Trading or Investment?

    March 2015

    The case of Terrace Hill (Berkeley) Ltd provides a further insight into the distinction between trading and investment.

    This perennial question appeared again recently in the case of Terrace Hill (Berkeley) Ltd v HMRC [2015] UKFTT 0075 (TC). The taxpayer was involved in the development of an office property and the question arose whether this was a trading activity or an investment. This is a familiar issue. The tribunal said that the question was finely balanced, but ultimately found in favour of the taxpayer that the property was purchased as an investment.

    The issue was one of fact. When the property was acquired, was it intended to be retained as an investment? Or was it intended to be sold immediately for the best possible price?

    The facts were long and complicated, but the essential elements which persuaded the First-tier Tribunal that the acquisition was an investment and not trading were as follows:

    • the accounting treatment of the property was as a capital asset – and not as trading stock;
    • a claim for capital allowances had been made which could only have been possible if it was an investment;
    • the evidence before the tribunal was that, at the point of acquisition, the property was intended to be an investment;
    • the documentation was (mainly) consistent with an investment; and
    • the sale was motivated by a disappointing rental performance combined with an extremely attractive offer to sell.

    A disturbing feature of the decision is that HMRC sought to impose a penalty of £1m, on the grounds that by claiming the disposal was of an investment, the taxpayer was negligent.

    HMRC is presently consulting on the question of penalties and how the system can be improved. They should start here. The proposition that merely expressing a view contrary to HMRC’s view is deserving of a penalty looks rather extreme, but there is nothing in the judgment to indicate how this could be regarded as reasonable.

    Fortunately, the tribunal found that the taxpayer had not been negligent. Indeed, he had been quite correct, and the tribunal confirmed that even if he had been wrong, he had not been negligent in dealing with the matter in this way.

    This Article was first published in Tax Journal, Page 6 ,13 March 2015