The Executors of Keith Denis Lewis Beresford (Deceased) v The Commissioners for HMRC

Ninecourt appoints Orega to operate and manage the serviced office business

Fit out works are to be carried out as agreed, and these are to be paid for by Ninecourt and the agreement sets out a mechanism to repay these out of the revenue of the business.

Certain costs to be incurred by Orega and the agreement sets out a mechanism to repay those out of the revenue of the business

Management fees to be charged by Orega, being an 8% fee if gross income (the Orega First Management fee) and a 2% fee of gross income (the Orega Second Management Fee)

There are certain situations where Ninecourt may trigger an early exit, but in the absence of those the agreement is for 10 years, but can be terminated on either side with notice.

The duties of Orega are set out, including actively seeking and accepting bookings from users, collecting amounts due, providing the services to the users, managing the business, preparing management reports and employing individuals to provide the services.

It is made clear Orega shall not be entitled to share possession of the premises.

The duties of Ninecourt are set out including providing working capital, permitting access to the premises, and entering into contracts for the various fit out works.

All funds deposited in the operating account an interest earned there on shall (subject to the terms of this agreement) be the property of the Owner.

All interest earned on funds deposited in the Operating Account will be credited to the Operating Account.

Expenses which are to be paid by the Owner as set out in Schedule 4 shall be paid out of the Operating Account in accordance with this clause and expenses which are to be paid by Orega shall be paid from its own funds and reimbursed in accordance with this clause.

The parties agree that all Priority 1 Expenses (whenever incurred) shall be reimbursed to the parties before any Priority 2 Expenses shall be paid and all Priority 2 Expenses (whenever incurred) shall be reimbursed or payed (as appropriate) to the parties before any Priority 3 expenses are paid

Within three business days of the end of any calendar month gross income received in such months shall be distributed as follows:

If the gross income should be less than Priority 1expenses incurred in that month then each pound of the gross income should be split equally between the Owner and Orega until either Orega or the Owner have been reimbursed or paid (as appropriate) for all their priority 1 Expenses and any remaining should be used in payment of the remainder of the Priority 1 Expenses until exhausted.

If the gross income should be equal or more than all the Priority 1 expenses incurred in that month then the Owner and Orega should be reimbursed or paid (as appropriate) in full in respect of the Priority 1 expenses and any excess should be used to pay any Priority 1 Expenses in respect of any previous months that shall not have been reimbursed or paid in that month or all Priority 1 expenses (whenever occurred) have been paid.

If all the sums payable under clause 11.5.2 have been paid then the excess shall be used to pay Priority 2 expenses incurred in that month and if the gross income should be insufficient to pay all the Priority 2 expenses then each pound of the gross income should be split equally between the Owner and Orega until either Orega or the Owner have been reimbursed or paid as appropriate for all their Priority 2 Expenses incurred in that month and the remainder should be used in payment for Priority 2 expenses until exhausted or all Priority 2 Expenses (whenever incurred) have been paid.

If the sums payable under clothes 11.5.3 have been paid then the excess be used to pay Priority 3 Expenses incurred in that month and if the gross income shall be insufficient to pay all the Priority 3 Expenses that each pound of the excess should be split equally between the Owner and Orega until either Orega or the Owner have been reimbursed or paid (as appropriate) for all their Priority 3 Expenses incurred in that month and the remainder shall be used in payment of the Priority 3 Expenses until exhausted or all Priority 3 Expenses whenever incurred other than in respect of the Priority 3 Expenses payable to the owner and Orega during the Agreement Year commencing on the Operational Date have been paid.

Any Priority 1 Expenses or Priority 2 Expenses which are stated to be reimbursed to the owner should be credited to the operating account or remaining the operating account and Priority 3 Expenses due to the owner shall be paid from the operating account to the Owner.

Within five business days following the preparation of the accounts at the end of any agreement year in accordance with clause 13.4 any any Net Income should be paid to the Owner and Orega in equal shares.

