RM v Sefton Council (HB)

No person shall be entitled to an income-related benefit if his capital or a prescribed part of it exceeds the prescribed amount.

The assets of any business owned in whole or in part by the claimant and for the purposes of which he is engaged as a self-employed earner …

Calculation of capital in the United Kingdom

Capital which a claimant possesses in the United Kingdom shall be calculated at its current market or surrender value less-

where there would be expenses attributable to the sale, 10 per cent; and

the amount of any encumbrance secured on it.

… The word ‘business’ is not defined anywhere in the Social Security legislation, so far as I can see. However, the mere receipt of rent from a letting has been held in another context not of itself to be a ‘business’, Bagettes v. G P Estates [1956] Ch. 290, CA Cf. Re. Wallis, ex. p. Sully (1885) 14 QBD 950. In Smith v. Anderson (1980) 15 Ch D 247 at 258-261 Jessel MR discussed the meaning of ‘business’. At page 260-261 he said:

The actual decision on the facts of the case by Jessel MR was overruled by the Court of Appeal (1880) 15 Ch. D. 268 et seq. but without in any way impugning the definition of business given by Jessel MR.

In R(SB) 4/85 at paragraphs 9-12, the learned Commissioner considered the meaning of ‘business’ in a context similar to the present one but he was not concerned with the particular type of problem that I have here and I do not find his remarks of assistance in the present context.

In my judgment however, using Jessel MR’s definition of ‘business’ by analogy, it cannot be said that the carrying of a business is constituted by the ownership by an individual of a tenanted house, the collection of the rent, the execution of repairs and the carrying out of other landlord’s duties. For that reason, in my view, the tribunal are correct in law in saying in their reasons for decision, ‘The house is not a business, it is an investment and as such it’s value falls to be included as a capital asset for family credit purposes.’ The tribunal had found the relevant facts and drawn their conclusion, which was a conclusion of law and was correct in my judgment. Consequently I do not accept that the tribunal erred in law and in my view its reasons were sufficient.

Lastly, I should say that the fact that paragraph 6 of Schedule 3 to the General Regulations uses the plural noun in the expression ‘the assets of any business …’ is not conclusive of the matter just because the claimant only owns one house. That is because the use of the plural noun has to be taken as qualified by section 6(c) of the Interpretation Act 1978 (applied to regulations by section 23 of that Act), stating, ‘In any [regulation], unless the contrary intention appears, … words in the singular include the plural and words in the plural include the singular.’ I do not consider that any contrary intention is shown here and that the word ‘assets’ could also mean a single asset. Nevertheless the circumstances of this case show that there could not be any question of the house being an asset of a business.

I agree that this should have been the starting point in this case, namely that receipt of rental income from a tenanted house is not of itself evidence of a business, although it may be business income. The secretary of state's representative submits that the Commissioner in R(FC) 2/92 is perhaps stating the law too widely in saying (paragraph 12):

This submission is supported by reference to CIS 11355 1995. I agree that this states the test too strongly, while not dissenting in any way from the conclusion of the Commissioner on the facts of R (FC) 2/92. Whether or not the way in which one or more rented houses are held and exploited is such as to produce investment income or business income is a question of fact. There is considerable caselaw about income from assets for tax purposes, where the question is of importance both to income tax and to value added tax, and the question has often been before the higher courts. This is often summarised in the six “badges of trade” identified by the Royal Commission on Income Tax in 1952:

- the subject matter of the transaction;

- length of ownership;

- frequency of similar transactions;

- work done on the property;

- circumstances responsible for the realisation;

- motive.

The approach is to test the evidence by reference to each of these or similar tests and then to take an overview of the conclusions. (See Revenue Law Principles and Practice, chapter 6, Butterworths, for a summary).

I do not consider that I need analyse the law any further, because I can see no evidence at all in the papers to suggest that any of these six tests are satisfied. Owning a single rented house is not of itself evidence of a business: R(FC) 2/92. There is no evidence that the appellant or his wife own any other rented property, or use No 9 for multiple lets such as “bedsits”. The circumstances of the purchase and length of ownership do not suggest a business, nor does the motive behind acquisition. Nor is there any evidence of an intended sale for a profit. There is no evidence of any similar present or past transactions, and no evidence of supplementary work or activities by the appellant, his wife, or her agents or employees to exploit the property.

