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A First Tier Tribunal ruling has upheld a decision by HM Revenue and Customs (HMRC) that a farmer could not offset losses from five holiday cottages on his land against other income, advises Richard Grayson.

In October 2009, Julian Nott received the Trewinnard estate – comprising farmland and holiday cottages – as a gift. Mr Nott undertook business on the estate including farming, letting the holiday cottages and working as a professional musician.

HMRC launched an enquiry after Mr Nott’s 2009-10 tax return set his losses from farming and holiday cottages against his other income for income tax purposes. A closure notice was subsequently issued to Mr Nott by HMRC confirming that although farming losses could be set against other income for Class 4 NIC’s purposes, losses from the holiday cottages could not.

On appeal to the First Tier Tribunal, Mr Nott argued that the estate should be viewed as a single parcel of land, including the holiday cottages, and that the letting agreement in place was equivalent to those of a hotel or bed and breakfast business.

But the First Tier Tribunal rejected the case, arguing that the letting of the holiday cottages was the main profit generating activity and that the associated provision of cleaning and breakfasts were incidental to this.

On this basis, the First Tier Tribunal found that profits derived from the exploitation of a property, rather than a package of services comprising a trade.

Richard Grayson is managing partner at chartered accountant and business adviser Nicholson.

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