Neutral Citation: [2025] UKFTT 663 (TC)
Case Number: TC09546
FIRST-TIER TRIBUNAL
TAX CHAMBER
Appeal reference: TC/2021/11490
TC/2021/11492
TC/2022/12329
TC/2022/12338
CAPITAL GAINS TAX - entrepreneurs' relief - whether "holding company of a trading group" carrying on activities which did not include to a substantial extent - s165A(8) TCGA 1992 - no - appeal dismissed penalty – under Finance Act 2007 Schedule 24 -
reliance on agent - reasonable care to avoid inaccuracy - appeal allowed
Heard on: 18 to 20 September 2023
Judgment date: 5 June 2025
Before
TRIBUNAL JUDGE GERAINT WILLIAMS
DR CAROLINE SMALL
Between
ANDREW MOFFAT
CHARLOTTE MOFFAT
Appellants
and
THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellants: Michael Thomas KC and Calypso Blaj of counsel instructed by Blick Rothenberg Limited
For the Respondents: Alex Turnbull litigator of HM Revenue and Customs' Solicitor's Office
DECISION
Introduction
Factual Background
(1) Long licence value with the uplift in value from the marriage between the boat the mooring licence accruing to CYBC. This indicated a value to the business of the long licences of over £120m;
(2) Annual mooring fees which are akin to ground rents. CYBC's annual mooring fees are out of line with local mooring fees and there is the potential to increase the fees over the next three years which would underpin a value of £13m-£15m for annual mooring fees (excluding the long licence value)
(3) Longer boats. CYBC was not restricted on the length of the boats with an average length of 63.3ft. It was anticipated that over the next five years boats would increase to 100ft which would have a substantial impact on the value of the annual mooring fees which are calculated by the boat's length. This would increase the annual mooring fees from £18.6m to £29.9m.
(4) Number of moorings. The area licenced by the PLA is large and would accommodate 70 boats providing an uplift in value of 16% to the above values.
"In summary, we strongly believe that the valuation applied to the sale of Chelsea Yacht and Boat Company Limited to Thames River Moorings Limited was in no way undervalued. In our opinion it was a conservative valuation."
"Firstly we want to make it clear that Mr Moffat's comment, in the letter to HMRC of 9 April 2018, that the mooring fees "are akin to ground rents" was not a technical analysis for a unique situation but a headline comment made for explanatory purposes only and should not be taken out of context or as a substitute for the full answer.
Regardless, the company's income from mooring fees accounts for only a small proportion of the total income of CYBC and is not a "substantial" (i.e. over 20%) proportion for ER purposes.
Income from non-trading activities
CYBC's average "fixed" income per boat is approximately £16,500 per annum, comprising of mooring fees and service charges but excluding income from ad hoc maintenance and repair of boats. The average length of CYBC's vessels is 67 feet and therefore the average income from these fixed fees per linear foot is approximately £246.
Within the fixed annual fee are the services provided by CYBC's team of 13 staff ... Fees for these maintenance/repair services are charged on top of the fixed mooring and service fees, however in order to provide the clients with certainty the mooring fees and service charges are charged as a single fixed fee, depending on the size and location of the mooring.
By way of comparison, there are five 'trot' moorings available in the same area with mooring fees of between £1,000 and £2,137.56 per annum, which is equivalent to approximately £30 per linear foot. A trot mooring allows the boat owner use of the land (being the riverbed below the boat) but without any services, connections or use of pontoons.
As you will appreciate, the trot mooring is therefore a useful comparison in terms of estimating the value of the mooring fee element of CYBC's income and in evidencing the additional value provided by virtue of the services rendered. In fact, our clients anticipate that the value of CYBC's mooring fee income per boat would be at the lower end of the range mentioned above by virtue of the fact that the aforementioned trot moorings enjoy exclusive possession, whilst CYBC's moorings do not. On this basis, Mr and Mrs Moffat's view is that less than £2,000 per annum per boat is attributable to mooring fees in CYBC's case.
The balance of the fixed income in CYBC is attributable to the significant additional services offered and provided to boat owners occupying CYBC's moorings. CYBC occupies a premium space within the London moorings market which is made possible only by the value added by the exceptional and round-the-clock services offered by CYBC. The provision of these services is a trading activity which requires active management and involvement by both Mr and Mrs Moffat and their team of dedicated staff, as opposed to being the passive receipt of rental income.
Based on a prudent estimate of £2,000 per boat for mooring fees, approximately 88% of CYBC's income is considered to be trading income from services provided to boat owners, before taking into account the ad hoc income relating to repairs and maintenance services provided, which are also trading activities.
Profit
It is important to note that the mooring fee element of CYBC's income is not profitable. CYBC pays £123,588 to the Port of London Authority for its head licence, equating to a license fee of £2,059.80 for each of CYBC's 60 moorings. This cost is directly attributable and broadly equivalent to the company's income from mooring fees. As such, the company's profits are therefore wholly attributable to the trading activities of the business (i.e. the additional services provided over and above the equivalent trot mooring).
Expenses incurred and time spent by employees of the company in undertaking its activities.
As noted above, CYBC employs a dedicated team of 13 employees to assist with running the business ... The cost of employing these staff, alongside the cost of materials and tools required, make up the vast majority of CYBC's expenditure and are directly attributable to the various trading services provided to boat owners. It is therefore estimated that well over 80% of the business' costs of sale and overheads are attributable to the trading part of the business, being the provision of boatyard services and the repair and maintenance of the boats. Additionally, it is clear that the employees' time is dedicated wholly to the provision of these services and a simple trot mooring would not require such staffing.
...
Conclusion
Based on the above facts and information, CYBC's activities did not, to a "substantial extent", include activities other than trading activities in the 12 months prior to the sale of the shares in Chelsea Marine Limited ("CML") in September 2016.
Provision of professional advice received prior to filing tax returns
No formal written advice was provided to Mr and Mrs Moffat prior to filing their tax returns for the year. This was because we were in discussion with our clients in relation to the filing of the tax returns and were satisfied that (as set out above) a legitimate claim for ER could be made."
