[2011] UKFTT 59 (TC)

TC00937

Appeal number: TC/2010/03253

INCOME TAX – deduction of mortgage interest – apportion to business purposes – not on facts – Appeal dismissed  

FIRST-TIER TRIBUNAL  
TAX 

	PAUL T STAVROU	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	TRIBUNAL JUDGE:         ADRIAN SHIPWRIGHT
				TRIBUNAL MEMBER:   ELIZABETH BRIDGE

Sitting in public at Holborn Bars, 138-142 Holborn, London EC1N 2NQ on 15 September, 2010

John Cotter CTA ATT of EA (UK) LLP for the Appellant

Michael Musgrove of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	This is an appeal by Mr Paul T Stavrou (“the Appellant”) against the Respondents’ (“HMRC”) Amendment to the Appellant’s Self Assessment and two discovery assessments made by HMRC. These were all issued on 27 November 2009.
2.	The details are as follows:
Year of Assessment	Nature	Amount of Tax
Due £	
2004-2005	Amendment to Self Assessment	1, 466.40	
2005-2006	Discovery Assessment	2, 218.88	
2006-2007	Discovery Assessment	1, 330.68	

The Issue 
3.	 The issue in this case is essentially whether the interest paid on the Birmingham Midshires Loan described below is part of the allowable expenditure of the Appellant’s trade and/or property business.
4.	We note that HMRC is not seeking penalties in this case.  There is no suggestion of fraud in this case.
5.	We are only concerned in this decision with the amount of tax due as a matter of law. The conduct of HMRC and/or the Appellant is not an issue for us.
6.	We remind ourselves that it is for the Appellant to prove its case ie the onus is on the Appellant.
The Law 
7.	Relief for interest is governed by the statutory rules for the computation of Trading and Property Income. These are essentially the same as section 272(1) ITTOIA headed “Profits of a property business: application of trading income rules” provides “The profits of a property business are calculated in the same way as the profits of a trade”.
8.	By section 25(1) ITTOIA “The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes”. This also applies to Property Income.
9.	By section 29 headed “Interest” “For the purpose of calculating the profits of a trade, interest is an item of a revenue nature, whatever the nature of the loan”.
10.	By section 33 headed “Capital expenditure” “In calculating the profits of a trade, no deduction is allowed for items of a capital nature”.
11.	However, by 34 headed “Expenses not wholly and exclusively for trade and unconnected losses” it is provided:
“(1)	In calculating the profits of a trade, no deduction is allowed for—
(a)	expenses not incurred wholly and exclusively for the purposes of the trade, or
(b)	losses not connected with or arising out of the trade.
(2)	If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade”.
12.	Income Tax Act 2007 ("ITA") makes provision for “Relief for interest payments”. Section 383 provides:
“(1)	A person who pays interest in a tax year is entitled to relief for the tax year for the interest if—
(a)	the loan on which the interest is payable is a loan to which a provision specified in subsection (2) applies,
(b)	the interest is eligible for relief in accordance with this Chapter, and
(c)	the person makes a claim.
(2)	The provisions are—
(a)	section 388 (loan to buy plant or machinery for partnership use),
(b)	section 390 (loan to buy plant or machinery for employment use),
(c)	section 392 (loan to buy interest in close company),
(d)	section 396 (loan to buy interest in employee-controlled company),
(e)	section 398 (loan to invest in partnership),
(f)	section 401 (loan to invest in co-operative), and
(g)	section 403 (loan to pay inheritance tax).
(3)	The amount of the relief given under subsection (1) is equal to the amount of the interest eligible for relief.
(4)	The relief is given by deducting that amount in calculating the person's net income for the tax year in which the interest is paid (see Step 2 of the calculation in section 23).
(5)	This section is subject to—
(a)	section 384 (general restrictions on relief under this Chapter),
(b)	section 385 (general provisions about loans),
(c)	section 386 (loans partly meeting requirements),
(d)	section 387 (exclusion of double relief etc), and
(e)	section 405 (carry back and forward of relief for interest on loans within section 403).
(6)	See also section 564O (under which this Chapter applies as if arrangements [to which section 564C applies were loans and alternative finance return were interest)”.
13.	This is subject to the “General restrictions on relief under section 384. This provides:
“(1)	Relief is not to be given under this Chapter for interest on a debt incurred—
(a)	by overdrawing an account, or
(b)	by debiting the account of any person as the holder of a credit card or under similar arrangements.
(2)	If the interest paid on a loan in a tax year exceeds a reasonable commercial amount of interest on the loan for the relevant period relief is not to be given under this Chapter for so much of the interest as represents the excess.
(3)	The relevant period is the tax year or, if the loan exists for part only of the tax year, the part of the tax year for which the loan exists.
(4)	A reasonable commercial amount of interest on the loan for the relevant period is an amount which, together with any interest paid before that period (other than unrelieved interest), represents a reasonable commercial rate of interest on the loan from the date it was made to the end of that period.
(5)	“Unrelieved interest” means interest which because of subsection (2) is not eligible for relief under this Chapter”.
14.	\There are similar rules for earlier years.
15.	The Taxes Management Act 1970 (“TMA”) gives HMRC power to make amendments to self assessments and to raise discovery assessments (see sections 9A, 28A and 29 TMA).
The Evidence
16.	We were provided with a volume of documentation.  This was an agreed bundle of documents. The documents were all admitted in evidence no objection having been taken to any of the documents.
17.	We heard oral evidence from Mr Stavrou
18.	A witness statement was provided for him and he was cross examined. 
The Facts 
19.	From the evidence we make the following findings of fact.
(a)	The Appellant carries on business as a sole trader selling fish and chips from his shop in North London. He derives trading income from this.  His wife assists him in the business but she is not a partner in the business.
(b)	There is a flat above the shop which the Appellant lets out. He has Property Business income from this in the form of rent.
(c)	The Appellant bought a house as his main residence in December 2008. The price was £332,000. Completion was on 10 December 2003.
(d)	This was done with the help of a mortgage (the Mortgage”) from Birmingham Midshires (“Midshires”);
(e)	The Midshires Offer Letter was dated 10 October, 2003.  It was addressed to poor and Marie Stavrou.  Marie Stavrou was the Appellant's wife.  The property details were given as the new property to be purchased at a purchase price of £332,000.  Almost £282,000 was directed to be sent to the purchasers’ conveyancer.
(f)	It was accepted that the main purpose of the Mortgage was the purchase of the house.  The appellant's representative also said that there was no business purpose likely to be mentioned on the application.  We agree that it is likely that only the business purpose was entered on the form. We were not shown a copy of the application form.
(g)	The Appellant had had business loans from NatWest Bank.
(h)	In September 2003 he had one loan from NatWest (“the Business Loan”) having consolidated two earlier loans.
(i)	 The Business Loan was repaid on 9 September 2003. After that date there was no Business Loan as it had been settled in full.
(j)	The Business Loan was discharged using money from the disposal of his earlier principal private residence.
(k)	The Appellant lived with his parents between the disposal of his earlier principal private residence and the acquisition of the house using the Mortgage from Midshires. 
(l)	EA associates acting for the Appellant explained the financing in their letter dated 7 August 2008 as follows:
						   “...   Business Loan		Home Loan
							£				£
		As 1 April 2003			105, 000		114, 073
		
