The first tier tribunal has given HMRC a bloody nose, allowing an appeal arguing that a company’s accommodation for foreign employees cannot be classified as a residential property.
J & A Young is a Leicester-based plastic recycling and reprocessing business. This case [J & A Young v HMRC] concerned one of the company’s sites in Loughborough. The site comprised of a factory and a large adjoining yard.
The company administrated a retirement fund. HMRC slapped J & A Young with hefty scheme sanction and unauthorised payments charges. The appellants were questioning these charges in relation to a property that was bought to house foreign workers.
According to the tribunal judge it was common ground that these appeals turned on the question whether a residential property in Loughborough purchased by the fund on 19 October 2006 was “taxable property” for the purposes of schedule 28 FA 2004.
In testimony, the owner of J & A Young explained that his company began to recruit in Eastern Europe after struggling to find UK employees to do outdoor manual labour. To accommodate their foreign workers, it bought a three bedroom, semi-detached house within a mile from its Loughborough site. The foreign employees’ employment contract required them to live at this address, for which they payed £50 a month.
In his summary, the judge stated “There was no evidence that anyone other than Polish employees or that any persons who worked otherwise than in the yard occupied the property in the periods material to these appeals”.
The company’s retirement fund is an “investment-regulated pension scheme” for the purposes of paragraph 2 Schedule 29 A FA 2004 i.e. it is a pension scheme with 50 or fewer members where the members (or connected persons) can influence the fund's investments.
As explained in the summary, if an investment-regulated pension scheme buys and retains “taxable property”, three distinct charges become relevant:
An investment-regulated pension scheme is treated as making an unauthorised payment (and also a scheme chargeable payment) if it acquires an interest in taxable property (section 174A FA 2004). This results in a charge to income tax on those members for whose benefit the taxable property is held.
An investment-regulated pension scheme is treated as having made a scheme chargeable payment to the members of the scheme if the pension scheme holds taxable property in a tax year (section 185A FA 2004).
Where a registered pension scheme makes, or is deemed to make, either of these scheme chargeable payments, there will also be a "scheme sanction charge" on the administrator of the scheme (i.e. the company) (FA 2004).
Paragraph 6 schedule 29A FA 2004 provides that "residential property" is taxable property. Paragraph 7 Schedule 29A defines residential property as including "a building that is used or suitable for use as a dwelling…." It is common ground that the property constituted "residential property" for these purposes, subject to the provisions of paragraph 10 schedule 29A.
One of the conditions of paragraph 8 reads “A home or other institution providing residential accommodation for children” is excluded from the definition of residential property. Residential property is not taxable property in relation to a pension scheme if these conditions are met. Another condition is if the residence is for students.
The first condition can be met if “the property is (or, if unoccupied, is to be) occupied by an employee who is neither a member of the pension scheme nor connected with such a member, is not connected with the employer, and is required as a condition of employment to occupy the property”.
The second condition is met “if the property is (or, if unoccupied, is to be) occupied by a person who is neither a member of the pension scheme nor connected with such a member, and used in connection with business premises held as an investment of the pension scheme”.
J & A Young appealed HMRC’s charge on these two grounds. The tribunal judge rejected the appeal on the first condition, but decided that the second condition was satisfied and that the appeal should therefore be allowed.
“The property was used for this purpose, and for no other purpose, and was used only by such employees. There was no element of personal use or benefit to members of the fund or persons connected with them. Finally, there was no artificiality about or manipulation involved in these arrangements. In our view, this establishes a sufficiently direct nexus (“connection”) between the use of the property and the yard. We therefore consider that condition B was satisfied.”