A fine line between investment and trading
A case concerning relief from ATED (rather than penalties for late submission of returns) raises some interesting points regarding the definition of a property development trade.
The dispute was whether Hopscotch Limited (TC07127) was carrying on a property development trade or not, and thus the fact that the tax concerned was ATED is largely irrelevant.
Hopscotch was incorporated in the British Virgin Islands and had acquired a residential property in London in 1993 for £1.25m. Owing to declining use, the directors took the decision to sell the property and it was placed on the open market in 2011.
The house failed to sell at its asking price of £13.5m, and in March 2014 the directors, on advice from the estate agent, decided to carry out substantial redevelopment work to broaden the property’s appeal to buyers. Planning permission was granted in December 2015 and construction work commenced in April 2016. The renovated property was relisted for sale in October 2017.
ATED returns for 2013/14, 2014/15 and 2015/16 were filed by Hopscotch and the ATED charges were paid. Relief from the ATED charge was claimed for 2016/17 and 2017/18 on the grounds that Hopscotch was carrying on a property development trade in accordance with FA 2013 s 138.
HMRC enquired into the 2016/17 and 2017/18 ATED returns and eventually issued closure notices withdrawing the relief claimed. Hopscotch appealed to the first tier tribunal.
Property development trade
A property development trade is defined as “a trade that consists of or includes buying and developing for resale residential or non-residential property, and is run on a commercial basis and with a view to profit” (FA 2013 s 138(4)).
Hopscotch argued it had formed comprehensive plans to redevelop the property and carried out the redevelopment as a scheme for profit-making which went beyond merely attempting to make the property more saleable. External finance had been raised to fund the redevelopment project. That the transaction was a one-off did not prevent it amounting to a trade, nor should relief be denied on the grounds the original acquisition of the asset was on capital account.