The Secretary of State submitted that the case should be remitted to a new appeal tribunal for rehearing and the absent parent agreed. I have hesitated over whether I could substitute a decision on the facts, as to whether the parent with care's rental income should be taken into account as earnings from self-employment or under paragraph 15 of Schedule 1 to the MASC Regulations as other periodical payments received. Paragraph 14 of the Secretary of State's submission sets out the general position soundly. Commissioner's decision R(FC) 2/92, although it is about the question of whether a house that was let constituted a business asset, does give helpful guidance. The mere ownership of property and the receipt of rent and payment of expenses or liabilities would not constitute employment as a self-employed earner. That situation is more properly looked at as the ownership of a capital asset, which produces income. But there will come a point, depending on the circumstances of individual cases, at which the amount of administration and/or activity involved even in the letting out of a single property would amount to the carrying on of self-employment. I have concluded in the end that I have insufficient evidence about the exact nature of Heritage Park, the terms of its letting and the activities required of both the parent with care and the absent parent beyond receiving the rent, to make a final decision.

I am not quite sure that the submissions of either party quite dealt with the wording of the provision in question. Paragraph 7(1) of the schedule refers to the assets of any business owned by the claimant (my emphasis). It does not matter in the present case whether the 3 flats are part of the retail business or part of some other business, so long as they are part of a business owned by the claimant and for the purposes of which she is engaged as a self-employed earner. Mr Posen is correct that this relates to the purposes of the business, not to the purposes of the asset. However, it seems to me that Mr Atkinson is correct insofar as he implies that the use of the asset indicates whether it is owned by the business.

With all due respect to Mr Commissioner Monroe I do not find the whole formulation in paragraph 11 of his decision to be particularly helpful. If, as in the present case, the business is owned personally be the claimant and, for example, there is no limited company which owns or operates any business or asset of the claimant, then virtually all of the claimant’s assets are at risk if the business fails, whether or not they are used for business purposes.

Paragraph 7(1) of the schedule must refer to any asset used for the purposes of any business owned by the claimant, except for any asset owned by a business in respect of which the claimant is not engaged as a self-employed earner. There can be little justification for disregarding large amounts of capital or valuable assets owned by a claimant for a means tested benefit and if capital is not used in a business then (subject to other statutory disregards) there can be no justification for disregarding it. The answers to the questions inherent in this test will mainly be matters of fact and degree. In the present case I see no basis for saying that the 3 flats are in any way used for the retail business and the facts that they are covered by the same business loan as the retail business, and that the freehold covers the retail business as well as the 3 flats, do not affect this. That leaves the question of whether the 3 flats are assets of some other business in respect of which the claimant is engaged as a self-employed earner.

In R(FC) 2/92, a case concerning a similar provision, having reviewed earlier authorities in different contexts, Mr Commissioner Goodman said (in paragraph 12) that:

I agree with that. There would come a point where a tribunal would be entitled to find that the scale of the operation would make such activities a business, but the facts of the present case come nowhere near that point. The tribunal was correct to find in effect that the 3 flats were not assets of any business in respect of which the claimant was engaged as a self-employed earner.

Applying these principles, in this case I am satisfied that the activity undertaken in respect of the Property, again taken overall, was sufficient in nature and extent to amount to a business for the purpose of s 162 TCGA. Although each of the activities could equally well have been undertaken by someone who was a mere property investor, where the degree of activity outweighs what might normally be expected to be carried out by a mere passive investor, even a diligent and conscientious one, that will in my judgment amount to a business. I find that was the case here.

