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FTT Decision In Office Development Case
Wednesday 11th March 2015
The FTT has recently issued its decision in Terrace Hill (Berkeley) Ltd v HMRC which considered whether an office development was a trading or investment activity.
The Appellant was a special purpose vehicle formed to hold the Terrace Hill group’s 50% beneficial interest in a development of 16 Berkeley Street, Mayfair. The Terrace Hill group was a property development group, substantially owned at the time by the family trusts of the Chairman, Robert Adair. The group also held property investments. The development was undertaken on a joint venture basis with the other 50% interest being held by another SPV, Longford Business Centres (Berkeley Street) Limited (“LBC(BS)”) in a totally independent group, the Longford Group. When the freehold was acquired, it was acquired by a 50/50 company owned by the two respective groups, but that company was simply a nominee for the two beneficial owners.
When the property was acquired in August 2000, there were sitting tenants on the various floors but all bar one of the leases were due to expire at the end of December and the final lessee agreed or was persuaded to leave early. The redevelopment plan was to demolish the existing building completely and to replace it with a grade A office property in the desirable area of Mayfair. However, evidence given on behalf of both joint venture parties claimed that there had been little discussion between the two groups in relation to their long term intentions.
The decision in this case revolved around whether the FTT accepted the oral evidence advanced by the directors of the Terrace Hill group, or whether it accepted HMRC’s case, founded largely on the terms of the joint venture agreement entered into by the two groups, and other references in letters, emails and minutes of meetings said to support its case that the Appellant always intended to sell its interest in the property once its maximum value had been achieved, once the building had been both completed and fully let.
The FTT commented on the impressive evidence given by Adair and other witnesses and held that there was a consistent and credible thread to the Appellant’s case, in particular:
The strategy of building up retained properties with potential for rental growth and to produce a steady stream of rental income, to iron out the significant variations in profits of the pure development activity, appears to have influenced Adair and the group from well before the acquisition of 16 Berkeley Street, and to have been genuine.
It was accepted that with many development properties, that strategy would have been precluded by otherwise desirable, risk reducing, pre sale arrangements, or by the terms of joint venture agreements.
Where however, such factors did not preclude retention, it would appear obvious that it was even more appealing to retain high quality properties that had been developed, than to purchase fully-let investment properties. This is because such a retention, whether or not coupled with long term financings that facilitated equity release, would inherently avoid all tax in relation to the uplift in value consequent upon the successful development, and would also avoid transactions for stamp duty and SDLT purposes. In this context, HMRC’s attention to the advantages of capital allowances and indexation would only apply if the retention objectives were abandoned, and there would appear to be an even greater, and wholly unexceptionable, advantage to continuing the initial strategy, and o retaining a high quality developed property with the potential in Mayfair for rental growth.
The accounting treatment throughout confirmed the Appellant’s claimed strategy.
Until September 2004, no reference to any intention on the part of Adair indicated anything other than his continuing desire to retain 16 Berkeley Street.
The disappointing letting experience, the break clauses, the lower rents and the lower standing of some of the tenants to render the decision to sell at £39.4m to be a more than adequate reason to justify the change of plan, and the decision to sell.
The FTT accordingly allowed the appeal and held that the property was acquired from the outset and held as an investment.
The FTT also considered the imposition by HMRC of the penalty for filing a negligent return. This dropped away in the light of the decision but the FTT added that if its decision on the primary matter were to be overturned on appeal, it nevertheless considered that there was no neglect in the filing of the return, since the Appellant honestly and credibly believed that its case was correct, and that its return was also correct.
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