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HMRC internal manual

Business Income Manual

Computing the amount to assess: business changes: changes in scale, nature or location of trade: organic unity

The comments of Lord Donovan in J G Ingram & Son Ltd v Callaghan [1968] 45TC151 at page 166 and Walton J in Rolls-Royce Motors Ltd v Bamford [1976] 51TC319 at page 346, based on the idea of trades having ‘an organic unity’, provide the best guide as to how the issue of changes in the scale, nature or location of a trade should be approached.

The appropriate question will normally be whether, as a matter of fact, a change represents the ‘organic growth’ of a trade. In the Rolls-Royce case (at pages 344-5) Walton J describes a hypothetical situation which illustrates this principle:

`it appears to me that there is all the difference in the world between an organic growth of a trade and a sudden and dramatic change brought about by either the acquisition or the loss of activities on a considerable scale. Let me illustrate what I mean by the case of a company owning a single village grocer’s shop. Over the years it acquires, a few at a time, additional shops; it then organises a central system of bulk buying for them; it may then possibly organise manufacturing facilities in respect of various lines for its chain of shops to sell; and it may well move into the realms of transport and run its own fleet of vans. If it can do all this without ever having discontinued one trade and commenced another - which is the assumption which has to be made in the present case and which may well be correct - well and good. The final trade of that company will, however, as a matter of business activity, bear but little relationship to its original beginnings. Then if, as a result of some crisis, that company has to get rid of all its activities by selling them off, leaving it with only the original village shop, I would myself be under no doubt whatsoever but that there had been a violent change in the trade of that company.’

In some situations (particularly in the context of professions and vocations) a substantial change in the nature of the business will disrupt its organic unity to the point where there has been a cessation (Edmunds v Coleman [1997] 70TC322 at page 329).

But the question usually arises in the context of the acquisition or loss of a business or activity. For the trade, after the change, to be a different one from that carried on before:

  • the change must be dramatic and on a considerable scale (in the Rolls-Royce case activities accounting for between 80% and 90% of sales and between 75% and 85% of labour costs were hived off to a new company, with just the remainder in the hands of the company which was claiming the benefit of the losses made before the restructuring), and
  • the change must happen suddenly (Rolls-Royce lost four of its six divisions overnight).

This means that if different activities overlap for only a short period of time then there may have been no cessation, however different the old and new activities.

In the Rolls-Royce case (at pages 346-7) Walton J approved the Commissioners’ finding that they had to adopt a common-sense point of view.

The Special Commissioners followed the approach taken by Lord Donovan in J C Ingram & Son in the case of Netlogic Consulting Ltd and Another v HMRC (SPC477/05).

The judgments of Lord Carmont and Lord Guthrie in Gordon & Blair, Ltd v CIR [1962] 40TC358 also stress that questions of cessation caused by a change in activities are a matter of degree.

In deciding whether a trade has ceased and a new one commenced it will not normally be appropriate to follow the approach of The Lord President (Clyde) in Gordon & Blair, which was to seek to identify some activity which is the essence of the trade, and ask whether or not that continues to be present.