What is part of a business as opposed to an asset used in a business?
Entrepreneurs’ Relief (ER) is available for the sale of unincorporated businesses carried on as either a sole trader or in partnership. This is in addition to the relief for the sale of certain holdings of shares in trading companies. The relief is given in the form of a reduction in the rate of capital gains tax to 10% on the first £10 million of gains, rather than the standard 28% rate for gains above the income tax basic rate band.
A long-established concept is that the disposal of all or even part of a business will fall under the umbrella of “qualifying business disposals”, however, a disposal of part of the assets of the business will not.
Where a trader sells the whole business as a going concern, there is no difficulty in establishing that ER will be available. The complication arises when a trade continues after certain assets are sold. Where, for example, a trader owns two shops in different locations and disposes of one of them, whether or not this constitutes the disposal of part of the business, or merely the sale of business assets is more complicated and will depend on the facts.
In order to qualify for ER, the trader would have to demonstrate that entirely separate businesses, connected only by common ownership, were conducted from each shop. An alternative successful argument would involve a single business where the activities at each shop form a separate, distinct and clearly identifiable part of the trade. For example, if one shop dealt exclusively with retail customers, while the other was an outlet dealing exclusively with wholesale customers, the sale of one shop should qualify for ER.
HM Revenue & Customs (HMRC) have always attempted to take a strong line on this, successfully challenging in several well known cases. In support of their argument, the two most frequently used cases are McGregor v Adcock (1977) and Jarmin v Rawlins (1994).
In the McGregor v Adcock case, Mr Adcock sold 4.8 acres of farmland out of a total holding of 35 acres. He carried on the same business after the disposal as before and it was held that he had simply made a disposal of part of the business assets.
Although Jarmin v Rawlings was a rare loss for HMRC, it is often cited whenever they do not believe that the circumstances of this case apply: Mr Rawlings owned a dairy farm. He sold 1.2 acres out of an original holding of 64 acres of farmland. 14 out of the 34 dairy cattle were sold, with the remainder transferred to a nearby farm owned by his wife. The labourer was made redundant and the milking parlour and yard was included in the sale. Mr Jarmin retained and leased the milk quota and continued farming by rearing and fi nishing store cattle.
Even though the majority of the land was retained and farming activities continued, all of the facts of the case indicated that the milking operations were discontinued completely; it was held that there was a disposal of the dairy farming business and relief was therefore available. The case also demonstrates that there is no requirement to dispose of all of the assets at the same time; Mr Rawlings did not get rid of all of his cattle at once, but was able to show that he had sold his dairy business.
Since Jarmin v Rawlings, HMRC have had success in several well known cases, but recently they lost an important case: Mr M Gilbert (t/a United Foods) v HMRC. The judgement included a useful guide to the test which needs to be passed to show that the sale was part of the business.
Mr Gilbert was a sole trader selling food on commission to wholesalers, representing nine manufacturers. He sold part of his business to one of his suppliers, including the brands, trademarks, customer database relating to the business and all of the goodwill that went with it. Mr Gilbert claimed ER, but this was rejected by HMRC on the basis that he had not disposed of “an identifiable part of the business which on its own was separately definable” and they argued that the sale was of assets. Mr Gilbert successfully appealed.
In the First-tier Tribunal’s view, the inclusion of goodwill and the customer database were the key factors for its finding that there was a sale of part of a going concern, as opposed to the sale of individual assets. HMRC’s test would be relevant where someone is carrying on more than one trade and selling one of the businesses, such as with the shop example, above.
The Tribunal held that the correct test in this situation is whether the taxpayer can show that the relevant part of the trade is a “viable section of a composite trade” which would still be recognisable as a trade if separated from the composite as a whole. An alternative acceptable test is whether the disposal involves a “distinct and clearly identifi able part of the trade”. There is a clear distinction between a part of the trade that is capable of being a “trade” in its own right and a separate and identifiable activity that is undertaken in the course of a trade.
The underlying concept of whether a business has been sold is simple. When some business activities continue after a disposal, for ER to be due, the whole of those activities must cease when the relevant asset or assets are disposed of. By contrast, if assets have been sold but no particular activity has disappeared, it cannot be said that part of the business has been disposed of and relief would not be due.