Potter and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 August 2019 |
| Neutral Citation | [2019] UKFTT 554 (TC) |
| Date | 29 August 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 554 (TC)
Judge Marilyn McKeever
Mr Neil Potter in person on his own behalf and as representative appeared for Mrs Jacqueline Potter
Mr Vallis, an Officer of the Respondents, appeared for the respondents
Capital gains tax – Entrepreneurs' relief – Whether appellants' company was a trading company during the relevant period – Whether there were substantial non-trading activities.
The FTT has held that shares in a company involved in specialist financial transactions that did not conclude any further deals after the financial crash in 2009 were eligible for entrepreneurs' relief when the company was liquidated because it remained a trading company.
Mr and Mrs Potter were joint shareholders in a company (Gatebright) that acted as a credit broker for clients who wished to enter into deals on the London Metal Exchange (LME) and required bank finance. Mrs Potter dealt with administration and Mr Potter brokered the deals, as well as advising clients on markets, price movements etc. Gatebright worked with a number of financing banks, but with only one bank at a time as each deal could take months to finalise, and during this time Gatebright was effectively licensed and regulated under the umbrella of the relevant bank's licence. Once a deal was concluded, Gatebright would invoice the bank for its share of the commission from the client. By the time of the financial crisis in 2008–09, Gatebright had built up reserves of over £1m, of which it applied £800k in acquiring six year bonds in order to safeguard those reserves. The remaining funds were retained as working capital. However, as a result of the crash, banks ceased to provide credit and Gatebright's last invoice was issued in March 2009. Also in 2009, Mr Potter was seriously ill and unable to work for three to four months. By the time he returned to work, his agreement with the bank he had been working with had lapsed hence he no longer had a regulatory licence to trade. However, until June 2014, Mr Potter continued to actively pursue further deals but owing to personal misfortunes (severe medical issues and a break-in that also resulted in an assault on his son), no deals reached fruition, and following surgery in June 2014 and again in June 2015 the decision was taken to liquidate the business, the liquidation being concluded on 11 November 2015.
Two issues arose:
- Was Gatebright a trading company for at least one year ending within the three years prior to 11 November 2015 (TCGA 1992, s. 169I(7))?
- If so, did its activities include to a substantial extent activities other than trading activities (s. 165A(3))?
In spite of a lack of documentary evidence, the FTT accepted that Gatebright was active at least up to November 2012 (within the three years before cessation) and that those activities were undertaken for the purposes of a trade that it carried on because no decision was taken to close down the business, temporarily or otherwise, until at least 2014 (distinguishing the retirement relief case of Marriott v Lane (HMIT) [1996] BTC 297). Moreover, the retirement relief definition of “trading company” (“trading company means a company whose business consists wholly or mainly of the carrying on of a trade or trades” – former TCGA 1992, Sch. 6, para. 11(2)) no longer applies and instead there is a lengthier definition of trading activities in s. 165A(4), the relevant part of which was, in the FTT's view, s. 165A(4)(b) – activities carried on “for the purposes of a trade that it is preparing to carry on”. In their view, Gatebright was carrying on the activities for the purposes, at the very least, of preparing to carry on its old trade once the economic environment permitted and in November 2012 there was still a realistic possibility that new business could be found.
The FTT also considered the question of whether the purchase of the investment bonds meant that non-trading activities became substantial. HMRC's case was that most of the assets and all of the income were derived from those bonds, hence this was a substantial investment activity. However, the FTT pointed out that, of the other factors to be taken into account according to HMRC's guidance (), neither the expenditure incurred by the company nor the time spent on investment activities were substantial – in fact, once the bonds had been purchased, the directors did not do anything in relation to them. Moreover, the company had always had money on deposit to safeguard it resources (). When considering the activities of the company “in the round” (Farmer (Executors of Frederick Farmer dec'd) v IR Commrs (1999) Sp C 216) its activities were entirely directed at reviving the company's trade once financial conditions improved and therefore the FTT found that the company's activities did not, to a substantial extent, include activities other than trading activities.
