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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Entrepreneurs’ Relief: trading company and holding company of a trading group - the meaning of "substantial"

Most companies and groups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities “… do not include to a substantial extent activities other than trading activities”. The phrase “substantial extent” is used in various parts of the TCGA92 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. Substantial in this context means more than 20%.

The question to ask is how should a company’s non-trading activities be measured to assess whether they are substantial?

There is no simple formula to this but some, or all, of the following are among the measures or indicators that might be taken into account in reviewing a particular company’s status. These indicators, adopted for Entrepreneurs’ Relief, are the same as those used for the old taper relief and in the Substantial Shareholding Exemption for corporation tax.

 
 
 
 
 
 

Income from non-trading activities

For example, a company may have a trade but also let an investment property. If the company’s receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.

The asset base of the company

If the value of a company’s non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see above regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company’s assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company’s trading and other activities. Which measure is appropriate will depend on the facts in each case.

Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities

For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.

The company’s history

For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, for instance if a company’s trade was seasonal, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when non-trade receipts amounted to a substantial proportion of total receipts.

Balance of indicators

The indicators discussed should not be regarded as individual tests to which a 20% “limit” applies. They are factors, or indicators, that may be useful in establishing whether there is substantial overall non-trading activity. It may be that some indicators point in one direction and others the opposite way. You should weigh up the relevance of each in the context of the individual case and judge the matter “in the round” (see approach of the Special Commissioner in the IHT case of Farmer and another (exors of Farmer dec’d) v IRC SpC 216). If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the First-tier Tribunal.