The meaning of ‘business’

As Mr Stone pointed out, the word ‘business’ has been described, by Lord Diplock in Town Investments v Department of the Environment [1978] AC 359 at p 353, as ‘an etymological chameleon; it suits its meaning to the context in which it is found.’ That case concerned whether a lease to a government ministry, where the premises were occupied by civil servants was a business tenancy within the meaning of then-applicable counter-inflation legislation. By reference to the mischief of those provisions, ‘business’ was construed broadly, so as to have no less wide a meaning than that applicable in covenants regarding the use of demised premises.

That construction followed from Rolls v Miller (1884) 27 Ch D 71, where Lindley LJ pointed out (at p 88) that the dictionary meanings of ‘business’, where the word means almost anything which is an occupation, as distinguished from a pleasure, or anything which is an occupation or duty which requires attention, were not of great assistance. The word must be construed according to its ordinary sense, having regard, in that context to the object of the covenant, and in this to the purpose of the legislation.

There is no direct authority on the meaning of business in the context of s 162 TCGA. In the capital gains context generally, I was taken to Harthan v Mason 53 TC 272, a case concerned in part with whether the taxpayer had disposed of a business for the purpose of obtaining relief from a charge to CGT under s 34 of the Finance Act 1965. That provision, known as ‘retirement relief’, provided relief where an individual who had attained the age of 60 years disposed of a business, subject to certain conditions. The relief was nevertheless confined to ‘chargeable business assets’, which excluded assets held as investments.

In Harthan v Mason, the taxpayer and his sister owned a row of terraced houses which they simply let to tenants. There were few facts found concerning the management of the properties, the judge in the High Court (Fox J) commenting merely (at p 276) that he had no doubt that the owners also did various work in finding tenants and doing repairs and in dealing with the various other matters to which an owner of a property would normally attend. The judge held that the decision of the General Commissioners that the activity of the taxpayer and his sister in relation to the property was not a business was a matter of fact, and a conclusion to which they could reasonably have come on the facts.

Harthan v Mason provides little assistance on the question of construction of ‘business’ in the context of this case. Equally, reference to cases in other contexts may lead to a misunderstanding of the proper approach in the context of a relief from CGT on the transfer to a company. Thus, for example, the distinction drawn between a trade taxable under Schedule D, Case 1, on the one hand, and property income taxable under Schedule A is not material to the construction of ‘business’ for this purpose.

Thus, in American Leaf Blending Co, a case relied upon by the FTT, and to which I have already referred, the Privy Council made clear that dicta to be found in some of the speeches in the House of Lords in Salisbury House Estate Ltd v Fry 15 TC 266, which suggested that the letting of land does not constitute a trade, had no relevance to the question in that case, namely whether the letting of land by a company amounted to the carrying on of a ‘business’ within the meaning of the applicable Malaysian legislation. The Privy Council held (at [1979] AC 676, 684) that ‘business’ is a wider concept than ‘trade’.

The Privy Council went on to draw a distinction between the case of a private individual merely receiving rents and a company doing the same. Giving the judgment, Lord Diplock said (at p 684):

Mr Richard Ramsay, appearing for Mrs Ramsay, argued that the reference to ‘some’ activity in this passage indicated that only a modest degree of activity was required. I do not accept that submission. The Privy Council was making the point, simply, that mere passive receipt of rent would not normally be regarded as the carrying on of a business, and that it had to be accompanied by some activity, even if that activity were not continuous. It was not setting a quantitative test as to the degree of activity required to cross the threshold; that remains a question of fact.

On the other hand, it is clear from the judgment of the Privy Council that no qualitative distinction should be drawn between activities that are carried out in the course of a passive investment activity, and those carried out in the course of a business. The activities of the company to which the Privy Council referred were all of a nature that might be expected to have been carried out by any property owner in receipt of rent; that did not prevent the Privy Council from finding that the evidence of such activity reinforced the prima facie inference that the company was carrying on a business.

