Hopscotch v HMRC - When is property development trading activity?

23 November 2020

The case of Hopscotch v HMRC was heard before the Upper Tier Tribunal (“UTT”) earlier in 2020 and the judgment has been published in November 2020.

The case deals with the question of whether or not a company was carrying on a trade of property development. The case was unusual in that it dealt with liability to the Annual Tax on Enveloped Dwellings (“ATED”) which applies where companies own UK residential property and do not fall into a relieving provision, which includes where the property is being held for trading/development purposes.  However, the decision provides insight as to how the matter might well be looked at in other situations, where one is seeking to establish that a company is trading such as Business Property Relief for IHT purposes and Business Assets Disposals Relief for CGT purposes.

The First-tier Tribunal (FTT) in seeking to establish the facts found as follows:

  1. A board meeting had taken place at which the redevelopment was discussed, however, the minutes did not record the profit that the expenditure was intended to produce, nor the expected expenditure itself.
  2. There were no trading accounts or business plan to show the level of profit to which the company’s redevelopment activity was expected to give rise.
  3. As it transpired, the redevelopment cost £1M rather than what had been estimated to be £2.75M. There was no paperwork explaining the rationale and implications of this on the project.
  4. The underspend was found in fact to have related to planning permission refusal.
  5. There was no contemporaneous evidence in the form of revised trading accounts, business plans or minutes of board meetings referring to the impact of that refusal on the cost of the redevelopment, the anticipated realisation value or the anticipated profit.
  6. The minutes of other board meetings of the company held during the redevelopment work lacked financial information

The conclusions drawn by the FTT were as follows:

  1. The failure to consider the expected profit and the anticipated costs was inconsistent with the conclusion that a trade was being embarked upon.
  2. Whilst BVI does not require annual accounts, there was an expectation that a trading company would draw up some financial statements. It had none.
  3. The absence of paperwork was found to tend to highlight the absence of the level of financial planning in relation to the redevelopment that would have regarded as distinguishing a trade from the taking of steps to maximise the value of an investment held on capital account.
  4. The change in the scope of the development was not documented. There was no paper trail. This appeared unlikely to be consistent with trading.
  5. The absence of financial information in board meetings minutes was inconsistent with what one would expect from a company carrying on a trade of property development.
  6. Further board minutes indicated concern with the nature and cost of the work which was being carried out but no more than that.
  7. The company had not registered for corporation tax or filed company tax returns. Whilst not definitive, this was further evidence of the absence of trading motive.

The Hopscotch case shows graphically, the importance of contemporaneous evidence and the importance of bringing forward that evidence upon challenge. The review of case law also draws attention to what happens when one is seeking to assert that what had been an investment had become a trading venture. Case law makes it clear for there to be a change in status, precision is required and it seems self-evidently that the tribunals were no convinced that such precision existing in the case of Hopscotch.

One of the lessons of Hopscotch is that it is vital to ensure that the evidence basis to back up the stance that you are seeking to put forward is robust, contemporaneous and accessible.

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