A client of ours (an individual) has accumulated schedule A losses. These arose from a property which has now been demolished and turned into a car park. The car park is being leased out.
The reading of the VAT legislation suggests that the leasing of the car park is a business activity but not LETTING OF PROPERTY. My question is from income tax point of view. Would the income arising from the leasing of the car park be available for offset of the brought forward schedule A losses.
Any comments gratefully received.
Abdul
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mm better minds than mine will have to help BUT
dont confuse the VAT legislation with the IT legislation . if your client is renting out his property by way of a lease then its 'sch A' one would think - if he is running it himself (ie thro a company or similar) then he has income from property AND a possibly a trading business
I dont thisnk you can
I dont think they are available.
Property business losses usually cannot be offset against the individual’s other income and gains for the year. Instead the loss is carried forward and set against future profits of the same property business (ITA 2007, s 118).
Remember, a UK property business. an overseas property business and furnished holiday lets are treated as separate businesses. This means that UK property business losses can be set against UK property business profits only and overseas property business losses can be set against overseas property business profits only.
In your case the building which gave rise to rental income has been demolished and is no longer in existence. The land which has the car park is being leased. In my opinion these are two different activities.
Anyone else - please correct me if i am wrong.
im not sure that your differentiation is right
it depends on what you mean by property business - this must mean development and or buying and selling - this is different from income from property which is not a businesss / trade . FHLs are a business whether here or abroad subject to the transitional provisions
PS i think you can offest foreign property income losses against UK property income surpluses
1 +1 = 3
The VAT legislation does not say what you're suggesting. What it says is that the supply of an interest in or a right over land is generally an (VAT) exempt supply, with certain exceptions (which are then standard-rated). One of those exceptions is the supply of facilities for parking a motor vehicle. As Carnmores says, that is just the VAT treatment though.
However, operating a car park is a trade and you can't generally set losses of a property business against traing income.
What you seem to be suggesting though is that you are leasing the car park to someone else (who operates it as a trade). That being the case,those are receipts of the individuals property business and, generally speaking, brought forward losses from a property business can be set against subsequent profits.
schedule A losses
Many thanks to all who have commented.
From what is said the leasing of land to a third party would still be property income and therefore the brought forward losses should be offsetable against that income.
Abdul
Can I throw this into the mix, not to be awkward, but..........
PIM2510 - Beginning and end of a rental business: cessationSummaryUsually a rental business ceases when the last let property is disposed of or starts to be used for some other purpose. If letting ceases and later re-commences it is a question of fact whether there is a new business or a resumption of the old one.PIM4210 - Losses: set against future profits (IT)
But rental business losses can only be set off against profits from the same rental business. They can’t be carried forward after the rental business has stopped. Where, after an interval, the taxpayer starts a new rental business they can’t deduct losses from their old rental business. Whether a rental business has stopped and a new business started depends on the circumstances of each case (see PIM2500).
Regards
MtF
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same piece of land but different businesses.
first business was rental of a building, second business is rental of land...not the same despite the fact that the same asset was uitilsed in both businesses.
IMHO.
But
Each of the businesses is deemed to be part of one business (S.264 ITTOIA 2005). When you read S.118 ITA 2007 in that context, HMRC's (rhetoric) manuals are just wrong as far as I can see.
I'm sure I must be missing something, but I don't think you can just take all your trading principles and throw them at differently drawn legislation.
Also from PIM2510
Rental business activities may stop and, after an interval, the taxpayer may begin again. Here it is necessary to decide whether the original business really continued after a period of dormancy, or whether it permanently ceased and the new activities amount to a new rental business. This too is a question of fact and much will depend on things such as:
whether the same property is let before and after the period of dormancy, and, if so, whether the property has been substantially altered during the period of dormancy,how long the interval between lettings lasts, what type of activities constitutes the rental business before and after the period of dormancy.
In this case;
a) It sort of is the same property, but it has been subjected to a major alteration during the period of dormancy.
b) Not sure how long period of dormancy was but if over 3 years and given the change in use, less likely to be found to be the same property business.
c) Very different activities.
