A recent case on ‘property trading’ has been won by taxpayers, but longer term, HMRC may be secretly cheering their own defeat because of the possible arguments it may give them on other future cases.
The case of Albermarle 4 relates to the classic dilemma of property dealing. Is it a trading transaction, taxable as income? Or is it a deal on capital/investment account to be dealt with under the capital gains tax regime? In many cases the facts point clearly one way or the other, but often, particularly where people have interests in a number of properties it can be unclear whether they are buying to hold, or buying to sell – especially as, for the right offer, virtually all commercial assets are for sale anyway.
The judgement in Albermarle 4 suggests that the decision was very finely balanced, with the taxpayer just about convincing the First Tier Tribunal that they intended to sell the properties on and trade them, rather than hold them long term. This meant that the resulting losses could be set against other income, producing a significant tax saving. This was despite the fact that the properties were shown as fixed assets on the balance sheet, rather than trading stock for resale which would have been a more conventional accounting treatment.
HMRC also lost on a subsidiary technical point on their powers which held that making an amendment to a partnership return to cancel a loss (which they purported to do) was not the same as making a ‘discovery assessment’ so they were ‘out of time’ in any event in terms of adjusting the earliest year of the enquiry into the taxpayers losses. Again this shows the importance of understanding properly which powers HMRC are purporting to use when they seek to make adjustments to a taxpayers self assessment. The rules are complex but do not give HMRC carte blanche to make amendments, especially outside the normal enquiry window. This is likely to be an important taxpayer defence in future, where stretched HMRC resources attempt to widen enquiries into more than 1 year. So far the courts seem to be willing to try to strike a balance between allowing HMRC powers to investigate whilst also protecting taxpayers by giving them the certainty regarding earlier years they were promised when self assessment was first introduced.
