The recent case of Russell v HMRC TC 2299 concerned a claim to entrepreneurs relief in respect of a disposal of farmland.
Three brothers carried on a farming business and in 2009 they disposed of 35% of the farmland at a substantial capital gain.
At first sight the claim to entrepreneurs relief looked hopeless. There is no doubt that the land was used for farming, but entitlement to entrepreneurs relief requires the disposal of the whole or part of a business. This was simply the disposal of part of the land. McGregor v Adcock 1977 STC 206 is good authority that the mere sale of the farmland is not a disposal of part of the farm business.
However, Mr Russell felt that the application of these general principles was inappropriate in his circumstances. The farm comprised of approximately 22 hectares of barley. That was the business and his job as farmer was to look after the business. The sale of 7 hectares meant that 35% of his business was gone so why should it not be said that the sale of the 7 hectares was not a sale of part of the business.
The Tribunal, taking their lead from McGregor v Adcock looked at the nature and extent of the business activities before and after and concluded that Mr Russell ran the business in exactly the same way both before and after the sale. That does not seem to be in the least surprising - and indeed must be inevitable if you are selling part of the business. Why should you conduct the remaining part of the business any differently from the way you conducted the whole? The more important element should surely be the extent of the activities after the sale - and in this case his activities were clearly scaled down to reflect the fact that the business was rather smaller than it was before.
That sounds good - but not good enough. In Atkinson v Dancer it was said that where a farmer sells some land which he has been using for a farming business, that will not prima face amount to the sale of part of the farming business because it is not in itself the sale of any part of the business notwithstanding that the sale of the land on which the business has been conducted will reduce the activity of the farmer and probably his profits.
This is very powerful authority but possibly too broad an explanation to deal with Mr Russell's circumstances. It is clear that in the context of a dairy farm, the sale of a field or the sale of a barn (or in a manufacturing company the sale of a factory with the processes being transferred to other premises) would represent the mere sale of an asset without the disposal of any part of the business. But Mr Russell's business was cultivating barley on a 22 hectare field. That was the whole of his business so one might enquire what he would have to do in order to sell part of his business?
Maybe the crop had been harvested and the land was just bare land, the sale of part of it might not represent part of a business. But what if he sold 35% of the land (including the growing barley) to another farmer who continued to farm it in the same way? Why should that not be the sale of part of the business? And how about the position when new barley has just been sown? Should it really make a difference whether the land is sold immediately before or after sowing or harvesting?
One might reasonably expect the legislation to be capable of applying to these simplest of circumstances and perhaps the judgments in Atkinson v Dancer and McGregor v Adcock were applied too literally to Mr Russell's circumstances. Otherwise it would seem to be impossible for Mr Russell to dispose of part of his business and that would be a harsh and possibly unreasonable interpretation. Why should the legislation not be interpreted purposively so that some effect can be given to it, rather than for purposive interpretations only to apply against the taxpayer.