Pawson (deceased) v Revenue & Customs [2012] UKFTT 51 (TC)
[24]“24. Commenting on that passage [from IRC –v- Fry [2001] STC 1715] in the Martin case, Mr Oliver said:- "The income attributed to the rent was taxable as such: the income arising from the latter class of activities, eg cleaning, heating, and lighting provided for a separate fee came from a separate source and was potentially taxable as trading income. The distinction is I think equally applicable here. The activities which a landlord carries out because he is obliged to under the lease are incidents of the tenancy and so fall on the 'holding investments' side of the equation. The business activities, if any, carried out by the landlord for gain and which are not required by the lease fall on the other side of the equation. The activities carried on by the landlord which are not required under the lease and for which he receives no separate consideration will fall on the 'holding investments' side of the equation if they are connected with and incidental to the holding of the property as an investment. " (para 21, emphasis added)”.[25]“25. I have underlined the passages most material to the argument in the present case. They were applied by another Special Commissioner, Mr Everett, when holding that a caravan park did not qualify for relief ( Powell v IRC [1997] STC (SCD) 181). In that case the owner carried out the ordinary maintenance and security work of the caravan park, including such activities as grass cutting and painting and cleaning site vans, and helping when the electricity or gas supply broke down. The Commissioner, having cited the passage to which I have referred from Martin , said: "Most of the activities which she carried out were either required under the terms of the lettings or pursuant to the terms of the caravan licence which governed the lettings." 19. It is important to note, for the purposes of this appeal, that the activities which potentially need to be analysed in respect of the investment issue are of three types. First are those which a landlord is required to carry out under a lease, second are those carried out for gain and third are those which although not required by the lease are connected with and incidental to the holding of the property as an investment. 20. The reference to Slesser LJ in the following paragraphs from the judgment of Carnwath LJ in George are references to comments Slesser LJ made in Fry distinguishing services such as the supply of cleaning light and heat separately charged for by a landlord and therefore falling outside the investment category. 27. However, I would make two comments of relevance to the present case. First, I agree in general terms that property "management" is part of the business of "holding" property as an investment (cf Webb v Conelee Properties Ltd (1982) 56 TC 149, 157C-E). In the case of a building held for letting, management no doubt includes the activity of finding tenants and arranging leases or licences, and that of maintaining the property as an investment. But I would not extend that term to additional services or facilities provided to the occupants (such as those referred to by Slesser LJ), whether or not they are included in the lease and covered by the rent. In the case of a building for letting, it is unlikely to be material. They will not be enough to prevent the business remaining "mainly" that of holding the property as an investment.[28]Where it does matter, in my view, the characterisation of such services depends on the nature and purpose of the activity, not on the terms of the lease (or, where relevant, a site licence). It is true that, in Fry , Slesser LJ noted the fact that the particular services mentioned (cleaning, heating and lighting) were optional under the lease, and that a separate charge was made. That was treated as a reason for not regarding them as "mere incidents" of the tenancy. However, the converse does not follow. There is nothing in that judgment to support the view that, merely because services or facilities are required by the lease, and their cost is included in the rent, they lose their character as services, and become part of the "holding" of the investment. 21. Carnwath LJ’s conclusions include the following passages. “60. For the reasons I have given, I think that was the wrong approach. The section does not require the opening of an investment "bag", into which are placed all the activities linked to the caravan park, including even the supply of water, electricity, and gas, simply on the basis that they are "ancillary" to that investment business. Nor is it necessary to determine whether or not investment is "the very business" of the Company. The statutory language does not require such a definitive categorisation. In the present context, it gives insufficient weight to the hybrid nature of a caravan site business, as I have explained. The holding of property as investment was only one component of the business, and on the findings of the Commissioner it was not the main component. In my view, the Commissioner's overall approach was correct in law, and he reached a view which was open to him on the facts. 