IHTM25275 - Caravan sites and furnished lettings: Lettings of commercial premises

These may tend to be the most clear cut type of ‘investment’ cases as written tenancy agreements - detailing both the landlord’s and the tenant’s obligations - may exist and there may be little other activity on the part of the landlord.

HMRC has taken the following case involving commercial premises to the Special Commissioners whose decision here (and in the Burkinyoung ( IHTM25276) case) has equal application in other lettings cases.

Martin & Horsfall (Executors of Violet Moore deceased)-v- CIR (1995) SC2

At her death in 1991, Mrs Moore owned a site on which several industrial units were erected. Since the 1960s she and her husband (who died in 1989) had let the units on three year leases to various businesses. The activities carried out by Mr and Mrs Moore (she continued after his death) were listed as:

• exterior repair and maintenance (including repairing walls, unblocking drains and gutters)
• exterior decoration
• maintenance of common areas (sweeping up litter, trimming hedges, resurfacing tarmac, maintaining toilet areas)
• maintaining the heating system for the site
• policing common areas (sorting out parking and rubbish problems)
• advertising for and interviewing prospective tenants
• negotiating renewal of leases
• dealing with tenants’ complaints.

Mr and Mrs Moore were extensively and personally involved in these activities often undertaking painting, removing rubbish and maintaining the heating themselves and frequently visiting the site.

We:

The Revenue conceded (a) before the hearing. So (b) was the sole issue for the Special Commissioners.

The Special Commissioner held that the operations carried on by Mrs Moore were the owning of freehold premises; those operations were conducted by:

• seeking and choosing tenants
• granting and renewing leases
• complying with the specific landlord’s covenants
• managing the premises.

The gain obtained was the “net rents and nothing else”.

The Special Commissioner decided that a business in fact existed; he said Mrs Moore

“... conducted a continuing activity on what seems to have been sound business principles and in a manner characteristic of commercial landlords of like properties. Those features, I think, elevate her activities from mere ownership or mere investment into a business ...”

However, he did not accept the executors’ argument that the extensive personal active involvement by Mrs Moore made the business more than just holding investments:

“There is no necessary implication in the words of section 105(3) that the expression “business of holding investments” is to be confined to the passive investment of property such as long leases managed by managing agents. To imply that is to narrow the scope of the words of exclusion to a point that is not in line with their ordinary meaning. It leads to the result that activities which could reasonably be described as incidents of investment holding, such as the active, efficient and energetic management of the reversion, have to be left out of the investment holding side of the equation in determining whether the business can properly be described as wholly or mainly of making or holding investments. In line with the principle that the words of a relieving provision should not be given a generous construction, it follows that words of exclusion found, as here, in the relieving provision should not be given an unnaturally restricted meaning.”

In applying the principle in Fry -v- Salisbury House Estate Ltd 15 TC 266, that a distinction can be drawn between the activities of a landlord which he assumed under the lease and those which are separate from the land-owning part of the business, he stated:

“The activities which a landlord carries out because he is obliged to under the lease are incidents of the tenancy and so fall on the “holding investments” side of the equation. The business activities, if any, carried out by the landlord for gain and which are not required by the lease fall on the other side of the equation. The activities carried on by the landlord which are not required under the lease and for which he receives no separate consideration will fall on the “holding investments” side of the equation if they are connected with and incidental to the holding of the property as an investment.”

In applying this to Mrs Moore’s business he found that:

“...active though [her] business was, none of the activities.....were concerned with anything other than the making or holding of investments.....they were all part and parcel of the business of making or holding investments.”

and dismissed the executors’ appeal accordingly.

It can be successfully argued therefore that many of the activities carried out purporting to be services are no more than the normal obligations of a landlord, particularly if the activities are prescribed obligations under a tenancy agreement.