Entrepreneurs' relief: case law on what constitutes part of a business

Introduction
Whether there is a disposal of part of a business rather than a mere sale of an asset used in the business is a question of fact. The same question arose in relation to the availability of retirement relief and there is already case law on the subject1. The question will arise when only some of the assets of the business are sold. The important point is that a disposal of a business asset, or assets, is not necessarily a disposal of the whole or part of a business. HMRC seek to establish all the relevant facts, so that a complete picture of the business, including the changes which have been made to it, can be built up for the period involved.

HMRC's internal guidance states that the retirement relief case law does not always provide certainty and it may be necessary to refer cases of difficulty in applying the guidance on the question to their CAR Capital Gains Technical Team. Generally the question will be one of fact and the answer will be arrived at by informal agreement or determination by the First-tier Tribunal15

McGregor v Adcock
the taxpayer had been carrying on mixed farming on 35 acres of land. He obtained planning permission for five acres of the land and sold it realising a gain. He continued farming the remaining land after the sale and claimed that as the sale of the land was a disposal of part of his business he was entitled to retirement relief. The court decided it was a question of fact whether there had been an interference with the whole complex of activities as could be said to amount to a disposal of part of the business. There was nothing to suggest that the scale of the business was seriously altered by the sale and accordingly the only reasonable conclusion on the facts was that there had been simply a sale of an asset and that no part of the business had been disposed of.

Mannion v Johnston
the Commissioners had found that there was a disposal of part of the taxpayer's farming business, on the grounds that after the sale there had been a major change in the taxpayer's business. In Atkinson v Dancer4 they found that the various parts of the taxpayer's mixed farming business had been interdependent, so that the continuation of it after the sale of part of the land was impossible. However, HMRC successfully appealed in both cases. The only matters to be considered as relevant in deciding whether the sale involved an interference with the whole complex of activities and assets were those caused by the sale. Changes in activities and assets caused by something other than the sale were irrelevant. The business activities before and after the sale should be compared; only if the position after the sale was wholly different, as a result of changes caused by the sale, was it possible to infer that the sale was of a business or part of a business. Further, the effect of two separate disposals could not be taken together, as if they constituted a single disposal or were interdependent transactions, in the absence of evidence (such as evidence that they were both part of the same transaction) to support such treatment. The Commissioners' determinations were held to be unreasonable on the facts of the cases; applying the test formulated in McGregor v Adcock, in neither case did the sale of part of the farmland constitute a sale of part of the business of farming.

Pepper v Daffurn
the High Court rejected the inference that, in posing the question whether there had been an interference with the whole complex of activities in McGregor v Adcock, Fox J had intended to establish what was in effect a substitute test for the words of the statute. In Pepper v Daffurn the taxpayer was a farmer who reared cattle. He began to reduce his herd in anticipation of receiving planning permission to develop a covered cattle yard. Following the grant of planning permission the yard was sold and the taxpayer continued farming on a reduced scale, grazing cattle instead of rearing them. He appealed against the refusal of his claim to retirement relief in respect of the gain arising on the sale of the yard. The High Court held that, on the facts of the case, the change in the nature of the taxpayer's business predated the sale of the yard, and that by the time of the sale he no longer needed the yard for the purposes of his business. Accordingly the court concluded that the sale of the yard did not amount to the disposal of part of a business and was not eligible for retirement relief.

Jarmin v Rawlings
the taxpayer had owned 64 acres of land, with a milking parlour and yard, a hay barn, an implements shed and cattle sheds. He had a dairy herd of 34 cattle, together with a full milk quota, and employed a full-time person on dairy farming. In October 1988 he sold the milking parlour and yard at auction. Between the auction and completion in January 1989 14 cows were sold. Following completion the taxpayer ceased dairy farming, but continued rearing and finishing store cattle. The High Court held that retirement relief was available in respect of the sale of the land and buildings. On the facts, dairy production was a separate part of the taxpayer's business from rearing and finishing store cattle. The sale of the means of production and the herd made it impossible to continue the dairy business. The Court noted that it was necessary to consider what was disposed of when the transaction took effect, which could only be assessed by comparing the position before the auction with the position immediately after completion. As for the time span, it was legitimate to have regard to simultaneous disposals of other assets used in the business, such as sales of cattle between contract and completion. A business is an activity (in this case, the production and sale of milk). This activity ceased on completion.

