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Big Yellow's Rift With HMRC Threatens REIT Conversion

by Robert Lee,, London

23 January 2007

UK storage company Big Yellow has warned investors that an ongoing dispute with the tax department, HM Revenue and Customs, could derail its plans to covert into a real estate investment trust (REIT).

In its quarterly trading update to the London Stock Exchange, Big Yellow revealed that it has been seeking clarification from HMRC in relation to the tax treatment of its self-storage rental income in relation to its intended plan to convert into a REIT.

At issue is the change from Schedule D to Schedule A - necessary for qualification as a REIT. Big Yellow has hitherto declared its earnings as trading income, which falls under Schedule D. However, the company is arguing that it should be allowed to report its earnings as rental income under Schedule A.

Big Yellow pointed to HMRC's own guidance issued in November 2006, which acknowledged that the borderline between Schedule A and D had become less distinct and indicating that provided that there is no loss of tax as a result of transition they would not object in marginal cases.

"There are inconsistencies in the industry with certain companies being treated as Schedule A and others as Schedule D. Our competitors could therefore choose to become Reits, so why can't we?" Big Yellow chief executive Jimmy Gibson was quoted as saying by the Financial Times.

While Big Yellow's management has not yet reached an agreement with tax officials, its statement said that it has nevertheless decided to make the election for REIT status to preserve the expected benefits from the earliest date. HMRC has objected to the notification but at the same time has agreed to continue discussions with the company.

Big Yellow's board is of the view that conversion to REIT status will be beneficial because historically HMRC has treated self storage rental income for VAT purposes as deriving from a licence to occupy land and hence as income. Also, there is varying treatment in the self storage industry by HMRC in relation to the classification of self storage rental income.

Big Yellow Self Storage is listed on the FTSE250. It has opened 43 storage units, mainly in London and the South East, but has ambitious plans to expand nationwide.

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