		Sells main residence 						243, 000
		in August 2003
		
		Net cash in hand						128, 927
		
		Unforeseen delay in 
		buying new home therefore 
		bridging finance to business 	
		of £105,000							(105, 000)

		Net cash in hand						23, 927
		
		Purchases new home in December 2003			332, 000
		
		New loan (Dec 2003)			              		282, 000”.

(m)	Accordingly, the new house could not have been purchased without the mortgage finance.  There was no money used out of the Mortgage on that basis to finance the trade or property business.  Accordingly, it has not been shown that there was a business purpose element of the Mortgage and we so find.
(n)	The Certificate from Midshires showed: 
i.	The mortgage account was opened 9 December 2003
ii.	Interest of £15,095.86 was paid for the period ended 31 March 2005.
(o)	Deductions of interest were claimed against the income from the fish and chip business and the rental business for 2004-05, 2005-06 and 2006-07.
(p)	This was done on an apportioned basis. The interest paid on the Mortgage was apportioned on the basis that £105,669.75 of the amount borrowed was effectively a replacement of the Business Loan which had been discharged on 9 September 2003. The appropriate proportion of the interest was claimed. 
(q)	There was no evidence to support or corroborate this. As we have found above the offer does not mention any dual purpose
(r)	HMRC opened an enquiry in August 2006.
(s)	This led to the amendment to the self-assessment and the two discovery assessments mentioned above.

The Submissions of the Parties
The Appellant’s Submissions in outline
20.	In essence, the Appellant submitted that:
(1)	The amount borrowed from Midshires included an amount for business purposes. This amount in effect replaced the Business Loan;
(2)	The Appellant borrowed proportionately the same level of loan finance before and after the refinancing;
(3)	Accordingly, interest on the amount equivalent to interest on the Business Loan was deductible;
(4)	HMRC should supply statute and case law to the Appellant;
(5)	Accordingly, the appeal should be allowed.  Witness statement and timeline
HMRC’s Submissions in outline
21.  In essence, HMRC submitted that:
(1)	The Mortgage was for the purpose of buying the house as is clear from the Mortgage Offer;
(2)	The Mortgage was thus not for a business purpose in whole or in part but a private purpose
(3)	Accordingly, it was not deductible;
(4)	The Appellant had not discharged the onus of showing that the interest was deductible;
(5)	Accordingly, the appeal should be dismissed.
Discussion
22.  The issue for determination here whether the interest paid on the Midshires Loan described below is part of the allowable expenditure of the Appellant’s trade and/or property business.
23.  We have found that it has not been shown that there was a business purpose element of the Mortgage.
24.  We have found that the new house could not have been purchased without the mortgage finance.
25.  We have found that there was no business purpose element to the Mortgage and that the Mortgage was not a replacement for refinancing of the business loan.  .  
26For the sake of completeness we recalled that the Appellant raised two supplementary points. 
27.  The first was that the taxpayer was not notified directly within 30 days of HMRC's views under section 49B TMA.  This was because the letter although addressed to the appellant was sent to him at his agent's address.  It was corrected within 10 days.  We consider that this was covered by section 49B (5) (e) TMA as within a reasonable period.
28.  The second point was that the discovery assessments were made out of time.  We find on the facts that this was not the case here.  We consider 2005 – 06 falls within section 29 (5) TMA and that section 24 (4) using its peculiar sense of "negligent" covers 2006 – 07.  We find against the appellant on this supplementary points as well.
29.  We have found against the appellant on his main and two supplementary points. Accordingly we dismiss the appeal and confirm the amendment to the self-assessment and the discovery assessments.  The amounts due those set out in paragraph2 above.

30.  The Appeal is dismissed.

31.  This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

			

ADRIAN SHIPWRIGHT

TRIBUNAL JUDGE
RELEASE DATE:  18 JANUARY 2011