Revenue 2: Heads of Income tax

Revenue Law
Tutorial 2

1. Which statutory charges to income tax apply in the following cases?

a) T1 has let a block of 6 furnished apartments she just purchased as an investment to groups of students.  The rents include a charge in respect of cleaning services.

Background:

• Van den Berghs v Clark: income is not statutorily defined, each case found upon own facts

Windfalls are not income:

• Graham v Green: winnings on horse betting is not income, even if TP made a living out of this, because losers would be able to set losses against income.
• Peter’s Executors v IRC: repeated gifts/allowances to wife not income
• Down v Compston: made bets on own golf sessions, not income
• Partridge v Mallandaine: profits of bookmakers are income
• Burdge v Pyne: card room in night club calculated to generate revenue, so income

Prizes:

• Norman v Evans: usually not income, but here breeder leased horses on contract condition that winnings are split. Held to be income from a one off business venture.

Application

Income is taxed by different rules according to its source, rules attached to each source form a comprehensive and exclusive code (Mitchell v Ross).

Tax year from 6th April to 5th April (s4 ITA 2007).

• s268 ITTOIA 2005: “income is charged on the profits of a property business”. Here income is from rental of furnished apartment.
• S264 (b): includes a ‘one off’ transaction for the purpose of generating income from land, so term ‘business’ is not absolute.

Cleaning services:

• Griffiths v Jackson: if charge for profits can be apportioned out, this would be trade income
• Fry v Salisbury House Estate: separately charged and apportioned out
• Are these standard services?
• E.g. Cleaning communal areas would be standard, but cleaning inside apartments would be separate.
• HMRC PIM4300: draws the line at ‘services beyond those normally provide by the landlord’

Furnished lettings

• HMRC practice is to treat furnished lettings as wholly land income, unless under s308 ITTOIA they arose out of the course of a separate business.
• Eligible for Rent-a-Room Relief under Part 7 Chapter 1?

(b) T2 has let a house she has just inherited from her late mother to a group of students for one term unfurnished, while she looks to sell it.

• Any renting out of land is deemed to be a property business under s264(b)
• S266: income from exploiting any interest in land, freehold or leasehold (i.e. includes rent) falls under ‘land’ and not ‘trade’ income.
• Residential occupation ➔ Part 7 Chapter 1 ITTOIA 2005 allows tax free rentals of up to £4200 per year, or £354 per month. (due to rise to £7,500 in 2016-2017 tax year)

(c) T3 owns a town centre hotel.

• s268 profits of a property business (yes)
• s264(a) a business generating income from land (yes)
• But can be exception under s10 ITTOIA 2005 for commercial occupation of land.
• Webb v Conelee Properties: requires the T’s physical presence, absent ownership is not enough, but presumably presence through employees or agents within business hours is sufficient. Thus a business in commercial occupation of the premises.

2.  T owns a car park with mechanical entrances and exits, and no attendants.  Under which charge will receipts from the car park be subject to income tax?

• Fees for parking is prima facie renting out the use of land, so this could be a land income charge under s268 (or income from exploitation of freehold in land s266). Whether it be a lease or license, would come under profits of a property business.
• S10: unlikely
• No physical presence of staff (Webb v Conelee)
• However, this rule was not legislated with mechanical control in mind, so ruling could be different now

Would it make any difference if the car park was manned by attendants 24 hours per day?

Park manned by attendants 24/7, if they are employees or agents of the taxpayer then this would be a trade receipt, we move on to consider ‘trade’ income.

• This could fall under a ‘trade’ by s5 profession income charge, or employment income under s1 ITA 2003.
• s989 ITA 2007 defines trade as ‘any venture in the nature of trade’
• Griffiths v JP Harrison (Watford) Ltd: trade is an ordinary English word.
• Ransom v Higgs: trade is the exchange of goods or services for reward.
• Edwards v Bairstow: even a one off deal can be trading as long as falls under s989

Here parking time is exchanged for a reward. However, consider the following alternatives i) employment – working in a post in someone else’s business, ii) profession – providing services in own capacity as an intellectual, iii) vocation – a residual category for the rest. Rental of parking lot does not fall within any of these 3.

Re Duty on Estate of Incorporated Council of Law Reporting for England and Wales: there need be no profit motive, but Grove Surveyor v YMCA held that the trade must at least have a commercial basis. Deliberate loss for religious motives do not count. There is no problem with that here.

