NATIONAL
INSURANCE CONTRIBUTIONS – landlord – whether carrying on business and therefore
a self-employed earner – no
THE
SPECIAL COMMISSIONERS
IRSHAD
MAHMOOD RASHID - Appellant
- and -
M. GARCIA (STATUS INSPECTOR) -
Respondent
Special
Commissioner: DR JOHN F AVERY JONES CBE
Sitting
in public in London on 3 December 2002
John
Antell, counsel, for the Appellant
John
Cormack, Area Director, Tees Valley Area, Inland Revenue, for the Respondent
©
CROWN COPYRIGHT 2002
DECISION
- Mr
Irshad Mahmood Rashid appeals against a decision of 29 April 2002 that "Mr
Rashid was not an earner for the period from 29 June 1997 to 29 April 2002."
The Appellant was represented by Mr John Antell and the Inspector by Mr John Cormack.
- The
issue is whether the Appellant is a self-employed earner for class 2 National
Insurance purposes.
- Section
2 of the Social Security Contributions and Benefits Act 1992 defines two types
of earner: employed earner and self-employed earner as follows:
"(a)
‘employed earner’ means a person who is gainfully employed in Great Britain either
under a contract of service, or in an office (including elective office) with
emoluments chargeable to income tax under Schedule E; and
(b)
‘self-employed earner’ means a person who is gainfully employed in Great Britain
otherwise than in employed earner’s employment (whether or not he is also employed
in such employment)."
- There
is an inclusive definition of employment in section 122(1):
"‘employment’
includes any trade, business, profession, office or vocation and ‘employed’ has
a corresponding meaning."
It
will be seen that, in contrast to income tax, there is a reference to "business".
The Appellant is not an employed earner. The issue is whether he is a self-employed
earner, which turns on whether his property activities constitute a business.
- The
Appellant gave evidence. I find the following facts. He has income from the letting
of four properties. He started a retail business in 1977 but from 1992 to 1995
his only income was from property. He started a taxi driving business in 1995
but had to give that up when he suffered a heart attack on 29 June 1997. Owing
to his poor health (his condition includes pituitary failure and schizophrenia)
he received Invalidity benefit from 1997 based on his Class 2 National Insurance
Contributions. This ceased when he started a term of imprisonment from 26 November
1998 to 27 March 2000. On his release he claimed Incapacity Benefit. This was
refused on the ground that he had not paid sufficient Class 2 contributions in
1997/98 and 1998/99. He then paid Class 2 contributions saying that he was dong
so in order to qualify for Incapacity Benefit. Initially this was accepted by
the Respondents but in a letter dated 9 November 2000 they gave an opinion that
the Appellant’s property rental activities did not entitle him to pay Class 2
contributions which were not validly made after 29 June 1997. Later, the opinion
was followed by the Notice of Decision appealed against.
- The
Appellant’s property income began in 1984 and continued throughout the period
of his imprisonment. He was returned the following assessable income from property:
years ended 5 April: 1998 £6,489; 1999 £7,750; 2000 £9,208; 2001 £10,942. Of the
four properties, one has three rooms for residential letting (there are a further
two rooms but these are used for storage), another property has one commercial
and one residential tenant, and two properties have a single commercial tenant.
The residential tenants can be those introduced by the DHSS who tend to stay for
only a few weeks, or students who stay for one or three terms. The specimen tenancy
agreement I was shown was for one year. I was not told about the length of leases
of the commercial tenants but I assume that these are longer term. The Appellant
gave witness statement and a further statement setting out in great detail all
the work he does. These include making arrangements where things go wrong with
the central heating, hot water, furniture, alarms, appliances. For new tenants
advertisements have to be drafted, credit checks are made on prospective tenants,
inventories have to be made and checked, the tenancy agreement drawn up, rent
has to be collected, the property inspected, common parts are cleaned and the
garden maintained. Legislation now requires that gas and electrical equipment
is checked annually and there are many other obligations now imposed on landlords.
He estimated that he spent 2 to 4 hours per week on average personally and because
his ill-health prevented him for working, more time was spent by members of his
family, which he estimated at 16 to 24 hours per week on average. Mr Cormack conceded
that the family’s activities could be attributed to the Appellant as they were
working as his agent.
- Mr
Antell in a helpful skeleton argument referred me to a number of authorities on
different legislation where business had been relevant. First, American Leaf
Blending Co v Director-General of Inland Revenue [1979] AC 676, a Privy Council
appeal from Malaysia in which a company had closed down its former tobacco business
and let its warehouse to three successive tenants and let the factory to a tenant,
followed by negotiations for letting both to a single tenant:
"The
carrying on of ‘business’ no doubt, usually calls for some activity on the part
of whoever carries it on, though, depending on the nature of the business, the
activity may be intermittent with ling intervals of quiescence in between."
