A recent tax case shows the lengths HM Revenue and Customs (HMRC) will go to when they think there is tax to be gained by adopting an aggressive attitude with taxpayers.

It involved a family, consisting of a mother and her three children, who owned a cottage they used for holiday letting.

When the mother died, Business Property Relief (BPR) was claimed in respect of her share of the property: the effect of the claim was to reduce the value of the property in her estate for Inheritance Tax (IHT) purposes.

There were only two issues:

  1. Had the property been used for the two years prior to the woman’s death for purposes which allowed it to qualify for BPR? IHT law requires that there was a business carried out for the purposes of gain for the two years prior to death; and
  2. Even if there was a business carried out for the purposes of gain, was the property in reality an investment and the business one of ‘holding investments’? BPR is only available for ‘trading’ as opposed to ‘investment’ assets (with some exceptions).

Case law has established that there are six factors which help determine whether a business is being carried out. These are:

  1. Whether the activity is a serious undertaking earnestly pursued, or a serious occupation;
  2. Whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity;
  3. Whether the activity has a measure of substance as measured by the quarterly or annual value of its outputs (the original words were ‘taxable supplies’, as they are derived from a VAT case);
  4. Whether the activity is conducted in a regular manner and on sound and recognised business principles;
  5. Whether the activity is predominantly concerned with making supplies (again the original words were ‘taxable supplies’) to consumers for consideration; and
  6. Whether the supplies are of a kind which are commonly made by those who seek to profit from them.

HMRC argued that all of these tests had to be satisfied. The First-Tier Tribunal (FTT) did not accept that argument, holding that not all would be relevant in all cases.

The FTT accepted that the ancillary services supplied, such as cleaning, the provision of television and so on, meant that there was a business. As to whether the property was held as an investment, the FTT was in 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…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.’

One issue raised by the case is that the guidance issued by HMRC regarding holiday lettings implies that rather more needs to be done to satisfy the ‘business’ tests than the FTT thought necessary.

The case is also interesting because it was conducted by the children of the deceased as ‘litigants in person’. None of them had any legal training. HMRC were very aggressive in their behaviour towards them, despite themselves failing to meet deadlines for the service of documents, and accused them of engaging in ‘litigation misconduct’ when their reply to HMRC’s skeleton argument cited cases (of which it was clear that HMRC were aware) that they had not cited before. HMRC applied for their costs to be met by the family in the event that HMRC won the case.

The FTT was clearly unimpressed by the tactics adopted by HMRC, commenting that their ‘attempts to exclude evidence on what we consider to be mostly ill conceived grounds…was all the more unsatisfactory in the light of the fact that…other cases have been stood over pending the result in this case’.

All in all, the case amounts to something of an own goal for HMRC. However, it does illustrate clearly the point that HMRC will seek to levy taxes in many cases in which it may not be obvious that they should.


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