What is a ‘business’? The answer should be straightforward in theory, but in practice it has been a grey area for tax purposes. Establishing the existence of a business can be important for a number of tax reasons.
For example, a business is a prerequisite of incorporation relief (or ‘rollover relief on transfer of business’, to be more precise) for capital gains tax purposes under TCGA 1992, s 162. There is no statutory meaning of ‘business’ for these purposes. Prior to the case below, there was no direct case law authority either.
Ramsay v HMRC
In Ramsay v HMRC  UKUT 0226 (TCC), the Upper Tribunal allowed Mrs Ramsay’s appeal against the decision of the First-tier tribunal [see Practice Update, July/August 2012] that she was not entitled to incorporation relief under s 162 on the basis that the transfer to the company did not constitute a ‘business’.
Mrs Ramsay had inherited a one-third share of a large single building, which was divided into ten flats (five of which were occupied at the relevant time). She subsequently made a gift to her husband of one-half of her own one-third share, and later purchased the remaining two-thirds share of the property from her brothers, with the assistance of a bank loan. Mr and Mrs Ramsay transferred the property (subject to the loan) to a company (TPQ), in exchange for shares in TPQ.
The First-tier tribunal summarised a list of 17 activities carried out by Mrs Ramsay in connection with the property, which the Upper Tribunal accepted as findings of fact. These activities included: checking and paying electricity bills for the communal areas, unblocking drains, returning post for previous tenants, gardening, cleaning vacated flats and communal areas, checking security of the property, and providing additional assistance to an elderly tenant. Mrs Ramsay and her husband spent approximately 20 hours per week carry out the activities, and had no other occupation.
The Upper Tribunal referred to various cases on the meaning of ‘business’ generally, including Customs and Excise Commissioners v Lord Fisher  STC 238 (a VAT case). In that case, the High Court identified six criteria for determining whether an activity is a business, as outlined below.
(a) Whether the activity is a ‘serious undertaking earnestly pursued’ or ‘a serious occupation, not necessarily confined to commercial or profit-making undertakings’.
(b) Whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity.
(c) Whether the activity has a certain measure of substance as measured by the quarterly or annual value of taxable supplies made.
(d) Whether the activity was conducted in a regular manner and on sound and recognised business principles.
(e) Whether the activity is predominantly concerned with the making of taxable supplies to consumers for a consideration.
(f) Whether the taxable supplies are of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them.
The Upper Tribunal considered that the factors referred to in the Lord Fisher case (with the exception of the specific references to taxable supplies, which are relevant to VAT) had general application to the questions whether there was a business in the Ramsay case.
Nature and extent
Taking the activities of Mrs Ramsay as a whole, the tribunal judge concluded that Mrs Ramsay’s activities fell within the tests described in Lord Fisher. The judge was also satisfied that the degree of activity undertaken in respect of the property overall was sufficient in nature and extent to amount to a business for the purpose of TCGA 1992, s 162. He added:
“Although each of the activities could equally well have been undertaken by someone who was a mere property investor, where the degree of activity outweighs what might normally be expected to be carried out by a mere passive investor, even a diligent and conscientious one, that will be in my judgement amount to a business. I find that was the case here.”
The Upper Tribunal was satisfied that the First-tier tribunal made an error of law in reaching its conclusion that the activities of Mrs Ramsay did not amount to a business for the purposes of TCGA 1992, s 162. The First-tier tribunal’s decision to dismiss Mrs Ramsay’s original appeal was set aside, and her appeal before the Upper Tribunal was allowed.
Subject to any appeal by HMRC, the decision in Ramsay should be helpful to rental property owners whose activities amount to a ‘business’ to a sufficient extent, should they wish to incorporate their business and take advantage of capital gains tax relief under TCGA 1992, s 162.
HMRC’s guidance on the meaning of ‘business’ for s 162 purposes in the Capital Gains manual at CG65715 does not refer to the business indicators in the Lord Fisher case. HMRC’s guidance will presumably now be updated to refer to that case, and also the Ramsay decision. However, it would be more helpful if a statutory definition of ‘business’ was introduced for tax purposes generally. For example, as mentioned there is presently no such definition for CGT purposes, and there is only a limited definition of ‘business’ for inheritance tax purposes, in the context of business property relief (IHTA 1984, s 103(3)).
The distinction between ‘business’ and ‘investment’ is potentially very important; greater clarity would therefore be welcome.
Mark McLaughlin CTA (Fellow) ATT TEP