FHL and BPR

Does the income tax position affect the outcome?

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A client operates an FHL business comprising of three separate FHL properties.  They offer/provide all of the relevant services required to establish a firm BPR position, and hopefully avoiding the difficulties experienced in the Pawson case on this front.

However, despite spending a fortune on advertising and their website, they fairly regularly fail to meeting the income tax qualifying conditions in order to have the rents reported as FHL income, and so any net profit is taxed as bog standard rent, or losses claimed on the property pages in the same way.

Does the fact they the properties are held out to be FHLs but fail to meet the income tax definition prevent them from being treated as FHLs for IHT purposes, and in doing so, lose out on BPR? 

I understand that for VAT purposes, FHLs are a VAT'able source if held out to be FHLs, irrespective of the income tax position, so was wondering if the same could be said when considering BPR?

One thing - the BPR issue revolves around whether the activity is wholly or mainly one of a business operated with a view to making a profit.  While they definitely run the thing to try and make money, in the past, the client has mentioned that the (fairly remote) location of the properties had been a factor in failing to secure full occupancy throughout the season, hence the failure to qualify for FHL tax treament for income tax purposes. 

Do readers think that this could prevent a susccessful BPR claim if challenged?  

 

 

Replies (7)

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Northumberland flag
By MJShone
26th Apr 2018 10:29

The FHL legislation deems the business to be a "trade" for certain tax purposes. If it's already a trade (quite a mountain to climb), you don't need that deeming.

So - the short answer to your question is that the fact that you fail the 105/210 day test isn't fatal to a BPR claim. However, you might want to revisit how the whole enterprise is being presented for income tax purposes.

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Replying to MJShone:
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By Tax Dragon
26th Apr 2018 15:35

Indeed. If BPR applies (big, nay, giant 'if') then FHL doesn't.

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Portia profile image
By Portia Nina Levin
26th Apr 2018 11:51

Wait. What? Since when have FHLs been anything other than businesses that make and hold property as investments

That was the point in Pawson, and you need to go a very long way to get inside George.

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Replying to Portia Nina Levin:
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By Justin Bryant
26th Apr 2018 16:18
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Northumberland flag
By MJShone
27th Apr 2018 12:35

I did say it was quite a mountain to climb. You start in the foothills with the fact that income generated from property (with statutory exceptions) isn't trading income (s263 ITTOIA 2005) - and then it's a long slog up from there.
"FHL" has a pretty specific meaning for income tax purposes - but there are much wider meanings in general parlance. If OP thinks he can get BPR in spite of Pawson and Ross, then presumably he has something that has a good chance of being treated as the commercial occupation of land within s10 ITTOIA 2005.

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By ianthetaxman
02nd May 2018 18:51

Thanks to all who have commented - all noted.

Aside from any inference from the income tax/VAT treatment on the overall picture, the client does provide full services, hence the initial suggestion this was a BPR qualifying activity.

The Ross case is interesting as it seems services were provided but via a third party to a degree, and perhaps this is why it fell down. In my client's case, the services are provided by them alone, but I appreciate that this doesn't mean BPR is a clear cut thing.

The background to this one is unfortunately more complex (involving a partnership and a trust, some of which I do not act for, hence the difficulty in directing how the income has been described in earlier years), but the replies have given food for thought.

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Replying to ianthetaxman:
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By Tax Dragon
03rd May 2018 06:53

Please don't encourage HMRC to think that work done on your behalf, e.g. by an agent, is not work you have done. That's just wrong.

My understanding from Ross is that the test is a simple one: what is the main supply? It seems the courts might consider the related question of what did the customers think they were buying? If the answer is "holiday accommodation" then that's a strong indication of what the supplier was mainly selling.

BPR on FHL is all but dead IMHO. But I hope you prove me wrong - in court, so I can hear about it.

Edit: Many hotels (in rural areas) offer what is essentially self-catering accommodation in a chalet or cottage within the grounds. Users can partake of all the hotel facilities. It seems to me that BPR should not be restricted. By extension, if that's what the Ross holiday-makers enjoyed, I think that case was perhaps wrongly decided. But that depends on the facts and I have not studied these in enough detail.

I think the "what did the customer think they were buying?" test is a good one, though.

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