Entrepreneur's relief on disposal of business

Gilbert v HMRC TC1542

Entrepreneurs' relief (ER) allows individuals and some trustees to claim relief on qualifying gains made on the disposal of a) all or part of a business, b) the assets of a business after it has stopped trading, and c) shares in a personal company. There is a cap on the maximum lifetime limit of the relief that one can claim. The effect of the relief is that the qualifying gains are taxed at 10% instead of the standard capital gains tax rate of 18% or 28%. ER applies to disposals made after 6 April 2008.

In this case the taxpayer provided sales representation services to nine catering wholesalers. In August 2008, one of the wholesalers entered into an agreement with the taxpayer to acquire the part of his business that related to the wholesaler's products. The sale agreement described the transaction as a sale of a going concern and the assets sold included the customer database and associated goodwill, trade marks that the taxpayer had registered relating to the wholesaler's products, business records and the benefit and burden of unperformed contracts.

The taxpayer subsequently submitted his tax return and claimed entrepreneurs' relief in respect of the capital gain realised on the sale. HMRC notified the taxpayer that the disposal did not qualify for entrepreneurs' relief as it was not enough for him to make disposals of assets used in the business; there needed to be the disposal of an identifiable part of the business which on its own was separately definable. HMRC contended that the business carried on by the taxpayer after the disposal was the same as that carried on before, albeit on a smaller scale. The taxpayer claimed that there were in fact nine separate and identifiable businesses, one of which he had sold. On that basis, he appealed to the First-tier Tribunal.

The disposal of a business involves more than the sale of business assets, but the question before the Tribunal was how much more was required. In allowing the appeal, the Tribunal rejected HMRC's approach of focusing on the nature of the retained business rather than the viability of the assets transferred and held that the viability of the part transferred was the key to determining whether there was a sale of part of a business. The Tribunal found that what characterises a sale as a going concern is a sale of goodwill, where it exists, and that the sale of the customer database was crucial in distinguishing this transaction as a sale of a going concern from a mere sale of assets.

Interesting because the relief is still relatively new and not well tested against real life situations. Of use also to main stream company commercial pratitioners in the contexts of sales and reorganisations.

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