Priority One expenses

Payable to Orega  - the Orega costs repayment

Payable to Ninecourt  - the monthly capital repayment and the further capital repayment

Priority 2 Expenses 

Payable to Orega - the first management fee

Payable to Ninecourt  - the costs of insurance payable to the owner under clause 16, any costs and expenses attributable to the premises in connection with the repair and maintenance and any service charge items for the building including any reasonable managing agent or other professional fees properly incurred in connection with the management of the building, any rates taxes outgoing and impositions of whatever kind payable in respect of the premises and where such sums appear payable in relation to the premises together with other property a fair and reasonable proportion of the total sum paid

Priority 3 Expenses

Payable to Orega  - the Orega second management fee

Payable to Ninecourt - the Owner’s Base Return 

‘The office centre remains the property and in the sole possession and control of Orega [see note below]. We are giving you the right to share the office centre with Orega and other users so that we can provide the services to you.....you accept that this agreement does not create any tenancy interest, leasehold estate or other property interest in your favour in the serviced offices.

...you may (by licence but not subletting) share occupation with another company in the same group of companies....

If we are permanently unable to provide the serviced offices or services to you then we can end this agreement and you are not liable to pay any further fees for the period after the date we bring this agreement to an end. We will try to find you suitable alternative office space at another Orega office centre...

When your agreement ends you are to vacate all of your serviced office immediately leaving it in the same condition as it was when you took it. We will charge a fee of £75 per workstation for cleaning and redecorating the service office and the common parts you had access to and reserve the right to charge additional reasonable fees for any repairs needed above normal wear and tear. Any works carried out to alter or adapt the existing layout and/or specification of your service office shall be fully reinstated by Orega at your cost prior to the end of the prevailing licence period. These works will be authorized and managed by Orega and you must provide vacant possession of your serviced Office early enough to allow these reinstatement works to be completed prior to the end of the prevailing license period. In order to transfer your mail and telephone calls from the office centre you will automatically be entered into a virtual office agreement with us at our prevailing rate plus associated costs....

Standard Services Provided

Furnished and Serviced Offices

We will provide the number of serviced and furnished office rooms for which you have agreed to pay in the initial in the serviced office centre stated in your agreement. Your agreement contains details of the rooms initially allocated for your use. We may need to allocate different rooms from time to time but these will be of equivalent size and we will try to agree these with you in advance.

We will provide the following office services during normal opening hours Monday to Friday; access to your serviced office, personalised telephone answering by our operators, reception of your visitors by our receptionist, heating and (where available) air conditioning, lighting and electrical power, cleaning, servicing, maintenance and repair of our equipment, use of kitchen, sanitary facilities and photocopying areas. We are happy to discuss special arrangements provision of these services outside on normal working hours.

 All of the available workstations the number of which are specified on page one of the agreement will be supplied with a telephone handset at the prevailing rate including the rental mainline DDI, personal answering services, voicemail and nightmail box

IT connectivity services are provided at the prevailing rate. Orega provide Network Switch ports equal in number to the amount of telephone handsets. A dedicated private partition service will be mandatory at the prevailing rate if voice or video conferencing services email and/or web servers over the network are intended....

You will be asked to sign an inventory of all the serviced offices, furniture and equipment you are allowed to use together with a note of its condition and details of the keys or entry cards issue to you. You may only use the service offices as offices which may not include office use of a retail or medical nature. You must not install any furniture or office equipment cabling, IT or telecoms connections without our consent which we may refuse at our absolute discretion....

‘104(1) Where the whole or part of the value transferred by a transfer of value is

attributable to the value of any relevant business property, the whole or

that part of the value transferred shall be treated as reduced –

In the case of property falling within section 105(1)(a)(b) or (bb)

below, by 100 per cent…’

‘(1) Subject to the following provisions of this section… in this Chapter

‘relevant business property’ means, in relation to any transfer of value

–

Property consisting of a business or interest in a business,

Securities of a company which are unquoted and which either

by themselves or together with other such securities owned by

the transferor and any unquoted shares so owned gave the

transferor control of the company immediately before the

transfer;

(bb) any unquoted shares in a company…

A business or interest in a business, or shares in or securities of a

company, are not relevant business property if the business or, as the

case may be, the business carried on by the company 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.

Subsection (3) above –

(a)…

does not apply to shares in or securities of a company if the

business of the company consists wholly or mainly in being a

holding company of one or more companies whose business

does not fall within that subsection.’