From PIM 4210
Carry forward against the same rental business only
ICTA88/S379A (1)(a) refers to carry forward against the profits or gains of 'that business' and ITA07/S117 and s118 refer to a deduction from the profits of ‘the business’ for subsequent tax years. Therefore the losses cannot be carried forward against:
Profits of another rental business which the taxpayer has in a different capacity,so, for example, if a taxpayer has let property of his own and is a member of a partnership which has rental income, losses of his personal rental business cannot be set against his share of the partnership's rental income.Profits of a current rental business started after the one in which the loss arose has ceased, for guidance on how to decide whether the same rental business has resumed after a pause, or whether a new one has begun, see PIM2500.
I hear what you are saying and it does seem to read a little bit like that. It would be interesting to know;
a) If client had other properties which were continued to be let during the period the land was being cleared.
b) How long was the period of dormancy.
Regards
MtF
I am absolutely reading your interpretation of that section...
"HMRC's (rhetoric) manuals are just wrong as far as I can see."
....but, do you really believe there is no case law to back up the manual?
HMRC seem to say that it has to be the same property business, as far as I can see we don't have enough information/knowledge to assess whether this is really the same property business.
Regards
MtF
well thanks again George
for this and other great answers particularly enjoyed the plane trip one not to mention the glasses. i think i agree with you here at least i have been working on that basis for a few years
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I am not saying any view is right or wrong, but I do think that HMRC would have an argument that the property rental business ceased when the building was demolished.
What we do know is that property businesses are viewed very similar in accounting terms with trades in terms of accounts preparation and accounting policies.
We do seem to have closed one loss making arm to the business and created a potential profit making arm, nothing wrong with that, but is this a significant change to the "business" and is this change fundamental enough to deem it "not the same" business? Even if it is different - the legislation does not seem to care because both are property related but HMRC do care and say so in their manuals.
From a common sense view, I can see both sides of the argument have merit. The legislation is quite relaxed and agrees to George's view but HMRC manuals hint that they may have a challenge.
What HMRC say isn't all that relevant
...but, do you really believe there is no case law to back up the manual?
Not only do I believe there not to be, I've already looked and found none. I've also checked what HMRC manuals said as far back as I've been able to look (in 2005, before ITTOIA, when there was the predecessor concept of the Schedule A business), and they said exactly the same thing then too. If there were case law supporting HMRC's assertions, they'd be sure to publicise it in their manuals.
I know of numerous situations where HMRC's manuals contain questionable interpretations of the law and even insert restrictive words into the legislation that simply aren't there.
Do you think it's a coincidence that the number of HMRC manuals have increased exponentially since the FOIA required that they be made publically available?
Amongst my research, I also found the explanatory notes to ITTOIA, that had this to say:
"Section 264: UK property business
1045. This section defines “UK property business” and introduces the concept of “generating income from land”. It is based on section 15(1) of ICTA.
1046. It makes it clear that all the income from a person’s UK land interests is treated as falling within a single UK property business.
1047. The term “property business” is not entirely straightforward. The term used in the source legislation – “Schedule A business” – was introduced as part of the 1995 reform of Schedule A. That concept was helpful in providing a vessel to contain all the income from land previously charged under Schedule A and to which the rules for calculating trade profits could be applied. But the concept of a Schedule A business – and a UK property business - is rather more complex than that of a trade. That is reflected in this and the other sections that, together, define the range of income that is assessed as income of a property business.
1048. First, the income has to be defined by reference to land law. There are only limited possibilities for simplifying terms which have to link directly with the concepts and language of current land law.
1049. Second, the concept of the “property business” is, to a certain extent, an artificial one. Unlike the term “trade” it may not always correspond to an activity organised in a way that the proprietor would necessarily describe as a business. As such, the term has to cover:
• “real” businesses where the lettings are organised in a professional way;
• lettings which are not so organised; and
• casual and one-off transactions which may have very little of the qualities normally
associated with a business.
Then all of these lettings of different types must be treated as part of the same, single
business.
1050. Although the Chapter builds on the concept of the “business”, the approach to defining a “UK property business” differs from the approach in the source legislation. This Act uses the term “UK property business” rather than “Schedule A business”. Although the terms “UK property business” and “Schedule A business” are defined differently they have the same tax effect.
