Potter – Tribunal considers the meaning of "trading company" in the context of entrepreneurs' relief

In Jacqueline Potter and Neil Potter v HMRC [2019] UKFTT 0554 (TC), the First-tier Tribunal (FTT) has confirmed that the owners of a company were entitled to entrepreneurs relief (ER) as the activities of the company amounted to trading.

Background

Mr and Mrs Potter (the taxpayers), were the directors and equal shareholders of Gatebright Ltd (Gatebright). For many years Gatebright had traded as a broker on the  London Metal Exchange (LME). It  brokered credit deals between clients and financing banks to enable clients to engage in high value trading on the LME.

Due to the financial crash in 2008, the volume of Gatebright's trades declined dramatically. During this period, Gatebright tried to introduce its clients to banks to obtain credit, but credit was not readily available. The company's last invoice was issued in March 2009.

In 2009, Gatebright used around £800,000 of its reserves of over £1 million to purchase two six year investment bonds. The bonds paid interest of £35,000 a year which was distributed by way of dividend.

The markets began to settle in 2010 and Gatebright continued trying to find credit for its clients. However, as matters were improving, Mr Potter suffered several medical issues and other personal misfortunes starting in 2011. This meant there were periods when Mr Potter was unable to work and his negotiations, which could take several months to come to fruition, were fragmented.

As a result of this combination of factors, Gatebright's last invoice was issued in March 2009.

HMRC rejected the taxpayers' claim for ER in respect of the disposal of their shares in Gatebright in 2015, which was made in connection with the company's voluntary liquidation. HMRC refused the claim on  the grounds that:

(1)   the company had ceased trading before 12 November 2012 – outside the three year period in condition B in section 169I, Taxation of Chargeable Gains Act 1992 (TCGA); or

(2)  the investment of reserves in the bonds meant that the company's activities had become investment activities. 

The taxpayers appealed HMRC's decision.

FTT decision

The appeal was allowed. 

The question for determination by the FTT was whether Gatebright was a "trading company" throughout the year to 12 November 2012 (that date falling within three years of the company's voluntary liquidation on 11 November 2015).

The FTT rejected HMRC's submission that the trade ceased in 2009 because no deals were carried out after that date. It concluded that  Gatebright was a trading company at least up to November 2012 and therefore during the relevant period.

In the view of the FTT, Gatebright's activities of seeking new business and "preparing the ground" for the continuance of trade once market conditions improved constituted trading activities within the meaning of section 165A(4)(b) TCGA (activities for the purposes of a trade that Gatebright was preparing to carry on). The FTT also concluded that Gatebright would not have ceased to be a trading company throughout the relevant period simply because there were periods when its activities were temporarily suspended due to Mr Potter's ill-health.

With regard to whether Gatebright was disqualified as a trading company because its activities included, to a substantial extent, non-trading activities, the FTT held it was not. Although, following Gatebright's investment in the bonds, most of its assets and practically all of its income were derived from the bonds, the company  spent neither expenditure nor time on non-trading activities. The FTT found that, when the activities of Gatebright were considered as a whole, they did not, to a substantial extent, include activities other than trading activities.

Comment

This decision may be helpful to those seeking ER in relation to the disposal of shares in a company which has experienced difficulties during the relevant period prior to disposal.

In addition, the FTT has provided some useful guidance on the definition of "trading company" in section 165A(3), TCGA. Given this definition is applicable to other reliefs, including the substantial shareholding exemption and holdover relief for gifts of business assets, the FTT's comments in this regard will be of broader interest.

The decision can be viewed here.