Although it is common ground that the exploitation of a proprietary interest in land for profit is in principle an “investment” activity, I would agree respectfully with the Commissioner’s comment as to the wide “spectrum” involved; and with his view that cases relating to different taxes and different subject matter are unlikely to be helpful. He said:

“It is not in dispute that the Company carries on a business; the question is whether it is a business consisting mainly of holding or making investments. There is a spectrum at one end of which is the exploitation of land by granting a tenancy coupled with sufficient activity to make it a business, which may be activity in granting tenancies rather than activity in relation to the tenancy once granted. At the other end of the spectrum, while land is still being exploited, the element of services means that there is a trade, such as running a hotel, or a shop from premises owned by the trader. Normally for income tax, leaving aside services for which a separate charge is made, the income must be either income from land or trading profits. Here the concept of trade is irrelevant and one is required to determine whether the business of the company consists mainly of making or holding investments or some other business. Although I was referred to a number of income tax cases, I do not find these helpful on this issue.” (para 12)

I would also agree with the Commissioner’s comment on the previous Special Commissioner decisions that they are generally distinguishable, either on the facts, or because the arguments were different. He said:

“The argument that the business of a residential caravan site is mainly the provision of services was not put forward in any of the previous cases before the Special Commissioners, and the attempt to put it forward on appeal in Weston did not succeed. In Powell [1997] STC (SCD) 181 a long-term caravan business was held to be the business of holding investments but the site was in a run-down state (p184b) and there was no evidence of any business activity beyond the receipt of income from caravan rents (p186j). In Hall v IRC [1997] STC (SCD) 126 there was a different type of caravan park with the caravans occupied only in the summer (p 128g). It was assumed that receiving rent from them was the business of holding investments and the decision was that commission on the sale of caravans was ancillary to the main business. In Furness v IRC [1999] STC (SCD) 232 (in relation to the long-term caravans), and Weston v IRC [2000] STC (SCD) 30 it was assumed that the residential caravan business was that of holding investments and the issue was whether this was the main business, which it was not in Furness and it was in Weston. Accordingly these cases do not help me in relation to the Appellant’s argument in this case.

Farmer v IRC [1999] STC (SCD) 321 is helpful as it concerned a farm which also had let properties. In deciding that the business was mainly that of farming the business was considered in the round and the fact that the lettings were more profitable than the farm was one factor to be taken into account but not a decisive factor. ” (para 13)

I agree that the last decision (of Dr Brice) is particularly helpful, not least in its emphasis on the need to look at the business “in the round”.

The only one of these cases which came to the High Court (before the present case) was Weston v IRC [2000] STC 1064, in which the Commissioner’s decision was upheld by Lawrence Collins J. With respect to the Judge, the basis of his decision (that the issue was one of fact for the Commissioner) was unremarkable. The present issue, as to the status of the services, had not been raised before the Commissioner, and was not permitted to be raised in the High Court.

...

Management and services

One Special Commissioner decision, Martin v IRC [1995] STC (SCD) 5 (Stephen Oliver QC), requires more detailed discussion. Apart from the respect due to the particular tribunal, this was seen as providing guidance for later cases before the Commissioners. It is also the main foundation for Mr McKay’s arguments in this appeal as to the treatment of services provided by the owners, and the relevance of the terms of the lease or licence.

The case also concerned the availability of business property relief, but in relation to a business of letting industrial units on three-year leases. It was argued that the landlord’s activity in managing and maintaining the properties was sufficient to take it out of the “investment” category, on the basis that it was “active” rather than purely “passive” property investment. Mr Oliver rejected that contention. That conclusion is unimpeachable. On any view, the business was at least “mainly” that of holding property for letting, and thus for investment.

The relevance of the case for present purposes is in relation to the treatment of the various activities of the owner. Mr Oliver divided them into three categories: i) Those directed at “making” the investment (finding tenants, negotiations over rent, granting leases, taking surrenders and the like); ii) “Compliance activities” which the owner had to carry out as landlord (such as keeping the exterior painted and in good repair); iii) “Management activities” (such as day-to-day maintenance of the exterior and the common areas, and “policing” the common areas to ensure that tenants complied with the terms of their leases). He regarded the first two categories as “clearly activities of or attributable to the making or holding of investments”.

