[2011] UKFTT 40 (TC)

TC00917

Appeal number: TC/2010/01088

Appeal against disallowance of losses – whether the Appellant’s activities amounted to a trade in the relevant tax year and he could deduct the losses against his other income

FIRST-TIER TRIBUNAL

TAX 

	MR A.W.KERR/GRANTHAM HOUSE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MRS.S.M.G.RADFORD (TRIBUNAL JUDGE)						J.AGBOOLA			

Sitting in public at Holborn Bars, London EC1N 2NQ on 8 November 2010

Alistair Kerr for the Appellant

Colin Williams for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against the decision of HMRC to disallow losses claimed as trading losses against the Appellant’s other income for the tax year ending 5 April 2007.
2.	The Appellant claimed trading losses on his self assessment tax return in respect of expenses incurred in relation to his activities at Grantham House which resulted in him receiving a repayment from HMRC.
3.	HMRC opened an enquiry into the tax return and came to the conclusion that the losses were not deductible.
4.	The Appellant requested a review of the decision and the HMRC reviewing officer, Mr Shorte, by letter of 2 December 2009 upheld the HMRC’s decision.
5.	HMRC contended that no trade had been carried on during the tax year in question and that the onus was on the Appellant to prove, subject to the balance of probabilities that he had conducted a trade on a commercial basis with a view to making a profit.
Background and facts
6.	The Appellant held a lease of Grantham House, a property belonging to the National Trust, from 14 September 2006 to 15 September 2007.
7.	Prior to taking the lease from the National Trust the Appellant made various enquiries of them. He met with Mike Booth, the National Trust property manager who told him that Belton House, a National Trust property near to Grantham House had attracted 167,417 visitors in the 2005/06 year and that at Grantham House they should have no difficulty in attracting visits from perhaps ten per cent of that number. This would have earned the Appellant in excess of £60,000 annually.
8.	The Appellant’s intention was not only to open the house and gardens to visitors but to hold functions there. The idea was to provide his partner with an occupation whilst he was still employed and then on his retirement for himself to work there full time.
9.	The lease was onerous. The tenant was required to maintain the house and gardens and the rent was £45,000 per annum for the first two years.
10.	Immediately after moving into the property the Appellant began undertaking some necessary repairs to the property and restoring the gardens incurring along with the other costs a wages bill of some £21,597. 
11.	He had planned to open the house to visitors as soon as possible but unfortunately the lease negotiations took longer than he expected so that by the time the lease was signed the main season for visitors which is from March to October was largely over.
12.	The grounds were opened for two days in late October/early November for an Autumn Tints event. The opening was promoted in the Grantham Journal and with leaflets displayed around Grantham and in several shops on the basis that it was the first time the garden had been open to the public to display its autumn colours. However only six families who were National Trust members attended. National Trust members have free access to National Trust properties and although the Appellant was officially open for business and had a lady selling tickets at the door in anticipation of paying visitors no paying visitors attended.
13.	In preparation for the next opening the Appellant liaised and gave talks to local clubs and organisations and paid for local advertising.
14.	In a letter dated 14 December 2006 the Melton Mowbray University of the Third Age wrote to the Appellant asking to arrange a visit to Grantham House on 27 April 2007 as part of their 2007 excursions programme. This was confirmed by the Appellant’s manager by letter of 14 February 2007 and he sent an invoice in the amount of £80 for the group to them by letter dated 28 March 2007.
The Law
15. Section 34 of the Income Tax (Trading and Other Income) Act 2005 (“ITEPA”) refers to expenses which are not wholly and exclusively for trade and unconnected losses:

(1)In calculating the profits of a trade, no deduction is allowed for—
(a)expenses not incurred wholly and exclusively for the purposes of the trade, or
(b)losses not connected with or arising out of the trade.
(2)If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.

16.	Section 57 of ITEPA refers to pre-trading expenses:
(1)This section applies if a person incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the person starts to carry on the trade (“the start date”).
(2)If, in calculating the profits of the trade—
(a)no deduction would otherwise be allowed for the expenses, but
(b)a deduction would be allowed for them if they were incurred on the start date,
the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).

17.	Section 66 of the Income Tax Act 2007 refers to restrictions on relief unless the trade is commercial:
(1)Trade loss relief against general income for a loss made in a trade in a tax year is not available unless the trade is commercial.
(2)The trade is commercial if it is carried on throughout the basis period for the tax year—
(a)on a commercial basis, and
(b)with a view to the realisation of profits of the trade.
(3)If at any time a trade is carried on so as to afford a reasonable expectation of profit, it is treated as carried on at that time with a view to the realisation of profits.
(4)If the trade forms part of a larger undertaking, references to profits of the trade are to be read as references to profits of the undertaking as a whole.
(5)If there is a change in the basis period in the way in which the trade is carried on, the trade is treated as carried on throughout the basis period in the way in which it is carried on by the end of the basis period.
(6)The restriction imposed by this section does not apply to a loss made in the exercise of functions conferred by or under an Act.
(7)This section applies to professions and vocations as it applies to trades.

