No ATED relief: redevelopment not a trade

In Hopscotch Limited v HMRC [2020] UKUT 0294, the Upper Tribunal (UT) upheld a First Tier Tribunal (FTT) decision that the taxpayer was subject to the Annual Tax on Enveloped Dwellings (ATED). The redevelopment of the property did not constitute a trade and so relief from the charge was not available.

In the FTT hearing, Hopscotch Limited appealed the ATED charge for the years ending 31 March 2017 and 2018. The undisputed facts of the case were:

• The company, based in the British Virgin Islands, purchased a Grade II listed property in 1993. It was used as a residential property by persons permitted by the company directors until 2007. The property was then only used by domestic staff until 2016.
• The property was put up for sale in 2011. It did not sell and was re-listed in 2013. Again the property did not sell and the new agent advised the company to redevelop the property in order to make it a more attractive purchase.
• The estimated costs of the works were £2.75m. A number of advisors and consultants were engaged for the redevelopment and the works were financed by borrowing. The final actual costs were about £1m due to the denial of planning permission for part of the redevelopment. 
• There were board minutes that detailed the redevelopment and the potential profit to be made on the subsequent sale. There were no minutes discussing the impact of the lower development costs on potential profit and there were no business plans or accounts drawn up for any part of the works.
• HMRC charged the ATED for the years ending 31 March 2014, 2015 and 2016 and the company paid in full.

As redevelopment started in the year to 31 March 2017, the company claimed relief from the charge on the basis that it was carrying on a property development trade. 

The FTT considered Badges of Trade to determine whether or not the company was carrying on a trade. Whether or not the company was specifically carrying on a property development trade could only be considered if it was carrying on a trade. The FTT found:

• Some badges were found in favour of HMRC and some in favour of Hopscotch Limited. 
• It was possible for intentions and motives to change during the ownership of assets.
• The case hinged on whether the company had acted in a way that was typical for a property development company. It found that the company had not. Whilst the company had sought to sell the property for an increased profit, this was not the focus of the company and there was no evidence to suggest otherwise. 
• The works were undertaken in order to achieve a sale and as such were not enough to cause the asset to cease being one of capital investment.

Appeals can only be made on the basis that there was an error in law. When considering the Existence of a trade, this is a matter of fact based of the primary facts as found by the Tribunal. The appellant appealed on the grounds that:

• There was an error of principle in considering the carrying on of a trade, in general, and not of the particular trade in question.
• The FTT considered irrelevant facts in establishing its findings.
• The FTT reached a decision that no reasonable tribunal could based on the primary facts.
• The FTT failed to make essential primary findings.

The UT found no errors of law were made. The UT held that:

• The FTT was right to consider whether the company was trading in general. Without trading in the first place, it cannot undertake the specifics of a particular trade.
• The FTT was correct to review the initial intentions of the company when purchasing the property. If the company changed its status during the ownership, a review of earlier intentions was required to establish whether a change had taken place.
• The FTT was right to consider all badges of trade and had correctly identified that the key issue was whether the company had decided to hold the property for trading purposes. This was a matter of fact based on whether there was any evidence that the company had changed its intention. There was no legal error by the FTT in its evaluation of these facts.
• The fact that a company is not an investment company, does not automatically make it a trading company. This is decided by the facts of the case. In this instance, the company "appeared to be no more than a passive property-owning vehicle established for the purpose of 'enveloping' the ownership of the property in corporate form".

The appeal was dismissed.

Links

Is it a trade, a business, or an investment activity?
Is your business a trade, a business or an investment activity? The distinction is very important for tax purposes.

Badges of trade
The 'Badges of Trade' are a series of key indicators which have been built up over time by the courts to decide whether a transaction or series of transactions constitutes a trade.

Annual Tax on Enveloped Dwellings
The Annual Tax on Enveloped Dwellings (ATED), originally called the Annual Residential Property Tax, is an annual charge on UK dwellings held by a non-natural person, e.g. a company.

External links

Hopscotch Limited v HMRC [2020] UKUT 0294