3.  T, a lawyer, while on holiday abroad came across 1,000 pairs of Reebok shoes being offered for sale at £100.  He bought the shoes and brought them back to England.  Within 6 weeks he had sold the shoes in one lot to a market trader at a profit of £3,000.  Explain T's tax position, both in respect of his earnings as a lawyer, and in respect of this particular transaction.

S5 2005 Act, income tax is charged on the profits of a ‘profession or vocation’.

Earnings as a lawyer fall under Ransom v Higgs classification: “a profession, providing services in own capacity as an intellectual”, unless TP is employed it would be employment income.

• IRC v Maxse: profession is providing intellectual services, or manual services controlled by intellect, provided T is not employed.

Sale of shoes

• Christopher Barker & Sons: people who buy and sell are traders, no matter if their work is intellectual or not.

Trade or capital gains? Latter has lower rates

• Venture in the nature of trade, Ransom v Higgs buying and selling for a profit
• Can be a one-off purchase (Edwards v Bairstow) and s989 ITA 2007.  However, EvB was a borderline case, as the car as kept for one year. Sale after only 6 weeks seems to lean towards this being a trade.

The decision of a tribunal would be final, unless it was unreasonable or the law was wrongly stated.

Simmons v IRC: income and capital gains are mutually exclusive

Badges of trade: Marson v Morton and other borderline cases:

• Nature of subject matter: 1000 pair of running shoes does not look like something to be used, nor property to be invested in (IRC v Rutledge, IRC v Fraser)
• Isolation: an isolated transaction is more likely to be a trade
• Relation to T’s ordinary business: none (Kirkby v Hughes)
• Intention: the longer T holds on to property, the more it is likely the transaction is an investment. Simmons v IRC (intention to trade, quick sale does not prove intention to trade, change in intention can change status, and change must be clearly proven).

Other points to remember:

• Intention:  Kirkham v Williams – intent can be a subsidiary purpose, contingent to a condition, only capable of being realised in the future.
• Taylor v Good it is easier to prove intention to trade forms later
• West v Phillips – but then again this must be clearly proven
• Effect of intent change: income tax profit = sale price – asset market value at date intention was formed  (s172C ITTOIA if T has traded with same asset in the past)(Sharkey v Wernher if transfer was out of business).
• Any benefit other than profits points away from trade…

4. T, an antiques dealer, bought a set of 8 antique chairs.  He placed 4 in his own dining room at home, intending to keep them there to satisfy his personal love of antiques.  The other 4 he placed for sale in his shop.  Two year later, the chairs in the shop having not yet been sold, a customer expressed interest in them.  The customer said that if T could supply 8 of these chairs, rather than just 4, he would be prepared to pay a very generous price.  After some negotiation, T decided to sell the chairs in the shop together with the chairs at his home for ten times what he had originally paid for them.  Analyze T's tax position.

Christopher Barker and Sons: people who buy and sell are traders, no matter if their work is intellectual or not.

• Simmons v IRC: no intention to trade when T first acquires assets, but there can be a change in intention. This needs clear proof. The fact that someone decides to sell something does not prove a change of intention.

People can decide to sell as capital assets, here the Taxpayer sold after a good offer, could just be selling a capital asset. Anything else to demonstrate a change of intention?

• T has adopted first 4 chairs into his business, forming intent to trade. He has brought items into the shop, and issued a shop receipt.

Income tax profit = sale price – market value of asset at the date of decision to trade.

It would be advisable to prolong the period of ownership of 4 chairs placed at home. Any increase in value of asset is a capital gain, so T should try ot apportion as much as possible to time before asset was adopted into the business.

• Offer made ➔ prompted him to sell ➔ formed intention at that moment ➔ thus there is no trading profit. Zero income profit, the increase can be apportioned to capital gain.
• HMRC may argue that market value of each chair in a set of 4 is lower than that in a set of 8, the increase would be trading profit.
• Taxpayer may make a self-assessment. If HMRC disagrees, they may issue their own assessment. Taxpayer may exercise the right to appeal to FTT, but further appeals only allowed on a point of law (here a factual dispute).

5. T is a professional tennis player.  Which charge to income tax will apply?

• Not intellectual enough for a profession, so the sweeping charge of ‘vocation’ applied.
• Down v Compston: professional golfer was held to be a vocation. Was not a ‘professional’ in tax sense, and not intellectual enough for a trade.
• However, tax rules regarding both ‘profession’ and ‘vocation’ are identical (s5 ITTOIA 2005), so there is no practical difference.

