Ten days in a tribunal, and it came down to the word "the"

Today is the day. Somewhere around 864,000 sole traders and landlords are due to file their first quarterly update under Making Tax Digital for Income Tax, covering 6 April to 5 July, and it is the first live checkpoint the regime has had. Most of the profession has spent July getting clients to the line.

A quieter figure appeared alongside it on Wednesday. Research reported this week found that just under a quarter of sole traders have either incorporated already or are in the middle of setting up a limited company, and well over half have at least considered it, with the reporting load of the new regime named as part of the reason. Whatever anyone makes of that as a plan, it means a meaningful number of businesses will change their legal form this year. The filings will record what they did. They will not, on their own, record why.

Which is what makes a judgment released last Friday worth reading even in a practice with no property clients on the books.

Property 118 Limited and Cotswold Barristers Limited v HMRC came out of the First-tier Tribunal on 31 July, after a hearing that ran for ten days back in February before Judge Harriet Morgan and Ms Jane Shillaker. The arrangements at the centre of it were sold to landlords who had been caught by the section 24 restriction on interest relief, and the structure moved rental businesses into companies through declarations of trust rather than a transfer of legal title, which meant the underlying mortgages did not have to be refinanced. HMRC issued scheme reference numbers, taking the view that the arrangements were notifiable under the disclosure rules. The appeal was against those numbers.

The condition that decided it required that either the main purpose of the arrangements was to obtain a tax advantage, or that the arrangements would be unlikely to have been entered into but for the expectation of one. The tribunal accepted that tax was a main purpose. It did not accept that tax was the main purpose, because the landlords also had reasons for wanting to keep the existing lending in place, and those reasons were ordinary and commercial. Some of them could not refinance at all while cladding questions were unresolved on their buildings. Others were sitting on mortgage terms they were never going to see again, or facing early redemption charges that would have taken a serious bite out of any benefit. On that finding the appeal succeeded, the reference numbers were cancelled, and the stop notice that sat behind them fell away with them.

So a case that ran for ten days, with counsel on both sides and a great deal at stake, turned on the distance between a main purpose and the main purpose. One word, and it was worth the whole hearing.

The part that travels beyond property is what the tribunal actually had to work with. Purpose is not a legal abstraction that gets settled by argument in the room. It gets settled on evidence, and the evidence is whatever exists about what the client was thinking when the decision was made. A cladding certificate that made refinancing impossible in 2021 is a fact, and it either sits somewhere in a file or it has to be reconstructed years later from memory, which is a far weaker thing to hand a judge. The landlords here had commercial reasons that were real and were capable of being shown. That is the whole of it.

It is worth being clear about what the decision does not do, because it is being read generously in places. The tribunal was asked whether the arrangements had to be disclosed, and it answered that question and no other. Whether incorporation relief under section 162 is available on these facts is untouched. So is the stamp duty position. Individual landlords remain under enquiry with real money attached, and the judgment does not move those enquiries an inch. It is also a First-tier decision, which means it binds nobody, and another tribunal looking at the same structure on a different set of facts is free to land somewhere else entirely.

Which brings it back to the sole traders quietly forming companies this summer. Incorporation is an ordinary commercial step and people take it for a long list of ordinary reasons, including that a company suits how they now want to be paid, or that a lender or a customer prefers it, or that they want the liability protection. If simplifying their reporting is part of the picture as well, that is not a difficulty in itself. The difficulty only ever arrives later, when someone asks what the reason was and the only surviving record is a set of incorporation documents dated the week the question became urgent.

The file that answers that question well is the one written at the time, by someone with no idea it would ever be needed. Everything else is a reconstruction, and reconstructions have a way of arriving late and sounding rehearsed. Ten days of tribunal time went into establishing why a group of landlords did something in 2021. The firms whose notes already answer that question for their own clients will never spend ten minutes on it.

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