As to the third he said:

“The purpose of these was to keep the property tidy, secure and in good repair and generally to keep up the standard of the whole investment property. But they were in no way productive of any income other than rent, nor were they designed to produce any separate income. This third category of activities covers, in my view, activities that were incidents of the business of holding investments.” (para 22)

His reference to the lack of “any separate income” from those activities should be seen in the context of an earlier passage, where he had recorded, without dissent, the following comment on behalf of the Revenue:

- “Had there been activities of producing income distinct from the rents, such as fees for cleaning or security services provided quite separately from the landlord’s obligations, those would not have been part of the investment holding activities and might have tipped the balance in determining whether the business in question consisted wholly or mainly of the making of holding of investments.” (para 19)

He concluded:

“Thus, active though Mrs Moore’s business was, none of the activities that had anything to do with the property were concerned with anything other than the making or holding of investments. The property is therefore excluded from ranking as qualifying business property by the words of exclusion in section 105(3).” (para 23)

In making that analysis, Mr Oliver QC relied (as does Mr McKay before us) on observations of Slesser LJ in the Court of Appeal in Fry v Salisbury House Estate Ltd [1930] 1KB 304, 372 331 (a case better known for the House of Lords decision, reported at [1930] AC 432). In Fry, the company managed a block of buildings, in which the rooms were let out as unfurnished offices. The statutory context was quite different, concerning the distinction under the income tax law as it then stood, between Schedule A (annual value of property) and Schedule D case 1 (trading profits). The question was to what extent the profits of the business were to be treated as covered by the assessment under Schedule A, or could be subject to separate assessment as profits of a trade under Schedule D.

The company had in fact admitted liability under Schedule D in respect of profits from services such as lighting, cleaning and care-taking; so no issue on those matters arose for decision. However, the following comments were made by Slesser LJ (p 331-2):- “…It is important to distinguish between those mere incidents of an ordinary tenancy, such as provisions as to the keys and porters, and those additions to the tenancy…whereby the landlord was able to, and did in fact, earn certain profits from the tenants with regard to charges for cleaning, lighting and heating. As regards these further matters, which are not normally incidental to a tenancy, they are clearly severable from it and in no sense alter the legal relation of landlord and tenant.” Having noted that under the terms of the tenancies the additional services, such as lighting of fires and cleaning, were optional, he continued:- “Now it is argued by the Attorney-General…that because that limited purpose of carrying on a trade is in some way necessarily connected with a pre-existing tenancy, therefore the whole undertaking of the company is in the nature of a trade. I am unable to accept that view. In so far as there is a trade of lighting and heating, and cleaning, it is a separate matter; it need not be done at all. And we come back to the position that when the matter is properly examined in all its aspects, we have here the ordinary relationship of landlord and tenant…”

Commenting on that passage 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 ifthey are connected with and incidental to the holding of the property as an investment.” (para 21, emphasis added)

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….”

As I have said, I have no doubt as to the correctness of the Martin decision on its own facts. Similarly, as the present Commissioner said (see above), the actual decision in Powell is readily understandable on the facts, in view of the run-down condition of the park and the “low intensity” of the managers’ activity (although that was not the basis of Mr Everett’s decision: p 187c-d).

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.

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.

....

For the reasons already given, I am unable to accept Mr McKay’s reliance on the terms of the lease or licence as definitive in the case of a caravan park. On the other hand, I think, with respect to the Judge, that he placed too much reliance on the particular formulations used in Cook and Weston, instead of concentrating on the language of the statute. As I have said, the most important point about each of those decisions is that the Court was upholding the decision of the fact-finding tribunal.

In the present case the Judge was being asked by the Revenue to find some error of law in the approach of the Commissioner. The error identified by Mr McKay, as accepted by the Judge (para 15, cited above) was, in Mr McKay’s words, that instead of following the sequence based on Weston, he “jumped straight to Cook v Medway”. As I understand it, the Judge intended that as another way of putting his point that the first step was to decide what activities were in “the investment bag”; or, in Mr McKay’s terms “recognising that the land was held as an investment”, and then assessing which of the other activities were “incidental to the investment business”. 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.

We agree that there are parts of the FTT Decision in which the FTT failed to include reference to the “wholly or mainly” part of section 105(3) IHTA 84 in its various repetitions of the statutory test. When the decision is read as a whole, however, it is clear that the FTT had fully in mind the “wholly or mainly” requirement, indeed in its final conclusions in paragraph [46] it explicitly addressed the point, concluding that it was “the provision of enhanced livery, albeit stopping short of part livery (as defined by Mr Vigne), but nonetheless providing a level of valuable services to the various horse owners, which prevents it being properly asserted that the business was mainly one of holding investments.”

In a similar way, although the reference to the “properly informed observer” in paragraph [45] is perhaps unfortunate, it is clear that from the remainder of paragraph [45] and paragraph [46] that the FTT is applying the correct test by considering the business as a whole and all of the services provided to horse owners.

