Enthusiasts of Capital Gains Tax, Business Asset Disposal Relief (BADR) will be keen to hear about a recent development in the interpretation of the description 'substantial' when determining the scale of a company’s non-trading activities.

For a disposal of shares, Capital Gains Tax (CGT), Business Asset Disposal Relief (BADR) the relief formerly known as Entrepreneurs’ Relief, is only available if the underlying company carries on substantial trading activities.

The meaning of 'substantial', when determining the scale of a company’s non-trading activities, has recently been considered by the Upper Tribunal. Its decision has caused HMRC to re-write their guidance to the relief.

The definition of 'trading company' for BADR, as found in s.165A (3) TCGA 1992 is that a 'trading company' means a company carrying on trading activities whose activities do not include 'to a substantial extent, activities other than trading activities'.

HMRC’s Capital Gains Manual has long advised that “’Substantial’ for BADR means 20%”. HMRC’s past guidance suggested that it is useful to consider the following factors:

(1) The income from trading and non-trading activities.
(2) The value of trading and non-trading assets.
(3) Expenses incurred and time spent by officers and employees of the company in trading and non-trading activities.

In the recent case of Assem Allam v HMRC [2021] UKUT 0291, the Upper Tribunal disagreed with HMRC's guidance and prescribed a different approach to the application of the substantial test as follows:

  • Identify the trading and non-trading activities.
  • Consider how best to measure the non-trading activities to see whether they are substantial in the context of the company’s activities as a whole.
  • The real issue is how one measures the extent of an activity.

The UT concluded that:

  • There is no 20% test: a strict numerical test is not provided for by the legislation.
  • The test is a holistic one not confined to physical human activity and requires an overall consideration of what it is that the company does.
  • HMRC’s list of factors to consider here should not be exclusive (although, the UT did appreciate that HMRC's staff need some guidance).

HMRC have now revised their manual placing less emphasis on a 20% test, which it now suggests is only likely to be relevant when considering turnover and the company’s asset base.

Points to note:

  • HMRC guidance does not have the force of law, while a decision of the Upper Tribunal makes the law.
  • It seems that HMRC’s shift of view may stem from the UT comments above about not confining the substantial test to physical human activity.
  • When it comes to assessing whether a company is trading for BADR purposes it is clear that a simple 80/20 test of trading v non-trading activity is not always going to produce the correct answer.

Useful guides on this topic

Subscriber briefing: what the new interpretation of Substantial means to you
The development in the meaning of 'substantial' when determining whether a company is trading or not for the purposes of Business Asset Disposal Relief (BADR).

BADR: Share disposals Tool
UPDATE: save three to four hours of research time with our Virtual Tax Partner BADR tool. This aims to speed up the decision making processes as to when and where BADR can be claimed.

Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of shares or securities in a company
When can you claim Business Asset Disposal Relief (BADR) on a share sale? What is the rate of Business Asset Disposal Relief (Entrepreneurs' Relief)? How do you claim BADR? What case law is there on BADR?

Surplus cash: CGT & IHT relief
Does having an excess cash balance affect a company's trading status for CGT or IHT relief? What are the issues for each relief? What evidence is considered when reviewing activities?


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