In John Douglas Wardle v HMRC [2024] TC09213, the First Tier Tribunal (FTT) allowed a Business Asset Disposal Relief (BADR) for the disposal of a Limited Liability Partnership (LLP) interest. Mr Wardle's successful appeal comes after losing a previous appeal on similar grounds for a disposal of an interest in the same partnership.

Power lines

In June 2015, a Limited Liability Partnership (LLP) was established to operate a power plant. Mr Wardle owned 14.65% of the partnership equity.

  • Contracts to sell electricity were entered into in August 2015 and were subject to several conditions being satisfied.  
  • In November 2016, Mr Wardle disposed of 6.65% of the partnership and claimed Entrepreneurs' Relief (ER) (now Business Asset Disposal Relief). The FTT denied ER because there was insufficient evidence that the LLP was trading.
  • By December 2017, the plant could import electricity. However, on 28 February 2018, the conditions of the contracts were not met and the plant was not generating electricity or receiving fuel commercially. 
  • In March 2018, commissioning tests were certified as complete and the plant generated electricity for the first time. 
  • Between April 2018 and May 2019 commissioning and final construction of minor elements took place and no electricity was generated in this period. 
  • In June 2019, electricity was generated commercially for the first time. However, some clauses of the contracts were still outstanding.
  • On 28 February 2020, Mr Wardle disposed of his remaining interest in the LLP and claimed BADR on the disposal.
  • HMRC opened an enquiry and issued a Closure Notice in March 2023, stating that the LLP had not commenced trading. 
  • Mr Wardle Appealed to the FTT.

For BADR to be available, the LLP must have been trading for two years at the point of disposal. Mr Wardle relied on, in part, his Previous appeal against HMRC for ER on the earlier disposal of equity in the same LLP. This appeal had failed due to a lack of evidence of the trading activities.

The FTT found: 

  • The Burden of Proof was on Mr Wardle to show that as of 28 February 2018, the LLP was carrying on a trade on a commercial basis with a view to the realisation of profit and continued to do so until the disposal on 28 February 2020. 
  • The central issue in this appeal is when, if at all, the LLP commenced trade. 
  • The FTT followed the principles set out in Mansell v HMRC [2006] Sp C551 to establish whether a business was trading:
  • Firstly, a specific idea must be that its activities will generate profits. The LPP met this test.
  • Secondly, the business must be set up, in terms of both capital and organisation.  
    • HMRC argued that as of 28 February 2018, the LLP had not yet established its business due to incomplete construction, outstanding commissioning, an absence of Renewables Obligation Certificates Accreditation and no electricity production, meaning that the LLP was unable to engage in trade with any party.
    • The FTT found that despite potential termination due to unsatisfied clauses in agreements, significant work had been done and all parties were committed, ‘the train was on the tracks travelling to its destination’.
    • Whilst not complete, the trade had been set up to the necessary extent as of 28 February 2018.
  • The third Mansell principle requires that operational activities must have commenced. The FTT found that:
    • By 28 February 2018, the LLP had not satisfied all clauses of the agreement, but this did not prevent the third step from being met.
    • The agreements constituted operational activity, involving dealings with a third party for supplies and intending to make a profit, with the LLP assuming financial risk.
    • The LLP's agreement to sell and the purchaser's agreement to buy all metered output constituted operational activity.

The FTT were satisfied that the LLP traded for the two years before the disposal and Mr Wardle was entitled to BADR. The FTT allowed the appeal.

Useful guides on this topic 

ER claim fails again due to lack of trading activities
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.

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.

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 Links

John Douglas Wardle v HMRC [2024] TC09213