Maclean v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 19 February 2007 |
| Date | 19 February 2007 |
| Court | Special Commissioners |
special commissioners decision
J Gordon Reid QC, F.C.I.Arb
Colin Tyre QC for the Appellant.
Jane Paterson, Advocate (12/5/06), Eric J Brown, Solicitor, Inland Revenue (20/12/06) for the Respondents.
Capital gains tax - Reinvestment relief - Whether company a qualifying company - Whether taxpayers entitled to reinvestment relief on disposal of shares by partnership - Taxation of Chargeable Gains Act 1992 section 164A section 164G section 164ITaxation of Chargeable Gains Act 1992, s. 164A164G, 164I
A special commissioner decided that two partners were not entitled to reinvestment relief in respect of a capital gain on the sale of shares in one company reinvested in another company whose business was the provision of serviced accommodation. The letting of furnished accommodation was deemed to be a trade and reinvestment relief did not apply to deemed trades.
The appeals concerned the meaning of the words 'qualifying trades' to be found in Taxation of Chargeable Gains Act 1992 section 164GTCGA 1992, s. 164G. The taxpayers, husband and wife, had been assessed for the tax year 1995-96 in respect of the capital gains accruing on the sale by a partnership of which they were the partners of shares in a property company. The taxpayers' partnership operated a hotel and six serviced apartments. The partnership sold the shares and an amount equivalent to the capital gain was reinvested in another company ("the company") which bought the serviced apartments from the partnership. The company had submitted a CT41G to the Inland Revenue with the nature of business to be carried on being "provision of serviced accommodation". The Revenue disputed the taxpayer's claimed entitlement to roll-over relief under Taxation of Chargeable Gains Act 1992 section 164ATCGA 1992, s. 164A.
The Revenue submitted that for the purposes of reinvestment relief, the company was not carrying on a trade. The letting of furnished accommodation was deemed to be a trade by virtue of Income and Corporation Taxes Act 1988 section 15 section 53ICTA 1988, ss. 15, 53, and Income and Corporation Taxes Act 1988 section 503503. Reinvestment relief did not apply to deemed trades.
The issue was whether the company was a qualifying company within the meaning of Taxation of Chargeable Gains Act 1992 section 164Gs. 164G so that each taxpayer was entitled to reinvestment relief in terms of Taxation of Chargeable Gains Act 1992 section 164As. 164A in respect of the gains accruing to each of them on the disposal by the partnership of shares; and whether it was carrying on a qualifying trade at the material time within Taxation of Chargeable Gains Act 1992 section 164Is. 164I.
A special commissioner (J Gordon Reid QC) (dismissing the appeal) said that income derived from the exercise of property rights properly so-called by the owner of land, i.e. the exploitation of the right of property and the right of occupation, was not income derived from the carrying on of a trade.
Income derived by an owner from granting or limiting his rights as owner of the land in favour of others was not regarded for income tax purposes as the carrying on of a trade. Thus, income derived from the commercial letting of furnished accommodation, whether for a short or long period, was not generally regarded as income derived from carrying on a trade, even although that activity might properly be described as the carrying on of a business. Business was a wider concept than trade.
Activities over and above the mere exploitation of heritable property or turning to profitable account the land, of which he was the owner, might be significant enough to classify a man's business as a trade. Whether the provision of services or other activities were significant enough to cross the line between land ownership and commercial enterprise in land was a question of fact and degree depending upon the nature and extent of the operations or activities concerned.
However, the fact that an owner made the visit to his land by a licensee more attractive by providing various services, e.g. keeping the property in a proper state and condition would not turn exploitation of property rights into a trade. Whether income was derived from the location of the land, which was the normal manner in which property in land yielded revenue, was a relevant consideration (Salisbury House Estate Ltd v FryTAX(1929) 15 TC 266, Sywell Aerodrome v CroftTAX(1941) 24 TC 126, Gittos v BarclayTAX[1982] BTC 197 and Griffiths v JacksonTAX(1982) 56 TC 583 considered).
