Is intention relevant for tax and whether a trade?

How important is intent?

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In an ongoing HMRC enquiry relating to whether or not the sale of two properties that were resided in were capital and the sale of main residences, or trading income, HMRC have stated '... your client's intentions or even occupancy are irrelevant, what matters is that your client's actions carry characteristics of the trade'.

Basically the actions referred to were improving and decorating the properties and selling within a relatively short space of time, but with valid reasons, so we contend intent to trade was not present.

Looking at BIM20205 the first badge of trade is Intent, but we appreciate that all the badges are not an essential to be seen as trading. However if there is intent to be doing something other than trading (i.e. buying and living in a home) wouldn't that be at the least be relevant?

How correct or otherwise are HMRC in stating what they have said and any suggested replies to HMRC on this point (professional replies please!)?

Thanks.

 

Replies (28)

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RLI
By lionofludesch
08th Oct 2018 16:08

They can be relevant.

But you're not sharing much with us.

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Replying to lionofludesch:
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By newmoon
08th Oct 2018 16:31

lionofludesch wrote:

They can be relevant.

But you're not sharing much with us.

Thanks. What additional information would be useful please?

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Replying to newmoon:
RLI
By lionofludesch
08th Oct 2018 17:03

newmoon wrote:

Thanks. What additional information would be useful please?

The back story.

If we don't have this we're reduced to saying that it's not trading if you can justify it's not trading. Which, I would imagine, is not helpful.

I can understand a family changing their minds once. Twice seems to be too much of a coincidence.

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Replying to newmoon:
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By Accountant A
08th Oct 2018 18:29

newmoon wrote:

What additional information would be useful please?

The "valid reasons" you mention in the OP. What are they?

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Tax Manager
By Dynamo1224
08th Oct 2018 16:31

2 properties?

Does quick flipping properties twice not severely weaken your intent argument regardless of whether intent is or isn't irrelevant?

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Replying to Dynamo1224:
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By newmoon
08th Oct 2018 17:00

It certainly doesn't help, but there were good reasons for the sales.
It's HMRC's assertion that our client's intentions are irrelevant I'm interested in.
I've always thought that intent was a significant part of the picture. For example if someone bought a property with the intent of renting it out but something happened to change circumstances and it was sold, there isn't the intent to trade and I thought that was highly relevant.
I'm surprised that HMRC are saying intent is irrelevant.

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Replying to newmoon:
RLI
By lionofludesch
08th Oct 2018 18:06

newmoon wrote:

I'm surprised that HMRC are saying intent is irrelevant.

Ask them to confirm that you can rely on that assertion in future. "Intention is never relevant."

Alternatively, just say "Rubbish!!" and leave it at that.

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Replying to lionofludesch:
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By newmoon
09th Oct 2018 08:28

lionofludesch wrote:

newmoon wrote:
I'm surprised that HMRC are saying intent is irrelevant.

Ask them to confirm that you can rely on that assertion in future. "Intention is never relevant."

Alternatively, just say "Rubbish!!" and leave it at that.


Thank you.
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Replying to newmoon:
By Ruddles
08th Oct 2018 19:13

What we don’t know is whether HMRC have taken the view that intention is irrelevant in this case in light of other factors. If you want any kind of meaningful advice you need to provide the full context, including the supposedly ‘valid’ reasons.

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By Paul D Utherone
08th Oct 2018 16:58

Move in, improve, decorate & sell twice does sound a bit close to trade.

What were the "valid reasons"

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Replying to Paul D Utherone:
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By newmoon
09th Oct 2018 08:56

Paul D Utherone wrote:

Move in, improve, decorate & sell twice does sound a bit close to trade.

What were the "valid reasons"

The situation was basically that the person who bought the houses was in the armed forces and single. He was stationed in the UK and lived at barracks during the week and the homes at weekends as a rule.
On the two occasions he bought these particular properties they were renovated to a reasonable condition and lived in for a few months and then unexpectedly and at relatively short notice he was posted overseas, he didn't want to leave the properties empty or rent them out (he had owned a house that was rented out previously and had a bad experience with tenants that had put him off renting).
HMRC are contending that his intention to buy the houses as his main and only homes is irrelevant as they consider it was a trade.
My question is purely to try and ascertain whether HMRC have any foundation for stating that the intention to live in these two properties as the main residence is basically totally irrelevant.
There are various other factors in the case and it would probably take an essay to set them all out in detail! However I'm really only interested in finding out if HMRC have any grounds for stating that intention is irrelevant, i.e. the client's intention not live in the houses as his main residences.

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Replying to newmoon:
By Paul D Utherone
09th Oct 2018 09:42

...and that does look to put a different slant on things, unless possibly the other factors swing things back the other way.

I don't think that intention can be completely irrelevant taking things in the round. Maybe you have just hit on someone in HMRC who has reached a view and does not want to budge, so you might want to try ADR to cut through it all.

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Replying to Paul D Utherone:
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By newmoon
09th Oct 2018 12:52

Thank you Paul and you have hit the nail on the head I think and we applied for ADR yesterday!

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Replying to newmoon:
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By Accountant A
09th Oct 2018 10:34

newmoon wrote:

The situation was basically that the person who bought the houses was in the armed forces and single. He was stationed in the UK and lived at barracks during the week and the homes at weekends as a rule.

