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Tax Tribunal Analyses the Nature of Trade

In a ruling which gives useful guidance on the meaning of ‘trade’ in the tax context, a tribunal has ruled that a laundry occupied by an NHS trust is a ‘commercial building’ within an enterprise zone and therefore qualifies for 100% income tax relief by virtue of section 271(1) of the Capital Allowances Act 2001 .

factoryThe substantial laundry had been constructed by a private consortium that leased it to the trust. The facilities it provided were in excess of the trust’s needs and, almost from its inception, laundry services were provided to other public health boards which paid for the use of the facility.

On that basis, it was submitted by a member of the consortium (the taxpayer) that the laundry was a commercial building that had been constructed in an enterprise zone and was thus eligible for industrial building allowances under the Act. Those arguments were disputed by Her Majesty’s Revenue and Customs (HMRC).

The taxpayer argued that the laundry was operated by the trust on a large-scale in the nature of a trade. Its services were provided to the third party health boards at arms-length and for reward with the objective of covering all the fixed costs and overheads of running the facility.  The absence of a profit motive in the trust’s operation of the facility did not preclude it from being viewed as a trade.

HMRC submitted that the operation of the laundry included a substantial element of ‘self-benefit’ for the trust. Neither the trust nor its health board ‘customers’ were engaged in trade and the arrangement between them was ‘utterly remote from a commercial context’.

Upholding the taxpayer’s appeal, however, the Tribunal found that the laundry had been built ‘for the purposes of a trade’. Although it provided in-house services for the trust, the other health boards paid a price to use the facility and it was operated to a commercial standard on an entrepreneurial basis. The arrangement between the trust and the health boards was a commercial one and the absence of a profit motive was not fatal to the appeal.