The distinction between a business and a trade was also clearly expressed in Griffiths v Jackson; Griffiths v Pearmain 56 TC 583. There the taxpayers, who were both practicing accountants, owned 11 properties parts of which were occupied by rent controlled tenants, but which were mainly let furnished to students and other short term occupiers. The taxpayers provided various amenities and services, and spent much of their spare time in collecting rents, inspecting properties, arranging lettings and ironing out tenants’ problems. In finding that this did not amount to a trade, Vinelott J in the High Court took the view that the general commissioners must have been misled into thinking that because the taxpayers could fairly be said to have been carrying on a business of letting furnished rooms and providing services to the occupiers, they were carrying on a trade. He concluded (at p 593):

Moving away from the cases that have been concerned with whether an activity was a trade, there have been a number of cases on the meaning of ‘business’ in relation to VAT. As Mr Stone and Mr Ramsay both accepted, that again is a rather different context to the one in which this case falls to be determined. In particular, the use of the term ‘in the course or furtherance of any business’ which now appears in s 4 of the Value Added Tax Act 1994 (‘VATA’), is part of the UK implementation of the definition of ‘taxable person’ now contained in Article 9 of EU Council Directive 2006/112/EC, meaning any person who, independently, carries out in any place ‘any economic activity, whatever the purpose or results of that activity’. Article 9 itself provides that the exploitation of tangible or intangible property for the purpose of 5 obtaining income therefrom on a continuing basis is, in particular, regarded as an economic activity. That this is a term of wide meaning is clear from the case law of the ECJ; see, for example, D A Rompelman and E A Rompelman-Van Deelen v Minister van Financiën (Case 268/83) [1985] ECR 655, from which it is clear that the mere letting of immovable property is regarded as the exploitation of that property.

There is no such basis for the meaning of ‘business’ in the TCGA. Nonetheless, whilst acknowledging the caveat to be attached to consideration of cases concerning VAT, the discussion in certain of those cases is useful to note. One such is Customs and Excise Commissioners v Lord Fisher [1981] STC 238 where the question largely resolved itself around whether the sharing of the costs of what was otherwise an activity (a shoot) for pleasure and social enjoyment by itself turned that activity into a business.

In that case, in the High Court, Gibson J discussed the judgment of the Court of Session in Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1. Firstly, there can be no exhaustive definition of ‘business’ for VAT purposes. Based on the definition of ‘business’ for those purposes, which is now contained in s 94(1) VATA, and which provides that ‘business’ includes any trade, profession or vocation, it is clear that a wide meaning of ‘business’ is intended. Secondly, it is necessary to consider the whole of the activity as it is carried on.

The judgment goes on to describe certain criteria identified by counsel for the Crown in Lord Fisher, largely by reference to Morrison’s Academy, as relevant for determining whether an activity is a business. As Gibson J made clear, however, these were not principles which, if satisfied, would in all cases demonstrate that an activity must be regarded as a ‘business’ for VAT purposes. The test is a statutory test, for which the identified criteria are no substitute. The criteria were set out at p 245 of Gibson J’s judgment as follows:

Business property relief provides relief from inheritance tax. There have therefore been a number of cases concerning that relief (in s 105 of the Inheritance Tax Act 1984 (‘IHTA’)), principally in relation to the provision, in s 105(3), that a business or an interest in a business is not relevant business property if the business consists wholly or mainly of making or holding investments.

In this connection, I was referred to two decisions of the special commissioners (in each case Sir Stephen Oliver QC), both of which were heard in January 1995. In the first, Martin and another (executors of Moore deceased) v IRC [1995] STC (SCD), the deceased owned and let industrial units on three-year leases at fixed rents. The deceased sought and chose tenants, granted and renewed leases, complied with landlord’s covenants and managed the premises. It was accepted by the Revenue that these activities constituted a business. Likewise, in Burkinyoung (executor of Burkinyoung deceased) v IRC [1995] STC (SCD) 29, it was accepted that the activities of the deceased in relation to a house he had owned, which was divided into 25 four furnished flats let on assured shorthold tenancies, constituted a business. The evidence was that running the flats involved maintenance of them and their common parts to a standard that would attract tenants to take and renew tenancies. Getting possession or redress from tenants was a difficult and onerous task.

These are cases therefore where the question for the tribunal was not whether there was a business (which was conceded), but whether the business was one that consisted wholly or mainly in the making or holding of investments. Those cases cannot therefore, in my judgment, assist the determination of this case.