On the two occasions he bought these particular properties they were renovated to a reasonable condition and lived in for a few months and then unexpectedly and at relatively short notice he was posted overseas, he didn't want to leave the properties empty or rent them out (he had owned a house that was rented out previously and had a bad experience with tenants that had put him off renting).

Surely a member of the armed forces lives in constant anticipation of being posted wherever he is required. Therefore buying a property as a home, but not being prepared to let it or leave it empty when that time comes, seems odd.

It seems even more odd to buy a second property having had the experience the first time round.

What were the timelines in each case? That might shed more light on the defence against trading analysis.

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Replying to Justin Bryant:
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By newmoon
09th Oct 2018 08:35

Justin Bryant wrote:

See: https://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05104.html

Justin
Thank you for the interesting and relevant link.

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By Wanderer
09th Oct 2018 10:44

Of course intention can be relevant, it's even in the legislation, Suggest to the Inspector that (s)he reads that!
http://www.legislation.gov.uk/ukpga/1992/12/section/222/enacted

(8)If at any time during an individual’s period of ownership of a dwelling-house or part of a dwelling-house he—

(a)resides in living accommodation which is for him job-related within the meaning of section 356 of the Taxes Act, and

(b)intends in due course to occupy the dwelling-house or part of a dwelling-house as his only or main residence,

this section and sections 223 to 226 shall apply as if the dwelling-house or part of a dwelling-house were at that time occupied by him as a residence.

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Replying to Wanderer:
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By Accountant A
09th Oct 2018 10:54

Wanderer wrote:

Of course intention can be relevant, it's even in the legislation,

I think the OP's question was about trading intention rather than intention to occupy in the context of PPR relief.

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Replying to Accountant A:
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By Wanderer
09th Oct 2018 11:04

Accountant A wrote:

I think the OP's question was about trading intention rather than intention to occupy in the context of PPR relief.

Not what the OP said:-
newmoon wrote:

.... , HMRC have stated '... your client's intentions or even occupancy are irrelevant, what matters is that your client's actions carry characteristics of the trade'.

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Replying to Wanderer:
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By Accountant A
09th Oct 2018 11:09

Wanderer wrote:

Accountant A wrote:

I think the OP's question was about trading intention rather than intention to occupy in the context of PPR relief.

Not what the OP said:-newmoon wrote:

.... , HMRC have stated '... your client's intentions or even occupancy are irrelevant, what matters is that your client's actions carry characteristics of the trade'.

We'll agree to differ. PPR relief, to which you referred, is only relevant if it is found that no trade existed. The OP's question was headed "whether a trade?"

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Portia profile image
By Portia Nina Levin
09th Oct 2018 11:44

I am happy to confirm that it is not possible to accidentally trade. Standard practice is to trade on purpose (ie intentionally).

However, the other facts will be indicators of whether or not the individual(s) was/were intentionally trading. As what was intended can be subjective, particularly since intentions can change over (even short periods of) time.

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Replying to Portia Nina Levin:
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By Tax Dragon
09th Oct 2018 14:35

Portia Nina Levin wrote:

I am happy to confirm that it is not possible to accidentally trade.

That's true. It is though possible to trade without realising that's what you're doing. Say if you bought a house or two, did it/them up and sold it/them for profit.

I'm not agreeing with HMRC (I don't know the facts) - but I predict that the OP has an uphill struggle ahead.

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Red Leader
By Red Leader
09th Oct 2018 11:42

Surely the issue is that income tax takes precedence over CGT. Therefore if there is an intention to trade and the trade exists, then the profit is taxed as income, precluding subsequent consideration of whether the profit is from sale of a main residence.

I'm sure that PNL will correct me if I'm wrong.

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Replying to Red Leader:
Portia profile image
By Portia Nina Levin
09th Oct 2018 11:57

You're not wrong. But you're a long way from being correct as well.

It is the case that the same gain can fall within the scope of both CGT and income tax, but that the legislation prevents it being taxed twice, by excluding that part of the gain that is taxable as income from also being subject to CGT.

However, in relation to a dwelling house, it is not possible for it to simultaneously be trading stock, and the individual's only or main residence.

Either it was always trading stock, and was never the only or main residence, or it was never trading stock, or it became trading stock along the way.

It is possible to not be trading for a period, and be occupying the dwelling house as your only or main residence and then start developing it for sale, whilst still living in your trading stock. Once it becomes trading stock though, there is not sufficient quality of occupation for it to be your only or main residence.

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Replying to Portia Nina Levin:
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By Accountant A
09th Oct 2018 15:43

Portia Nina Levin wrote:

It is the case that the same gain can fall within the scope of both CGT and income tax, but that the legislation prevents it being taxed twice, by excluding that part of the gain that is taxable as income from also being subject to CGT.

Ta for that; interesting. I wasn't aware how the law worked to achieve that.

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By ireallyshouldknowthisbut
09th Oct 2018 11:44

Id say intention was key myself.

But its often the facts after the event which help establish what the intention actually was.

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By Justin Bryant
09th Oct 2018 12:11

HMRC make great play of equivocal and unequivocal re intention in the link below:

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim60045

See also here re sole status:

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim60055

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By Tax Dragon
09th Oct 2018 17:31

Might I suggest that you do some sums?

The tax at stake may be much less than you first thought, because tax relief would be available for expenses under the "trade" scenario that would not be relevant in the CGT one. The most obvious example would be interest on a mortgage, but there are doubtless many more.

It's useful to know what you are fighting for, before you put too much effort into the fight.

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