Could also be an employment charge if T is working under a club/employment contract.

Must demonstrate that all 3 options has been considered for a good answer.

6. T is a doctor in private practice.  For a number of years he has held directorships on the board of five drugs companies, which appointed him for his medical expertise.  Under which charge to income tax will his director’s fees fall?

Director’s fees

• s4 ITEPA 2003 a charge to any employment under a ‘contract of service’
• Employment income charge is extended to s5 ITEPA 2003 to holding an office charge, for instance where a person works for an organization but is not .

Problem, is this a ‘contract for services’ or ‘contract of service’. If the former, it would fall under trade, profession or vocation (most likely profession).

• Hall v Lorimer, not an employee if providing service on his own account
• Contrast cases of Davies v Braithwaite (actress engaging in many contracts was a professional) , and Fall v Hitchen (dancer taking permanent post was employee). T held directorship in 5 different companies so likely that he is acting in a profession under s5 ITTOIA.
• But Sidey v Phillips an engagement can be employment even if it is short term and part time.

However, may in fact be an ‘office’ for his prestigious position (Great Western Railway Co v Bater) referring tos5 ‘position with existence independent of person and can be filled by successive holders’.

• Permanent existence, but need not be absolute (Edwards v Church). Need only have some degree of duration, and possibility that a successor might be appointed.
• Taylor v Provan – it is the post that need a successor, not the job done in that post.
• Edwards v Clinch directorship is an office even if it was created for someone uniquely qualified, as long as directorship can be passed on to someone else regardless of what job they were doing.

   One of the companies has recently asked T to stand down in favour of another candidate, offering T a single payment of £30,000 "as compensation for the loss of income from the directorship over the next three years".  Advise T of the income tax consequences of accepting.

Termination payment. Is employment/office as an asset of trade?

Blackburn v Close Brothers: in the case of TP having his own business (here private practice), when they take office, that office is an asset of their profession. Therefore when the TP is paid to give up that office, the money belongs to his medical practice (capital), and is not earnings. Taxed under s5 ITEPA 2003.

If not classed as a business asset, then termination payment falls termination payments under Part 6 Chapter 3 ITEPA 2003.

• First £30,000 exempt.
• T will want to argue that this is not a business asset.

IRC v Brander and Cruikshank:

• Did T deliberately in the course of business set out to acquire the post? (as opposed to post incidentally acquired). If yes, would be a business asset.
• Thus if T advertised himself, then it could be said that he deliberately set out (e.g. headed paper, brochure about himself). If T was approached in a conference and offered a job, then this is not an asset.

T has 5 directorships, so it is unlikely that he has been incidentally appointed. He has set out to acquire them so £30k exemption does not apply.

7. Over the past decade T, a socialite, has partied with many famous stars.  During this period she has kept a detailed diary of her experiences.  She has now entered into a contract with a tabloid newspaper whereby she is to write a series of 10 weekly articles for the paper, based on the diary, and she is to receive £10,000 on the publication of each article.  To protect itself against legal action, the newspaper has inserted a term into the contract whereby the diary, and all rights in it, became the property of the newspaper from the date of the agreement.  Advise T of the income tax consequences of the contract.

Writing 10 articles:

• T is not a professional under s5 ITTOIA 2005.
• This does not look like an employment charge under s4 ITEPA 2003. Is there a designated job title or job description for the post? No, and it looks like T is writing in her own time.

Otherwise, s687 ITTOIA 2005 income not taxed under any other charges apply (sweeping up).

• Ryall v Hoare: can be an isolated  provision of services
• Brocklesby v Merricks: must be a legal obligation to pay for the isolated matter. There must be a contract (satisfied).
• Hobbs v Hussey: distinguishes provision of services to sale of property, which would be profit from a trade. The courts are to look at the substance of the transaction.
• Jones v Leeming: an isolated purchase resale of property cannot fall within s687. This is a capital profit, not income. (does not apply here).

Payment for the sale of property? Or provision of services?

• Could be a capital receipt – sale of property/value of diary
• Courts (Hobbs v Hussey) you have look at the substance of the transaction. Here the transfer of legal rights in the diary is simply a legal precaution, the main substance is writing. Thus s687 applies. Sale of property would have been a trade.
• Haig (Earl) Trustees v IRC: main substance with publishing rights of the diary, so a capital receipt.

Here Hobbs apply.