HMRC fails to satisfy the Tribunal that residential property purchased for a pension fund was "taxable property"
In J & A Young (Leicester) Limited and Others v HMRC [2015] UKFTT 0638 (TC) TC 04771, the First-tier Tribunal (FTT), has allowed the taxpayers' appeals and held that certain residential property acquired by a self-administered occupational pension scheme was not "taxable property", for the purposes of Schedule 29A, Finance Act 2004 (FA 2004).
Background
J & A Young (Leicester) Limited (the Company) operated a plastic recycling and reprocessing business, one of the sites relating to which was located in Loughborough. The site comprised a factory building (the Factory) and a large adjoining yard (the Yard). The operations in the Yard comprised unloading used plastic materials from lorries, sifting the plastic, baling and reloading the plastic which was then exported.
The J & A Young (Leicester) Limited Retirement Fund (the Fund) is a small self-administered occupational pension scheme registered with HMRC for the benefit of certain of the Company's employees. At all times relevant to the appeals, the Fund owned the Yard, but did not own the Factory. The Company acted as Scheme Administrator.
The Fund purchased a residential property (the Property) in Loughborough in October 2006. The Property is a three bedroom semi-detached house located about a mile away from the Factory and Yard in Loughborough.
The Property had been purchased to provide living accommodation for employees who were working in the Yard.
HMRC issued an assessment to the Company (as Scheme Administrator) to a scheme sanction charge, pursuant to sections 174A and 185A, FA 2004, and unauthorised payment charges were assessed on various members of the scheme under section 174A FA 2004.
The Law
Paragraph 6, Schedule 29A, FA 2004, provides that "residential property" prima facie is "taxable property" for the purposes of an investment regulated pension scheme under FA 2004.
It was common ground that the Property constituted "residential property" within paragraph 7(1)(a), Schedule 29A, FA 2004, because the Property was used "as a dwelling". The issue between the parties was whether any of the exclusions contained in paragraph 10, Schedule 29A, FA 2004, applied, so that the Property would fall outside the definition of "taxable property".
Paragraph 10 provides, so far as relevant, as follows:
"(1) Residential property is not taxable property in relation to a pension scheme if Condition A or B is met.
(2) Condition A is met if the property is (or, if unoccupied, is to be) occupied by an employee who …
c) is required as a condition of employment to occupy the property.
(3) Condition B is met if the property is (or, if unoccupied, is to be) …
(b) used in connection with business premises held as an investment of the pension scheme".
The FTT's decision
The issue before the FTT was whether the Property was "taxable property", for the purposes of Schedule 29A, FA 2004.
Condition A
The FTT accepted that the Property was occupied by the employees and also that in the material periods the Property was used only by employees who worked solely at the Yard. The only issue in dispute between the parties related to paragraph 10(2)(c) i.e. whether the employees were required as a condition of employment to occupy the Property.
Following a careful analysis of the relevant employment condition, the FTT concluded that
there was no requirement that the employees should occupy the Property and therefore Condition A was not met.
Condition B
The FTT considered whether occupation by the employees of the Property meant the Property was "used in connection with" the Yard, for the purposes of paragraph 10(3)(b).
In the view of the FTT, two propositions could be derived from the many authorities which had considered the meaning of the phrase "in connection with" in different contexts. First, the words "in connection with" generally have a very broad meaning. Secondly, the degree of connection – the remoteness, proximity and type of connection required by the use of that phrase in a particular statute, must be identified from the particular statutory context in which it is used.
In the view of the FTT, the fact that the Property was acquired for the purpose of providing accommodation for employees working in the Yard and was used solely by such employees for that purpose (there was no element of personal use or benefit to members of the Fund or persons connected with them), was sufficient to establish the nexus that Condition B requires in order to be satisfied. The FTT therefore concluded that the use of the Property to provide accommodation for the employees working in the Yard was a sufficient connection for the purposes of paragraph 10(3)(b), and allowed the appeal.
Comment
The FTT has provided some helpful guidance on the approach to be taken when considering whether Conditions A or B are met. The FTT noted that there was no artificiality or manipulation involved in the arrangements, and this may have influenced the approach adopted by the FTT in arriving at its conclusion.
Given the FTT's findings of fact, there would appear to be little prospect of HMRC successfully appealing this decision should it decide to appeal to the Upper Tribunal.
For the full judgment click here.