Kevin Read discusses a recent case that has highlighted a key difference between partnerships and shares in the business asset disposal relief rules.
Most of the cases on entrepreneurs’ relief (now called business asset disposal relief (BADR)) have concerned the disposal of private company shares.
A notable exception was Gilbert (t/a United Foods) [2011] UKFTT 705 (TC), dealing with the disposal of part of an unincorporated trade. Although only a First-tier Tribunal (FTT) decision, the judgement in favour of the taxpayer made it clear that a ‘disposal of… part of a business’ (as required by TCGA 1992 s 169I(2)) must not simply be a disposal of one of the activities carried out in the course of a trade, but instead, a disposal of a viable section of a composite trade which would still be recognisable as a trade if separated from the composite whole.
John Douglas Wardle v HMRC
This recent case ([2021] UKFTT 124 (TC)) has drawn an important distinction between the entrepreneurs’ relief rules for shares and partnerships in the context of disposals during a period of pre-trading activities.
John Wardle (JW) was one of three partners who, in January 2014, established a partnership to develop, construct and operate renewable power plants at three locations in the UK. Shortly afterwards, on 1 May 2014, the partnership commenced pre-trading activities.
The following year, once the projects had reached the stage where construction could begin (but prior to commencing trading), the partners sold two plants to a third party.
JW declared his share of the gains in his 2015/16 tax return and claimed entrepreneurs’ relief, despite trading not having begun. HMRC refused the claim, arguing that:
- the partnership needed to be ‘a business’ (under TCGA 1992, s 169S); and
-
a business is a trade, profession or vocation and is conducted on a commercial basis with a view to the realisation of profits (my emphasis added).
JW argued that a partnership's business disposed of during the pre-trading period came within the definition of 'a business' under TCGA 1992, s 169S(1). This legislation explicitly states that a disposal of shares can qualify for relief where the company is conducting pre-trading activities. JW believed that it should be interpreted more widely to allow the same treatment to partnerships.
FTT decision
A straightforward reading of the definition in the legislation showed that the legislation was written in the present tense (i.e., 'is a trade' and 'is conducted on a commercial basis'). Thus, the trading activity should already have started by the time of the disposal.
Section 169S(1) could not be interpreted more widely to include a partnership conducting pre-trading activities. Parliament had chosen to make commencement of trading a pre-condition. There was, therefore, no reason to adopt an interpretation to ensure the same treatment for partnerships as for shares in companies. Pre-trading activities were insufficient to make the partnership disposal the disposal of a business.
Conclusion
The existence of a partnership requires there to be a business for the purposes of the Partnership Act 1890, s 1. However, that does not mean there is a business for BADR purposes, as the definitions are different.
Business is defined by the BADR legislation in different ways, depending on the type of disposal. For the disposal of an interest in a partnership, there needs to be the 'disposal of all or part of a business', but in a share sale, the underlying company is governed by different qualifying rules. The definitions for each type of disposal are distinct.
Practical tip
Those starting a business where there will be a period of pre-trading activities should consider a limited company structure rather than a partnership; if possible, a disposal will be made before trading commences.
