Tribunal analysis: Entrepreneurs’ relief dispute
The key question, explored by the first tier tribunal in the case of Jeremy Rice v HMRC, is whether or not a significant change in a business can amount to a cessation of the existing trade and the start of a second business, says Shaz Nawaz of AA Chartered Accountants.
Rice consulted AA Chartered Accountants in 2013 regarding the refusal of HMRC to allow his claim for entrepreneurs’ relief (ER) on the capital gain arising on the disposal in tax year 2008/09 for the freehold premises formerly used in his high street motor-trader’s business, based on the contention that the business had ceased in 2005 and that the disposal took place within three years of the cessation date, entitling Rice to ER under Section 169I of TCGA92.
HMRC had opened an enquiry into the 2008/09 tax return which, at the time we were consulted, had already passed the stage of statutory review, with HMRC’s refusal based on two points:
1. That there had been no cessation
2. If there had been a cessation, the disposal took place outside the three-year post-cessation window
Rice provided copies of correspondence between his usual accountant and HMRC, from which it appeared that no cogent arguments had been put forward to HMRC relating to statutory provisions or relevant case law. No steps had been taken to lodge an appeal to the tribunal.
The established facts of the case were that Rice had decided to vacate his high street premises as a result of a number of incidents of vandalism. He originally intended to trade from an extensive site adjacent to his residence, which was some way off the beaten track in a village outside Peterborough. This was however frustrated by the refusal of the planning authority to allow him to put any cars on display, or to advertise the presence of the trading site in any way. In fact, no-one travelling through the village would have been aware of the presence of the business. Rice was therefore forced to rely upon internet advertising and trading, a process which had formed a negligible part of his former high street business. The contention was that this constituted a new trade.
Opinions were divided among our team on the strength of the claim. On the one hand there was support for the HMRC view that Rice was a motor-trader before and a motor-trader afterwards, and therefore there could not have been a cessation. At the other extreme was the view, based on a review of the relevant case law, that there had been a sufficient change in the modus operandi of the business to amount to a cessation of one trade and the start of a new trade. I felt there was a sufficiently convincing argument in the client’s favour to go ahead - but I tasked the team member holding view (a former lawyer) with full responsibility for managing the case and the representation.
The first step was to lodge an appeal with the first tier tribunal, which was accepted despite being out of time. We then sought to open further negotiations with HMRC, who remained unconvinced by our arguments based on relevant case-law, and also persisted in their view that the principal point was that the disposal was outside the three-year post-cessation window. The process towards the tribunal hearing did however provide us with sight of the full set of correspondence between HMRC and Rice’s accountants and we made the key discovery that there were a number of inaccuracies in the correspondence upon which HMRC had relied, including some self-contradictory assertions.
The principal cases relied upon were:
1. Fry v Burma Corporation Ltd  15TC113 which established the principle that the relocation of a local business can give rise to the permanent discontinuance or one trade and the commencement of a different trade
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2. J G Ingram & Son v Callaghan  45TC151 and Rolls-Royce Motor Ltd v Bamford  51TC319 both of which referred to the concept of ‘organic unity’ and ‘organic growth’. The judgment of Lord Donovan in the former case and of Walton J in the latter case both indicate a difference between a slow and gradual (‘organic’) change and a sudden and dramatic change
Satisfied that there was case law supporting the contention that there had been a cessation, we still had to overcome the hurdle of the three-year window. Substantiating the disposal date was straightforward, but fixing the exact (alleged) cessation date relied principally on Rice’s recollection, although the local authority were able to confirm the date on which the property was declared empty for non-domestic rates purposes.
Come the day of the tribunal hearing, my colleague presented the information set out in her skeleton argument and led Rice through giving evidence on oath. The inaccuracies in the correspondence from Rice’s previous accountants were noted, and it was argued that only minimal reliance could be placed on this evidence, especially as Rice had not approved the factual content beforehand. At the end of the day, apart from the application of case law, the outcome depended largely upon the credibility of Rice’s evidence.
The successful outcome of the case has been widely reported. The tribunal judge accepted that the business no longer relied upon passing traffic but on internet-based sales (with a surprising number of customers buying unseen). In addition Rice’s evidence was that he had switched from selling high performance cars to family-style cars and that the volume of business had in fact decreased. This amounted to a significant change, and the factor of vandalism, even though it took place over a period of time, was far from the concept of ‘organic growth’. The tribunal accepted Rice’s evidence and found that the changes amounted to a cessation of the original business.
On the point of whether or not the date of cessation placed the subsequent disposal within the three-year window, the tribunal placed little reliance on the confusing and contradictory information supplied by the former adviser and preferred Rice’s evidence of timescale, which he was able to link to his recollection of external events.
Why is this case important? Most cases turn to some extent on their own facts and the Rice case is an exception. By no means every business which elects to trade on the internet will be able to claim a cessation of their existing business. What it does establish is that there are distinctions between internet-based trading and high street trading which can amount to a new trade, even if this is within the same sector. The issue of whether or not a cessation has occurred has ramifications beyond ER.
Secondly, the case highlights the importance of looking ahead, of reviewing case law and legislation and of constructing a cogent and persuasive argument as soon as, if not before, any challenge is received.
Shaz Nawaz is managing director of AA Chartered Accountants who are based in Peterborough. The firm has a specialist interest in business growth and advanced tax planning.