London Luton Hotel BPRA Property Fund LLP v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 June 2021 |
| Neutral Citation | [2021] UKUT 147 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 147 (TCC)
Mr Justice Michael Green, Judge Thomas Scott
Upper Tribunal (Tax and Chancery Chamber)
Capital allowances – Payment of development sum by LLP in relation to conversion of flight training centre into functioning hotel – Eligibility of payment for Business Premises Renovation Allowances (BPRAs) – Whether particular amounts paid qualified for BPRAs.
The Upper Tribunal (UT) held that expenditure incurred by a limited liability partnership on the conversion of a building was, in large part, qualifying expenditure for the purposes of Business Premises Renovation Allowances (BPRAs).
London Luton Hotel BPRA Property Fund LLP (the LLP) had appealed to the First-tier Tribunal (FTT) against a closure notice issued by HMRC which reduced the LLP's claim to BPRAs. This was an appeal by the LLP and by HMRC against aspects of the FTT's decision (London Luton Hotel BPRA Property Fund LLP [2019] TC 07059).
The disputed expenditure had been incurred by the LLP under an agreement (the Development Agreement) entered into between the LLP and a developer which provided for the conversion of a former flight training centre near London Luton Airport into a hotel. At the time the expenditure was incurred, BPRAs provided 100% capital allowances for expenditure incurred on, or in connection with the repair, renovation or conversion of unused business property in certain designated disadvantaged areas.
It fell to the UT to determine the following issues:
- Issue 1: Whether the disputed expenditure as a whole comprised expenditure on, or in connection with the conversion, renovation or repair of the property.
- Issue 2: The extent to which each separate component of the disputed expenditure was qualifying expenditure for BPRAs.
With regard to issue 1, the FTT had rejected the LLP's argument that the entirety of the disputed expenditure qualified for BPRAs, finding that it was appropriate to enquire into the constituent parts of the expenditure.
For the UT, the FTT had made an error of law because, in coming to its decision, it had considered the nature of the expenditure incurred by the developer and not the expenditure incurred by the LLP. On this basis, the UT set aside the FTT's decision with regard to Issue 1. In remaking the decision, the UT found that the Development Agreement and another document (the Intercreditor Deed) were “interlocking and inextricably linked” with the result that, in return for the development expenditure, the LLP received obligations from the developer under both documents. In other words, the LLP did not merely obtain an obligation from the developer to carry out the construction works. Therefore, it was necessary in determining to what extent the sum claimed by the LLP qualified for BPRAs to consider each of those obligations.
In summary, the UT remade the FTT's decision so as to dismiss the LLP's appeal on Issue 1.
The FTT's decision with regard to whether each separate item of the disputed expenditure qualified for BPRAs is set out below.
- The Interest Amount/Licence Fee: qualified.
- The Capital Account: did not qualify.
- IFA (Independent Financial Adviser) Fees: qualified.
- Promoter Fees: qualified.
- Legal Fees: qualified in part. The parties were left to agree the specific amounts.
- Franchise Costs: the Ramada Payment qualified; the Sanguine Payment did not qualify.
- Fixtures, Fittings and Equipment: qualified.
- Residual Amount: to be apportioned between qualifying and non-qualifying amounts, with the precise apportionment being left to the parties to calculate.
The Interest Amount/Licence Fee related to an amount paid by the LLP to the developer on the LLP granting a licence to enter the property to the developer. The developer drew down against this amount in order to make quarterly payments to the LLP equal to the LLP's liability to pay interest to the lender. The FTT had found that this was a “commercial arrangement”; the UT disagreed, having failed to find any “credible commercial reason” for the arrangement. The UT allowed HMRC's appeal, finding that the expenditure did not qualify for BPRAs.
The Capital Account was, broadly, monies paid by the LLP to the developer which the developer agreed to deposit in an account to give comfort to the lender. For the FTT, the expenditure did not qualify for BPRAs because the amount was not beneficially owned by the developer or, alternatively, because the expenditure was “circular and self-cancelling”. For the UT, the Capital Account was in substance a guarantee by the developer of the LLP's obligations to the lender, sourced from the developer's potential profit from the project. Therefore, it was clearly expenditure “on or in connection with” the conversion of the property as required by CAA 2001, s. 360B(1) as drafted at the relevant time. The UT allowed the LLP's appeal with regard to the Capital Account.
The UT dismissed HMRC's appeal with regard to the IFA Fees, the Promoter Fees and the Ramada Payment, and allowed the LLP's appeal with regard to the Sanguine Payment, finding that each item of expenditure was incurred on, or in connection with the conversion.
