TC01748: NV Pawson dec'dNovember 2011 First tier Tribunal
The issue as to whether Furnished Holiday Lettings (FHL) qualify for BPR has been debated for some time. HMRC appeared in recent years to have changed their policy and the indications were that they would reject a claim. That position now seems to be in some doubt following a decision at the First tier Tribunal. There is an indication in the decision that a number of other cases were being held depending on the outcome of the particular appeal and so the decision may have wider implications, although it might be expected that HMRC will take the case further.
Fairhaven is a large bungalow which overlooks the sea and has direct access onto the beach. The taxpayers contended that for some years, including the two years leading up to the death of Mrs Pawson in June 2006, that the property was used as a business of letting as a holiday cottage.
The income from the property in the last three financial years before Mrs Pawson's death had been 2003/04 £4,342.99, 2004/05 £6,072.51 and 2005/06 £8,120.00. That income generated profits of £680.27 in the year 2003/04, £802.32 in 2004/05 and a loss of £2,071.61 in 2005/06. The income in 2006/07, during which year Mrs Pawson died, was £16,589.67 with a profit of £4,449.66.
Services included the provision of heating and lighting, clean bedding, a television and telephone, hot water on arrival, fully equipped kitchen cleaning between each letting and upkeep of the garden.It was agreed that there were two issues to be settled in this appeal. The first related to whether or not the activity constituted a business within s105(1) IHTA 1984 and the second was whether, if it did, the business was one of wholly or mainly making or holding investments under s105(3).
Was it a business?
The Tribunal identified the authority of Gibson J in the VAT case of Fisher where he had identified six basic features which enable an activity to be regarded as a business.
Applying the criteria to the case, the judge highlighted:
• The operation of the property as a holiday cottage for letting to holidaymakers was a serious undertaking earnestly pursued. He noted particularly the dealing with people and the need for advertising.
• There was reasonable continuity in the operation. It had been available for letting in all recent years and the fact that the letting tended to be seasonal was irrelevant.
• Whilst there were some issues given the late Mrs Pawson's age, the property was being maintained and the activity was run on sound principles. HMRC had tried to make issue of the fact that family members used the property for three weeks but the judge rejected this argument.
• Those supplies were of a type commonly made by those seeking to profit.
The judge concluded that there was a clear business being conducted.
Was s105(3) a problem?
Various cases on caravan parks have considered whether those activities constitute a business from the making and holding of investments. To quote from one case:
'The activities which a landlord carries out because he is obliged to under the lease are incidents of the tenancy and so fall on the 'holding investments' side of the equation. The business activities, if any, carried out by the landlord for gain and which are not required by the lease fall on the other side of the equation. The activities carried on by the landlord which are not required under the lease and for which he receives no separate consideration will fall on the 'holding investments' side of the equation if they are connected with and incidental to the holding of the property as an investment.'
In the current case, the Tribunal noted that it is not appropriate to equate the FHL arrangement with a lease where services are very much secondary to the right of occupation. The agreement entered into for holiday lets is to provide accommodation and services together.
'Certainly, the right the holidaymaker has to occupy the premises is under the same contract as the provision of the services that are promised (such as cleaning heating etc.) but it is unrealistic to equate that with a formal lease typically of much longer duration and under which the services are very much secondary to the right of occupation'.
The judge concluded:
'We have no doubt that an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading. The need constantly to find new occupants and to provide services unconnected with and over and above those needed for the bare upkeep of the property as a property lead us to conclude that no postulated intelligent businessman would consider such a property as Fairhaven to be correctly characterised as an investment. He would consider it to be a business asset to be exploited as part of the provision of services going well beyond investment as such.'
The Upper Tribunal decision
UKUT 050 Upper Tribunal (Tax and Chancery Chamber)HMRC v the Personal Representatives of Nicolette Vivian Pawson deceased)December 2012
HMRC appealed the decision, not on the basis that there was a business but rather that that business was mainly one of holding the property as an investment.
HMRC argued that the essence of Mrs Pawson's business was one of the provision of self-catering accommodation with some ancillary services and not vice versa.
The Upper Tribunal started with the presumption that:
'In considering these rival submissions, I take as my starting point the owning and holding of land in order to obtain an income is generally an investment activity and that such an investment may be actively managed without losing its essential character as an investment.'
The fact that the Pawsons carried on an active business did not detract from this. All of the 'services' associated with this were:
'...activities...directed at maintaining or enhancing the capital value of the property, and obtaining a regular income from its letting.'
The First tier Tribunal had misdirected itself in law:
'The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property. Looking at the business in the round, there was in my view nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature.
The FTT reached their conclusion by seeking to apply the test of how an intelligent businessman would regard the business. They do not explain, however, how an intelligent businessman, who must be assumed to be fully instructed in the relevant law, could conclude that the services elements outweighed the investment elements to such an extent that the 'mainly' test was no longer satisfied.'
So, it looks as though HMRC have been successful in showing that mainly FHL will never qualify for BPR, a change from their long-held position.