In Richard Denny v HMRC [2013] TC02714 a director was caught out by the benefits code. His company had paid for improvements to his property and he had used the company’s yacht. HMRC raised an assessment to tax the benefits received.

This was a long judgment concerning an investigation over many years including other areas of dispute which the tribunal was required to deal with following the breakdown in relations between HMRC's officer and the taxpayer. This summary only considers the benefits element.

Improvements to property

The taxpayer granted his own company a licence to build an office block for the purposes of carrying out its trading activities on the taxpayer’s land.

  • It was agreed that on termination of the agreement the company would be paid for its share of any uplift in value.
  • The company was paid an uplift but it was less than market value.
  • The Tribunal found that the company incurred its own costs but had also paid some liabilities of the taxpayer.
  • The benefit to the taxpayer were provided at the time the expenditure was incurred by the company, plus the uplift unpaid.
  • Once paid no further benefit accrued - this was not a case of a company continuing to make buildings available to Mr. and Mrs Denny since the land and buildings remained in their sole ownership.
  • The amount of the benefit is the cost of the benefit (the expense incurred by the company) less any amount "made good" under s156(2) ICTA 1988 (now s203-204 ITEPA 2003).

The yacht

The taxpayers’s company purchased a yacht and it was let out commercially on limited occasions.

  • The tribunal decided that during the sailing season the boat was placed at the director’s disposal when it was not being used by others.
  • He would have had to pay for it but it was still available to him because there was no substantial likelihood that it would be used by someone else.
  • The sailing season was June to September, some 17 weeks.
  • In 1999 it was used by other persons for seven weeks, in 2000, two weeks, in 2001 one week, and in 2002, three weeks.
  • Thus respectively and there were 10, 15, 16 and 14 weeks in which it was available to Mr Denny.
  • The annual value was 20% of the boat's market value acquisition so 20% x £306,000 = £61,000.
  • The costs of maintenance and insurance were £2,000 per annum giving a cost for a year was £63,000 (s156(5) ICTA 1988, now s204 ITEPA 2003).
  • The annual cost must be apportioned in some way to determine the "cost of the benefit".
  • The tribunal apportioned by reference to the periods when the boat could or would sensibly have been used i.e. the sailing season.
  • From the apportioned sum there must be deducted the amounts made good by Mr. Denny.

As a result it arrived at the following figures:

  • 1999: 10/17 x £63,000= £37,058 less £6000 = £31,058
  • 2000: 15/17 x £63,000= £55,588 less £6000 = £49,588
  • 2001: 16/17 x £67,000= £59,294 less £6000 = £53,294
  • 2002 : 14/17 x £67,000= £51,800 less £nil = £51,882

Useful guidance on this theme:

Directors: converting part of your house into your office or trading premises
Many of us work from home, and it would be pleasant to obtain tax relief on the cost of converting the spare room, or building a deluxe summerhouse to serve as an office in the garden...More

Links: Richard Denny V HMRC

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