The reasoning in the authorities was not particularly easy to apply to the circumstances of this appeal and they were of limited value and of questionable utility in the modern context of carrying on the business (to put it neutrally) of providing serviced apartments. It was, however, reasonably clear that the provision of furnished holiday lets was not generally regarded for the purposes of income tax as the carrying on of a trade. Under Income and Corporation Taxes Act 1988 section 503ICTA 1988, s. 503, a commercial letting of furnished accommodation was to be treated as a trade but that did not assist the taxpayers here. The services provided by the company were typical of the services provided under a holiday letting arrangement. The other services were not truly services provided by the company but activities carried on by the partnership. They provided the services having purchased all necessary goods (food and beverages for example). They charged the holidaymakers who paid the partnership.
While it was true that a trade could be carried on by procuring the provision of services from third parties, the services procured here were relatively insignificant compared with the main activity of letting furnished holiday accommodation. Even if the activities of the company constituted a trade, it was not a qualifying trade. Its income was derived broadly from payments by holidaymakers for the use of the apartments. That was in the nature of a payment for the grant of a right to use or occupy a holiday apartment. Many of the services relied upon by the taxpayers to bring themselves within the meaning of qualifying trade disappeared over the winter months when the hotel was closed. For several months of the year the company existed for a purpose which was not the carrying on of a qualifying trade.
Accordingly, the company was not a qualifying company within the meaning of Taxation of Chargeable Gains Act 1992 section 164GTCGA 1992, s. 164G. Neither taxpayer was entitled to reinvestment relief in terms of Taxation of Chargeable Gains Act 1992 section 164As. 164A in respect of the gains accruing to each of them on the disposal by the partnership of the shares.
This decision relates to two appeals directed to be heard together and is concerned with the meaning of the words qualifying trades to be found in section 164G of the Taxation of Chargeable Gains Act 1992 (the "1992 Act"). The taxpayers, husband and wife, have been assessed for the tax year 1995/96 in respect of the capital gains accruing on the sale by a partnership (Innseagan Holidays) of which they were the partners, of shares in a property company (Keep Issue Limited). An amount equivalent to the capital gain was reinvested in another company (Highland Holidays Scotland Limited). HMRC (the "Revenue") dispute the Appellants' claimed entitlement to roll-over relief under section Taxation of Chargeable Gains Act 1992 section 164A164A of the 1992 Act.
A Hearing took place at Edinburgh on 12th May 2006 and 20th December 2006. The Appellants were represented by Colin Tyre Q.C, instructed by Jeffrey Crawford, Chartered Accountants and Chartered Tax Advisers, Edinburgh. He led the evidence of one of the appellants, Donald Stewart Maclean. Jane Paterson, Advocate, was instructed by the Revenue Solicitors' Office, Edinburgh. She led no evidence. Due to her indisposition on 20th December, the Revenue solicitor, Eric J Brown, at very short notice, completed the submissions outlined by Miss Paterson on 12th May.
A bundle of productions was lodged along with a Statement of Agreed Facts.
This appeal has a tortuous history. It began before the General Commissioners. The Appellants were initially successful but an appeal to the Court of Session was allowed largely because, it would appear, the then Clerk to the General Commissioners failed to produce a draft Stated Case and resigned without doing so and without leaving adequate notes to enable a proper Case to be prepared. The appeal was eventually remitted to the Special Commissioners in December 2005.
The issue between the parties, as identified by them, is whether Highland Holidays Scotland Limited (the "Company") was a qualifying company within the meaning of Taxation of Chargeable Gains Act 1992 section 164Gsection 164G of the Taxation of Chargeable Gains Act 1992 so that each taxpayer was entitled to Reinvestment Relief in terms of section 164A of the 1992 Act in respect of the gains accruing to each of them on the disposal by the partnership (Innseagan Holidays) in 1995/6 of shares in Keep Issue Ltd.
That issue turns largely on an analysis of the activities of the Company and whether it was carrying on a qualifying trade at the material time within the meaning of section 164 I of the 1992 Act.
The relevant provisions of Chapter 1A of Part V of the 1992 Act as it stood for the purposes of this appeal, are as follows:
(1) Subject to the following provisions of this Chapter, roll-over relief under this section shall be available where-
(a) a chargeable gain would (apart from this section) accrue to any individual ("the re-investor") [on any disposal by him of any asset ("the asset disposed of"); and
(b) that individual acquires a...
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