This wording comes from an old CGT relief known as “retirement relief” and there are several tax cases on retirement relief where the meaning of “a part of a business” was the point at issue.
HMRC have always maintained that in order to decide if a “part of a business” has been disposed of, you look at what is left after the disposal, and if the remaining business is the same as the one before the disposal (apart from being a little smaller), then that was simply the disposal of some business assets, not of “part of a business”, and retirement relief – and therefore, entrepreneurs’ relief – is not due.
In their Capital Gains Manual (at CG64015), HMRC talk about the disposal of one of two shops owned by a businessman, and they argue that he would need to show that the business carried on in the shop he sold was entirely different from that carried on in the one remaining if he wanted to show that he had disposed of “a part of a business” and could claim entrepreneurs’ relief. This attitude on HMRC’s part has led to problems with claiming entrepreneurs’ relief on a number of different kinds of disposals.
Letting furnished holiday accommodation is deemed to be a trade for various tax purposes, including entrepreneurs’ relief, but on the basis of HMRC’s attitude to the sale of one of two shops in CG64015, it has long been thought that if the owner of, say, three holiday cottages sold one of them, he would need to show that this cottage was somehow very different from the remaining two if he wanted to claim it as a disposal of “part of a business” and secure his 10% rate of CGT under entrepreneurs’ relief.
In November 2011, the First-tier Tax Tribunal decided the case of Mr M Gilbert, who traded under the name of “United Foods”. Mr Gilbert acted as a middleman between wholesale food suppliers and their customers in the food and catering industry. He had nine such wholesalers as his clients, and he agreed to sell one of them (Fayrefield Foods) his contact list and goodwill relating to their products – Fayrefield were cutting out the middleman. Mr Gilbert claimed entrepreneurs’ relief on the disposal. HMRC refused the relief, on the grounds that all Mr Gilbert had done was to dispose of one of several clients – he still had the other eight and his business was essentially the same.
The Tribunal, however, agreed with Mr Gilbert that what he had sold was a business in that the purchaser could if he wished run it as a separate and independent business. The Tribunal said that the test was whether the purchaser had acquired a viable business entity, including goodwill, which it could operate – the effect on the vendor’s business was irrelevant. The test they applied was similar to the VAT concept of a “transfer of a going concern”.
Practical Tip :
Although the Tribunal’s decision is not binding in law, it represents a useful debating point when claiming entrepreneurs’ relief – to go back to our example of the three holiday lets, it is clear that the purchaser of one of them could run it as an independent business if he wished, so under the Tribunal’s definition, such a sale would be a disposal of “part of a business” and entrepreneurs’ relief would be due.
James Bailey