Legal Fees comprised nine items of disputed expenditure of which two items were found by the FTT to be qualifying and seven non-qualifying. The UT found that the LLP had not discharged the burden of proving that the Legal Fees were not excluded from BPRAs as a result of being incurred on, or in connection with the acquisition of land. Therefore, the UT dismissed the LLP's appeal in relation to the two items found by the FTT to be non-qualifying and allowed HMRC's appeal in relation to the remaining items.
HMRC's appeal with regard to Fixtures, Fittings and Equipment concerned the LLP's expenditure on tarmacking, landscaping, drainage and mains services connections. The UT dismissed the appeal, rejecting HMRC's argument that the expenditure was excluded from qualifying for BPRAs by s. 360B(3)(c) as being on, or in connection with “the development of land adjoining or adjacent to a qualifying building”. For the UT, the works “assisted, and were presumably necessary, in rendering the converted building suitable for its intended use as a hotel”.
The UT allowed the LLP's appeal with regard to the Residual Amount (ie the developer's profit on the project) on the basis that regard should be had to the LLP and not to the developer: “If a taxpayer incurs expenditure of £100 to acquire a series of specific obligations which the supplier can discharge for £80, the question for BPRA purposes is not whether the taxpayer has made a good bargain, or how the £20 should be allocated, but whether the specific obligations are on or in connection with Conversion.”
In summary, the Interest Amount/Licence Fee and the Legal Fees were not eligible for BPRAs.
Although still on the statute book, BPRAs are of largely historical interest as qualifying expenditure must have been incurred before 1 April 2017. Further, this case concerns the rules in place prior to the significant changes made by Finance Act 2014.
Malcolm Gammie QC and Jonathan Bremner QC, instructed by DWF Law LLP, for London Luton Hotel BPRA Property Fund LLP
Jonathan Davey QC, John Brinsmead-Stockham, Sam Chandler and Nicholas Macklam, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for HMRC
[1] This is our decision on the appeals by London Luton Hotel BPRA Property Fund LLP (the “LLP”) and HMRC against the decision of the First-tier Tribunal (the “FTT”) reported at [2019] TC 07059 (the “Decision”).
[2] In its tax return for the year ended 5 April 2011 the LLP claimed £12,478,201 of business premises renovation allowances (“BPRA”), a form of capital allowances.
[3] That expenditure had been incurred by the LLP under an agreement entered into between the LLP and OVL (Bankfield) LLP1 (“OVL” or the “Developer”) which provided for the conversion of a former flight training centre near London Luton Airport into a Ramada Encore hotel.
[4] HMRC opened an enquiry into the tax return and issued a closure notice2 on 5 February 2016 which reduced the BPRA claim. HMRC subsequently revised the amount so disallowed, with the result that £5,255,761 of the claim was disallowed and a claim for BPRA of £7,222,439 was allowed.
[5] The basis of the disallowance by HMRC was that the following items of expenditure, discussed in detail below, were not qualifying expenditure under the BPRA legislation:
- The Interest Amount.
- The Capital Amount.
- IFA (Independent Financial Adviser) fees.
- Promoter fees.
- Legal fees.
- Franchise costs.
- Fixtures, Fittings and Equipment.
- Part of the Residual amount.
[6] The LLP appealed against the closure notice. The LLP's primary case was that the entirety of the sum paid to OVL qualified for BPRA, and it was not appropriate to enquire into the constituent elements of OVL's expenditure. The LLP further argued that, if the FTT did not accept that case, the constituent elements disallowed by HMRC were all eligible for BPRA.
[7] The FTT rejected the LLP's primary case.
[8] In relation to the eligibility for BPRA of the constituent elements of expenditure disallowed by HMRC, the FTT allowed the LLP's appeal in part. Its conclusions were as follows:
- In relation to the eligibility for BPRA of the constituent elements of expenditure disallowed by HMRC, the FTT allowed the LLP's appeal in part. Its conclusions were as follows:
- The Capital Amount did not qualify.
- The IFA Fees qualified.
- The Promoter Fees qualified.
- Most of the Legal Fees did not qualify, but some did, with the specific amounts left to be agreed by the parties.
- As regards the Franchise Costs, part (the Sanguine Payment) did not qualify, and part (the Ramada Payment) did.
- The Fixtures, Fittings and Equipment qualified.
- The Residual amount must be apportioned between qualifying and non-qualifying amounts, with the precise...
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