HMRC internal manual

Capital Gains Manual

CG64060 - Business Asset Disposal Relief: trading company and holding company of a trading group - meaning of "in the course of, or for the purposes of, a trade"

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.

TCGA92/S165A (4) (a) & (b) and TCGA92/S165A (9) (a) & (b)

An activity is carried on in the course of, or for the purposes of, a trade if it is carried on in the process of conducting or preparing to carry on the trade. So, for example, where a company, or group, renegotiates an ongoing trading contract relating to its trade this will be an activity undertaken “in the course of” its trade. It will be clear in most cases whether an activity that a company, or group, undertakes is carried on in the course of, or for the purposes of, its trade or not. But similar transactions can be undertaken for different reasons depending on the facts.

For instance, a company, or group, may buy some land. If the company, or group, is a property developer and buys the land as trading stock, or a manufacturer and buys it to provide a site for a factory it intends to build to house its manufacturing process, the buying of the land would probably count as a trading activity. However, if a company, or group, buys the land so as to earn future rental income, or for potential capital growth, the buying of the land would not normally be a trading activity.

Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company’s, or group’s, trade. An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company, or group, might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future.

The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company, or group, may intend distributing the monies received to its members. Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company’s, or group’s, trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company’s shareholders.

However, the long term retention of significant earnings generated from trading activities may amount to an investment activity. The first point to consider is whether or not there is any identifiable activity distinct from the trading activity.

Factors to consider include:

  • whether the earnings are retained for the present and future cash flow requirements of the trading activity.
  • the nature of the underlying investments used as a lodgement for the funds, for instance if the funds are locked into long term investments or the investments themselves are high risk that may suggest that they are not available for the trading activity.
  • the extent of the company’s (or group’s) activity in managing the investments.
  • whether the funds have been ear-marked for a particular use in the trading activity.

If a separate investment activity is identified then it will become necessary to determine whether that is substantial in terms of the overall activities.

Whether or not making and holding investments are part of a company’s, or group’s, trading activities is a question of fact that can be determined only by reference to all the relevant circumstances.