration of the contract. Thus it was unlikely that the taxpayer's Sch. D business would result in any profits, having regard to the size of the taxpayer's refurbishment expenditure.
Under the transfer agreement the taxpayer spent £132 million (including the £104 million for the Council's covenant for carrying out qualifying works) to acquire the housing stock. That expenditure was incurred for the purposes of its Sch. A business but was a capital expense which could not be set against the taxpayer's rental income for the purpose of its Sch. A corporation tax computation.
The fact that the parties offset their respective payments of £104 million did not affect the analysis of the taxpayer's tax position. The set-off did not mean that the taxpayer did not receive value of £104 million under the DWA.
The refurbishment expenditure was incurred by the taxpayer wholly and exclusively for the purposes of its Sch. D business not its Sch. A business.
The taxpayer's profits for the periods from incorporation until 30 November 2004 and derived from its renting out of properties were not exempt from taxation pursuant to s. 505 and 506 of ICTA 1988.
In order to obtain exemption from tax in respect of its Sch. A profits the taxpayer was required to establish during the relevant periods that the properties were vested in it for charitable purposes and the profits in question were applied to charitable purposes only.
It was common ground between the parties that for the properties to have been vested in the taxpayer for charitable purposes, the taxpayer had to establish that it was a charity during the period 1 July 2002 to 30 November 2004.
Considering the taxpayer's memorandum and articles its foremost purpose was managing and providing housing to tenants for the benefit of St Helens Metropolitan Borough. The words "for the benefit of St Helens Metropolitan Borough" were not sufficient to connote a charitable purpose. The taxpayer's foremost purpose conferred substantial private benefits, and the benefits to St Helens Metropolitan Borough were subsidiary and remote. The taxpayer was not established for purposes which were exclusively charitable.
Therefore the taxpayer was not entitled to an exemption from tax under Income and Corporation Taxes Act 1988 section 505ss. 505 and 506 of ICTA 1988.
1. The Appellant was appealing against assessments for corporation tax issued on 13 December 2006 for the accounting periods 1 July 2002 to 31 March 2003, and 1 April 2003 to 31 March 2004. The amounts under Appeal were £2,674,819.39, and £3,457,667.10 plus interest. At issue was the availability of a corporation tax deduction for expenditure incurred by the Appellant on the refurbishment of its housing stock which was acquired from St Helens Metropolitan Borough Council. The decision sought by the parties is one of principle on the liability of the Appellant to pay the assessments for corporation tax. The Appellant advances two separate arguments in support of its Appeal. The first argument which has been termed the Technical Issue is that the Appellant was entitled to a corporate tax deduction for the refurbishment expenditure. The second argument is that the Appellant was a charity from its inception, in which case it had no liability at all for corporation tax. If the Appellant succeeds on either argument, it wins the Appeal. HMRC considers the Appellant's arguments flawed and misconceived.
2. The Appellant is a Registered Social Landlord which as at 30 June 2008, held a portfolio of 12,780 properties in the Metropolitan Borough of St Helens in Merseyside. The Appellant is run on a not for profit basis with its principal activity being the letting, management and maintenance of rented housing with income of almost £43 million for the year ending 31 March 2008. Since 2002 the Appellant has spent over £200 million on refurbishing its housing stock, which has been funded through external loans.
3. The Appellant came into being following a review in May 2000 by St Helens Metropolitan Borough Council (hereinafter known as the Council) of the options open to the Council in respect of the management of its housing services. Chapman Hendy Associates, which conducted the review, identified that the housing stock belonging to the Council would require a capital investment of £238 million over the next seven years to bring the properties up to an acceptable standard. The only way that the Council could fund this investment itself was through a substantial increase in rents which was not politically acceptable. Chapman Hendy Associates concluded that the sole option which would enable the Council to carry out a complete repairs and improvements programme and keep annual rent increases within reasonable limits was to transfer the whole housing stock to another body, most probably a new organisation set...
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