If any doubt yet lingers that HMRC has lost the plot in litigation, Peter Vaines offers a taxing re-working of Macbeth. Or Catch 22. Also, encouraging signs for Business Property Relief claims on investment property.
Tax Avoidance Motive Test
Occasionally tax advisors are faced with a conundrum in connection with the various tax motive tests, that if a taxpayer claims a tax relief, he must have done so for the purpose of obtaining a tax advantage – so he is therefore disqualified from the relief by reason of his tax avoidance motive.
The most obvious example is investing in shares qualifying for EIS. Of course you want the tax relief – the whole purpose of the EIS is to encourage investment by the provision of a tax advantage and it is bound to be one of the purposes of making the investment (and so easy for HMRC to say that it is one of the main purposes). But by doing so, you are disqualified because of one of the main purposes would be the avoidance of tax. You fall squarely into ITA 2007 s 178.
This has generally been regarded as merely an amusement reminiscent of Albert Haddock, because it would be ridiculous to enact a relief which is denied by the very act of claiming it. Time to stop laughing now. This is exactly the argument advanced by HMRC in the case of Oxbotica Ltd v HMRC TC 6538.
The case involved a spin out from Oxford University of some innovative products which had been developed and patented by a number of professors who were the investors in the company. The facts reported in the case reveal a wholly conventional spin out, with no special or abusive features. The investors did however claim Seed EIS relief (shock horror). HMRC argued that the purpose of the investors was to secure tax relief under the SEIS rules; they therefore failed the motive test and they were disqualified from relief.
You can just see Macbeth opening his post in the morning:
“Is this a tax relief which I see before me,
the share certificate toward my hand? Come, let me clutch thee.
I have thee not, and yet I see thee still.
Art thou not, fatal vision, sensible to feeling as to sight? Or art thou but a tax relief of the mind, a false creation …
Thou marshall'st me the way that I was going and such an instrument I was to use. Mine eyes are made the fools of the other senses”
the share certificate toward my hand? Come, let me clutch thee.
I have thee not, and yet I see thee still.
Art thou not, fatal vision, sensible to feeling as to sight? Or art thou but a tax relief of the mind, a false creation …
Thou marshall'st me the way that I was going and such an instrument I was to use. Mine eyes are made the fools of the other senses”
This argument by HMRC was roundly rejected by the Tribunal.
HMRC had some more arguments. ITA 2007 s 257CB provides that the shares must be issued to raise money for the purpose of a qualifying business activity carried on by the company. HMRC argued that the share subscription monies were not used for the business because the amounts were too small to be “of meaningful use” as the company had secured funding from the university for their project.
The Tribunal rejected all the arguments of HMRC saying that: “Their focus was again and again and again on the articulation [of] their own guidance”. The Tribunal held that HMRC were wrong to seek to impose a minimum level of investment when Parliament had not done so; there was no basis for suggesting there must be a meaningful level of investment (which in any event would create impossible uncertainty); and that it was not open for HMRC to contend that the tax motivation test was met.
If HMRC don’t want to give EIS relief or SEIS relief, it would be better if they just abolished them rather than to pretend they exist and then deny relief when they are claimed.
IHT Business Property Relief
The Tribunals have consistently held that letting property is an investment business, no matter how extensive the services which are provided. Business property relief cannot therefore apply because IHTA 1984 s 105(3) excludes entitlement to the relief if the business:
“consists wholly or mainly of one or more of the following, that is to say, dealing in securities, stocks or shares, land or buildings or making or holding investments.”
The recent case of Executors of Marjorie Ross v HMRC TC 5959 involved holiday cottages which were let, and where loads of services were provided to the guests. The Tribunal acknowledged that a high level of services was provided to guests and these services were more extensive that those considered in any previous case. However, that was irrelevant because in the view of the Tribunal, the relief would not be available “however high the standard of services which were provided and whatever the level of expenditure incurred on those services”. The fact that the business was run on sound business lines and with considerable effort, was also irrelevant. This decision, together with the cases of Pawson v HMRC [2013] UKUT 50 and Zetland v HMRC TC 5387 and many others, looked like the end of the road with this argument. Well, maybe not.
HMRC took the same view with regard to a livery business (which of course necessarily involves the use of land and buildings – or at least structures) saying that the business was nothing more than the letting or licensing of land for the use of others and was therefore an investment business – being the making or holding of investments: Executors of M Vignes v HMRC TC 6068.
However, the FTT concluded that no properly informed observer could have concluded that the livery business was wholly or mainly a business of holding investments. They said that the Upper Tribunal in Pawson had wrongly started from the pre-conceived idea that the business was wholly or mainly one of making or holding investments and then asked whether there were factors indicating to the contrary. The Tribunal said that the proper starting point is to make no assumption one way or the other, but to establish the facts and determine whether or not the business is wholly or mainly one of making or holding investments.
This approach has now been supported by the case of Executors of Joyce Graham Deceased v HMRC TC 6536 which also involved the letting of holiday accommodation and the provision of various services. The taxpayer represented herself and her impressive advocacy persuaded the Tribunal that the services she provided were of such importance that the business should not be regarded as wholly or mainly an investment business. The Tribunal said that the provision of “the pool, the sauna, the bikes and in particular the personal care lavished upon guests by Louise Graham” distinguished it from a second home let out in the holidays.
It does not seem that the services provided in this case differed very much from those in Marjorie Ross, (or Pawson or Zetland), all of whom were unsuccessful in their claims for business property relief, so Louise Graham’s success is even more impressive.
The conclusion must be that letting property can represent a business qualifying for business property relief, being more than the mere holding of an investment – and that the nature and quality of the services provided is what makes the difference. After all that is why a hotel qualifies for relief. There is clearly a line – the Tribunals refer to it – but we do not yet know where the line is. Maybe it will become visible in due course.
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