Entrepreneurs’ relief (ER) allows individuals and some trustees to claim relief on qualifying gains made on the disposal of a) all or part of a business, b) the assets of a business after it has stopped trading, and c) shares in a personal company. There is a cap on the maximum lifetime limit of the relief that one can claim. The effect of the relief is that the qualifying gains are taxed at 10% instead of the standard capital gains tax rate of 18% or 28%. ER applies to disposals made after 6 April 2008.
ER being relatively a new concept, there are hardly any case laws available on the subject. In one of the first cases to be brought before the First-tier Tribunal (FTT), the tribunal decided in favour of the appellant that ER was allowable on sale of a part of the appellant’s business (Mr M Gilbert T/A United Foods v HMRC – [2011] UKFTT 705 (TC).
The background of the case was that an individual trading as a food distribution ‘broker’ worked as an intermediary between manufacturers and suppliers and their customers, being UK catering wholesalers. The business worked by charging a commission on sales, representing nine suppliers and supplying to 120 customers. In August 2008 he sold part of his business to one of his suppliers – Fayrefield Foods Limited (FFL) as a going concern. The agreement defined the “business” sold as that part of the Appellant’s business consisting of the customer database relating to the business and the goodwill, the trade marks which the Appellant had registered representing the FFL products, and business information together with the benefit and burden of unperformed contracts and the records. After the sale the Appellant could no longer use the trademarks nor have any contact at all with the customers of FFL. The Appellant stated that after the sale his gross commissions were reduced by 55% and his customer base was reduced to 35.
HMRC contended that this was a sale of assets and not a part of a business, citing a number of cases to support their view including McGregor v Adcock. HMRC further contended that there was something organic about the whole business that did not exist in its parts. So the question before the tribunal was whether the disposal constituted a disposal of a part of a business to be eligible for ER.
The primary condition for ER is that the relief is available where there is a ‘material disposal’ of ‘business assets’ (Taxation of Chargeable Gains Act 1992 (“TCGA”) s. 169H(2)(a), s.169I). S.169I(2) of the Act states that to qualify for the relief a “disposal of business assets” requires the disposal of all or part of a business. This is more than a disposal of assets used in a business, but how much more was the crucial question. The tribunal found that there were a number of pointers showing that it was sufficient if there was a disposal of all or part of a business as a going concern. The fact that there was a sale of goodwill that did exist and also a sale of the Appellant’s customer database, a crucial asset in distinguishing a sale of a going concern from a mere sale of assets. The tribunal also found that what was sold was a bundle rather than odd sticks and constituted a significant and identifiable part of the Appellant’s business. Entrepreneurs’ Relief, therefore, was allowed.
Entrepreneurs’ relief being a relatively new area many more cases of this type are likely to come up in future.