"Licence premiums - the licence premiums are paid for the grant of permission to the boatowner to moor their vessel for a set period. The licence premium is a fixed amount paid over the life of the licence and the reverse is recognised over the licence period accordingly. This broadly equivalent to the right to use a houseboat at one location.
Mooring fees - in addition to the licence fee, a mooring fee is paid by the boatowner. This is a fixed fee, calculated per foot and per annum which is payable in exchange for a number of extensive services, supported by 14 on site members of staff provided by CYBC to its customers.
Maintenance charge - the maintenance charge is also a fixed annual fee relating to the general maintenance of the boatyard and mooring facilities. It is effectively a reimbursement of maintenance costs incurred by the company, allocated between boat owners relative to the size of their boat and the proportion of the mooring space that this occupies.
Ad hoc repairs income - this is income received in relation to ad hoc repairs made to boats as and when requested. This income is not fixed and is distinct from the other activities described above.
Boat building and fitting - this activity relates to the construction and sale of boats, including completing all internal and external fittings."
The Issues
(1) Were the Notices of Enquiry and Closure Notices validly issued?
(2) Was CYBC a trading company for the purpose of ER for the 12 months leading up to the share disposal on 30 September 2016 ("the Period") i.e. was it a company carrying on trading activities whose activities did not include to a substantial extent activities other than trading activities?
(3) Were the inaccuracies in the Appellants' tax returns a result of their careless behaviour and, if yes, was HMRC's decision in not suspending the penalties flawed?
Burden of proof
Relevant Legislation
Entrepreneurs' relief
"165A Meaning of "holding company", "trading company" and "trading group"
(1) This section has effect for the interpretation of section 165 (and this section).
(2) "Holding company" means a company that has one or more 51% subsidiaries.
...
(8) "Trading group" means a group of companies–
(a) one or more of whose members carry on trading activities, and
(b) the activities of whose members, taken together, do not include to a substantial extent activities other than trading activities.
(9) For the purposes of subsection (8) above "trading activities" means activities carried on by a member of the group–
(a) in the course of, or for the purposes of, a trade being carried on by any member of the group,
(b) for the purposes of a trade that any member of the group is preparing to carry on,
(c) with a view to any member of the group acquiring or starting to carry on a trade, or
(d) with a view to any member of the group acquiring a significant interest in the share capital of another company that–
(i) is a trading company or the holding company of a trading group, and
(ii) is not a member of the same group of companies as the acquiring company.
...
(13) For the purposes of this section the activities of the members of a group of companies are to be treated as one business (with the result that activities are disregarded to the extent that they are intra-group activities).
(14) In this section–
"51% subsidiary" has the meaning given by Chapter 3 of Part 24 of CTA 2010, "group of companies" means a company which has one or more 51% subsidiaries together with those subsidiaries,
...
"trade" means (subject to section 241(3)) anything which–
(a) is a trade, profession or vocation, within the meaning of the Income Tax Acts,
and
(b) is conducted on a commercial basis and with a view to the realisation of profits."
Section 201
(1) Any receipt or other credit item, so far as it falls within—
(a) Chapter 2 of this Part (receipts of trade), and
(b) Chapter 3 of Part 4 so far as it relates to a UK property business,
is dealt with under Chapter 3 of Part 4 ...
Section 205
A company's UK property business consists of—
(a) every business which the company carries on for generating income from land in the United Kingdom, and
(b) every transaction which the company enters into for that purpose otherwise than in the course of such a business.
Section 207 sets out the meaning of "generating income from land":
(1) In this Chapter "generating income from land" means exploiting an estate, interest or right in or over land as a source of rents or other receipts.
(2) "Rents" includes payments by a tenant for work to maintain or repair leased premises which the lease does not require the tenant to carry out.
(3) "Other receipts" includes—
(a) payments in respect of a licence to occupy or otherwise use land,
(b) payments in respect of the exercise of any other right over land, and
(c) rentcharges and other annual payments reserved in respect of, or charged
on or issuing out of, land.
(4) For the purposes of this section a right to use a caravan or houseboat at only one location is treated as a right deriving from an estate or interest in land.
Penalties
"3 Degrees of culpability
(1) For the purposes of a penalty under paragraph 1, inaccuracy in a document given by P to HMRC is–
(a) "careless" if the inaccuracy is due to failure by P to take reasonable care, ..."
"18 Agency
P is liable under paragraph 1(1)(a) where a document which contains a careless inaccuracy (within the meaning of paragraph 3) is given to HMRC on P's behalf.
(2) In paragraph 2(1)(b) and (2)(a) a reference to P includes a reference to a person who acts on P's behalf in relation to tax.
(3) Despite sub-paragraphs (1) and (2), P is not liable to a penalty under paragraph 1 or 2 in respect of anything done or omitted by P's agent where P satisfies HMRC that P took reasonable care to avoid inaccuracy (in relation to paragraph 1) or unreasonable failure (in relation to paragraph 2).
(4) In paragraph 3(1)(a) (whether in its application to a document given by P or, by virtue of sub-paragraph (1) above, in its application to a document given on P's behalf) a reference to P includes a reference to a person who acts on P's behalf in relation to tax.
Evidence
(1) two witness statements from one of the Appellants, Mr Andrew Moffat ("Mr Moffat");
(2) a witness statement of Mr Jeremy Hirmer ("Mr Hirmer") who, since 10 August 2020, is the Marine Operations Officer of CYBC; and
(3) two witness statements of Mr Christopher Smith ("Mr Smith"), an International Tax Specialist at HMRC.
Mr Hirmer's evidence
Mr Smith's evidence
"The capital gain made on the disposal of the Chelsea Marine Ltd shares was large and the disposal was made to a related party, which means there was an added element of complexity for tax purposes ... this transaction, involving a large Entrepreneurs' Relief claim was not routine and not something the taxpayer had encountered before.
Given these previous penalties charged for failing to take reasonable care, I would have expected a taxpayer to be even more diligent than they would otherwise, especially when again claiming for a CGT relief.
