HMRC Throws A Spanner in the Works for Entrepreneurs’ Relief Claim
The case of Reneaux and Another v HMRC (2019) provides guidance on the level of business activity required to be treated as “trading” for Entrepreneurs’ Relief (“ER”) purposes. In this case, the First-Tier Tribunal (“FTT”) held that the occasional use of business premises and the letting of those premises were not sufficient to amount to a trade.
ER is a valuable relief which can reduce the rate of Capital Gains Tax (“CGT”) on the sale of business assets to 10%.
In brief, in order for sole traders or partners of partnerships to qualify for relief they must have sold whole or part of their business, or disposed of an asset used in a business at the time the business ceases to be carried on .
Between the years of 1993 and 2003, Stephen Reneaux (“SR”) and Lynne Reneaux-Smith (“LRS”) traded at two business units (the “Premises”) which they owned as joint owners. SR was a self-employed MOT tester and vehicle mechanic, and LRS was employed part-time by SR to deal with administration and accounts. The business traded under the name Trucktest.
Trucktest was sold in 2003, and the Premises was leased to the purchaser until 2011.
The Premises were unoccupied between 2011 – 2012.
Between 2012 – 2013, the Premises were leased for workshop or storage purposes- but only for short periods of time at a time.
SR continued his trade as a MOT tester and vehicle mechanic, however this was rarely carried out at the Premises. He used the workshop “a couple of times a month” and stored some tools there, however he admitted that during this time he did not spend significant amounts of time supervising the storage and workshop hire business.
LRS visited the premises a few times a week in order to supervise the use of the workspace.
Income received from leasing the premises was split equally between the couple and was reported on their individual tax returns as rental income.
In May 2013, the premises were sold for a substantial amount. ER was claimed on the gain on the basis that when they sold the premises they sold a business and an asset used by that trade.
The court observed that they needed to determine whether the premises were being used for the purposes of SR’S business “at the time at which a business ceased to be carried on,’ or whether the occasional letting of the premises was a trade in itself. The court also needed to consider whether SR and LRS were in a partnership.#
The taxpayers’ argument focused on the fact that SR stored his tools at the premises, demonstrating that the premises was a business asset used in his trade. A second argument was that the storage and leasing activities were in themselves a trade as supervision was frequently undertaken by LRS.
However, HMRC contended that SR’s trade as an MOT tester and vehicle mechanic had not ceased, and the letting activities undertaken by SR and LRS did not constitute a trade.
The court found foremost that the question of whether or not business amounts to trading is one of fact and degree. Although the court did point out that they could envisage scenarios where letting storage facilities could be considered a trade, it would require far more substantial activity then what was present here. Therefore, the court found favour with HMRC.
In addition, the court found that whilst SR was carrying on a trade as a MOT tester and vehicle mechanic throughout the period, the FTT held that the Premises itself had not been in use for the purposes of that trade and his trade had not ceased on the sale.
Although the court concluded that there was no trade for ER purposes, it was held that there was a partnership between SR and LSR because they had a common view to make a profit.
Implications for Taxpayers
This case shows how even if you are carrying out an activity that is sufficient enough to create a partnership, the activity may not be substantial enough to qualify as a business activity for capital gains purposes.
The ‘Badges of Trade’ approach – Eugene Blaney v HMRC (16 December 2014)
Case of a Material Disposal – Entrepreneurs’ Relief (11 March 2014)