Mark McLaughlin on Entrepreneurs’ relief: the ‘right’ asset disposal?

Mark McLaughlin looks at a recent tribunal case on a particular type of business asset disposal for capital gains tax entrepreneurs’ relief purposes.

Many taxpayers, and most tax practitioners, will be familiar with entrepreneurs’ relief. It is a very popular type of CGT relief claim, as the relief offers a reduced rate of 10% on lifetime net aggregate chargeable gains of up to £10 million.

Entrepreneurs’ relief is available on qualifying business disposals, including a material disposal of business assets. To be a ‘material disposal of business assets’ an individual needs to make a disposal of certain types of business asset, which constitutes a ‘material disposal’ (TCGA 1992, s 169I(1)).

There are three different types of business asset disposals for entrepreneurs’ relief purposes; firstly, a disposal of the whole or part of the business; secondly, a disposal of (or of interests in) an asset or assets used for the purposes of the business when it ceased to be carried on; and thirdly, a disposal of (or of interests in) company shares or securities (s 169I(2)).

The category of business asset disposal considered in this article is the second one, i.e. the disposal of assets in use when the business ceased (in s 169I(2)(b)).

Disposal of assets after business cessation

As indicated, to be eligible for entrepreneurs’ relief the disposal of business assets must be a material one. There are various types of ‘material disposal’. In the case of disposals of business assets in use on cessation of the business, there are two requirements for a material disposal. First, the individual must have been owned the business throughout the period of one year up to the date when the business ceases. Secondly, that date is within the period of three years ending with the date of disposal (s 169I(4)).

In addition to businesses carried on by an individual, a business is treated as being carried on by an individual if carried on by a partnership of which he or she is a member (s 169I(8)(c)).

Not all types of assets are eligible for relief in this context. Where a qualifying business disposal does not consist of company shares or securities, entrepreneurs’ relief is only given in respect of the disposal of relevant business assets comprised in the qualifying business disposal. ‘Relevant business assets’ means assets (including goodwill, subject to a certain exception in respect of goodwill transferred to a close company (see s 169LA)), other than ‘excluded assets’ (i.e. shares and securities, and other assets held as investments (s 169L)).

Accountancy practice

In Amin v Revenue and Customs [2016] UKFTT 515 (TC), the taxpayer was a sole practitioner accountant, and was also the sole owner of the practice premises. He sold a 50% interest in the business premises, by means of three separate deeds:

  • The first deed dated 4 April 2008 was for the sale of a 22.7% interest in the business premises, for the sum of £249,700;
  • The second deed dated 25 June 2008 was also for the sale of a 22.7% interest in the premises, again for consideration of £249,700; and finally
  • The third deed dated 23 April 2010 was for the sale of a 4.6% interest, for proceeds of £43,700.

The purchasers in all three transactions were the taxpayer, his wife and son, who were the trustees of a pension scheme.

The tribunal case concerned the second of these three disposals. The taxpayer submitted his tax return for the year ended 5 April 2009, which included a CGT computation relating to the disposal of the 22.7% interest in the business premises on 25 June 2008, on which entrepreneurs’ relief was claimed. HMRC opened an enquiry into the return (under TMA 1970, s 9A), and concluded that entrepreneurs’ relief did not apply, because the taxpayer’s sole practitioner’s business had not ceased. HMRC issued an enquiry closure notice, which removed the entrepreneurs’ relief claim and so increased the taxpayer’s CGT liability. In addition, HMRC imposed a penalty calculated at 27% of the additional tax, on the basis that the taxpayer’s behaviour in claiming the relief had been careless.

Disposal of audit practice

The taxpayer’s case for claiming entrepreneurs’ relief was that in addition to providing accountancy services, he also had audit clients. However, because he was unable to carry out the audit work (as he was not qualified to do so), in April and May 2008 he disposed of the goodwill associated with the audit work (which generated fees of around £70,000) to another accountant  for a nominal consideration of 99 pence. The taxpayer said he did this so that he could retain those clients for their non-audit accountancy work. He argued that he was entitled to entrepreneurs’ relief on the disposal of the 22.7% property interest in June 2008 because he had sold part of his business (i.e. the audit work element).

The transfer of the audit work was agreed verbally, rather than in writing. HMRC contended that the taxpayer was not entitled to claim entrepreneurs’ relief. They pointed out that he had produced no evidence of the sale of goodwill, and there was no evidence that the audit work was a distinct part of the rest of his practice.

Unfortunately for the taxpayer, the First-tier Tribunal agreed with HMRC’s interpretation of the entrepreneurs’ relief legislation. The taxpayer’s appeal was dismissed, and the 27% penalty was upheld.

Why did the claim fail?

HMRC’s guidance on this category of disposal for entrepreneurs’ relief purposes in its Capital Gains manual gives some indication of the circumstances that HMRC considers the relief was aimed at (CG64045):

‘Rather than disposing of a business, possibly as a going concern, someone may cease in business and then sell off the business assets. Such disposals will not constitute the sale of the whole or part of a business for TCGA92/S169I(2)(a) but may instead qualify as disposals of assets sold after the cessation of the business for TCGA92/S169I(2) (b) and TCGA92/S169I(4).’

The tribunal in Amin accepted that the taxpayer had disposed of his audit practice to the other accountant. However, the tribunal pointed out that the entrepreneurs’ relief legislation did not allow the taxpayer to claim relief for the partial disposal of his premises as a result of the disposal of his audit practice. Thus entrepreneurs’ relief was not due on his disposal of an interest in the whole premises.

A different outcome?

The tribunal contrasted the taxpayer’s claim with this example: suppose that instead of disposing of an interest in the whole business premises, the taxpayer had sold distinct office space in it (such as the second floor of the premises), because he no longer needed that office space as a result of ceasing to carry out the audit work. The tribunal accepted that, in those circumstances, entrepreneurs’ relief might have been due.

However, the tribunal agreed with HMRC that the partial sale of the business premises and the audit goodwill had to be seen as wholly unconnected transactions on the particular facts and evidence of the case. What the tribunal presumably meant was that the disposal of the interest in the business premises was not the result of the audit practice ceasing, although it needed to be for entrepreneurs’ relief purposes. On the face of it, that seems like a reasonable conclusion, although a penalty for careless behaviour in claiming the relief might seem a little harsh.

 

mark-mclaughlin-7285Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is the general editor of the Bloomsbury Professional core tax annuals, and contributor to a number of other Bloomsbury Professional titles.  He is also a consultant to professional firms with Mark McLaughlin Associates Ltd (www.markmclaughlin.co.uk). He can also be contacted via Twitter https://twitter.com/charteredtax and LinkedIn http://www.linkedin.com/pub/mark-mclaughlin/11/811/12.

Written by Ellie MacKenzie

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