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HMRC internal manual

Capital Gains Manual

Non-resident Company: exemptions: Economically Significant Activities - for 2012-13 and later years - practical considerations

The term economically significant activities should be straightforward to apply in practice provided a clear understanding of the nature of the company’s activities is held. If a company is carrying on genuine commercial activity then the test would be met. For example a joint property venture in a genuine commercial business would satisfy this test. Difficult areas that may need to be considered include investments, holding companies and cases where the asset was used wholly or mainly in activities carried on wholly or mainly in the UK:

Asset used in activities wholly or mainly in the UK

Following the approach of the Advocate General in Case C-196/04 Cadbury Schweppes the question of the genuineness or otherwise of the company’s activities focuses on the activities of the company in the host country (Member State or third country other than the UK). However, although the specific exclusion in section 13(5)(ca) is not available for an asset used for the purposes of ‘economically significant activities’ carried on by the company wholly or mainly in the UK, consideration must still be given to how the asset has been used. If it has been used by the company in carrying on legitimate economic activities which reflect economic reality then the disposal of the asset will be outside the scope of TCGA92/S13.

Investment companies

Investments comes within the meaning of “goods and services to others on a commercial basis” for the purposes of TCGA92/S13A(4). So an investment business may provide a service to investors on a commercial basis, for example a financial service company providing investments to the general public would be providing a service on a commercial basis.

However a company holding or making investments solely for its participants is unlikely to meet the test - it may just be a private money box.

A distinction needs to be drawn between a business that uses the asset within its business of asset management and for which it would expect reward from the management activity itself and merely seeking to benefit from the actual or anticipated increase in the value of the asset.

Holding companies

It is possible for a holding company to undertake economically significant activities, for example providing management services to other companies in a group.

A holding company may undertake no economically significant activities within the holding company itself. For the purposes of applying the economically significant activities test HMRC will look at the wider business structure in assessing the business of the holding company.