As to the FTT’s apparent contradiction of Henderson J in Pawson, we do not consider there to be anything in the point. It must be remembered that Henderson J’s comments were made in the context of his preliminary statement at [42] that

“I take as my starting point the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity. Further, it is clear from the authorities that such an investment may be actively managed without losing its essential character as an investment”.

The FTT’s statement at [44] of the FTT Decision to the effect that Henderson J’s comments cited at [24(5)] above were a transposition of the statutory test, whilst somewhat unhappily expressed, does not in our view amount to an error of law which undermines the FTT Decision as a whole. It is clear that in effect the FTT was simply taking the view that the proposition expressed by Henderson J as being an appropriate “starting point” for a managed holiday let property business was not necessarily also appropriate for a livery business of the type under consideration in this appeal, which it considered to be fundamentally different. Accordingly, as the FTT did not consider the deceased to have been owning the land “in order to obtain an income from it”, the “presumption of investment activity” referred to in the comments of Henderson J was quite simply inapplicable to the present case, and accordingly the statutory wording should be applied de novo and without any presumption of the type referred to by Henderson J in Pawson. Mr McNall’s arguments appeared to be based on a submission that any business involving exploitation of land should, as a matter of law, be assumed to be wholly or mainly a business of investment unless the taxpayer could establish otherwise. This clearly overstates the position; Pawson makes it clear that such an assumption only applies to “owning and holding land in order to obtain an income from it”, a much more restricted proposition. We also note that Briggs LJ in the Court of Appeal, in refusing permission to appeal in Pawson, said this:

“I accept Mr Gordon’s submission… that there is no presumption that requires to be rebutted, that a business, which consists of the exploitation of land for profit, is an investment business. Of course it must be looked at in the round.”

Accordingly we are satisfied that when the FTT Decision is read as a whole, the FTT applied the correct legal test.

In considering these rival submissions, I take as my starting point the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity. Further, it is clear from the authorities that such an investment may be actively managed without losing its essential character as an investment: see Martin, Weston at paragraphs 18 to 19 and George at paragraphs [18] and [27].

" Trade " cannot be precisely defined, but certain characteristics can be identified which trade normally has. Equally some indicia can be found which prevent a profit from being regarded as the profit of a trade. Sometimes the question whether an activity is to be found to be a trade becomes a matter of degree, of frequency, of organisation, even of intention, and in such cases it is for the fact-finding body to decide on the evidence whether a line is passed.

....

Trade involves, normally, the exchange of goods, or of services, for reward, not of all services, since some qualify as a profession, or employment, or vocation, but there must be something which the trade offers to provide by way of business. Trade, moreover, presupposes a customer (to this too there may be exceptions, but such is the norm), or, as it may be expressed, trade must be bilateral—you must trade with someone. The " mutuality " cases are based in part at least upon this principle, and it was the existence of it that made Sharkey V. Wernher [1956] A.C. 58 an interesting problem: could Lady Zia trade with herself?

Then there are elements or characteristics which prevent a trade being found, even though a profit has been made—the realisation of a capital asset, the isolated transaction (which may yet be a trade). In recent years a transaction, even one of property dealing, which amounts to no more than a planned raid on the revenue (see Lupton v. F.A. & A.B. Ltd. [1972] A.C. 634), has been held not to be by way of trade—a sophistication which I do not reject, but which must be carefully watched for illegitimate extension. Although these are general characteristics which one cannot state in terms of essential prerequisites, they are useful benchmarks, so when one in faced with a novel set of facts, as we are here, the best one can do is to apply them as tests in order to see how near to, or far from, the norm these facts are.

‘In considering whether a person ‘carried on’ a trade it seems to me to be essential to discover and examine what it was that the person did.

‘the number of serviced and furnished office rooms for which you have agreed to pay in the initial in the serviced office centre stated in your agreement. Your agreement contains details of the rooms initially allocated for your use. We may need to allocate different rooms from time to time but these will be of equivalent size and we will try to agree these with you in advance.

We will provide the following office services during normal opening hours Monday to Friday; access to your serviced office, personalised telephone answering by our operators, reception of your visitors by our receptionist, heating and (where available) air conditioning, lighting and electrical power, cleaning, servicing, maintenance and repair of our equipment, use of kitchen, sanitary facilities and photocopying areas. We are happy to discuss special arrangements provision of these services outside on normal working hours.

 All of the available workstations the number of which are specified on page one of the agreement will be supplied with a telephone handset at the prevailing rate including the rental mainline DDI, personal answering services, voicemail and night mail box’