Business asset disposal relief - excess cash

Is excess cash in a business an issue when claiming BADR?

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The current situation:

- ltd uk company has circa £1.5m in cash

- the company is a trading company providing digital marketing services

- cash has been accumulated over the past decade from profits

- husband and wife owners (60% 40%)

- no investments or property etc

If the business were to close or be sold - does the excess cash create a potential problem for BADR elegibility?

I'd really appreciate anyone's thoughts on this, thank you.

Replies (12)

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paddle steamer
By DJKL
28th Nov 2022 15:51

Always a grey area, HMRC used to have their 20% rule re excess cash re ER(Their because there was little in legislation to support their view). I am sure there have been cases more recently on the subject.

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Replying to DJKL:
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By David Ex
28th Nov 2022 15:56

DJKL wrote:

Always a grey area, HMRC used to have their 20% rule re excess cash re ER(Their because there was little in legislation to support their view). I am sure there have been cases more recently on the subject.

The OP may find a read of this case helpful.
Assem Allam vs. HMRC [2021] UKUT 0291

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By SteveHa
29th Nov 2022 11:44

Without hunting down the source (It may even be Assem Allam), I believe that HMRC no longer take the view that excess cash compromises trading status, provided no active steps are taken to invest that excess cash (i.e. if it's just sat in the working account of the company).

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Replying to SteveHa:
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By Hugo Fair
29th Nov 2022 12:00

Beat me to it ... I was trying (and failing) to find a source to cite.
But I'm fairly certain that what matters is how the 'excess cash' is (or is not) being used.
If it remains part of working capital (subject to the vagaries in & out of cashflow) then I believe it's fine ... the potential for problems start when it is invested in something that is outwith the normal trading business.

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Replying to Hugo Fair:
By SteveHa
29th Nov 2022 12:50

There is a source somewhere, I just have too much on my plate right now to spend time hunting it down.

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Replying to Hugo Fair:
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By David Ex
29th Nov 2022 21:33

Hugo Fair wrote:

But I'm fairly certain that what matters is how the 'excess cash' is (or is not) being used.
If it remains part of working capital (subject to the vagaries in & out of cashflow) then I believe it's fine ... the potential for problems start when it is invested in something that is outwith the normal trading business.

No idea whether it makes any difference but the description doesn’t sound like “working capital”, in the normal sense:

andydc wrote:

- ltd uk company has circa £1.5m in cash

- the company is a trading company providing digital marketing services

- cash has been accumulated over the past decade from profits

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Replying to David Ex:
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By Hugo Fair
29th Nov 2022 22:20

True (based as always on the limited info provided)
... but I was responding to the titular question "Is excess cash in a business an issue when claiming BADR?" and assumed it to be a generic query.

Also, I was trying to be mindful of the edict oft quoted on here that we shouldn't provide advice - just pointers (even if mine is missing the important source)!

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Replying to Hugo Fair:
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By David Ex
29th Nov 2022 22:23

Hugo Fair wrote:

True (based as always on the limited info provided)
... but I was responding to the titular question "Is excess cash in a business an issue when claiming BADR?" and assumed it to be a generic query.

Also, I was trying to be mindful of the edict oft quoted on here that we shouldn't provide advice - just pointers (even if mine is missing the important source)!

Yes. You’d expect tax on £1.5m might justify some tailored advice being taken.

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By Paul Crowley
29th Nov 2022 11:54

How much time is spent on investing the cash?
How much time spent on the trade?

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By Alex Ramshaw 88
05th Dec 2022 10:03

I would agree re pointing to the Allam vs HMRC (2021) case, which seemed to conclude that large cash balances in excess of what might be reasonably required for working capital are suitable, if have been generated from trading activity, which seems to be the case in the above scenario

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By The Dullard
05th Dec 2022 13:27

Assem Allam only considers the point of whether non-trading activities (in that case the generation of rental income) are substantial.

The only relevant (non-binding precedent in relation to cash balances is Potter, where the company's trade went into a semi-suspended state and c £800K of it's "accumulated reserves" were "safeguarded" by putting them into mid-term bonds that generated interest income of c £35,000 pa. The FTT didn't regard this as an activity and concluded that, despite the temporary suspension becoming permanent, the companies activities were wholly trading activities.

https://www.bailii.org/uk/cases/UKFTT/TC/2019/TC07348.html

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