[2024] UKUT 232 (LC)

The question of whether it was appropriate to take account of a manager’s salary when in fact none is employed arose in Apple Jacks. However, in that case the circumstances were different; the owner was also running a 300 acre farming business and the Tribunal took the following view at paragraph 66:

“We remind ourselves that in this case the hereditament is partially exempt and that the hypothetical tenant would be primarily running a farm, with the attraction as a diversification activity. It seems to us more likely than not that the hypothetical tenant would need to employ a manager to cover the kind of day-to-day work ‘in’ the business that Mr and Mrs Fryer carry out. We also note that in cross-examination Mr Cox did not dispute the figure of £35,400 as an appropriate amount to reflect that cost. We therefore adopt Mr Hunter’s approach and deduct that amount as an expense in order to reach a divisible balance.”

The approaches of the respective experts to this item are subtly different. Mr Davies said that the hypothetical tenant would employ a manager and that the actual circumstances in which Mr Waters adopts a ’hands on’ approach to running the farm without paying himself a salary should be disregarded. Mr Cox disputed that conclusion but also dealt with the question of a director’s salary. He considered that a venture of this size and type would be run by an individual or family who themselves would not be providing the advice usually provided by in-house professional directors. In his view, the costs associated with the appointment of directors providing services in relation to matters such as human resources should only be included in connection with valuations of sizeable leisure properties such as the London Eye. Allowing for either a manager’s or director’s salary results in the same effect; it reduces the net profit and consequently the divisible balance. In the present case the inclusion of a director’s salary because Mr Waters is a director would effectively be a prior call on profits and as Mr Cox rightly states, care should be taken in arriving at the tenant’s share to avoid double counting.

Both Mr Waters and Mr Davies appended a series of job descriptions and terms of employment for various posts in the leisure sector to their evidence, and Mr Davies concluded that the cost of employing a manager would be £50,000 per annum. However, it was not clear whether these businesses were comparable in size and profitability to the farm and the figures related to posts offered in 2022 and 2023, not 2015. Mr Davies had advised many other farm attraction businesses and had included details of them in his evidence. However, he supplied no evidence about the way in which each was run, whether they relied solely on the owner or operator for management functions and whether they drew a salary. Financial details of three of his comparables were appended to his report but the wages and salary bills were not broken down between staff and managers. Mr Ormondroyd submitted that Mr Waters worked in the business free of charge but that ignored the profits shared between himself and his brother. No evidence was offered about how those profits were paid out, whether Mr Waters took monthly drawings or payment after year end, or a combination of the two.

Mr Cox’s approach was that favoured by the guidance; that in a small to medium sized business the hypothetical tenant would often run the business him or herself. He took support for his view from the Guidance Note which says at paragraph 5.29:

“Where the expenditure takes the form of directors’ remuneration by way
of salary, contributions to pension schemes or other reward, it is necessary to
consider the nature of that remuneration to ensure that it properly forms an
expense and is not an item which should be considered under the tenant’s share.
Where the occupier is an individual, or where the hypothetical tenant might be
expected to carry on the undertaking without advice from directors, it is normal
to allow for remuneration solely in the tenant’s share.”

The Tribunal has adopted this approach in cases involving small bed and breakfast or holiday letting businesses. Examples can be found in Wishart v Hulse (VO) [2018] UKUT 224 (LC)and Facciolo v Constantin (VO) [2020] UKUT 0123 (LC).

The question to be resolved is whether the hypothetical tenant would act any differently to Mr Waters. I have no evidence on which to base my decision other than the reality of Mr Waters’ situation. I accept Mr Cox’s approach that a small to medium sized operation would simply outsource the advice that an in-house director would provide. In this particular case there does not appear to have been any expenditure on this type of service and I do not therefore include it as a working expense. Taking all of this into account together with the practice extolled by the Guidance Note, I conclude that in this particular case it is inappropriate to allow for either a manager’s or director’s salary in the working expenses.