Disposal of part of a business

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The issue of disposing of part of a business can be complicated. Essentially, you are looking at the sale of a 'sub-business'. That is, something that is capable of being carried on in its own right. For this to be applicable, you will need to consider firstly whether the part of the business qualifies as a business itself. That is, it must be:

·      a trade, profession or vocation, and

·      conducted on a commercial basis with a view to the realisation of profits CG63965

This would include a deemed trade such as where a property business qualifies as a furnished holiday letting. See the Furnished holiday lets guidance note for more information.

Furnished holiday lets are a good example of where this can be an issue. It might be that the taxpayer includes a house they use predominantly as a 'holiday home' in with their furnished holiday trade. If they were to sell the property whilst continuing the trade, it might be that the entitlement to entrepreneurs' relief is challenged under the grounds that the part of the business was not conducted on the basis of a view to realisation of profits. A consequential consideration of this would be that the eligibility of the entitlement to relief might be challenged.

The next issue to consider is what is meant by 'part' of a business. Because entrepreneurs' relief was largely based on retirement relief, some of the key wording is the same. Therefore, there is quite a lot of case law on what constitutes part of a business. Whilst this is not binding, as HMRC state atCG64010:

Parliament's use of the same terms in a subsequent Act is a clear indication of the intended meaning and a Court is likely to find the previous cases persuasive.

A sale of assets does not constitute a sale of part of the business in itself. Whilst the purchaser may be acquiring assets for use in business, or as the main part of their business, this can prove deceptive. It is the sale of the business that is of concern, not the subsequent use.

The following paragraphs summarise the relevant case law. For more detailed commentary on the relevant cases see Here

In Pepper v Daffurn [1993] STC 466, Jonathan Parker J stated that he was content that the old provision of retirement relief did not limit itself to the sale of part of a business as a going concern. That is, the assets disposed of did not need to be used as a business. However, the sale of part of a business as a going concern is indicative of a disposal of part of a business. Therefore it is worth considering whether this has occurred. If this has been found to be the case for VAT purposes, it will mean that a sale falls within TCGA 1992, s 169I(2)(a).

There is a very good summary of the points that HMRC will consider at CG64035.   Also see Checklist - entrepreneurs' relief - sale of part of a business which incorporates most of these points, and other considerations.

The main body of cases cited by HMRC relate to farmers. These are very useful because they illustrate the distinction between the assets of the business and the business itself. Whilst the land represents a distinct part of the assets of the business, it doesn't necessarily represent a distinct part of the activities of the business. This is illustrated in the Adcock, Atkinson and Dancer cases. The most relevant quotes are cited by HMRC in their manuals at CG64030. See below.

Following the introduction of entrepreneurs' relief, there have now been a few cases which refer to the disposal of part of a business. These cases highlight how the tribunals and courts will consider old case law.

A recent case, M Gilbert T/A United Foods, considered the situation where the taxpayer, a food 'broker', effectively sold a portion of his business by selling his contract with a supplier and the customer database relating to that supplier. M Gilbert T/A United Foods [2011] UKFTT 705 (TC)

The sole trader represented nine different suppliers and the disposal related to that of one supplier.

HMRC contested that this was not an identifiable part of the business, but a scaling down of the business and they argued that the same business was still being carried on after the disposal. Although substantial assets were disposed of, this alone did not constitute the sale of part of a business. They considered that the changes in the business fell short of leaving a position after the sale that was wholly different.

HMRC cited almost all of the cases in the case law summary guidance note below.

The taxpayer cited Maco Door and Window Hardware (UK) Ltd v HMRC Commissioners. This case actually considered the meaning of 'part of a trade' for capital allowances purposes. Essentially, this provided the basis for a test of a 'viable section'. That is, if a 'viable section' of a composite trade was separated from the whole, would it still be recognised as a trade? Maco Door and Window Hardware (UK) Ltd v HMRC Commissioners [2008] STC 2594

It is worth noting that the tribunal also referred to the VAT rules on the transfer of a going concern. This indicates how the considerations undertaken for VAT purposes might prove useful in such cases. See the Overview of a transfer of a business as a going concern guidance note in the VAT module

Although Gilbert is a First-Tier Tribunal case, it may be persuasive in the findings of other tribunal cases, or a higher court, though whilst the decision is final as HMRC did not appeal, it is understood that HMRC does not necessarily agree that the reasoning put forward by the Tribunal accurately reflects the law in this area. However, the case referred to by the appellant is a House of Lords case, so may be useful to refer to as a precedent that is binding to lower courts.