The FTT therefore upheld the appeal, concluding that entrepreneurs' relief was available.
Although this case turned largely on its facts, it does emphasise the need to understand the nature of the business that is being carried on in order to determine whether the activities are trading activities and whether any other activities are substantial. (In fact the FTT noted that HMRC had demonstrated that they did not understand how the particular business was conducted when they asked for evidence of where the business was carried on “eg website, telephone, shop premises” and that their case stated incorrectly said that “the company sold insurance until 2009 …”).
[1] Mr and Mrs Potter appeal against HMRC's decision that they are not entitled to Entrepreneurs' Relief (ER) in relation to their capital gains tax liability on the disposal occasioned by the voluntary liquidation of their company, Gatebright Limited (“Gatebright”) in the tax year 2015–2016.
[2] In particular, the matter turns on whether Gatebright was a “trading company” for the purposes of section 165A(3) of the Taxation of Chargeable Gains Act 1992 (TCGA) during either of the qualifying periods discussed below.
[3] Statutory references below are to the TCGA unless otherwise specified.
[4] The normal rate of capital gains tax (“CGT”) on the disposal of shares in a company was, in the tax year 2015–16, 28%. Where the conditions for ER are satisfied, a reduced rate of 10% applies to the first £10 million of gains realised, in aggregate, by a taxpayer.
[5] The conditions for ER are set out in. Part V Chapter III TCGA. Section 169H TCGA provides for the reduced rate of tax on a “material disposal of business assets”. This term is defined in section 169I, which, so far as relevant, provided at the time:
(1) There is a material disposal of business assets where–
- an individual makes a disposal of business assets (see subsection (2)), and
- the disposal of business assets is a material disposal (see subsections (3) to (7)).
(2) For the purposes of this Chapter a disposal of business assets is–
- a disposal of the whole or part of a business,
- a disposal of (or of interests in) one or more assets in use, at the time at which a business ceases to be carried on, for the purposes of the business, or
- a disposal of one or more assets consisting of (or of interests in) shares in or securities of a company.
(3) A disposal within paragraph (a) of subsection (2) is a material disposal if the business is owned by the individual throughout the period of 1 year ending with the date of the disposal.
(4) A disposal within paragraph (b) of that subsection is a material disposal if–
- the business is owned by the individual throughout the period of 1 year ending with the date on which the business ceases to be carried on, and
- that date is within the period of 3 years ending with the date of the disposal.
(5) A disposal within paragraph (c) of subsection (2) is a material disposal if condition A[, B, C or D] is met.
(6) Condition A is that, throughout the period of 1 year ending with the date of the disposal–
- the company is the individual's personal company and is either a trading company or the holding company of a trading group, and
- the individual is an officer or employee of the company or (if the company is a member of a trading group) of one or more companies which are members of the trading group.
(7) Condition B is that the conditions in paragraphs (a) and (b) of subsection (6) are met throughout the period of 1 year ending with the date on which the company–
- ceases to be a trading company without continuing to be or becoming a member of a trading group, or
- ceases to be a member of a trading group without continuing to be or becoming a trading company, and that date is within the period of 3 years ending with the date of the disposal …
[6] The liquidation of a company is a disposal of the shares in the company taking place when the liquidation proceeds are paid. In the present case the disposal occurred on 11 November 2015. The question I have to decide is whether Gatebright was a trading company, either:
- throughout the period of one year ending with 11 November 2015 in accordance with Condition A in section 169I(6); or
- Throughout the period of one year ending with the date the company ceased to be a trading company where that date is within three years ending with the date of the disposal in accordance with Condition B in section 169I(7).
[7] In order to satisfy Condition B, the business must not have ceased before 12 November 2012 and the company must have been a trading company for at least one year ending with 12 November 2012 (or any later date before 11 November 2015) which I will call the “relevant date”.
[8] HMRC accept that the other conditions for ER are satisfied.
[9] The expression “trading company” is defined by section 169SA, which refers to Schedule 7ZA which in turn...
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