Overall, given the size and complexity of the transaction, its novelty, and the previous penalties charged for careless behaviour I would have expected a taxpayer taking reasonable care to take a higher degree of care than otherwise, including seeking written professional advice if they lacked the expertise to undertake a full analysis of the availability of ER themselves.
...
If the taxpayers lacked the expertise to carry out such an analysis themselves, it is my view that they should have sought formal advice from a suitably qualified and independent professional as to whether CYBC was a trading company for ER purposes prior to claiming ER. When obtaining such advice, the taxpayers should have taken care to ensure complete and accurate information and documents were provided to the advisor in order to demonstrate reasonable care.
The taxpayers' agent stated that no formal written advice was provided in respect of the ER claim prior to filing because the agents "were in discussion with our clients in relation to the filing of the tax returns and were satisfied that...a legitimate claim for ER could be made" (letter of 25 April 2019). No further details or evidence was provided in respect of these discussions ... I doubted that a taxpayer taking reasonable care could conclude that ER was due after a mere discussion with their agents (i.e. without being provided with a more formal technical analysis in writing) ... I did not view the agent's statement that they were satisfied a legitimate ER claim could be made following discussions with the taxpayers as sufficient evidence of the taxpayer taking reasonable care
A taxpayer taking reasonable care would have taken steps to ensure they were fully aware of all the conditions for claiming Entrepreneurs' Relief and that the shares disposed of qualified. One condition of making a successful Entrepreneurs Relief claim is that the shares disposed of relate to a trading company (or a member of a trading group).
The taxpayers should have been aware at the time of filing their returns that activities always accepted as non-trading (such as sales of long-licences) were an important part of CYBC's business."
(1) Telling - 10%. An explanation was provided and Mr Moffat attended a meeting but some of the explanations were contradicted by the documentation and third party information.
(2) Helping - the maximum reduction was given as no help was required to quantify the tax loss
(3) Giving - 10%. Some documentation was provided and the taxpayer agreed to a meeting but there were serious delays in providing the information necessitating the use of formal information powers and penalties.
No further reductions were given.
Mr Moffat's evidence
Findings of fact
ER
(1) At all material times, CYBC were party to two agreements that allowed their business to operate. These are:
(a) A River Works Licence ("RWL") dated 24 May 1989 between the Port of London Authority ("PLA") and CYBC. The RWL granted a licence to CYBC to retain the "Works". In the Period, CYBC paid approximately £128,000 to the PLA under the terms of the RWL. This represented about 15.5% of CYBC's turnover from mooring fees and licences. The "Works" are defined in the RWL as the following structures:
"Moorings pontoons entrance piers and gangways to accommodate residential craft drydock administrative and workshop barge campshedding vacuum sewage system and mooring piles in the position in accordance with PLA drawings ..."
CYBC covenanted to perform the obligations set out in the Second Schedule which included:
Clause (2) To execute and maintain the Works to the PLA's reasonable satisfaction
Clause (11) To use the Works only for the mooring of residential craft and ancillary office and workshop use and access thereto
Clause (12) To equip the Works with such life saving and fire fighting apparatus as recommended by the PLA and/or the London Fire Brigade; and
Clause (13) To:
(a) to grant mooring licences and charge mooring fees for the use of the moorings forming part of the Works
(b) provide in the mooring licences for periodic reviews of the mooring licences ...
(c) keep proper and up to date records of all the mooring fees but not maintenance charges derived from vessels whilst they are moored at the Works.
The Third Schedule set out the procedure for reviewing the licence fee payable with the provision that a sum equal to twenty per cent of the total mooring fees payable to the Licensee by vessels moored at the Works in the year immediately preceding the review date shall be payable every six years.
(b) A Lease dated 13 March 2008 between the Royal Borough of Kensington and Chelsea ("RBKC") and CYBC of the "land and premises known as Old Ferry Wharf Lots Road London SW10 0DG" ("the Lease"). In the Period, CYBC paid RBKC approximately £95,000. This represented about 9.5% of CYBC's turnover from mooring fees and licences. The permitted use granted by the Lease was:
"For the building maintenance servicing and repair of boats houseboats pontoons and gangways for the mooring of three vessels or structures for access to and from moorings in Cheyne Walk and servicing of moorings for office purposes for research for light industry and for storage".
(2) In the Period, CYBC offered two types of moorings to the owners of boats ("Boatowners"):
Houseboat moorings
CYBC offered space for 60 houseboat moorings. Each boat is anchored, tied up to the relevant pontoon and connected to utilities.
Trot moorings
CYBC offered space for eight trot moorings for small water craft but only one was in use in the Period. Trot moorings comprise steel buoys to which the boats are tied using a ring and rope. The boats are not connected to any utilities and do not benefit from any of the services or support provided by CYBC. The trot moorings were removed for maintenance in 2017 and not replaced.
(3) CYBC's contractual relationship with Boatowners fall into one or more of the following categories: mooring fees and licences, formal mooring licences and additional services. All Boatowners who use the houseboat moorings pay mooring fees and maintenance charges annually. The maintenance charges are not optional. Boatowners using the trot moorings only pay mooring fees. Payment of the mooring fee is payment for the right to moor a vessel for an indeterminate period of time. Payment of the mooring fees is linked to payment of the maintenance charges as the former cannot be paid without the latter and vice versa. The maintenance charges are charged at cost and estimated at the start of the year.
(4) Three types of formal mooring licences were in existence in the Period:
(a) A ten year or five year licence with an option to renew for the same period;
(b) A one year licence with no option to renew; and
(c) A longer licence, 17 or 23 years, with no option to renew.
(5) Not every Boatowner had a mooring licence in the Period as some had expired and had a "periodic licence" as the Boatowner continued to make payments per the terms of the expired licence. Notwithstanding the type of mooring licence, all required payment of the maintenance charges. Regardless of whether the Boatowner has a formal mooring licence or not, there is no right to a specific mooring. CYBC reserves the right to move the boat and has repositioned boats for good estate management.