- The
issue is Jowett v O’Neill and Brennan Construction Ltd [1998] STC 482 was
whether a company which had discontinued its trade and placed funds in a bank
account in October 1994 followed by closing its current account and adding to
the deposit in May 1995, receiving interest and paying corporation tax, was an
associated company for the small companies rate of corporation tax or whether
it was ignored as not having carried on any trade or business. It was held that
it was a case of the latter as the bank deposit did not amount to the carrying
on of business. Mr Antell contended that placing money on deposit was not "investment"
and therefore not a "business". My reading is that while the deposit
may have been an investment the company was not carrying on an investment business.
The Special Commissioner had found that it was not carrying on the business of
investment without actually saying that it did not carry on business, which Park
J held was implied.
- Mr
Antell also referred to Griffiths v Jackson [1983] STC 184, concerning
a partnership owning 11 properties let as furnished flats which was a business
but not a trade. In it Vinelott J said of Fry v Salisbury House Estate Ltd
15 TC 266 that all members of the Court of Appeal recognised that a landlord
who lets out a number of properties, or parts of a property can be fairly described
as carrying on a business. Slesser LJ observed at 301:
"As
it seems to me, every landlord who lets out habitually more than one house, or
part of a house, may be said to be carrying on a business…."
It
should be remembered that Fry v Salisbury House concerned a large office
block.
- There
are numerous other examples of the use of the expression "business"
which I was not shown, for example partnership law and VAT. It is accepted in
VAT that virtually any letting is in the course of business, but this must be
read in the light of the provision of the Sixth Directive that "the exploitation
of tangible or intangible property for the purpose of obtaining income therefrom
on a continuing basis shall also be considered an economic activity" (or
business, in UK law). Another source is the former excess profits duty which depended
on "trade or business" where Rowlatt J defined "business"
as "an active occupation or profession continuously carried on" (IRC
v Marine Steam Turbine Co Ltd 12 TC 174, 179) which was described as being
too narrow a definition by Atkin LJ in IRC v Korean Syndicate 12 TC 181,
205.
- Mr
Cormack urged me to be cautious in applying cases on other legislation. He referred
me to one decision of the Social Security Commissioners CP129/50 in which they
decided that a retirement pension did not fall to be reduced by reason of earnings.
The claimant owned four buildings each with a caretaker who cleaned the common
parts. The Local Tribunal treated him as employed in the business of a lodging
house proprietor. He performed no services or other work personally. It was held
that he was not employed in the business of a longing house proprietor, applying
a previous decision in which it was held that "a gainful occupation is one
in which a person is engaged with the desire, hope and intention of obtaining
for himself, directly and personally, remuneration or profit in return for his
services and efforts." He added: "I am not saying that a man who managed
a property owning business on a considerable scale would not be engaged in an
occupation, even though the property belonged to himself. It must depend upon
whether he performs any appreciable amount of work." I find this decision
slightly strange because if the claimant had so much to do that he engaged four
caretakers who were presumably his employees one might expect that their activities
would be attributed to the claimant, rather than concentrating on his own services
and efforts.
- I
agree with Mr Cormack that one must be careful about applying the meaning of "business"
in other contexts but the authorities are some help in conveying the ordinary
meaning of business generally. I think one should also be cautious of cases concerning
companies because although a company does not necessarily carry on business it
is perhaps more likely to be doing so than an individual if that is one of its
objects. The context here is that business is included along with trade, profession,
office or vocation in the definition of employment, implying activity in contrast
to mere investment, although of course there can be a business of investment,
as in the definition of "investment company" for corporation tax: "A
company whose business consists wholly or mainly in the making of investments…"
(section 130 of the Taxes Act 1988). A property rental business can be an example
of an investment business. Whether property rental is a business in any particular
case is a matter of degree. I am short of evidence about the type of lettings.
It seems to me that since two of them are wholly commercial and another partly
commercial the Appellant’s activity in relation to them will be less because there
will be less turnover of tenants and less work as there are no common parts in
two of the properties let to one commercial tenant and I suspect less need to
check that the tenant is not misusing the property and fewer appliances to go
wrong. In addition to the commercial tenants there are three residential tenants
in one property and one in another. More activity will be required in relation
to these but even these may be let for periods of a year to students. The Appellant
clearly has responsibilities when things go wrong and need attention which will
require some activity but nothing more than a landlord normally does.
- Standing
back and looking at all the evidence although I think that the case is near the
borderline in the end I am not satisfied that there is sufficient activity for
it to constitute a business. In my view, it is an investment which by its nature
requires some activity to maintain it, rather than a business.
- Accordingly
the appeal is dismissed.
J
F AVERY JONES
SPECIAL
COMMISSIONER
SC
3095/02
