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CG64090 | Business Asset Disposal Relief: trading company and holding company of a trading group - the meaning of "substantial"

From HM Revenue & Customs · Capital Gains Manual

Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020. The new name is generally used in this guidance but should be read as applying to times before that date.

Most companies and groups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities “… do not include to a substantial extent activities other than trading activities”. The phrase “substantial extent” is used in various parts of the TCGA92 to provide some flexibility in interpreting a provision without opening the door to widespread abuse.

This requires identification of the trading and non-trading activities and then considering how best to measure the non-trading activities to see whether they are substantial in the context of the company’s activities as a whole.

There is no simple formula to this but some, or all, of the following are among the measures or indicators that might be taken into account in reviewing a particular company’s status. These indicators, adopted for Business Asset Disposal Relief, are the same as those used for the old taper relief and in the Substantial Shareholding Exemption for corporation tax.

Income from non-trading activities

For example, a company may have a trade but also let an investment property. If the company's receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.

The asset base of the company

If the value of a company's non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see above regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company's trading and other activities. Which measure is appropriate will depend on the facts in each case.

Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities

For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.

The company's history

For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, for instance if a company’s trade was seasonal, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when non-trade receipts amounted to a substantial proportion of total receipts.

Balance of indicators

The indicators discussed should not be regarded as individual tests to which a percentage limit applies. They are factors, or indicators, that may be useful in establishing whether there is substantial overall non-trading activity.

It is likely that some indicators point in one direction and others the opposite way. You should weigh up the relevance of each in the context of the individual company’s activities as a whole.

In most cases it should be clear if you are considering a trading company.

The First-tier Tribunal decision in Assem Allam [2020] TC07532 provides an example of a case where there were substantial non-trading activities for the company and how the individual factors were considered. That decision was subsequently confirmed following an appeal to the Upper Tribunal see the [2021] UKUT 0291 (TCC) decision. In the case the company had a substantial investment portfolio and the key question was whether or not this amounted to substantial non-trading activity.

For practical purposes it is likely that from accounts submitted some consideration can be given to the level of non-trading income and the asset base of the company. Where neither of these suggest the non-trading element exceeds 20% the case is unlikely to warrant any more detailed review.

If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the First-tier Tribunal. Advice can be sought from CG Technical in contentious cases.