In Elizabeth Moyne Ramsay v HMRC [2013] UKUT 0226 (TCC) the Upper Tax Tribunal (UTT) allowed a taxpayer Capital Gains Tax s162 incorporation relief (roll over) on the transfer of her ordinary property letting business (a small appartment block) to a company. It decided that letting was "a business" for s162 relief.
Section 162 TCGA 1992 states that:
This section shall apply for the purposes of this Act where a person who is not a company transfers to a company a business as a going concern, together with the whole assets of the business, or together with the whole of those assets other than cash, and the business is so transferred wholly or partly in exchange for shares issued by the company to the person transferring the business ...
HMRC had denied the taxpayer tax relief on basis that it tends to regard property letting by an individual as an investment (passive) type of actvity and this is not a business. The taxpayer appealed and the First Tier Tribunal (FTT) found in favour of HMRC. The taxpayer appealed to the UTT.
The UTT noted that the FTT found that Mrs Ramsay's activities are those which are normal and incidental to the owning of an investment property. However, it decided that the FTT has made an error in law and it reversed their the decision, in coming to its conclusions the UTT reviewed different case law examining the terms of both "business" and "trade" across the taxes.
The FTT had commenced on the basis that case law established that where an individual asserts that a business arises, there is a presumption that unless proof of sufficient activity is established, that is not a business. However that UTT noted that in American Leaf Blending Co Sdn Bhd v Director General of Inland Revenue [1979] AC 676 it was concluded that no qualitative distinction should be drawn between activities that are carried out in the course of a passive investment activity, and those carried out in the course of a business.
It also reviewed:
Harthan v Mason 53 TC 272 - a CGT retirement relief case. This concerned the disposal of business assets, and not "a business" and so was not relevant to s162.
Rashid v Garcia (SpC 348) - a national insurance case which examined whether letting was a business and where it was decided that lettings profits did not amount to a business and so were not earnings for NICs purposes. The UTT did not lend any particular weight to the case as it was decided in the context of NICs legislation that "business" had been included along with trade, profession, office or vocation in the definition of earnings.
Griffiths v Jackson; Griffiths v Pearmain 56 TC 583 - the taxpayers owned 11 properties which were occupied by rent controlled tenants, and also let furnished to students and other short term occupiers. It was found that the activity did not amount to a trade. The UTT did not attach weight to this decision because the term "trade" is not relevant to s162.
Customs and Excise Commissioners v Lord Fisher [1981] STC 238 - a VAT case: concerned whether the sharing of the costs of what was otherwise an activity (a shoot) for pleasure and social enjoyment by itself turned that activity into a business. It was decided that there can be no exhaustive definition of “business” for VAT purposes however certain criteria were set out at p245 of Gibson J's judgment as follows: "... the aspects of that activity which are to be considered, as being indicia or criteria for determining whether the activity is a business, are six in number and were listed by counsel for the Crown as follows:
(a) whether the activity is a 'serious undertaking earnestly pursued', a phrase derived from the judgment of Widgery J in Rael-Brook Ltd v Minister of Housing and Local Government [1967] 1 All ER 262 at 266, [1967] 2 QB 65 at 76, or 'a serious occupation, not necessarily confined to commercial or profit-making undertakings', a phrase derived from the speech of Lord Kilbrandon in Town Investments Ltd v Department of the Environment [1977] 1 All ER 813 at 835, [1978] AC 359 at 402, both of them cited to and referred to by the tribunal in their decision;
(b) whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity: per Lord Cameron in Morrison's Academy [1978] STC 1 at 8;
(c) whether the activity has a certain measure of substance as measured by the quarterly or annual value of taxable supplies made: again per Lord
Cameron (at 8);
(d) whether the activity was conducted in a regular manner and on sound and recognised business principles: again per Lord Cameron (at 10);
(e) whether the activity is predominantly concerned with the making of taxable supplies to consumers for a consideration: per the Lord President (at 6);
(f) lastly, whether the taxable supplies are of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them: per the Lord President (at 6) and per Lord Cameron (at 10)."
The UTT considered IHT Business Property relief cases involving let property, however it discounted them because they considered not whether there was a business (which was conceded), but whether the business was one that consisted wholly or mainly in the making or holding of investments.
The UTT concluded that there is no statutory definition of “business” for the purposes of s162.
"...Business is not aligned as a concept with trades or professions, and there is nothing in that respect to colour its meaning. Nor is any special exception created for cases where the business comprises wholly or mainly the holding of investments. What there is, on the other hand, is a requirement that a person who is not a company transfers a business as a going concern to a company. The logic, and perceived purpose, of s 162 is to defer a charge to capital gains tax when the only change that has taken place is the form in which the business is operated (from non-corporate to corporate), and to the extent that the consideration consists of shares in the company. The legislation is looking at business in the context of something that is or may be carried on both by, for example, an individual and by a company. In my judgment the proper approach in that context is to construe “business” broadly, according to its unvarnished ordinary meaning."
Comment
Property letting when carried on by a company is treated as a business activity (CTA 2009 s1218B) and there is no quantitative test for companies with regard to the level of activities they undertake. The UTT found that it would be irrational to deny an individual s162 relief on the basis that property letting was not a business when the same activity will be treated as a business when run though a company.
Link to case: Elizabeth Moyne Ramsay v HMRC [2013]
