Helena Housing Ltd v Revenue & Customs Commissioners (TC00384) (2010)
A social landlord which not only rented out housing which a local authority had transferred to it, but had also performed refurbishment work on the housing on behalf of the local authority could not, for the purposes of corporation tax, deduct the expenditure incurred on that work from its rental income as it was not incurred in its rental business but in its business of providing services to the local authority.
The appellant company (H) appealed against the respondent Revenue's decision that it was neither entitled to a corporation tax deduction for expenditure it incurred on the refurbishment of its housing stock nor was it a charity from its inception with no liability at all for corporation tax. H was a registered social landlord and was run on a not-for-profit basis with its principal activity being the letting, management and maintenance of rented housing which a local authority (S) had transferred to it. Under the Housing Act 1996 s.2, a registered social landlord had to be either a registered charity, a society registered under the Industrial and Provident Societies Act 1965 or a company registered under the Companies Act 1985 which was non-profit making with defined objects. H chose the corporate option, although it later amended its memorandum of association with a new objects clause and registered as a charity. As the housing stock required a significant injection of investment, and thus a considerable amount of VAT would be incurred which H could not recover because the expenditure would be connected with its exempt supplies of rental income, H and S agreed a transfer scheme which took advantage of S's entitlement to recover VAT under the Value Added Tax Act 1994 s.33, which in turn enabled H to recover the majority of the VAT incurred on the investment programme. Under the scheme, S covenanted to perform the refurbishment works and H undertook to supply those works for £104 million from S. Since the value of the property was £29 million in its present condition, H paid £133 million to S for the housing stock. As a result of the transfer, H acquired the housing stock in an unenhanced, but habitable condition. It received rents which were treated as income under Schedule A for corporation tax purposes. The expenditure incurred on the refurbishment of the properties was regarded by H as a deductible expense against the Schedule A income, and it reclaimed the VAT element of the expenditure incurred as input tax. However, according to the Revenue, H's proposition that the refurbishment and transfer agreements could be used to determine the VAT status of supplies but not be applied to determine its corporation tax liability was contradictory and perverse. It maintained that on a proper construction of the agreements, H ran two businesses: a Schedule A business and a Schedule D business. The latter business related to the provision of services to S and the sums paid by H for the refurbishment works constituted expenditure incurred in that business, not in its Schedule A business of renting the housing. Alternatively, H contended that its profits from renting out the properties before it registered as a charity were exempt from taxation pursuant to the Income and Corporation Taxes Act 1988 s.505 and s.506 because its purposes were exclusively charitable, as its providing housing to tenants was for the benefit of the community.
(1) According to their agreements, H received consideration of £104 million for carrying out the development works and it paid £133 million to S for the transfer of the housing stock. Although the value of S's obligation to refurbish the housing stock was offset against the value of H's requirement to undertake those works, that provision did not deny the existence of a receipt in money or monies worth to H for performing the development works or the existence of the value of the H's payment to S for the transfer. The construction of the agreements did not support H's assertion that it paid consideration of £29 million for S's housing stock. H's receipt of £104 million was under Case I or Case VI of Schedule D. It was supplying building services to S which could not be classified within a business carried on for the exploitation, as a source of rents or other receipts, of any estate, interest or rights in or over land in the United Kingdom. Thus, it was running two businesses for tax purposes, its rental business and its sub-contracting business, which were respectively a Schedule A and a Schedule D business. The refurbishment expenditure it incurred was wholly and exclusively for the purposes of its Schedule D business and was not, therefore, allowable in calculating Schedule A profit under the 1988 Act. (2) H's foremost purpose of providing housing to tenants in R's borough conferred substantial private benefits, and the benefits to the community were subsidiary and remote. Accordingly, H had not been established for purposes which were exclusively charitable and was therefore denied from claiming an exemption from tax under s.505 and s.506. Housing provision was not a new social phenomenon, but there was no case which showed housing to be a charitable purpose unless connected with the relief of a specific individual need.