(6) CYBC ran the business in a similar fashion as it had been run by the previous owners and, as far as Mr Moffat was aware, the facts had not changed during the Period.
(7) In the Period, the mooring fees were £138 per foot (calculated by reference to the length of the boat). The maintenance charge for the Period was £75.35 per foot with a discretionary discount of £6 per foot for Boatowners who also have a mooring licence.
(8) Each mooring licence was drafted in similar terms and made reference to and provided for the payment of the maintenance charge and contained similar rights and obligations. The 10-year mooring licence dated 12 April 2012 is representative of the three types of mooring licences in existence in the Period and, relevantly for these purposes, stated:
(a) "Boatyard" is defined as the boatyard wharf premises and mooring owned occupied or licenced by CYBC at 106 Cheyne Walk and shown on the plan;
(b) "Licence Period" is defined by reference to a period of 10-years with a specified commencement and termination date;
(c) "Maintenance Charge" is defined as the maintenance charge payable by the Boatowner in accordance with Clause 3;
(d) "Mooring" means the mooring known as berth [relevant berth number inserted]106 Cheyne Walk London SW10 indicated approximately for the purposes of identification only on the Plan or in such other position as CYBC may from time to time require in writing in accordance with this Licence;
(e) "Mooring Fee" means until 28 September 2012 £108 per foot per annum. until 28 September 2013 £115 per foot per annum and until 28 September 2014 £120 per annum, multiplied by the overall length of the Vessel until reviewed;
(f) "Mooring Facilities" means the facilities and services set out in the Fifth Schedule;
(g) Clause 2 is headed "Licence to Moor" and states that CYBC grants permission to the Boatowner to moor the Vessel on the Mooring for the duration of the Licence in consideration of the Boatowner: (a) paying a sum of £60,000 on the grant of the Licence; (b) paying the Mooring Fee; (c) paying the Maintenance Charge; and performing and observing the obligations of the Boatowner set out in Clause 3 together with the rights set out in the First Schedule reserving and granting to CYBC the rights set out in the Second Schedule.
(h) Clause 3 is headed "Boatowner's Obligations". The relevant obligations are: pay the Mooring Fee; pay the Maintenance Charge; to pay all utility charges consumed or supplied to the Vessel; to keep the Vessel in a riverworthy and safe condition; to keep the Vessel in a good state of decorative repair; to permit CYBC at all reasonable time on reasonable notice (except in an emergency) to board and enter the boat to inspect its state of repair and riverworthiness; to permit CYBC after having given reasonable notice (except in the case of an emergency) to alter or relocate the position of the Vessel in the Boatyard for reasons of safety and/or good management provided that such alternative location shall be as close as possible to the existing location; not to move the Vessel without the prior written consent of CYBC nor to alter or in any way interfere with any part of the moorings including the mooring ropes, wires, chains and gangways; not to use the Vessel otherwise than as a private residential dwelling in the occupation of the Boatowner; at the end of the Licence at the Boatowners own cost to remove the Vessel from the Boatyard forthwith; dry dock the Vessel in 2018 for the Vessel to be surveyed and provide a copy of the report to CYBC; to provide and maintain such fire fighting equipment and means of escape as required by the London Fire and Civil Defence Authority, CYBC or such other authority may require; to provide and maintain on the Vessel mains water and vacuum drainage systems to the approval of the CYBC and to permit CYBC to connect such systems to CYBC's mains water and vacuum drainage installations in the Boatyard and thereafter only to use these systems for the supply of mains water and the disposal of effluent from the sanitary fittings on the Vessel and all gas electricity and water installations and appliances shall be installed in accordance with the manufacturers instructions and all current regulations
(i) Clause 4 sets out CYBC's obligations subject to payment of the Maintenance Charge: to administer manage maintain and repair the Boatyard and the Mooring in particular including, the mooring piles ropes wires chains anchors the routes of access to and from the boat gangways pontoons piers safety facilities sewage disposal facilities water supply and the CYBC's electric cables in or upon the Boatyard and so far as practical but subject as provided in this Clause to provide the Mooring Facilities set out in the Fifth Schedule.
(j) Clause 5 sets out the provisions for reviewing the Mooring Fee each Review Date.
(k) The First Schedule sets out the rights granted to the Boatowner: a right of way for the Boatowner and all persons authorised by him over the wharf pier pontoons and gangways of the Boatyard for the purposes of access to and egress from the boat so long as it is moored on the Mooring and the right to be connected to the utility installations in the Boatyard.
(l) The Second Schedule sets out the rights retained by and granted to CYBC: to use the utility pipes and wires which pass over or under the boat, the right to enter the boat upon reasonable notice (except in an emergency) inspect and clean the utility infrastructure and to carry out necessary safety work and the right of access on foot over the boat only at all times for normal purposes connected with the use and enjoyment of the remainder of the Boatyard and other boats for the benefit of CYBC and other licensees or occupiers of the Boatyard.
(m) The Third Schedule is headed "Maintenance Charge" and is stated to be "such fair and reasonable proportion of the aggregate of the costs expenses and outgoings incurred by CYBC ("CYBC's Expenses") in connection with performing its obligations in the Licence". The Maintenance Charge is to be assessed having regard to the proportion that the length of the boat bears to the total length of all boats moored at the Boatyard from time to time subject to licences in a similar form. CYBC's Expenses are deemed to include all the expenses charges and other expenditure reasonably disbursed incurred or made by CYBC in fulfilling its obligations and in providing administering and managing the Mooring Facilities referred to the numbered the Fifth Schedule.
(n) The Fifth Schedule is headed "Mooring Facilities and Maintenance" and lists the following:
(i) Mooring Piles and Travellers.
(ii) Access Pontoons and Access Gangways.
(iii) Lighting and other equipment and facilities.
(iv) Mains Electrical Meter Rooms Installations Sub-meter and Cable to Pontoon Outlet.
(v) Mains Water Supply Installation to the Vessel's Upstand.
(vi) Vacuum Drainage to the Vessel's Upstand.
(vii) Pontoon fire Fighting Stations.
(viii) Mooring Ropes Wires Chains and Anchors.