61. I would add that I am happy to be able to arrive at this conclusion. I find it difficult to see any reason why an active family business of this kind should be excluded from business property relief, merely because a necessary component of its profit-making activity is the use of land”. The evidence and findings of fact. 22. Fairhaven is situated on the Suffolk Heritage Coast near Aldeburgh, Snape and the Suffolk Heaths Area of Outstanding Natural Beauty. It is therefore in a holiday area. The property, which is a large bungalow, overlooks the sea and has direct access onto the beach. The business contended for by the appellants is that of letting as a holiday cottage. Letting is the normal term used in such cases though the visitors have contractual licenses to occupy rather than leases. Typically the lettings are for two weeks at most and many are for less than a week for example long weekends. The bungalow can accommodate up to eleven people. It is set in its own grounds of about .4 of an acre. 23. The property has been owned by members of the Pawson family for some time including Mrs Pawson’s husband who died in 2002. Mrs Pawson died on 20 June 2006 at the age of 81 and she had been in ill health for about 18 months before her death, suffering from cancer. 24. The income from the property in the last three financial years before Mrs Pawson’s death had been 2003/04 £4,342.99, 2004/05 £6,072.51 and 2005/06 £8,120.00. That income generated profits of £680.27 in the year 2003/04, £802.32 in 2004/05 and a loss of £2,071.61 in 2005/06. The income in 2006/07, during which year Mrs Pawson died was £16,589.67 with a profit of £4,449.66. 25. In each of those years family members had occupied the property for three weeks during the holiday season. In their Statement of Case the commissioners alleged that without the family’s payments for those three weeks there would have been a loss in each of the three years before Mrs Pawson’s death but that was based on an assumption that the family members who occupied the property would pay the same amount as a holiday maker would have paid. That was not the case as stated in evidence by Mrs Lockyer, Mrs Robertson and Mr Pawson which evidence was not challenged on this point. The family members who occupied the property were Mrs Pawson’s two daughters and they paid amounts which they had calculated, or which had been calculated for them, from HMRC’s literature for payments for private use by way of adjustments in accordance with the Notes on Land and Property. It was not contended that they had calculated that amount incorrectly. 26. The evidence of the witnesses, which we accept was truthful and accurate in this respect, was that the loss in 2005/06 was caused by a large expenditure on re-decorating and improving the property. We note that in that year the income was higher than in the two previous years in which profits had been made and so we are satisfied and find that had it not been for the expenditure on re-decorating and improvement a profit would have been achieved in 2005/06. The evidence was that the extra expenditure was decided upon to improve the attractiveness of the property and therefore to increase the income. 27. A good deal of oral evidence was given about the operation of the property as a holiday home and it is the case that Mrs Lockyer and Mrs Robertson had an imperfect recollection of when events occurred which we find unsurprising after the lapse of time. Subject to that, we found them to be accurate and truthful witnesses as was Mr Pawson. Some of the items of expenditure were not individually shown in the accounts but we are satisfied that the figures for profits and the loss are accurately reflected in the totals.28. Mrs Robertson’s evidence was that over the years the expectations of holidaymakers have increased so that, for example, it is expected that clean bedclothes will be provided and that they will not need to bring their own. Clean bedclothes are now arranged through a laundry service and by the person who is employed as the cleaner and caretaker. However, it turned out when the documents were examined again that the laundry service only started after Mrs Pawson died.29. Television and telephone have been provided at the property for a number of years as the accounts confirm from at least 2003/04. Until June 2005 Mrs Pawson had done most of the running of the holiday letting and things like advertising had not kept up with modern developments such as advertising on the internet. At about that time Mrs Robertson became more involved and the family had discussed how things could be improved and that led to the re-decorating.30. The cleaner cleans the property between each letting and the garden is attended to and that has been the case for all the relevant times for this appeal.31. Mrs Robertson said that some repair or replenishment of supplies such as cleaning materials is needed after about one in three lettings and the cleaner/caretaker inspects the property regularly.32. The property is fully furnished, heated by night storage heaters, hot water is turned on before visitors arrive, the kitchen is fully equipped and these services were provided at all material times.33. There was some doubt raised by the respondents as to whether the insurance on the property covered letting but we are satisfied that it did, at least for some time before Mrs Pawson’s death because the policy is called a ‘household – commercial’ policy.34. It was put to Mr Pawson that Mrs Pawson had only allowed people she knew to rent the cottage and he denied that. We believed him.35. Mr Pawson produced evidence from an estate agent giving it as her opinion that the property could be let at about £1,000 per month on a long let. He contrasted that with the amount potentially available as a holiday let and indeed with the amount achieved in the year 2006/07. He argued that the difference reflected the value of the services provided with the right of occupation. Our findings.36. We find that the exploitation of Fairhaven has amounted to the operation