London Luton Hotel BPRA Property Fund LLP
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 March 2019 |
| Neutral Citation | [2019] UKFTT 212 (TC) |
| Date | 28 March 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 212 (TC)
Judge Brooks, Nicholas Dee
Capital allowances – Conversion of flight training centre into 124-room hotel – Whether entitled to Business Premises Renovation Allowances on whole or only elements of sum paid to developer – Appeal allowed in part.
The FTT partially allowed an appeal against a closure notice rejecting a claim for Business Premises Renovation Allowance (“BPRA”) totalling £12,478,201.
This case concerned the extent to which expenses incurred as part of a construction contract entered into by London Luton Hotel BPRA Property Fund LLP (“the LLP”) amounted to “qualifying expenditure” pursuant to CAA 2001, Pt. 3A for the purposes of BPRA.
After a detailed analysis of the relevant provisions at CAA 2001, s. 360A–G, the FTT adopted the “purposive construction” approach established in Pollen Estate Trustee Co Ltd v R C Commrs [2013] BTC 606 as a way to interpret them.
The FTT heard from several expert witnesses and witnesses of fact on behalf of the LLP and HMRC and came to the following findings of fact:
The Cannock group of companies (“Cannock” or “the Developer”) were developers who sought development projects and sponsors to promote and find private investors. In December 2009, Cannock and the LLP entered into a conditional agreement to purchase a disused flight training centre next to the Ibis Hotel in Luton Airport (“the building”). The building included access to the surrounding land and a car park and had the benefit of planning permission for the development of a 149-bedroom hotel. The purchase price was £2,880,000 plus VAT of which the Developer was to pay a deposit of £29,999 plus VAT and the LLP £1.
After much research, Cannock secured a franchise to manage and operate the finished hotel with ThenHotels Ltd.
In terms of construction, Cannock entered into a design and build agreement with Multibuild (Construction and Interiors) Ltd (“Multibuild”), a subsidiary of Balfour Beatty plc (with a guarantee given by Balfour Beatty plc), on 24 March 2011. The agreed price was £5,894,555 and because the contract preceded the acquisition of the freehold of the building by the LLP, the contract was conditional on formal notice of the “financial close” (or loan agreement finalised) of the contract with the LLP given before 5 April 2011, after which either party was entitled to terminate. At the same time, Cannock and Multibuild entered into a Fixtures, Fittings and Equipment Supply Agreement for a reduced price and which was also conditional on financial close of the contract with the LLP.
Works commenced in May 2011 and completed in June 2012.
Cannock obtained a secured loan from the Co-op bank to include a £2m “Developers Capital (or Security) Account” designed to give comfort to the bank and the investors and to be called upon in the event that the interest and amortisation payments were not made out of trading income. The Developers Capital Account was not, however, required by the Co-op and the proposal was in place before the loan request was made to the bank.
On 21 March 2011, the LLP and the Co-op entered into a loan agreement which after much negotiation was fixed at £7m.
On 25 March 2011, Cannon agreed to lend the LLP a further £1.985m in case any sums were withdrawn from the Developers Capital Account as per the bank loan agreement. This loan carried interest at the same rate applied by the Co-op from time to time and was to be rolled up and compounded quarterly and paid at the same time as repayment of the principal amount. The deadline for repayment was the earliest of the time the LLP repaid its bank loan by securing funds from a third party, the sale of the building or eight years.
A sponsor of the fund, issued an Information Memorandum (“IM”) in order to raise private equity from investors. In that IM each investor was invited to make a contribution of at least £100,000 for which higher rate taxpayers would get “significant relief on the cost of their investment”. The investors were also made aware of the limited recourse loan provided by Co-op and of the Developers Capital Account secured by the developer. The total subscription sought was £15.5m which was meant to fund the purchase of the building and the conversion building works. The IM warned of a risk that HMRC's practice and view of the legislation may differ from those set out in the IM and that any claims for BPRA relief may be delayed or lower than initially expected. All investments in the project were regulated by the FCA. It became clear that at least four individuals connected with Cannock invested in the project and that one individual played a significant role in the drafting of the IM and in corresponding/ providing information to IFAs to market the project.