(ix) Supply of Refuse Sacks.
(x) Collection Storage and Disposal of Refuse.
(xi) Nightwatchman Patrol.
(xii) Reception and Emergency Key Holding.
(xiii) Provision of Post Boxes for each boatowner at the Old Ferry Wharf and at Cheyne Walk Pier or at the Beaufort Stairs entrance subject to Post Office Approval Receipt and Sorting of Post or collection from Post Room Parcels Telegrams Registered and Recorded Post held in Reception for collection.
(xiv) Pedestrian access to Old Ferry Wharf, Beaufort Stairs, Cheyne Walk and the Moorings.
(xv) Emergency Call-Out.
(xvi) Mooring inspection at Weekends and Public Holidays.
(xvii) Emergency Equipment (temporary gangways ropes lifebelts and pumps) and items required for compliance with health and safety requirements.
(xviii) General inspection and attendance of mooring facilities.
(xix) Provision of panel and upstand in Pontoons for British Telecom panels and cables.
The mains gas supply is stated not to form part of the Mooring Facilities and Maintenance.
Turnover | 2017 | % of turnover |
Mooring fees and licences | £1,015,612 | 49.2% |
Boat Sales | - | - |
Maintenance charges | £392,262 | 19% |
Boat fittings and repairs | £539,987 | 26.2% |
Light and heat | £111,297 | 5.4% |
Sundries | £5,420 | 0.25% |
Total | £2,064,578 | |
(a) The turnover from mooring fees and licences was £1,015,612 of which approximately 25% is paid to satisfy CYBC's obligations under the RWL and the Lease.
(b) There were no boat sales. Boat sales were an occasional part of the business but not part of his future plans for the business.
(c) The turnover from maintenance charges was £392,262 which was payment for the compulsory services charged at cost. The maintenance charges were separated out from the mooring fees and licences as required by the RWL.
(d) The turnover from boat fitting and repairs (the additional services) was £539,987.
(e) The turnover from light and heat was £111,297 but he would not describe it as turnover. The cost is charged to boat owners at cost.
(f) The turnover from sundries was £5,420 but he could not recall what it related to but most likely comprised the sales of small items.
Parties submissions
Appellants' submissions
HMRC's submissions
Discussion
Was CYBC carrying on a single trade?
"Property or Trading
34. As discussed above, the tax legislation has long sought to grapple with the dividing line between property and trading income. The starting point in the analysis - what HMRC in their submissions called "the default position" - is that income derived from the exploitation of property is to be taxed as property income. In certain situations, however, the taxpayer may be able to establish that the activities giving rise to the income constitute a trade. While the existence of a trade is ultimately a question of fact, it was argued by both parties that case law establishes certain characteristics as having particular significance.
35. Passages from two decisions relevant to this appeal neatly summarise this position. In the decision of the House of Lords in Salisbury House Estate, Ltd v Fry [1930] 15 TC 266 , Lord Macmillan stated (at page 330):
"A landowner may conduct a trade on his premises, but he cannot be represented as carrying on a trade of owning land because he makes an income by letting it. The relatively insignificant services for which the company makes charges to its tenants are not in my opinion sufficient to convert the company from a landowner into a trader, though the profits so made may quite properly be charged with tax under Schedule D.
To hold otherwise would be to invert the rule that the principal follows the accessory."
36. In the more modern case of Griffiths v Jackson [1985] 56 TC5 83, Vinelott J. reaffirmed the force of this principle while helpfully summarising its historical origins (at page 190):
"It is a cardinal principle of United Kingdom tax law that "income derived from the exercise of property rights properly so-called" by the owner of land (freehold or leasehold) is not income derived from the carrying on of a trade. The words I have cited come from the speech of Lord Macmillan in Salisbury House Estate, Ltd v Fry 15 TC 266 at page 329. The historical origin of the principle is that tax under Schedule A was formerly charged "in respect of the property in all
37. On the face of it, income from a business of letting property, such as that in this appeal, would fall naturally within the wording of section 266(1): "'generating income from land' means exploiting an estate, interest or right in or over land as a source of rent or other receipts." It would, on that basis, constitute a "UK property business", the profits of which would be taxable as property profits under section 268 . What factors might indicate that such income would nevertheless fall to be taxed as the profits of a trade?
38. Perhaps because section 268 is, in effect, the starting position, consideration of the relevant case law shows that the normal "badges of trade" have not been found to be of particular assistance to the courts in addressing this issue. To take only some of the badges, in relation to income from letting property, a profit-seeking motive, the number of lettings, the nature of the asset, and the nature of the financing, could all be present in a typical property letting business without themselves pointing in the direction of a trade.
39. Both parties argued that case law does, however, identify two factors which are to be given particular weight in distinguishing property and trading income, namely whether the taxpayer is in occupation of the property giving rise to the income and the level of services provided by the taxpayer in relation to that property.
...
45. We now consider the key cases in turn, from which it will be seen that a more nuanced picture emerges.
46. The Governors of Rotanda [sic] Hospital was relied on heavily by Mr Nott in his submissions to the Tribunal. He argued that the decision establishes that the most significant factor in categorising property profits as trading income is occupation by the taxpayer of the property from which the income derives. He further argued that most of the other authorities cited by HMRC (which we discuss below) were not materially relevant, because they concerned situations where the taxpayer was not in occupation and where, as a consequence, it was necessary to establish a much higher level and degree of additional services.
47. Rotunda concerned the hiring out by the Governors of the hospital of certain concert, exhibition, refreshment and ball rooms for the purposes of musical or dining entertainment. The rooms were prepared by the Keeper of the Rotunda Rooms, who remained on the premises at all times, attending to lights and fires and regulating the conduct of the patrons. The rooms were equipped for purpose with seating, heating and lighting.
