Ramsay v HMRC [2013] UKUT 0226 (TCC)

Analysis

The appellant appealed against a decision of the First-tier Tribunal (FTT). The issue before the FTT was whether Mrs Ramsay had transferred to TPQ Developments Ltd (TPQ) a ‘business as a going concern’ in exchange for shares issued by TPQ so as to qualify for roll-over relief under s162 Taxation of Chargeable Gains Act 1992 (TCGA 1992). The FTT found that what Mrs Ramsay had transferred to TPQ was not a business within the meaning of s162 of the TCGA 1992.

Mr and Mrs Ramsay owned a property known as Moat House in Belfast (the property). On 16 September 2004 they transferred the property subject to an existing bank loan to TPQ. The FTT found as a fact that Mr and Mrs Ramsay carried out many administrative and practical management tasks in relation to the property. It was not disputed by HMRC that Mr and Mrs Ramsay spent approximately 20 hours per week engaged in such tasks. Moreover, they had no other occupation during the relevant period. In addition Mr and Mrs Ramsay were involved in a planning application in respect of the property and undertook various tasks in connection with this, including securing funding for works and taking professional advice.

The FTT considered the essential question to be whether Mrs Ramsay’s activities ‘as a landlord, are sufficient to distinguish the property letting business carried out by her from a normal Sch A taxable concern’. The FTT referred to s15 and Sch A of the Income and Corporation Taxes Act 1988 (ICTA 1988) in drawing such a distinction. The FTT drew two propositions:

1. (1) That there is a presumption that unless proof of sufficient activity is shown by the individual there is no business (applying Rashid v Garcia [2002] SpC 348).
2. (2) That the activities required to satisfy the sufficient activity test would be over and above those which might be required or expected as incidental to ordinary maintenance, repair and development of an investment property. The FTT held that Mrs Ramsay’s activities did not meet the test. Further, the FTT found that the scale of the activities was simply commensurate with the size of the property; concluding that the scale of the property itself did not convert its ownership into a business. Finally, the FTT dealt with the refurbishment and development activities by finding that in the main they were carried out after the transfer to TPQ and in so far as they were carried out by Mrs Ramsay or her husband before the transfer, they were undertaken to maintain or enhance an existing investment property. The FTT concluded that Mrs Ramsay was not carrying on a business within s162 TCGA 1992.

The judge considered authorities on the meaning of the word business. Little assistance was provided by Harthan v Mason 53 TC 272, which considered the word in the context of s35 Finance Act 1965, a provision on retirement relief. Neither was the distinction between a trade taxable under Sch D Case 1 on one hand and property income taxable under Sch A material for the purpose of the s162 TCGA 1992 test. It was clear from the judgment of the Privy Council in American Leaf Blending Co Sdn Bhd v Director General of the Inland Revenue [1979] AC 676 that no qualitative distinction should be drawn between activities that are carried out in the course of an investment activity and those that are carried out in the course of a business. The distinction between a business and a trade was clearly expressed in Griffiths v Jackson 56 TC 583.

The judge also considered various cases which approached the definition of business in the context of s4 of the Value Added Tax Act 1994 (VATA 1994). Owing to the European background to this legislation the term was to be given a wide interpretation for which there was no such reason in construing the s162 test. The discussion in some VAT cases was however, useful to note; for example Customs and Excise Commissioners v Lord Fisher [1981] STC 238, which listed various indicia for determining whether or not an activity is a business. Cases on whether or not a business was mainly or wholly one of making or holding investments for the purposes of business property relief from inheritance tax were not of assistance in the current context.

The judge considered the role of the Upper Tribunal under s11(1) of the Tribunals, Courts, and Enforcement Act 2007 (TCEA 2007). It was argued for HMRC that the question under appeal was one of fact. Further, that the question of sufficiency of degree of activity is a value judgment made by the FTT on the facts with which the UT should be slow to interfere.

Held:

1. (1) Considering the decision as a whole, the FTT’s finding was based on an error of law, rather than of fact. The FTT’s characterisation of the central question was incorrect and it adopted the wrong approach. The question of whether activities in relation to property investment constitute a business is one of degree; the FTT’s decision was affected by its references to Sch A and reliance on Rashid, which was a case in which the meaning of business took its colour from an association in the statutory definition with trades, professions, and vocations.
2. (2) The FTT was wrong to find that there was a qualitative test by which if activities are ordinarily associated with investment property management, they are not to be regarded as referable to a business. Similarly, the FTT was mistaken in disregarding the scale of the activities simply because they could be explained by reference to the size of the property. It is the degree of activity as a whole which is material to the question of whether there is a business, not its extent compared to the number or size of the properties. In addition the FTT’s treatment of Mrs Ramsay’s work in connection with the proposed refurbishment and redevelopment of the property was subject to criticism. The FTT had made an error of law and its decision would be set aside.
3. (3) The judge proceeded to remake the FTT’s decision:
4. (a) The word ‘business’ in the context of s162 TCGA 1992 should be given a broad construction. Regard should be had to the factors in Customs and Excise Commissioners v Lord Fisher. The question was therefore whether Mrs Ramsay’s activities were a ‘serious undertaking earnestly pursued’ or a ‘serious occupation’. Taking the activities as a whole this test was satisfied.
5. (b) The question of degree had however, also to be considered. There is nothing in s162 to colour the extent of the activity which must be undertaken to constitute a business so the question must be approached giving a broad meaning to the term. In the circumstances the activity was sufficient. The degree of activity outweighed that which might be expected of even a diligent and conscientious passive investor.

JUDGMENT JUDGE ROGER BERNER: Decision [1] The appellant, Mrs Ramsay, appeals, with the permission of this tribunal, against the decision of the First-Tier Tribunal (the FTT) (Judge Huddlestone and Mr Hennessey) released on 25 January 2012. [2] The issue before the FTT was whether Mrs Ramsay had, on 16 September 2004, transferred to a company, …

Continue reading "Ramsay v HMRC [2013] UKUT 0226 (TCC)"