It had taken between 70 to 80 documents to execute the transactions necessary to secure funding and begin the project.
HMRC rejected the BPRA claim on the following amounts:
- The Interest Amount/ Licence Fees (£350,000) – derived from the loan facility;
- The Capital Account (£2,000,000);
- IFA fees (£372,423.40);
- Promoter fees (£310,000);
- Legal fees (£153,409.89);
- Franchise costs (£272,862);
- Fixtures, Fittings and Equipment (FF&E) and other non-qualifying amounts (£587,556.35); and
- Residual amount/profit (£1,209,510).
In deciding whether or not the payment of the Development Sum by the LLP to Cannock was made “on or in connection” with the conversion renovation or repair to the building, the FTT concluded that the words in s. 360B(1) and (3) should be given a wide construction. In addition, it was clear from the provisions that for the expenditure to be “qualifying expenditure”, it must be incurred on or in connection with the conversion of a flight training centre into a hotel. It should not include all expenditure needed to create a fully functioning hotel business. The FTT agreed with HMRC that they should consider the “constituent elements” of the Development Sum which were paid by Cannock and whether they are “qualifying expenditure”.
This was a sum paid by Cannock into the Interest Account in accordance with various agreements. The terms “interest amount” and “licence fees” were used interchangeably in some of the agreements. Under the terms of some of the agreements, Cannock was precluded from making any withdrawals for any purpose other than to cover the quarterly interest that was due from the LLP to the Co-op.
HMRC argued that this amount was used to inflate the BPRA claim only as there was no commercial reason for it to be paid to Cannock as the LLP could have made the interest payments directly to the Co-op.
The FTT accepted that the LLP granted a licence to Cannock because it was necessary to enable it and its contractors to enter the building and carry out the conversion works. Also, the LLP did not have the funds to pay the loan interest to Co-op during the development phase. Therefore, this was a commercial arrangement which did not increase the tax deductible by the LLP as income from the licence fee was taxable. The Licence Fee was on or in connection with the conversion, renovation etc of a qualifying building.
HMRC contended that viewed realistically, the £2m deposited into this account by the LLP was funded by the loan from the Co-op under which the LLP had borrowed £5m (not £7m) in order to be in a position to incur “real expenditure” of that amount. They argued that the amount was self-cancelling as evidenced by Cannock's inability to withdraw any benefit from it during the period the amount was deposited.
The FTT rejected the argument by the LLP that any sums withdrawn from the Capital Account would “be treated as having been added” to the Developer Loan as it did not reflect the commercial reality that both Cannock and the LLP could make withdrawals. In addition, the Capital Account was not a requirement imposed by the Co-op and became part of the loan process on the initiative of Cannock. In reality, the nature of the Capital Account was circular and amounted to self-cancelling cashflow with its beginning and end under the Co-op and therefore was not incurred on or in connection with the conversion or renovation of the building.
HMRC also contended that there was no real commercial reason for Downing (the entity which engaged IFAs and paid their fees) to arrange for the LLP to pay a sum to Cannock just so that Cannock could pay a sum to Downing to reimburse the IFA fees. Downing could have simply reimbursed itself or paid the fees out of the LLP's raised funds.
The FTT disagreed and held that the IFA Fees qualified for BPRA. Had such sums been paid by the LLP directly, they would either be deductible revenue expenditure or, given the wide interpretation given to s. 360B, expenditure incurred “in connection” with the conversion, renovation etc of the building, a qualifying building for BPRA purposes. There could be no suggestion that these fees related to the acquisition of an interest in land (the building) as the fees had been paid in exchange for services in raising equity finance.
HMRC again argued that this expenditure was in connection with the acquisition of land and that there was “no need” for the payments to be paid to the promoters from the Development Sum. For the same reasons, the FTT disagreed that the expenditure was in connection with the acquisition of land and even though it could be said to be no need to structure the payment of the promoter fees in this way, it was so structured and it was this reality which needed to be considered. Noting that the payments were made by Cannock (and not the LLP) to the promoters, the FTT considered that they were made in connection with the conversion or renovation of the building. The fees...
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