The First-tier Tribunal handed down its judgement in the executor’s appeal against the notice of determination in The Personal Representatives of Grace Joyce Graham v HMRC (2018) UKFTT 0306 (TC)
Mrs Grace Joyce Graham (Mrs Graham) died on 6 November 2012 and up to the time of her death, she ran a holiday letting business in the Isles of Scilly.
Carnwethers is a large farmhouse originally purchased with her late husband in 1972. It was previously run as a bed and breakfast business and then a country house hotel between 1972 and 2003.
Following an increase in demand for self-catering holiday accommodation, four self-contained flats were built adjoining Carnwethers. Part of Carnwethers was retained as the family home (together with a laundry, guest sitting room and office). The other part included two guest bedrooms which were occasionally used as B&B accommodation and were made available where guests’ flights were delayed or for extended family members of guests staying in the flats.
After Mr Graham’s death in 2007, their daughter Louise Graham (Louise) returned to the Isle of Scilly to work in the business at Carnwethers.
Mr and Mrs Graham and subsequently Mrs Graham and Louise devoted time and effort to provide a unique venue for their guests. The presence of Mrs Graham and Louise in the house also meant they could be actively involved with their holidaymaker’s experience.
Services included but were not limited to a games room, thermal heated swimming pool and sun loungers, barbeque area, golf buggy/bicycles were made available, tea/coffee/biscuits/cakes on arrival, welcome pack including ‘what’s on’ guide, water and electricity, toiletries, consumables, herb garden when in season, tomatoes from the greenhouse, fruit from the garden trees, grocery deliveries would be taken into the house and put in the fridge whilst the guests were out, fresh crab was obtained from the quay and made available to the guests, parties and events were organised for weddings and anniversaries, flats were serviced on changeover days etc.
The cottages were occupied between April and October. Outside of these months, no bookings were taken as there was no boat service to the island. Out of season, bookings would be taken, gardens were tended to, cottages and furniture deep cleaned, bike shed and games room cleaned.
These activities during the season amounted to approximately 7,200 hours in a year.
The gross income of the business in 2012 was £74,000. Mr Guthries; who runs a property letting agency in the Isles of Scilly and has extensive experience in managing holiday cottages stated that had Carnwethers been let on a shorthold tenancy, annual rent of £27,600 could have been expected.
Mr Guthrie would be viewed as an intelligent businessman who had a good understanding of the business and did not view Carnwethers to be an investment business.
In HMRC v George, it was argued that the holiday accommodation industry has a wide spectrum ranging from luxurious multinational hotels (Trading) to holiday lets with little/no input from its owners (Investment). The Appellants argued that Carnwethers lies towards the hotel end of the spectrum.
The tribunal is required to look at the business in the round over a period of time and to form a view as to the relative importance to the business as a whole of the investment and non-investment activities, following HMRC v Brander. In the Brander case, it was found that it was difficult to compartmentalise the business and attribute management and maintenance activity to either investment and non-investment.
HMRC accepted that Carnwethers is a commercially run business in which the owners and employees spent a lot of time on it.
In Martin v IRC, it was argued that parliament did not intend for BPR to apply to landlords letting land.
In George v HMRC, it was clear that a business which consists of letting a building, the provision of additional services is unlikely to be material and there will not be enough to prevent the business from being mainly one of property investment.
In the case of Carnwethers, the provision of additional services was part of obtaining a return from an investment and what was provided to guests on top of the use of the land was minor or ancillary.
The taxpayers’ appeal was upheld and Carnwethers was not one which consisted of wholly or mainly of holding investments.
The main reasons for this conclusion were as follows:
- The use of Carnwethers on its own would be viewed as generating income for the use of land and so was capable of being viewed as a business consisting of the holding of an investment. ‘Normal’ activities such as advertising, taking bookings, repairing and maintaining the buildings does not affect this conclusion.
Having said this, Carnwethers was providing ‘exceptional’ activities such as providing homemade and purchased food, drink and household goods, bikes, fish and extensive help and assistance was provided.
- Other infrequent activities such as B&B accommodation for guests’ extended families, cream teas and organisation of BBQ’s and events held weight as to additional services provided.
- The licensing rights for the land for the provision of a pool would have been part paid by the guests. However, the services outweighed the licensing rights once you consider the time and costs involved in providing a heated, cleaned pool with furniture associated with it.
The sauna and games room would also involve licensing of the right to use land and the services involved would be to a lesser extent when compared to the previous point in respect of the pool. However even if considered on its own, it would still not be a business of consisting of mainly investments.
- In Pawson, a basic garden was provided and maintained which was considered to be an activity directed at maintaining the capital value and obtaining regular income from the letting of the property.
However, the garden at Carnwethers was seen as exceptional and its maintenance provided was something beyond the simple licensing of the land and those enjoying the garden could see that. Similar references were made in the case of George.
- It is the nature and extent of the activities rather than the intensity of the property management which is relevant. The intensity of property management cannot turn it into a trading activity but the extent of additional services can be significant enough for the business to be carrying out trading activities.
- Significant time was spent by those working in Carnwethers to provide a service to the guests which involved welcoming, assisting, cleaning furniture and other apparatus in the cottage, maintaining the pool, laundering towels and bedclothes etc. It was estimated that approximately 53.5% was spent by staff in providing additional services versus the letting land part of the business.
- When comparing the holiday cottages in Pawson with Carnwethers, Carnwethers provided all of the services that were provided in the Pawson case as well as the extensive supply of provisions and a significant level of welcome and assistance from Louise.
- Furthermore, in Ross and Green, although more services were provided than in Pawson, it was still not sufficient enough to secure BPR.
It is refreshing to see a furnished holiday business being accepted as qualifying for BPR however this does not mean HMRC are relaxing the rules on FHLS’s on BPR. Carnwethers was a business which only marginally fell into the trading side of the spectrum.
Also this case is currently won at FTT and the decision could be appealed in the UT.
If you have any questions or queries, please contact our TaxDesk line on 0845 4900 509 and ask for Reena Bhudia.