No ER for partnership only preparing to trade

In John Douglas Wardle v HMRC [2021] TC08105, the First Tier Tribunal (FTT) dismissed an appeal against HMRC closure notices denying Entrepreneurs’ Relief as pre-trading activities were insufficient to render the partnership disposal the disposal of a business.

• The taxpayer (along with two others) established a general partnership whose business was to develop, construct and operate renewable power plants.
• The partnership commenced pre-trading activities on 1 May 2014.
• Once construction of the power plants could begin, the partnership sold two sites (out of three) to a third party.
• The appellant claimed Entrepreneurs’ Relief (ER – now known as Business Asset Disposal Relief) on his share of the disposal proceeds.
• HMRC raised an enquiry and issued a Closure notice denying the ER claim as there was no disposal of a business.
• The taxpayer Appealed.

It was common ground between the parties that:

• Gains arising in partnerships are taxed on the partners.
• The parties agreed the partnership had not commenced trading at the time of the disposal.
• Preparing to trade was not itself trading.
• A trade is not being conducted if it has not commenced.
• The burden of proof was on the appellant to show he had been overcharged by the closure notices.
• The appellant had to show that there had been the disposal of a ‘business’ for the purposes of the ER code which defined a business as:
  • A trade, profession or vocation, which is conducted on a commercial basis and with the view to the realisation of a profit.

The FTT dismissed the appeal finding:

• The straightforward reading of the legislation was that there needed to be an ongoing trade conducted on a commercial basis to be considered a business for ER purposes.
• There was nothing conclusive in the parliamentary discussion around the introduction of ER which provided anything to displace this straightforward reading.
• While the existence of a partnership required there to be a business for the purposes of the Partnership Act, that did not mean there was a business for ER purposes as the definitions were different.
• The definition of business is used by the ER legislation in different ways depending on the type of disposal. For the disposal of an interest in a partnership, there needs to be the 'disposal of all or part of a business' whereas for a share sale the underlying company needs to meet different definitions in order to qualify. The definitions for each type of disposal are independent of each other.

Useful guides on this topic

Business Asset Disposal Relief (Entrepreneurs' Relief): At a glance (Freeview)
What is Business Asset Disposal Relief (BADR)? When does BADR apply? What is the rate of BADR? How to claim BADR.

Business Asset Disposal Relief (Entrepreneurs' Relief: Disposal of a business
Entrepreneurs' Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020.  When does BADR apply? What is the rate of BADR? How to claim BADR. Case law on BADR.  

Closure notices 
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

 External links

John Douglas Wardle v HMRC [2021] TC08105