BIM37725 - Wholly & exclusively: duality of, or non-trade, purpose: remuneration, etc: loss on sale of property used as a temporary residence by employee
Intention to retain for short period does not convert capital into revenue
The acquisition or disposal of a property used by an employee
will normally be on capital account. The costs of acquisition or
disposal and any profit or loss will also be on capital account. It
does not matter that the taxpayer can show that the expenditure was
necessary in order to attract and/or retain a valuable employee. It
does not matter that the property is only intended to be held for a
short time.
A partnership’s claim to deduct the loss suffered on
sale of a property used as a temporary residence by an employee was
refused in the case of Owen & Gadsdon v Brock [1951] 32TC206.
The taxpayers were partners in a firm of solicitors as
solicitors. One of the partners was anxious to ensure the continued
service with the firm of a valued employee. He arranged to have a
bungalow built for occupation by the employee, and he also bought a
house for occupation by the employee until the bungalow was
completed. The partners agreed that the purchase should be a
partnership venture. The house was sold at a loss, when, after
about 18 months, the employee moved into the bungalow.
The acquisition of the house was dealt with in the private
ledger of the partnership under the heading ‘temporary
housing account’. The partners' fixed capital under their
partnership articles was not used to pay for the house. The money
was obtained out of the partners’ undrawn profits. When the
bungalow was paid for the partners increased their fixed capital by
the amount of the cost of it (£1,358) and their capital
accounts were adjusted accordingly.
On appeal to the taxpayers claimed that the loss, together
with the expenses of purchase and resale of the house, was
allowable as a deduction in computing the partnership profits. The
Commissioners held that the deduction was inadmissible.
Wynn-Parry J that the Commissioners' decision was correct,
the purchase and sale of the house being on capital account. The
finding of fact that the property had been purchased solely for the
purposes of retaining the services of an employee was insufficient
to allow a deduction. The expenditure on the bungalow was a capital
nature. The argument that the expenditure on the house assumed a
revenue character because it was only intended that the house
should be held for a very short time, namely, until the bungalow
was completed did not displace the capital nature of the
transaction.
For those who do not have ready access to tax case volumes,
the part of Wynn-Parry J’s judgement on which the above
guidance is based is set out below (page 209):
In my judgment there is a short answer to this appeal. It is true there is a finding that the expenditure on the acquisition of the house in question - that is the semi-detached house - was incurred solely for the purpose of retaining the services of Mr. Sheldon [the valued employee], and that it was necessary to make the purchase of the house for that purpose. That finding of course is not of itself sufficient to entitle the Appellants to succeed. The question remains - is that expenditure to be treated as a capital expenditure or as a revenue expenditure? Prima facie the expenditure, being made in the purchase of a house which was intended to be let to the clerk, Mr. Sheldon, has the character of a capital expenditure. It is not for one moment contended that the expenditure on the bungalow could be regarded as otherwise than that of a capital nature but it is said that the expenditure on the house assumes a revenue character because it was only intended that the house should be held for a very short time, namely, until the bungalow was completed. That does not appear to me to be sufficient to displace the prima facie capital character of the expenditure. The partners retained a complete volition in the matter. If the bungalow for some reason had not been completed, then no doubt, to achieve the purpose for which they bought the house, they would have continued to hold the house. Indeed, even if the bungalow had been completed they might still have decided to retain the house and to sell the bungalow.
Therefore it appears to me that, in short, this is clearly a case of a change of capital investment,…
