Nott
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 February 2016 |
| Neutral Citation | [2016] UKFTT 106 (TC) |
| Date | 18 February 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Thomas Scott, Kamal Hossain FCA FCIB
The Appellant appeared in person
Mr Simon Bracegirdle, HM Revenue and Customs appeared for the Respondents
Income tax – Whether income from letting holiday cottages property or trading income – Meaning of occupation – Relevance of HMRC practice in relation to hotels and bed and breakfasts – Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 10 – Furnished holiday lettings rules.
The First-tier Tribunal dismissed the taxpayer's appeal. Income from the taxpayer's holiday cottage complex was property income from furnished holiday lettings, not income from a trade.
The taxpayer (N) acquired the Trewinnard Estate, by gift, in 2009. The Estate included a manor house, gardens, farmyard area including farm buildings, and holiday accommodation units.
The manor house was rented out and rents from it taxed as property income. There were six holiday cottages (five owned by N) and two residential cottages (one occupied by the Estate manager and the other by N), on the Estate.
The five cottages owned by N were business rated. Lettings were generally for two weeks or less. The terms and conditions of letting provided a licence to use the property for a holiday, together with access to make use of certain additional facilities advertised on the business's website.
Cooked breakfasts were offered, usually for an additional charge, but no other meals. The cottages were cleaned at the end of the guest's stay, but not daily (though a daily cleaning service was offered, on request and for an additional charge).
The additional facilities available included the recreational grounds; a working farm environment including guided tours for children; a concierge service; a pool, pool house and games room.
N's tax return for 2009/10 included self-employment pages in respect of, inter alia, trades of farming and a holiday cottage complex; and a property income page for rents in respect of the manor house. N set his farming and holiday cottage losses against his other income for income tax purposes. He had not, however, set off such losses for purposes of Class 4 NICs. Following an enquiry into N's return, HMRC issued a closure notice. This noted HMRC's conclusion that farming losses could be set against other income for Class 4 purposes (in fact generating a small tax repayment), but the losses from the holiday cottage complex could not. This was on the basis that the income from the holiday cottages was property income from furnished holiday lettings, and did not arise in the course of a trade. N appealed to the Tribunal.
The Tribunal said the sole issue was whether income from the holiday cottage complex was trading or property income (and noted that the real significance of this in fact related to N's ability to set off losses from such business for subsequent years against his general income for income tax purposes).
ITTOIA 2005, s. 4 had the effect that the property business charge (in s. 264) took priority over the charge on trades (in s. 5). However, s. 4 was subject to s. 2(3), which provided that the rules as to priority need to be read with other rules of law (whether in this Act or otherwise) about the scope of particular provisions or the order of priority to be given to them. The Tribunal said the two remaining pieces of the jigsaw to be considered in this case were s. 10 (commercial occupation of land), and ITA 2007, s. 127 (commercial letting of furnished holiday accommodation).
The Tribunal referred to HMRC's Business Income Manual (BIM22001), which stated that income from furnished lettings … is only treated as a trade when the landlord remains in occupation of the property and provides services substantially beyond those normally provided by a landlord. This will be the case, for example, where the activity consists of providing bed and breakfast, or running a hotel or guesthouse. Similar language appeared in HMRC's Property Income Manual (PIM4300). However, the Tribunal did not think the decided cases had formulated a definitive occupation plus services test, even though clearly the nature and level of any services offered would be important and whether or not the taxpayer remained in occupation would also be relevant. Indeed, a property owner who remains in occupation was, all else being equal, more likely to be able to show that, if additional services are being provided, it is a package of services forming part of a trade from which his income derives.
In the Tribunal's view, N did not occupy each of the holiday cottages, either individually by reference to the terms and conditions of letting or on the argument that the Estate, including the holiday cottages, should properly be viewed as a single parcel of land of which he was the occupier.