48. The House of Lords held that, on the facts, the activities amounted to a trade, that trade being one of providing and letting rooms for entertainment. In reaching that finding, it was held that the services provided were not merely incidental to the letting of the rooms. In the words of Viscount Finlay (at page 582):
"Profits are undoubtedly received in the present case which are applied to charitable purposes, but they are profits derived not merely from the letting of the tenement but from its being let properly equipped for entertainment, with seats, lighting, heating and attendance. The subject which is hired out is a complex one. The mere tenement as it stands, without furniture, etc, would be almost useless for entertainment. The business of the Governors in respect of those entertainment is to have the hall properly fitted and prepared for being hired out for such uses."
49. Viscount Cave expressed himself in similar terms, at page 585:
"I am unable to see how the profits in question can be said to be derived from the Rotunda Rooms alone. They result, not from the letting of bare rooms, but from the whole venture, consisting of the equipment, and disposal of the rooms with their fixtures and furniture and the provision of the service of heating, lighting and attendance. They may perhaps be described as profits of a trade or concern in the nature of trade, that is to say, of the business of providing and letting rooms for entertainment ..."
50. Salisbury House Estate, decided in 1930, was relied on by HMRC. The case concerned unfurnished offices which were leased, with the landlord providing lighting, heating, caretaking and other services. Some of the services were optional and only charged for if taken up. The taxpayer also provided and operated lifts in the building, and provided uniformed staff, cleaners, housekeeper and concierge services.
51. The House of Lords held that on the facts the total income fell to be taxed as property rather than trading income (as then was, Schedule A rather than Schedule D). Much of the discussion concerned the need for exclusivity amongst the various Schedules. The court remarked that Rotunda "... entirely differs in its facts and appears to throw little light on the law in question before this House" (Lord Atkin at page 321). The ratio for the decision in Salisbury appears to be that on the facts the services offered by the taxpayer were not sufficiently significant to supplant the natural characterisation of the leasing income as property income: see the passage from Lord Macmillan's judgment quoted at [35] above.
52. Sywell Aerodrome concerned income which was potentially assessable under any of the former Schedules A, B or D. The taxpayer's argument was that the income was properly property income taxable under Schedule A, or income from the occupation of land taxable under Schedule B. The income arose from various licences of the aerodrome, and the taxpayer also provided the services of a guardsman and made available first aid appliances and tools.
53. The Court of Appeal held by a majority that the entire income was taxable under Schedules A or B. Having considered authorities including Rotunda and Salisbury House , Lord Greene stated (at page 143):
"I have so far ignored the one thing done by the company which in my view falls outside the profit-making activities with which Schedules A and B are concerned - viz; the provision of tools and equipment which is a condition of the licence. Compliance with this condition cannot in my opinion change the whole picture and turn what would otherwise be profits covered by Schedule A or Schedule B into profits assessable under Schedule D, any more than would be the case if, for example, under housing bye-laws the landlord of a block of flats were bound to keep fire-fighting appliances on the premises. On principle, however, whatever part of the profits made by the company ought to be apportioned to the provision of this equipment [is a] matter for the Commissioners [and] is assessable under Schedule D. The point, however, is obviously too trivial to lead to any practical result.
I have given the best consideration that I can to the authorities which, I must confess, do not appear to me to throw a particularly clear light on the point which we have to decide."
54. Gittos v Barclay is a more modern decision (1982). Its facts are closer to those in this appeal than those in Rotunda , Salisbury House or Sywell Aerodrome , in that the case concerned the taxation of an individual in respect of income from the letting of holiday villas. The High Court held that they could not overturn the findings of fact which had led the General Commissioners to conclude at first instance that the profits were not profits of a trade. Before the General Commissioners, the taxpayer had relied heavily on the presence of many of the conventional "badges of trade". The court rejected an argument raised by the taxpayer that it made a material difference to this question whether the occupiers of the villas were tenants or only licensees. Goulding J's approach echoed that of the earlier decisions discussed above (at page 639):
"So the real question that was before the General Commissioners in the present case and which, so far as I can see, they properly grasped - and, indeed, they were referred to the Salisbury House case - was whether the activities of Mrs Gittos over and above the mere exploitation of her landed property were significant enough to make her a trader and not a mere landowner who derived an income by exploiting her property. It is not of course possible to give an answer to such a question in general terms. It is a question of fact and degree."
55. The decision in Griffiths v Jackson concerned income from various properties which were mainly let furnished to students and other short-term occupiers. The taxpayers provided various amenities and services, and spent considerable time in collecting rents and looking after the properties. The High Court overturned the decision of the General Commissioners that the taxpayers were carrying on a trade.
56. Vinelott, J. reaffirmed the "cardinal principle" that "income derived from the exercise of property rights so-called" by a landowner is not trading income, in the passage quoted at [36] above. Applying a similar approach to that in Salisbury House he stated (at page 591):
"Thus, the income derived by the owner of property from letting the property furnished, whether for a short or a long term and whether in small or large units and whether in self-contained units or to tenants who share a bathroom or kitchen or the like, is not income derived from carrying on a trade but is still taxable under Schedule A or, in the case of para 4 [of Schedule A], under Case VI of Schedule D. Of course, if the owner provides services and the services are separately charged or the receipts can be otherwise apportioned in part to the provision of the services any profit derived from the provision of the services will be taxable as the profits of a trade. That was the case in Salisbury House Estate, Ltd v Fry . But the rents the owner derives from the use of the different parts of the property are not receipts of a trade."
57. Vinelott, J. rejected the taxpayer's argument based on Rotunda (at page 592):
"However, on a close examination of the facts of that case it does not, in my judgment, support his argument. In that case the taxpayers remained in legal occupation of the entertainment rooms and retained control over them. The income was not derived from their property in the rooms, as it would have been if they had parted with legal occupation to someone who had carried out the activities of providing the rooms for public entertainment. That was the ground on which the Rotunda Hospital case was distinguished in Salisbury House Estate, Ltd v Fry . Viscount Dunedin said at page 309:
"But the rooms were not let to anyone. There was no question of including the rents of the rooms in the profits which were calculated under Schedule D; the hospital was held to be in occupation of the whole premises." "
58. He continued by discussing the relevance and meaning of "occupation" in this context as follows (at page 592):
"The Rotunda Hospital case, in fact, is a useful illustration of the way in which the owner of land may, without parting with his occupation of it, exploit his rights of property and occupation by carrying on a trade.
