Entrepreneurs’ relief: Efforts to sell amounted to trading
The first tier tribunal determined that Gatebright Ltd was trading up until 2014 despite having issued no invoices since March 2009. Therefore, entrepreneurs’ relief was due on the gain made on liquidation of the company.
In order to access the 10% tax rate on capital gains available under entrepreneurs’ relief (ER), all the conditions set out in TCGA 1992 ss 169H-169S must be met.
HMRC agreed that the ER conditions had been satisfied, except that Gatebright Ltd was not a trading company for the required 12-month period. Thus, ER was not available on the capital gain arising from the taxpayers’ voluntary liquidation of their company. The owners Jacqueline and Neil Potter appealed [TC07348].
The first tier tribunal (FTT) had to decide whether Gatebright had been a trading company either for at least one year ending with 11 November 2015 (when the disposal took place) or for at least one year ending within the three years before the date of disposal, (condition A and condition B respectively) TCGA 1992 s169I. The ER provisions were amended from 6 April 2019, so companies are now required to have been trading for at least two years to qualify for the relief under condition A or B.
No question of trade pre-2009
Gatebright traded in the London Metal Exchange (LME). Working with one financing bank at a time, the company would broker credit deals to provide clients with sufficient finance to trade.
When a trade was made using a bank’s credit, Gatebright received 50% of the commission charged to the client for its services as ‘introducing broker’.
Mr Potter acted as an introducing broker and dealer at the LME and also carried out some advisory work for clients. Mrs Potter handled the administrative aspects of the business.
While Mr Potter was registered with the Financial Services Authority, Gatebright effectively ‘piggybacked’ off the regulatory memberships and licences held by the banks that the company worked with in order to carry out trades.
Gatebright was a successful business, with reserves exceeding £1m at the time of the financial crash in 2008.
In 2008, in order to safeguard the company’s reserves, Gatebright used approximately £800,000 of its reserves to buy two six-year investment bonds that matured in November 2015. The bonds paid £35,000 in interest a year which was distributed via dividends.
The remaining £200,000 was retained in Gatebright as working capital, although ultimately this was also distributed as dividends between 2009 and 2015 as it was not needed.
The impact of the financial crisis on Gatebright was significant. Banks withdrew lines of credit and clients’ appetite for risk decreased. As a result, the volume of trades decreased dramatically, and the bank the company was working with ended their agreement. Gatebright’s last invoice was issued in March 2009.
Efforts to revive
The taxpayers maintained that Gatebright continued to be a trading company up until June 2014 (ie within the three-year period prior to the liquidation, as required under Condition B).
This was on the basis that, despite the fact that the taxpayers had dealt with a number of personal matters between 2009 and 2014 (including bouts of ill health suffered by Mr Potter) they actively attempted to continue the company’s usual business trading, including attempts to regain the relevant regulatory licences to enable Mr Potter to trade.
HMRC argued that Gatebright ceased to trade after March 2009, and so it was not a trading company during the three-year period prior to liquidation.
The FTT found that, pending consideration of whether Gatebright undertook substantial non-trading activities, Gatebright was a trading company at least up to November 2012, which was still within the relevant period for ER purposes.
Judge McKeever noted that, although no business was secured after 2009, a “trade does not automatically come to an end because there is a gap in deals actually being done.”
No substantial investment activities
In order for a company to be deemed trading for ER purposes, the activities of the company should either be wholly trading or not consist of a substantial amount of non-trading activities.
HMRC argued that, even if Gatebright was a trading company, it undertook substantial investment activity from the time when the company made its investment into the bonds.
Mr Potter countered that the purchase of the bonds was a one-off transaction, and no further activity was undertaken in relation to the bonds after the investment was made.
The FTT highlighted that there were indicators to support the arguments of both sides. However, when looking at the activities of the company as a whole, the FTT determined that Gatebright’s activities were entirely trading activities directed at reviving the company’s trade.
The FTT also found that the activities of the company did not, to a substantial extent, include non-trading activities.
Therefore, Condition B per TCGA 1992 s169I was deemed satisfied, and the appeal allowed.
The FTT’s decision may well be appealed by HMRC. Nevertheless, this case is significant when considering what may constitute trading activities, and will undoubtedly be of interest to any taxpayers that find themselves in a similar situation to the shareholders in this case.