In this case the First Tier Tribunal was asked to consider the extent to which rollover relief was available where a company sold a property where it carried on business and bought a replacement property which it traded from but where its directors also lived. The calculation of the benefit in kind figures for accomodation was also in point.

Background

The appellants in the case were threefold. Firstly, Pems Butler Ltd which carried on a trade consisting of the sale of kits for model buildings and the second and third appellants were the directors of the company.

The company had purchased a farm in 1990 (where the directors lived) but which it also used as its premises until 2000 when it was sold for £600,000. The company then bought a replacement property for £354,900 comprising a house, outbuildings and land. Again, the directors lived in the property and the trade was also carried on from here.

Under section 153 TCGA 1992, the company claimed rollover relief in respect of part of its gain on the sale of the farm. Other pertinent facts were that the directors paid the company £5,000 annually for their occupation of the premises; in effect they were licensees with no security of tenure. Council tax was paid on the property however, business rates were not. The District Valuer had apportioned approx.75% of the value to the house and 25% to the remainder.

HMRC opened an enquiry followed by a closure notice on the basis that 95% of the new property was used for non-trading purposes, so that only 5% of the purchase price (£17,745) qualified for rollover relief. The company appealed.

At that time the directors also appealed against assessments to income tax on the benefit in kind of accommodation at the farm from 2000–07. Whilst they accepted that they had received a taxable benefit, its computation was disputed. The company also appealed against the calculation of Class 1A NIC determinations in relation to the benefits of the accommodation for those years.

HMRC argued that the property was not used and occupied by the company for the purposes of its business within the meaning of sections 152, 153 and 155 of TCGA 1992 arguing that if there was an apportionment, there was no trade occupation of the house apart from an office room. HMRC also argued that only some part of the outbuildings could be said to be used for the trade.

Decision

The First-tier Tribunal (FTT) allowed the appeals in part.

Rollover relief

Under sections 152(1) and 155 TCGA 1992, for new assets to qualify for rollover relief two conditions had to be satisfied. First they had to be ‘used and used only for the purposes of trade’. Second they had to be occupied (as well as used) only for the purposes of that trade (there was no dispute in relation to the other conditions for rollover).

The FTT examined these conditions in detail and decided that to the extent that the granting of a licence to live in the house could be viewed as payment by the company to the directors for their work for the company, the house was used by the company for the purposes of its trade. The company used the house to provide the directors with consideration for their work for the company and not for another purpose. Thus the house was used the purposes of the trade.

However, the directors also occupied the house as their home but this was by virtue of a licence from the company and not because of any express term in their contract. Nor was their occupation essential to the performance of their duties. It followed that the directors were the occupiers of that part of the house other than the part used as an office, and that the company was not the occupier.

It was clear that the company was not the occupier of the fields for the purpose of its trade. However, the company was the occupier of the outbuildings which were used for the storage, packing and organisation of its sales. Those parts were used by the company as well as occupied by it as was the office in the house.

Furthermore, section 98 ICTA 1988 was not to be construed in the light of its association with the rollover regime for capital gains tax. There was no warrant for a restricted construction of its terms and therefore when looking at section 98(1)(b) the question was whether the company sold goods ‘on’ the premises. As a matter of ordinary language, the company ‘sold’ and thus that the test was satisfied.

Turning to look at section 98(1)(d), the premises were used for the purposes of the trade, at least in relation to the house and some of the outbuildings. Nothing was sold on the fields or in the bedrooms, kitchen or hall of the house or in the dilapidated buildings. The conditions were satisfied only in relation to the other parts. Therefore, section 156 TCGA 1992 and section 98 had the effect that only those parts of the house which were actually used for selling were to be treated as both used and occupied by the company for the purposes of its trade.

Although the company might have wished to sell the property for a profit in the future thus expecting that improvements would add to the value of the house, the main purpose in buying the house did not include a purpose to realise a gain on its sale. Therefore section 152(5) did not apply. Sections 152(6) and (7) related to assets which had been owned by a taxpayer and were disposed of by the taxpayer. They did not relate to new assets which were acquired by a taxpayer.

Section 152(11) allowed apportionment to the extent that the property could be divided into parts which were ‘assets in relation to which a claim under this section applies’. The parts, of the property which could support a claim under section 152 would be those parts which were both used and occupied for the purposes of the company's trade. Under sections 152 and 155, those parts had to be identified at the time of acquisition; at the time of acquisition only three outbuildings and the office room could be so identified.

It was therefore just and reasonable to apportion the consideration on the basis of the District Valuer's findings. The Valuer apportioned £86,000 to the outbuildings and fields therefore a just and reasonable apportionment of the consideration to the buildings used by the company would be £40,000. The Valuer apportioned £270,000 to the house. Of that, 10%, being £27,000 was apportioned to the office. This totalled to a claim under section 152 of £67,000.

Benefit in Kind

In relation to the benefit in kind calculation, HMRC calculated the taxable benefit by taking the District Valuer's allocation of the consideration to the house of £270,000, and using that figure (together with amounts spent on improvements) to calculate the additional value treated as being received by virtue of section 146 of ICTA 1988 and its successors.

To that they added the gross rating value and then subtracted the payment made to the company by the directors, a 5% deduction being applied for business use.

The FTT decided that the business use deduction should be 10% and that the amount paid by the directors should be deducted after the application of that deduction rather than before it.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j6140/TC01769.pdf