1051. Paragraph 1(1) of Schedule A (see section 15(1) of ICTA) provides for tax to be charged on “the annual profits arising from a business carried on for the exploitation, as a source of rents or other receipts, of any estate, interest or rights in or over land in the United Kingdom”. Under paragraph 1(2) of Schedule A, “to the extent that any transaction is entered into for [that purpose], it is taken to be entered into in the course of such a business”. Paragraph 1(3) of Schedule A treats all businesses and transactions carried on or entered into by a particular person, so far as they are carried on or entered into for that purpose, as together forming a single business for the purposes of Schedule A.
1052. Section 832(1) of ICTA provides:
“Schedule A business” means any business the profits or gains of which are chargeable to income tax under Schedule A, including the business in the course of which any transaction is by virtue of paragraph 1(2) of that Schedule to be treated as entered into.
1053. Each of the individual businesses carried on (or, by virtue of paragraph 1(2) of Schedule A, notionally carried on) for the purpose mentioned in Schedule A is thus a “Schedule A business”. Under paragraph 1(1) and (3) of Schedule A, the charge to tax is on the profits of the single notional business consisting of all the Schedule A businesses carried on by a single person. It is that notional business that is defined as the person’s “UK property business” in section 264.
1054. Section 859 explains how the “one business per person” rule applies in the case of a business carried on (or a transaction entered into) in partnership."
The underlining above is mine. In the situation that the OP describes, I'd personally feel rather bullish about taking the matter to tribunal if HMRC sought to deny relief.
Thank you for that............
1053. Each of the individual businesses carried on (or, by virtue of paragraph 1(2) of Schedule A, notionally carried on) for the purpose mentioned in Schedule A is thus a “Schedule A business”. Under paragraph 1(1) and (3) of Schedule A, the charge to tax is on the profits of the single notional business consisting of all the Schedule A businesses carried on by a single person. It is that notional business that is defined as the person’s “UK property business” in section 264.
1054. Section 859 explains how the “one business per person” rule applies in the case of a business carried on (or a transaction entered into) in partnership."
The underlining above is mine. In the situation that the OP describes, I'd personally feel rather bullish about taking the matter to tribunal if HMRC sought to deny relief.
But does any of that mean that losses can be carried forward forever to be used against any schedule A profits, even if an individual ceases all property related activities for a long period, would the courts not define 'that business' as a new one and the losses from 'a ceased property business', I don't know. I wish someone would go to tribunal on this subject because it seems like an area where most people would get run over if you are reading it right.
Could I also ask, who wrote the explanatory notes to ITTOIA?
Anyway thank you once again, most enlightening.
Best regards
MtF
Explanatory Notes...
... are issued along with the legislation. I assume that they're written by the drafters of the legislation itself.
You can find them HERE for ITTOIA.
With a lengthy break between between an individual having any rental investments, I'd be nervous that (i) HMRC would pursue the point and (ii) they would find favour with a tribunal/court.
I don't think it should be that way though. It has to be remembered that prior to the 1995 Schedule A business rewrite, losses arising on properties let at 'full' rents on landlord repairing leases (LR) could be pooled and carried forward ad infinitum against the future pool of profits from any such properties. There were more restrictive provisions for tenant repairing leases (TR) and leases at other than a 'full' rent (NFR). The application of trading principles, including W+E, would probably have eradicated the issues that would have given rise to the more restrictive treatments, which ought to leave a situation where all rental profits should benefit from the LR pooling treatment. I'm really not sure where HMRC's assertions come from.
Cheers George
You have to admit it is hard for the vast majority to know where they stand when HMRC defines the legislation on a 'quantum ' basis, with meanings and definitions creeping into existence from nowhere. I accept that it doesn't seem to say what the HMRC manuals say anywhere in the legislation.
Once again, thank you.
Regards
MtF
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hi canmores,
its not just as simple as to say that they "wont have it".
in situations like these I feel we have to respect both sides of the argument. I am sure even George will admit that the point is neither black nor white.
George does so admit!
I can see there being situations where I wouldn't feel quite so bullish. I do think HMRC are out of the ball park on this one though, but I can't see that the arguments have been tested on either side.
you see
they wont have it - its not a matter of whose side you are on
what is clear is that HMRC wish to restrict losses