of a business during the years we have examined and therefore for more than two years before Mrs Pawson’s death. We have taken into account all the evidence given by the witnesses and we have had regard to the documents in making that finding.37. The operation of the property as a holiday cottage for letting to holidaymakers was a serious undertaking earnestly pursued. Mrs Robertson explained to us the inconvenience she had suffered as a result of needing to travel to the cottage from time to time when an emergency occurred and the dealings she had to have with various people and we also regard the efforts to advertise for lettings is important in this respect.38. Clearly there is and has been reasonable continuity in the operation. There has been no year in recent years when it was not used for letting and although inevitably the main period of occupation is during the summer months that is only to be expected given the location.39. The annual outputs are certainly not de minimis and are an activity having a measure of substance.40. Some criticisms of the effectiveness of the operation are no doubt possible, albeit understandable given Mrs Pawson’s age at the time she was running the operation, but the basic principles on which the activity is run are regular and sound. The property is not being allowed to go to ruin, there are no debts and the owners are intending to achieve what they can by advertising and by keeping the property clean and up to a reasonable standard. Clearly the use of the property by family members for three weeks a year reduces the level of activity and the profit but in our view that is not enough to prevent the property being run on sound principles. In this context we would ask whether a property in a prime location, say in Central London, lettable at a very large fee as holiday accommodation would cease to be run as a business and would, for example, escape VAT registration accordingly; just because the owner occupied it occasionally.41. The activity is clearly intended to amount to making supplies to consumers. That is all it does except for the three weeks a year use by family members.42. The supplies are clearly of a type that are commonly made by those seeking to profit. In fact the operation had made a profit in two of the three years before Mrs Pawson’s death and was apparently running profitably in the part-year in which she died.43. The business was being conducted with a view to gain and we hold that that satisfies the “for gain” requirement in section 103(3) of the Act. In the year when the loss was made it was only made because the owners wanted to ensure the continued profitability of the business.44. On those findings, the question whether the business consisted of one which consisted wholly or mainly of the holding of an investment does require to be examined.45. On the facts of this case there are clearly significant services provided to the occupiers of the property. Those services are a significant part of the reason why the occupiers are prepared to pay what they do pay for the package of benefits they receive when they book to use the property as a holiday destination. The fact, even if it is a fact, that the appellants can provide those services at a relatively low cost to themselves compared with the amount they can charge for the package appears to us to be irrelevant.46. We note again the passages quoted from the George case. At paragraph 17 above we cite the passage from Carnwath LJ’s judgment in which he cites with approval from the decision in the Martin case referring to the three types of activities.47. The first is the activities a landlord carries out because he is obliged to do so under the lease. We note the phraseology and ask ourselves whether a holiday let is really to be equated with a landlord’s obligations under a lease at all. Certainly, the right the holidaymaker has to occupy the premises is under the same contract as the provision of the services that are promised (such as cleaning heating etc.) but it is unrealistic to equate that with a formal lease typically of much longer duration and under which the services are very much secondary to the right of occupation.48. The second type of activity is the separate provision of services carried out for gain and that is clearly not part of the holding of an investment on any view.49. The third category is services which are not required to be carried out under the lease but which are provided without separate consideration. These only fall within the holding of investments heading if they are connected with and are incidental to the holding of the property as an investment. No doubt some of the services provided in this case are not specifically required to be carried out under the holiday letting contract but such services can hardly be said to be incidental to the holding of the property as in investment.50. We have no doubt that an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading. The need constantly to find new occupants and to provide services unconnected with and over and above those needed for the bare upkeep of the property as a property lead us to conclude that no postulated intelligent businessman would consider such a property as Fairhaven to be correctly characterised as an investment. He would consider it to be a business asset to be exploited as part of the provision of services going well beyond an investment as such. Conclusion.51. We therefore allow the appeal.52. 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. RICHARD BARLOW TRIBUNAL JUDGE RELEASE DATE: 14 December 2011
Cited in 5 later judgments