Wase v Bourke
the taxpayer decided to cease dairy farming and accordingly sold his entire dairy herd. For financial reasons, he delayed sale of his milk quota until the following year, as at the time of the sale of the herd he had used up part of his sale of milk quota for that year and it was not then as valuable as “clean” quota. The High Court held that the disposal of milk quota was on the facts simply the disposal of an asset forming part of the dairy farming business. Furthermore, the disposals of the dairy herd and the milk quota were not part of a single transaction; they did not satisfy the “simultaneous disposals” test identified in Jarmin v Rawlings. Accordingly, relief was not allowed on the gain in respect of the milk quota.

Barrett v Powell
Relief was denied by the High Court, which held that a surrender of an agricultural tenancy of farmland was not a disposal of part of the taxpayer's farming business. In that case, the taxpayer carried on the same business profitably for a further two seasons after the surrender of the tenancy by virtue of a new licence granted on the same date as the tenancy was surrendered.

Rusell v HMRC
The decisions in McGregor v Adcock and Barrett v Powell were applied in the more recent case of Russell v HMRC9, where three brothers had inherited some farmland, which they farmed in partnership. In 2009 they disposed of about 35% of the land, but continued to farm the remainder. One of the brothers (R) claimed entrepreneurs' relief in respect of his share of the gain on the disposal. HMRC rejected the claim and the First-tier Tribunal dismissed R's appeal, holding that the disposal was the disposal of a business asset, rather than the disposal of part of the partnership business.

Hatt v Newman
The question whether the use to which the asset was put constituted a business is also one of fact. For example, in Hatt v Newman11 the taxpayer sought relief in respect of a property that was let in part to tenants as furnished rooms. He had used the kitchen for the purposes of his haulage business and stored lorry spares in the cellar. The High Court held that this usage did not make the property an asset of the haulage business. Furthermore, the property was not an asset of the business of letting furnished rooms, as the letting of furnished rooms was not a trade for tax purposes.

Purves v Harrison
The question as to whether there was a disposal of part of a business or merely a disposal of business assets was also considered in the non-farming case of Purves v Harrison. In that case, the taxpayer ran a coach and minibus service. He disposed of the premises to a company, but retained a licence to occupy those premises (and a three-year lease was also agreed, should that be required upon the expiry of the lease). Before the disposal the taxpayer had informal discussions with a separate purchaser who eventually bought the business. HMRC accepted that if both disposals took place at about the same time, they could be regarded as part of the same transaction and qualify for relief, but argued that as the two sales took place nine months apart they could not be regarded as part of the same transaction. The High Court held that a continuing intention to dispose of the premises along with the remainder of the assets of the business could not alone suffice to create a sufficient connection between the two where, as in the instant case, the two disposals were to different persons and were separated in time by many months.

Gilbert v HMRC
Another non-farming case was Gilbert v HMRC13, where the appellant (G) had carried on a business of selling food on commission, representing nine different suppliers. He claimed entrepreneurs' relief on the sale of part of this business to one of the suppliers. HMRC rejected the claim but the First-Tier Tribunal allowed G's appeal, finding that his business had comprised nine different parts (ie one part for each of the suppliers he represented), and that he had disposed of one of those parts.

Carver v HMRC
In the case of John Humphrey Roberton Carver v HMRC14, the appellant (C) was a Lloyd's underwriter who had claimed entrepreneur's relief in relation to the disposal of syndicate capacity. The First-Tier Tribunal dismissed his appeal, finding that capacity was not the trade itself but a means by which the trade was carried on, in a way analogous to goodwill. It was therefore an asset of the trade.