Entrepreneurs’ Relief case

The First Tier Tax Tribunal (FTT) recently came to an interesting decision on two difficult questions which are crucial if a business is to qualify for Entrepreneurs' Relief (ER) on disposal or voluntary liquidation.

The first issue involved determining when a struggling business actually ceases trading. The second issue was whether holding significant investment assets involves substantial non-trading activities.

In the case of Potter v HMRC [2019] TC7348, the company had a successful finance brokering business to enable clients to trade on the London metals exchange. However, following the 2008 financial crash, banks withheld credit and the business stalled. To safeguard its reserves for the next trading opportunity, the company purchased fixed term bonds paying annual interest. However, the company’s last invoice was issued in March 2009 and, while the company continued to seek business, no deals were concluded and its only income after that point was the bond interest. The company went into voluntary liquidation on 11 November 2015, triggering a disposal of the shares for CGT purposes.

In order for the gain arising on liquidation to qualify for ER, the FTT needed to determine whether the company was a trading company throughout the period of one year ending with the date the company ceased trading and that this date was within three years ending with the disposal. In other words, the disposal of the shares could qualify for ER if the trading business ceased on or after 12 November 2012 and it had been a trading company for at least the year prior to that. The FTT concluded that even though no business was actually done after March 2009, the directors’ intention was to continue the business and their whole purpose was to seek new business and prepare the ground to continue the trade once market conditions improved. Therefore although the company was not carrying on a trade, it was still carrying out activities for the purposes of a trade it was preparing to carry on, and so was, for the purposes of ER, a trading company at least up to November 2012.

The next question was to consider whether the company carried out a substantial amount (i.e. 20% or more) of non-trading activities. If so, ER would be denied. HMRC’s view was that since 2009 most of the assets and income of the company were derived from the bonds, which was a substantial investment activity. However the FTT focused on what the company actually did in the round and the nature of its business. The FTT concluded that all of the ‘activities’ of the company, such as expenses incurred and time spent by the directors/employees, were devoted entirely to trading, directed at reviving the company’s trade in order to put it in a position to take advantage of the gradual improvement in global financial conditions. Therefore the activities of the company did not, to a substantial extent, include activities other than trading activities and ER was allowed.

This is a welcome decision, confirming that substantial investment assets do not necessarily jeopardise ER trading company status, provided there is a sufficient amount of other trading activity. It is not clear yet whether HMRC will appeal.