That, I think, affords the answer to Mr. Sokol's alternative argument. He drew an analogy between the position of these taxpayers and that of a hotel owner or the landlord of a lodging house. It was the analogy of a lodging house keeper which led Rowlatt J. to conclude in Salisbury House Estate, Ltd. v Fry that the taxpayer was carrying on a trade (see page 282). However, as Lord Russell of Killowen pointed out in Westminster Council v Southern Railway Co. [1936] AC 511 at page 530, the landlord of a lodging house remains in occupation and "for the purpose of that business he has a continual right of access to the lodgers' rooms and ... in fact, retains the control of ingress and egress to and from the lodging house, notwithstanding that the power of ingress and egress at all times is essential to the lodger". That was a rating case but in J.A. and J. Dawson v Counsell 22 TC 49 Scott L.J. pointed out that "the occupier for tax purposes is broadly the same kind of occupier as the occupier for rates". The distinction between a hotelier or a lodging house keeper, on the one hand, and the owner of property who lets furnished rooms and provides services is no doubt in practice a narrow one, more particularly in these days of self-service hotels and motels, but the principle is clear and in the present case there can be no doubt on which side of the line the taxpayers' activities fall. It is quite clear from the terms of the tenancy agreements and the taxpayers' form of letter that they let rooms furnished to tenants, albeit with shared facilities and some services."
59. Finally, we considered Maclean. While only a decision of the Special Commissioners, this contains a useful review of the authorities discussed above. The following passage from the judgment of J Gordon Reid QC (at page 359) is in our view particularly pertinent:
"Guiding Principles
From the authorities cited, I derive, albeit with some difficulty, the following principles. (1) Income derived from the exercise of property rights properly so-called by the owner of land, that is to say the exploitation of the right of property and the right of occupation, is not income derived from the carrying on of a trade. (2) Income derived by an owner from granting or limiting his rights as owner of the land in favour of others is not regarded for income tax purposes as the carrying on of a trade. Thus, income derived from the commercial letting of furnished accommodation, whether for a short or long period, is not generally regarded as income derived from carrying on a trade, even although this activity may properly be described as the carrying on of a business. Business is a wider concept than trade. (3) Activities over and above the mere exploitation of heritable property or turning to profitable account the land, of which he is the owner, may be significant enough to classify a man's business as a trade. Whether the provision of services or other activities are significant enough to cross the line between land ownership and commercial enterprise in land is a question of fact and degree depending upon the nature and extent of the operations or activities concerned. (4) However, the fact that an owner makes the visit to his land by a licensee more attractive by providing various services, eg keeping the property in a proper state and condition, will not turn exploitation of property rights into a trade. 5) Whether income is derived from the location of the land, which is the normal manner in which property in land yields revenue, is a relevant consideration.
Like so many areas of law, principles can be stated but their application to any given set of facts may be attended with the greatest difficulty. I have not found the reasoning in the authorities particularly easy to apply to the circumstances of this appeal and such principles as I have been able to extract, I have found to be of limited value and of questionable utility in the modern context of carrying on the business (to put it neutrally) of providing serviced apartments."
60. Drawing together these various authorities, one striking point is that none of them articulates the determinative criteria in establishing a trade in this context as occupation by the taxpayer combined with a substantial level of additional services. There are "guiding principles" derived from the authorities summarised in Maclean. There are numerous conclusions to the effect that additional services provided by a landlord must be substantial if they are to stand any prospect of displacing the "cardinal principle" and establishing a trade. And there are several pronouncements as to the limited value of the described cases given the importance of the facts.
61. In relation to the significance of occupation, it may be that the passage from Griffiths v Jackson quoted at [58] above has been taken by HMRC and others to mean that a trade in this context can be established only where there is occupation by the taxpayer. A close reading of the passage shows that in fact it is not saying this. It is attempting to reconcile the various authorities by observing that continued taxpayer occupation of the land, as in Rotunda, may help to distinguish the lodging house keeper (in Salisbury House) from the property owner who lets furnished rooms and provides services.
62. We asked HMRC to amplify the precise basis for the statement in BIM22001, quoted at [41] above, that a furnished lettings business "is only treated as a trade when the landlord remains in occupation of the property and provides services substantially beyond those normally provided by a landlord". We also asked them, in view of Mr Nott's submission that occupation was by far the most significant factor, what relative weight they might attach to occupation and services. HMRC's response to the Tribunal provided an interesting comparison to BIM22001:
"HMRC does not attach particular weight to occupation or services. We instead examine the nature of the activity that gives rise to the payment."
63. HMRC further articulated this approach as a two-fold test intended to identify the true derivation of the income. The first question, they submitted, is "what is the activity giving rise to the payment?". The second question is "what are customers paying for - the use of the land, or a package of services forming part of a trade?".
64. While observing that this is essentially the same question posed from different perspectives, we find this a more objective distillation of the case law than the "occupation plus services" test. It may be less granular, but is consistent with the approach in the decided cases, which is to determine, in the words of Lord Atkinson in Rotunda, "what is let, paid for and used" (page 592). Clearly, in reaching that determination, the nature and level of any services offered by the taxpayer will be important if the "cardinal principle" is to be displaced. Whether or not the taxpayer remains in occupation of the premises will also be relevant. But we do not find authority in the cases for the proposition that these two issues are determinative.
65. It is nevertheless necessary, and we trust helpful, to consider the submissions of the parties in relation to these two issues, and their application on the facts of this appeal to Mr Nott's letting income.
66. Let us deal first with occupancy. In our view, the decisions in Rotunda and Griffiths v Jackson can best be regarded as demonstrating that a property owner who gives up occupation of his property in return for payment is very likely to be generating property income. He is monetising his property asset in the most straightforward way, by, in effect, selling the right to occupy it. Conversely, a property owner who remains in occupation is, all else being equal, more likely to be able to show that, if additional services are being provided, it is (in HMRC's formulation) a package of services forming part of a trade from which his income derives."