In another case on the question of relevant business property that I was not referred to, the First-tier Tribunal (Judge Barlow and Mrs Stott) did have to consider the question whether the activities of the deceased amounted to a business. In Revenue and Customs Commissioners v Lockyer and another (as personal representatives of Pawson deceased) [2012] UKFTT 51 (TC), the deceased owned a bungalow which was let as a holiday cottage. Various services were provided, including cleaning and gardening, and for example hot water was turned on before the arrival of guests. The cottage was advertised for letting. The tribunal found that this was a business. It relied on the criteria referred to in Lord Fisher, in particular that this was a serious undertaking earnestly pursued, there was reasonable continuity and the activities had a measure of substance. That conclusion was not challenged on the appeal to the Upper Tribunal (where the Revenue’s appeal was allowed on the basis that the tribunal had been wrong to find that the property was not held mainly as an investment).

The question whether an activity, and relevantly to this case activity connected with the letting of property, can amount to a business has also been considered, again at the level of the special commissioners, in a national insurance context. In Rashid v Garcia (SpC 00348; 11 December 2002) Mr Rashid claimed to be a self-employed earner for Class 2 national insurance purposes. The definition of ‘employment’ for this purpose was contained in s 122(1) of the Social Security Contributions and Benefits Act 1992 as including ‘any trade, business, profession, office or vocation’. The question, therefore, was whether the activities of Mr Rashid in connection with his ownership and letting of four properties constituted a business. A number of activities were carried out, including maintenance, advertising for tenants, making credit checks, compiling and checking inventories, drawing up tenancy agreements, collecting rent, cleaning the common parts and maintaining the garden. With members of his family it was estimated that between 18 and 28 hours was spent on these activities each week.

The special commissioner (Dr Avery Jones) decided (although acknowledging that the case was near the borderline) that he was not satisfied that there was sufficient activity for a business to be constituted. He held that the property holding was an investment which by its nature required some activity to maintain it, rather than a business. In doing so, the special commissioner referred to the particular definition of ‘employment’ as the context. He took the view that because business had been included along with trade, profession, office or vocation in that definition, that implied activity in contrast to mere investment. He referred to a property rental business as one example of an investment business, and concluded that whether property rental business is a business in any particular case is a matter of degree.

It is clear from this that the special commissioner based his conclusions on the particular context applicable to national insurance, and in particular on the alignment in the relevant legislation of business with trade, profession, office or vocation. He appears to have treated that context as providing particular colour to the meaning of ‘business’ in determining the level of activity that would require to be found to distinguish it, in a national insurance context, from mere investment.

There is no such context for the purpose of s 162 TCGA. There is no statutory definition of ‘business’ in that respect. Business is not aligned as a concept with trades or professions, and there is nothing in that respect to colour its meaning. Nor is any special exception created for cases where the business comprises wholly or mainly the holding of investments. What there is, on the other hand, is a requirement that a person who is not a company transfers a business as a going concern to a company. The logic, and perceived purpose, of s 162 is to defer a charge to capital gains tax when the only change that has taken place is the form in which the business is operated (from non-corporate to corporate), and to the extent that the consideration consists of shares in the company. The legislation is looking at business in the context of something that is or may be carried on both by, for example, an individual and by a company. In my judgment the proper approach in that context is to construe ‘business’ broadly, according to its unvarnished ordinary meaning.

The facts, as I understand them, are clear enough, and the question is whether what the company do amounts to carrying on trade in the United Kingdom. There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade, but I know no one distinguishing incident, for it is a compound fact made up of a number of things.

She did not need to leave her home as she can work anywhere, she is not making any profit on the business she claims to be running although she is advising others on how to run a business. She had told the Local Authority she does not wish to sell her home as she wishes to keep it as an investment for the future. … she is not running a business renting out her old home.

There seems to me to be an arguable question of law as to whether the value of the house constituting the relevant asset should have been taken as the value of the house with vacant possession, or the value of the house subject to the tenancies granted by the claimant.