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Brass Tax by BKL Tax

BKL Tax outline two recent points of interest on the meaning of carrying on a business, and on a case concerning the recovery of costs that raises issues of legal professional privilege.

None of My Business

What amounts to carrying on a business? The question crops up in a number of situations, one of which is identifying associated companies for the purposes of small companies' relief - you don't include any company which has not carried on any trade or business in the relevant period.

We know from Jowett v O'Neill and Brennan that putting £5,000 on deposit may not amount to carrying on a business. We now know (from the recent case of Salaried Persons Postal Loans) that the entirely passive receipt of rent from a single tenant (all the dirty work being carried out by the managing agent) may also not amount to the carrying on of a business.

Not carrying on a business is of course likely to be a Good Thing as far as Small Companies' Relief goes. It may be a Bad Thing if you have incurred expenses which would otherwise be relievable as management expenses: relief for such expenses applies only if and to the extent that they are referable to an "investment business" and it seems to us that if you are carrying on no business, you cannot possibly simultaneously claim to be carrying on an investment business.

More fundamentally, is a company that passively receives rent but does not carry on a business subject to tax? Remember that tax is charged under Schedule A on "profits arising from a business carried on for the exploitation of any rights over land". So the finding that no business is carried on must negate any Schedule A charge. This doesn't necessarily mean that the rents are tax-free: Case VI of Schedule D generally catches income not caught elsewhere, and is apposite to include rental income that arises otherwise than from a business.

Interestingly, however, Case VI would not include all the various special charges that arise under Schedule A - things like the charge under ICTA S34 that taxes certain premiums as if they were in part rent. Nor (probably) is there provision under Case VI for interest paid to be deducted: and the specific interest relief for let land was abolished when Schedule A was modernised a few years ago. So the tax treatment of a company which receives rent but is not carrying on a business is both anomalous and obscure.

The activity of "receipt of rent other than in the course of a business" when carried on by a non-company also causes interesting problems on incorporation. Hitherto it has been possible to say with confidence that TCGA 1992 S162 (relief on incorporation of a business) applies to a Schedule A business as it does to any other business: however it will not, on the face of it, apply to the incorporation of a "non-business rental activity".

Salaried Postal Loans has opened more cans of worms than at first meets the eye...

Agassi Serves Double Ace

Towards the end of last year the Court of Appeal held that endorsement payments made by Nike and Head to Andre Agassi's non-UK-resident company were not subject to tax under the "non-resident entertainers" scheme. Mr Agassi has now won a second victory in recovering costs against the Revenue. This of itself is unexceptional; but the circumstances will be interesting to specialist tax advisers.

Mr Agassi was a "litigant in person". Lest this conjures up visions of Mr Agassi swapping tennis whites for wig and gown and personally appearing in the High Court, we should explain that this simply means that he did not instruct his Counsel through solicitors: instead, his accountants instructed Counsel under the BarDIRECT scheme. The rule on recovery of costs is that such a litigant is not able to recover fees paid to a non legally qualified assistant for work which would normally have been done by a solicitor. However, he is able to recover disbursements. It thus became necessary for the Court to decide whether the work done by the taxation specialists was such as would normally have been done by a solicitor (and non-recoverable) or a disbursement (and potentially recoverable).

The Court held that at least part of the work was of such an esoteric nature that specialists would have been needed even if a solicitor had been instructed to conduct the appeals; and therefore recoverable as costs.

OK: not many of us are going to be worrying about whether our fees are recoverable under CPR 48.6. More to the point is the significance of the judicial recognition that there do exist areas of law where great expertise may reside with professionals other than solicitors. Once that is established, will perhaps the next bastion to fall be legal professional privilege, which is at present jealously guarded by the legal profession? In a world where even the Courts recognise that the reality is that expert legal advice is daily provided by non-legally qualified advisers, for how much longer can legal professional privilege continue to be denied to such advisers, we wonder?

December 2005

Brass Tax

About BKL Tax

BKL Tax is a division of Berg Kaprow Lewis LLP. For information about BKL Tax Consultancy Services, visit www.bkltax.co.uk or call 020 8922 9222 for telephone support.

Brass Tax®

Brass Tax is intended for general guidance only and no liability is accepted for actions taken in reliance upon these notes. Where appropriate professional advice should be taken. Such advice is available under the terms of the BrassTax®Plus service. See the BKL Tax website for details. www.bkltax.co.uk.