Taxation – Annual tax on enveloped dwellings – Tax relief – Appellant company claiming relief from annual tax on enveloped dwellings (ATED) under section 138(1) of Finance Act 2013 – First-tier tribunal upholding decision of respondent commissioners to refuse relief – Appellant appealing – Whether sufficient evidence that appellant carrying on property development trade – Appeal dismissed
The appellant company, established in the British Virgin Islands, had acquired a residential property in London in 1993. The property was a grade II listed property in a designated conservation area which the company had been trying to sell since 2011, without success.
The annual tax on enveloped dwellings (ATED) was a charge to tax on companies which owned residential property in the United Kingdom. The tax also extended to certain partnerships and collective investment schemes. Relief from the tax was available if (among other cases) the property was held for the purposes of a property development trade: section 138 of the Finance Act 2013.
In the chargeable periods ending 31 March 2014, 2015 and 2016 the company paid ATED in full. In 2014 the company received advice that it should redevelop the property before re-offering it for sale. The actual redevelopment works commenced in April 2016. The appellant contended that that redevelopment constituted the carrying on by it of a property development trade. The company sought, on that basis, to claim relief from the charge to ATED for periods since 1 April 2016 arguing that the conditions in section 138(1)(a) and (1)(b) were satisfied throughout those chargeable periods. In order to satisfy those conditions, the appellant had to establish that, throughout each of the periods, it had been carrying on a “property development trade”, as defined in section 138(4).
The respondent commissioners considered that, although the appellant had shown that the property was being developed, they were not satisfied that it had demonstrated that a development trade existed so that the relief claimed was withdrawn. The First-tier Tribunal (FTT) agreed: [2019] UKFTT 288. The appellant appealed.
Held: The appeal was dismissed.
(1) It was plain from the terms of section 138(1) of the 2013 Act that the relief operated by reference to particular days in a chargeable period. Whether the relief was available on a particular day was determined by reference to a number of conditions being met on the day concerned. One of the conditions was whether, on the day in question, the person was “carrying on a property development trade”. In order for an activity to constitute such a trade, it had to be a trade that met the particular tests set out in section 138(4)(a) and (b). There was no need to consider those particular tests unless the activity was, on analysis, a trade in the first place. If it was not a trade, it inevitably could not be a trade of a particular kind.
(2) Whether or not an activity was a “trade” depended on an analysis of all the relevant facts, which included, in the case where intentions were alleged to have changed, those that existed before the day in question. Accordingly, in determining whether on any day in the chargeable periods concerned, the company was carrying on a trade, the FTT was right and obliged to consider all relevant circumstances. It was essential to consider whether, despite the admitted fact that the property was acquired otherwise than for trading purposes, it had subsequently become an asset held for trading purposes. Accordingly, the FTT had not made an error of principle.
(3) This was a case where a painstaking consideration of each of the “badges of trading” was not a productive way of evaluating the particular factual circumstances. There was no dispute between the parties that residential property could be held as trading stock, that a one-off transaction could constitute a venture in the nature of a trade and that works had been done on the property. The respondents accepted that the property had been redeveloped and, absent the development of the property, there was no existing trade. Although there was no dispute that the property had originally been acquired for non-trading purposes, the FTT recognised that that did not preclude the possibility of the property being subsequently appropriated to a trade.
The critical question was whether there was sufficient evidence that the appellant had resolved to hold the property for a trading purpose and it was open to the FTT to consider whether the transaction was carried through in a manner typical of a trade of property development. In framing the question as it did, the FTT was, as a specialist tribunal, entitled to use the experience that it had to assess the way in which trades were ordinarily carried on. The FTT was looking for evidence to establish whether the company was doing more than merely improving the property to facilitate its sale. There was no basis for challenging the factual findings made by the FTT.
(4) The mere fact that a person might recoup more than the expenses incurred in increasing the value of an asset could not by itself be enough to constitute a trading transaction where previously the asset was held for non-trading purposes. A hope to recover more than the outlay of expenses did not necessarily turn the transaction into a venture in the nature of trade. The FTT was rightly focused on whether what was done was a “scheme for profitmaking”. It was entirely appropriate for the FTT to have asked itself whether the evidence showed that that company was focused on profit. There was no error of law in its approach.
(5) There was no evidence that the appellant was a “commercial” company. Such evidence as there was tended to point in the opposite direction. It appeared to be no more than a passive property-owning vehicle established for the purpose of enveloping the ownership of the property in corporate form. The intention of the legislation was, as the name of the tax indicated, to tax companies that existed as simple corporate “wrappers” or “envelopes” for holding property the occupation of which was enjoyed by a defined class of individuals. It was open to the FTT to conclude that the appellant had not done more than take steps to redevelop the property in order to secure an acceptable offer for a property that it had hitherto been unable to sell.
David Southern QC appeared for the appellant; Julian Hickey (instructed by the General Counsel and Solicitor for HM Revenue & Customs) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Hopscotch Ltd v Commissioners of HM Revenue and Customs
