In the case of Wardle v HMRC [2024] the First-tier Tribunal has recently held that an individual taxpayer was entitled to Entrepreneurs' Relief (ER)(now called Business Asset Disposal Relief) on the disposal of his interest in a limited liability partnership (LLP) despite it not actually being in a position to make the supplies that were its trade. This gave the taxpayer a capital gains tax (CGT) saving of circa £87,000.
ER is available for qualifying business disposals, which require, among other things, the disposal of the whole or part of a business owned by an individual throughout the period of two years ending with the disposal date. If ER can be claimed, it can, reduce the CGT charge on all or part of the gain to 10% (from the usual 20%).
In this case, HM Revenue & Customs (HMRC) refused the taxpayer's claim for ER because it did not consider the trade of the LLP had commenced two years before the disposal date of the taxpayer's interest in the LLP. Although the LLP had started construction and begun the initial steps of operating a biomass fuelled power plant, it had not completed construction, commissioning was outstanding and regulatory certification had not been obtained.
The tribunal adopted the tests from the case of Mansell v HMRC [2006] to examine whether the LLP was carrying on a trade for ER purposes. As a first step, it noted that before a trade can commence, there was the need for there to be a fairly specific concept of the type of activity to be carried on. The LLP in this matter had a specific concept of the type of activity to be carried on by it, namely generating profit from the construction and operation of a power plant from the construction and operation of a power plant burning wood waste.
The tribunal noted from the decision in Mansell "that a trade cannot commence until it has been set up (to the extent it needs to be set up), and that acts of setting up are not commencing or carrying on the trade. Setting up trade will include setting up a business structure to undertake the essential preliminaries, getting ready to face your customers, purchasing plant, and organising the decision-making structures, the management, and the financing. Depending on the trade more or less than this may be required before it is set up.” The tribunal concluded that "set up" did not require full, 100% set up and that set up can be achieved although incomplete. The fact that the LLP had in place its decision making structure and management, its funding (some of which it had drawn down) and it had entered into numerous contracts relating to the construction and operation of the plant, led the tribunal to decide that the LLP was carrying on a trade despite the fact that it had not made a sale. On this basis, the taxpayer's claim for ER succeeded.
This case is very fact specific and although it is typically difficult to demonstrate that a business has commenced prior to making sales, it is possible in certain circumstances.
Ensuring the availability of Business Asset Disposal Relief will be important in budgeting for CGT costs and avoiding any surprises by HMRC. It may also become more beneficial and ever more relevant should CGT rates increase in the future.
If you require any advice in connection with Business Asset Disposal Relief, please contact our tax specialists.
