In a recent decision of the First-tier Tribunal (Tax Chamber) ('FTT') it was held that a significant change in business constituted a cessation of one business and the commencement of a second business, (Jeremy Rice v HMRC [2014] UKFTT 0133 (TC)). Accordingly, the taxpayer was able to claim relief against chargeable capital gains arising on the disposal of a property asset which had been used in the original business pursuant to the entrepreneur's relief provisions contained in section 169I Taxation of Chargeable Gains Act 1992 ('TCGA 92').

Background

Mr Rice (the 'Appellant'), was a sole trader at all times selling used cars. He had premises at Fletton Avenue in Peterborough which had originally consisted of two sites. The first part had been acquired in the late 1980's and had been used as a small garage for servicing police cars. In 1998 an adjoining site was also acquired which gave the Appellant more space to trade from. Whist at the premises at Fletton Avenue he traded under the name Performance Cars, selling cars from the premises which was located on one of the main roads into Peterborough. The trade depended on passing traffic for business.

The Appellant experienced problems with vandalism at Fletton Avenue. Eventually the problems became so bad that the Appellant decided to sell the premises. There was no dispute between the parties that Fletton Avenue was sold on 29 April 2008, with contract and completion taking place simultaneously. The property was sold to a property developer. The Appellant's evidence was that he had ceased to trade at Fletton Avenue in May 2005. He remembered this date because it was shortly before his wife went into hospital for surgery in June 2005 and because of the vandalism. He then sold his stock of cars by auction and through newspaper advertisements. Evidence from Peterborough City Council showed that Fletton Avenue qualified for Empty Property Rates Relief from 1 September 2005.

The date on which the Appellant ceased to trade at Fletton Avenue (and indeed whether he ceased to trade at all) was in dispute.

The Appellant thereafter started to sell used cars from a site adjoining his house called 'Four Acres' which was in a village outside Peterborough. He renamed the business 'Four Acres Car Sales'. The Appellant had previously stored cars at Four Acres. At first he had intended to run the business at Four Acres in the same way as Performance Cars. However, he quickly ran into problems with the local council whose planning department would not allow him to trade at Four Acres and served an enforcement notice upon him.

The Appellant was not able to trade at Four Acres until 29 September 2006 when planning permission was finally granted for the site to be used for the sale of motor cars, with no display of the vehicles for sale to the general public being permitted. There were various other restrictions. These meant that the Appellant had to conduct his business by advertising on the internet. Potential customers would then make an appointment to inspect a particular vehicle.

At Four Acres there was no forecourt displaying cars to the public. There was a small sign indicating that this was the premises of Four Acres Car Sales. Unlike the Appellant's business at Fletton Avenue there was no passing trade. Moreover, the type of cars sold by the Appellant at Four Acres Car Sales was different from those sold by Performance Cars. The original business had concentrated on sports cars. Four Acres Car Sales concentrated on four wheel drive vehicles and family cars.

The Appellant had made a capital gain on the disposal of Fletton Avenue of £274,649 in relation to which entrepreneur's relief in the sum of £21,203.92 was claimed for the year to 5 April 2009. The effect of entrepreneur's relief was in effect to reduce the rate of tax charged on the gains to 10%.

Following the filing of his 2009 return, HMRC opened an enquiry. Following correspondence with HMRC, the claim to entrepreneur's relief was denied. The correspondence with HMRC in this connection had been written on the Appellant's behalf by his accountant.

The FTT (Judge Brannan and Sonia Gable), in its review of this evidence accepted the Appellant's evidence that the accountant had written these letters without reference to him. The FTT said (at paragraph 37):

"[Mr Rice] trusted [his accountant] to carry matters forward with HMRC, having relied on his advice for many years".

They noted that the correspondence was written on a mistaken assumption and contained inaccuracies and inconsistencies and seemed to be confused. Accordingly, bearing this in mind, the FTT placed little weight on the information provided by the accountant.

The law

It was common ground that the disposal of Fletton Avenue qualified for entrepreneur's relief if it satisfied the requirements of section 169I TCGA 92, which provides that:

"(1) There is a material disposal of business assets where –

(a) an individual makes a disposal of business assets (see subsection (2)), and

(b) the disposal of business assets is a material disposal (see subsections (3) to (7)).

(2) For the purposes of this Chapter a disposal of business assets is –

(a) a disposal of the whole or part of a business,

(b) a disposal of (or the interests in) one or more assets in use, at the time at which a business ceases to be carried on, for the purposes of the business, or

(c) a disposal of one or more assets consisting of (or of interests in) shares in or securities of a company.

(3) ……

(4) A disposal within paragraph (b) of that subsection is a material disposal if –

(a) the business is owned by the individual throughout the period of 1 year ending with the date on which the business ceases to be carried on, and

(b) that date is within the period of 3 years ending with the date of the disposal."

The issues

As it was common ground that the disposal of Fletton Avenue occurred on 29 April 2008, the two relevant issues were:

  1. was there a cessation of the original business; and  
  2. if so, when did that cessation take place; was it within 3 years of 29 April 2008 ie after 29 April 2005?

The FTT's decision

The taxpayer's representative relied on concepts drawn from authorities on cessation of trading such as Fry v Burma Corporation [1930] 1 KB 249; J G Ingram & Son v Callaghan(1968) 45 TC 151 and Rolls Royce Motors Ltd v Bamford [1976] STC 162. In particular, that the Burma Corporation case established the principle that the relocation of a local business could give rise to a permanent discontinuance of one trade and commencement of a different trade. It was submitted on behalf of the Appellant that the changes in his mode of business were sufficient to fall within that principle.

The Ingram and Rolls Royce cases both referred to the concept of "organic unity" and "organic growth" within a business. It was submitted that there was a difference between a slow and gradual (organic) change and a sudden and dramatic change. The changes to the Appellant's business, it was submitted fell into the latter category.

The FTT accepted the Appellant's evidence that with the original Performance Cars business most of his business came from passing customers who would stop to look round his forecourt. They considered that the change to an internet business with no passing trade, with customers coming out to a country village because they had seen his website, constituted a very significant change in the business carried on by the Appellant. In the view of the FTT, the differences between the way in which and the location at which the Appellant's businesses were carried on, led to the conclusion that there was a cessation of trade.

The FTT also accepted the Appellant's evidence on the timing of cessation.

Comment

This case provides helpful guidance on the way in which the FTT will interpret section 169I 4(a) TCGA 92 and the degree of change which is necessary to evidence this. This decision will be of interest to entrepreneurs who are contemplating a shift of emphasis in their business and the disposal of assets used within a business as part of that process. The case also illustrates the potential pitfalls that can arise in corresponding with HMRC on the issues arising on a dispute which may subsequently be litigated (although on this occasion it would appear that the taxpayer's position was not ultimately prejudiced).