HMRC’s Submissions

18.	HMRC referred to the case of Marston v Morton 59 TC 381 in which it was decided that amongst the matters which should be treated as badges of trade was that the transaction in question should be repetitive and not a one-off transaction. Mr Williams contended that the Appellant had not shown that the trade was repetitive and that the six families who had visited Grantham House in October 2006 should count as occasional visitors who had a contract with the National Trust and not the Appellant.
19.	He submitted that the only other possible trading activity in the relevant year was the one agreement with the Melton Mowbray University of the Third Age and that was not necessarily a trading contract. Additionally the visit took place after the end of the tax year.
20.	 HMRC claimed that because of the wording of the lease it was not possible to run the property as a business. The property could only be opened for a limited period during the year and so Mr Williams contended that there was no prospect of the activity making a profit.
21.	Clause 7.2 of the lease stated that the tenant should not use the property or any part of it for any profession, trade, business or other purpose. As this clause did not appear to have been amended in any way Mr Williams did not believe that any business could have been carried on during the Appellant’s tenancy.
22.	Mr Williams contended that even if it was possible to make a profit from opening the house to paying visitors it was debatable whether such activity could count as a commercial trade.
23.	The rent alone was £45,000 a year and the nature of the possible activities was so limited that they did not afford a reasonable expectation of profit.
24.	 Further he queried whether all the expense was wholly and exclusively for the purpose of the possible trade as the lease was in effect for a residential property at which the activity would take place. The property was the Appellant’s home.
Appellant’s Submissions
25.	The Appellant submitted that the intention had always been to make a profit. They had begun their lease negotiations in May and could have had more openings if they had been able to move in earlier.
26.	He contended that the trade had been started in the tax year ending 5 April 2007 albeit in an embryonic way.
27.	  Although the lease appeared restrictive this was not so in practice. The National Trust had agreed that they could run antique fairs, open the house for weddings and host concerts.
28.	The Appellant submitted that it was not correct to submit that the house could not generate the sort of income which would be sufficient to maintain it as there were many properties, National Trust and private, which maintained themselves partly or wholly from being open to the public.
29.	 The lease obliged the tenant to admit the public to the property and to charge such admission fees as stipulated which the tenant was entitled to keep. The Appellant submitted that it therefore followed that because they were allowed to keep admission monies and that from other sales a business, however modest, was being run with the express approval of the landlord.
30.	In the following tax year many of their ideas had come to fruition and they had been able to run some events.
31.	The lease had been varied by the National Trust and their predecessor had sub let some of the premises to an architect and operated a restaurant in the house.
32.	The division between their living premises and those parts of the house which were opened to the public was clear and the money spent on renovation and repair related to the parts of the house open to the public and the largest proportion of the money was spent on the gardens.
Findings
33.	We examined the lease and the notes of the meetings with the National Trust which were produced to us.
34.	We found that although the lease might appear restrictive in parts in practice it was quite possible for the Appellant to run the property as a business charging admission fees to non National Trust members and opening the property for events.
35.	We found that the Appellant had carried on a trade in the tax year ending 5 April 2007. We based this in part on the comment made in the reviewing officer’s letter of 2 December 2009. He wrote in that letter: “There is a difference between activities directed to setting up a trade and the trading activities themselves. A simple example would be starting to trade as a retail shop. The premises need to be obtained, stock purchased …..etc. However the trade itself does not start until the day the shop opens its doors for business”.
36.	The Appellant opened the house for business on two days in late October/early November 2006 for the Autumn Tints event and although there were actually no paying visitors there was someone to sell tickets had such paying guests arrived. We find therefore that the trade started on the day of the first opening for the Autumn Tints event.
37.	Additionally during that year the Appellant advertised that the house was open for business and as a result of this a booking, which we find was a trading contract, was made by the Melton Mowbray University of the Third Age. The Appellant told the Tribunal that the best potential profit was to be made by private bookings and we find that the advertising was to ensure that the trade was repetitive and not occasional.
38.	As to whether the trade was commercial with a view to making a profit we find that the Appellant did all that he could with the intention of making a profit. We find that he was severely hampered by the length of time it took to obtain the lease but nevertheless we find that the anticipated activities when carried on as a trade would clearly be and were commercial. 
39.	We did not find however that the loss claimed was necessarily accurate. Whilst the majority of the expenses claimed on the tax return, a copy of which was provided to us, clearly relate to the business we would have liked to have seen a breakdown of the premises costs.
40.	We were unable to discern from the papers submitted to us the exact amounts spent on each part of the house and gardens. We do not find a dual purpose for the expenditure but agree with HMRC that some provision ought to have been made in the accounts to recognise the Appellant’s use of the living premises which were clearly not part of the business.
41.	Section 34 of ITEPA states that no deduction is allowed unless the expense is wholly and exclusively for the purposes of the trade. If the expense is incurred for more than one purpose then the taxpayer can deduct for any identifiable part or portion of the expense which is wholly and exclusively for the purposes of the trade. The Appellant informed us that the living premises were discrete from the public areas.

Decision
42.	The appeal is allowed subject to a deduction being made from the expenses which recognises the Appellant’s use of the private living premises which were identifiable from those parts of the house open to the public.
43.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

					S.M.G.RADFORD
					TRIBUNAL JUDGE
					RELEASE DATE: 11 JANUARY 2011