As regards the additional services provided by N, whilst extensive, they were not such as to change the whole picture in the words of Lord Greene in Sywell Aerodrome, Ltd v Croft (HMIT) TAX(1941) 24 TC 126. They were in large part consistent with the services normally provided by a landlord of furnished holiday accommodation. The recreational facilities offered were in substance features intended to increase the attractiveness of the cottages for letting, rather than additional services. The breakfasts and daily cleaning which were offered for an additional fee were insufficient to change the profit derivation from the exploitation of property to a package of services comprising a trade.
The Tribunal also dealt with three additional arguments:
1) N argued that his activity was, in all material respects, indistinguishable from that of many hotels and bed and breakfast establishments. Since HMRC's published practice was to treat such establishments as trades for tax purposes, both in fairness and in law his activity should be taxed in the same way. But the Tribunal said the tax treatment of other businesses could not operate to convert N's activity into a trade if there was no trade on the facts; and in any event, N did not go so far as to suggest that his activity was in fact a hotel or bed and breakfast.
2) it was not considered that N was in occupation (which, the Tribunal said, had to be actual occupation) of the holiday cottages within the scope of ITTOIA 2005, s. 10 (the section which provided that the commercial occupation of land in the United Kingdom was treated for income tax purposes as the carrying on of a trade).
3) the Tribunal found no evidence, as N had argued, that HMRC had failed to consider whether N's activities amounted to an actual trade for tax purposes, either because they had already pigeon-holed those activities as an Furnished holiday lettings business or for other reasons.
Accordingly, N's appeal fell to be dismissed.
This is a further case to add into the mix on the dividing line between trading and property letting.
It was interesting to see the Tribunal, in its discussion, question HMRC's formulation in their Manuals – for establishing a trade in the case of furnished accommodation – of (landlord's) occupation plus (substantial) services (emphasis added); and then express a preference for the profit derivation test. The Tribunal also, separately, expressed its view on the meaning of occupation in the context of ITTOIA 2005, s. 10.
Based on its views here, one does wonder how this particular Tribunal might approach, for example, the case of a business providing motorway travellers with overnight lodge accommodation (comprising basic room with wash facility, but no other additional services or even staff presence at all).
[1] This is an appeal against a closure notice which has been issued to the Appellant, Mr Nott, for the tax year 2009–10 under sections 28A(1) and (2) of the Taxes Management Act 1970 (TMA 1970).
[2] The issue is whether certain income received by the Appellant in that year is property income or trading income. The technical issue in the appeal is whether losses from the activity giving rise to that income can be set against the Appellant's income for 2009–10 for the purposes of Class 4 National Insurance Contributions. The issue of greater practical significance is the ability of the Appellant to set off such losses for subsequent years against his general income for income tax purposes.
[3] There are various provisions relating to the taxation of income from property contained in the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). Those which are relevant to the appeal are set out below. The order in which they are set out is intended to aid understanding of the statutory framework.
[4] Section 5, contained in Part 2 of the Act, charges to income tax the profits of a trade.
[5] Section 268, contained in Part 3 of the Act, charges to income tax the profits of a property business.
[6] Section 264 provides:
(1) A person's UK property business consists of –
a) every business which the person carries on for generating income from land in the United Kingdom, and
b) every transaction which the person enters into for that purpose otherwise than in the course of such a business.
[7] Sections 266 and 267 provide:
(1) In this Chapter generating income from land means exploiting an estate, interest or right in or over land as a source of rents or other receipts.
(2) Rents includes payments by a tenant for work to maintain or repair leased premises which the lease does not require the tenant to carry out.
(3) Other receipts includes –
a) payments in respect of a licence to occupy or otherwise use land,
b) payments in respect of the exercise of any other right over land, and
c) rentcharges and other annual payments reserved in respect of, or charged on or issuing out of, land.
(4) For the purposes of this section a right to use a caravan or houseboat at only one location is treated as a right deriving from...
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