In John Douglas Wardle v HMRC [2022] TC08485, the First Tier Tribunal (FTT) upheld HMRC's decision to deny Entrepreneurs' Relief (ER) as the appellant's LLP had yet to start trading. Mr Wardle was appealing the decision less than a year after losing an appeal on similar grounds for another partnership disposal.

  • In June 2015, a Limited Liability Partnership (LLP) was established in order to acquire, construct and operate a biomass power plant. Mr Wardle owned 14.65% of the partnership equity.
  • In August 2015 a number of contracts were entered into relating to the power plant, including a contract to purchase feedstock (fuel). The activities of the LLP were to burn wood waste and sell the generated electricity or the Renewable Obligation Certificates (ROCs) awarded as a result by Ofgem.
  • In September 2016, the LLP applied to the Environment Agency for a permit to operate the plant. This was granted in May 2017.
  • In November 2016, Mr Wardle disposed of 6.65% of his equity share and claimed Entrepreneurs' Relief (ER) (now Business Asset Disposal Relief).
  • At this point despite the contracts in place, the construction of the plant had yet to start. It would take two to three years to become operational. 
  • In May 2018, HMRC opened an enquiry into the 2016-17 return and then issued a Closure Notice in March 2020 which denied relief. HMRC believed that the LLP was not trading and so the conditions of ER had not been met.
  • Mr Wardle Appealed to the FTT.

For ER to be available, the LLP would have needed to have been trading for one year at the point of disposal. The question was whether the signing of all of the contracts in August 2015 constituted the start of trading.

The FTT noted that the Burden of Proof was on Mr Wardle to show that this was the case, however, he produced only a limited number of documents to evidence this. The judge noted that his oral evidence was limited to general assertions even though he had documentary evidence to substantiate his claims, which he chose not to submit. Mr Wardle claimed that he had three reasons for the lack of documentary evidence: 

  1. He did not want to advertise the profits of the business.
  2. The documents were commercially sensitive and subject to confidentiality agreements.
  3. There were 56 contracts and it was unnecessary to produce them all when one illustrative contract was a good enough sample of the rest.

Mr Wardle relied on, in part, a Previous Appeal of his against HMRC for ER in relation to another business. This appeal had failed due to a lack of trading activities.

The FTT followed the principles set out in Mansell v HMRC [2006] Sp C551  to establish whether a business was trading:

  • Firstly, there must be a specific idea as to the activities that will generate profits. The LPP met this test.
  • Secondly, the business must be set up, in terms of both capital and organisation. The FTT found that other than financing, nothing other than contractual commitments existed.
  • The judge also applied a third Mansell principle, that whilst no sale needed to have been made at that point, operational activities must have begun. Without the relevant documentary evidence, the FTT were unable to find that this was the case.

The appeal was dismissed as the LLP had not begun trading and ER was not available.

Useful guides on this topic

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.  

Partnerships: Unlimited or Limited?
What types of partnership are there? What are the differences? 

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 Link

John Douglas Wardle v HMRC [2022] TC08485


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