Occupancy
Services provided
"... the owner of land may carry on activities on the land that go beyond the mere exploitation of his proprietary rights in the land and which constitute a trade. Where it is shown that there have been such activities, it is a matter of fact and degree whether they are sufficient to amount to the carrying on of a trade."
"Activities over and above the mere exploitation of heritable property or turning to profitable account the land, of which he is the owner, may be significant enough to classify a man's business as a trade. Whether the provision of services or other activities are significant enough to cross the line between land ownership and commercial enterprise in land is a question of fact and degree depending upon the nature and extent of the operations or activities concerned."
As the discussion of the relevant case law earlier shows, in order to displace the "cardinal principle", the services offered by a landlord must be such as to convert what is being sold into a package of services of which the accommodation enjoyed by guests or customers is only part. The extract from Lord Macmillan's judgment in Salisbury House quoted at [35] above states that "the relatively insignificant services for which the company makes charges to its tenants are not in any opinion sufficient to convert the company from a landowner into a trader ....". Sywell Aerodrome considers whether the additional services could "change the whole picture and turn what would otherwise be property covered by Schedule A or Schedule B into profits assessable under Schedule D".
"I have so far ignored the one thing done by the company which in my view falls outside the profit-making activities with which Schedules A and B are concerned - viz; the provision of tools and equipment which is a condition of the licence. Compliance with this condition cannot in my opinion change the whole picture and turn what would otherwise be profits covered by Schedule A or Schedule B into profits assessable under Schedule D."
Non-trading activities and whether substantial
90. Both parties accept that the FTT gave the right meaning to the word "substantial" at [157] of the decision. We agree with the FTT that in this context substantial should be "taken to mean of material or real importance in the context of the activities of the company as a whole". Both parties agreed and we agree that the test is qualitative and quantitative. It is necessary to look at both the nature of the activities and to measure in some way the extent of those activities. Further, the company's activities must be looked at as a whole. It is not appropriate to apply any sort of numerical threshold as suggested by HMRC's guidance.
...
96. Mr Ridgway's submissions proceeded on the footing that the activities of a company are confined to the actions of its directors and employees; in other words actual human activities. We do not accept that activities in this context are to be construed so narrowly. We accept that the reference to "activities" in s 165A(3) is in the sense of what the company actually does, but the question of what the company actually does must be looked at in commercial terms. In that sense, trading is an activity, but so too is holding an investment property and receiving rents. That is what the FTT meant when it described the activity of holding property and collecting rent as a "passive activity". There may be little action required on the part of directors and employees in such an activity, but it remains an activity in commercial terms. In ordinary language a company might be described as having a principal activity as a holding company. There may be little if any activity on the part of directors and employees as such, but it remains the company's principal activity, even if it also engages in other commercial activities.
...
101. In our view, the question of what amounts to an activity in the context of a company is a straightforward question. It is what the company does in commercial terms. The question of how to measure the extent of an activity may be more difficult ..."
Activity
"There is an ongoing High Court action which was filed in Spring 2017 against the company. It claims that the company does not have the legal right to charge licence premiums. Whilst this case has taken up a substantial amount of time and money, it was filed after the relevant date [the Period]"
Financial indicators
"As noted, the maintenance charge is effectively a reimbursement of costs incurred in maintaining the facilities and is not profitable. Instead, it forms part of the wider, value add service of the business alongside the mooring fees.
Mooring fees cover the services that are considered to be exceptional when compared with services offered by other boatyards in the area. These services go over and beyond what is standard, and they therefore do "change the picture" to one in which a customer is paying for a full package of services."
"The main value [of CYBC] was in the long term mooring licences ... We subsequently did more work on this and our estimate of fair market value was low ... the annual mooring fees have become out of line with the local mooring fees market. There is an opportunity to trend these fee over the next 0-3 years to the market value"
"In terms of the tangible fixed assets of the company, CYBC had £1.7m of assets on its balance sheet at the end of September 2016. Apart from a boat it held on its balance sheet ... the rest of its assets were related to mooring fees (80% of the total fixed assets)."
Conclusion
Penalties
Discussion
"19. In my view carelessness can be equated with "negligent conduct" in the context of discovery assessments under section 29 Taxes Management Act 1970. In that context, negligent conduct is to be judged by reference to the reasonable taxpayer. The test was described by Judge Berner in Anderson (deceased) v Revenue and Customs Commissioners [2009] UKFTT 206 at [22], cited with approval by the Upper Tribunal in Colin Moore v Revenue and Customs Commissioners [2011] UKUT 239 (TCC):
"The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done."
21. What is reasonable care in any particular case will depend on all the circumstances. In my view this will include the nature of the matters being dealt with in the return, the identity and experience of the agent, the experience of the taxpayer and the nature of the professional relationship between the taxpayer and the agent. In my view, if a taxpayer reasonably relies on a reputable accountant for advice in relation to the content of his tax return then he will not be liable to a penalty under Schedule 24."
"As discussed in recent email correspondence, a claim for [ER] has been made ... There is also a risk the that claim for [ER] could be denied by HMRC, either because the company has not been actively trading for a sufficient amount of time, or because of wide ranging anti-avoidance rules. Chis Smith called on 15 October 2018 and mentioned the company had only been owned from February 2016, which was less than 12 months to the date of sale in September 2016 - he therefore questioned whether Entrepreneurs Relief was correct or not. I explained there were pre-trade activities ongoing since September 2015, which met the 12 months test. Chris said he would be reading the disclosure wording on receipt of the tax return carefully and warned that any incorrect claim could result in penalties being charged."
"No formal written advice was provided to Mr and Mrs Moffat prior to filing their tax returns for the year. This was because we were in discussion with our clients in relation to the filing of the tax returns and were satisfied that (as set out above) a legitimate claim for ER could be made."
Conclusion
Decision
(1) We dismiss the Appellants' appeals in relation to ER.
(2) We allow the Appellants' appeals in relation to the penalties.
Right to apply for permission to appeal
Release date: 05th JUNE 2025