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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation tax: small profits relief: whether trade or business carried on - business compared with trade

Business is a wider concept than trade. To be in business a company should be actively engaged rather than passive, although the degree of emphasis that should be placed on being active was a matter of debate in the cases above. Generally when a company turns assets to account and earns an income return it is carrying on a business. But there may be exceptional cases on particular facts. Several recent cases demonstrate the importance of fact finding and provide guidance on the factors that may be relevant in considering whether a company’s activities amount to a business.

In the case of HMRC v Salaried Persons Postal Loans [2006] EWHC 763 the company traded in money lending until 1995 after which it continued to let former premises which had been let continuously after it had relocated in 1966. The Special Commissioner made a finding of fact that the continued letting of the premises did not constitute carrying on a business; although it was relevant that the company’s actions in letting the property were authorised by its Memorandum of Association, this was not determinative. The High Court held that it did not inevitably follow that a company was carrying on a business because it received a particular type of income such as rent which was generated from holding a particular type of asset such as land. The property had not been purchased as an investment, so the limited property related activity coupled with the fact that the premises were a small part of overall assets entitled the Commissioner to reach the view that the company was not in business.

The Special Commissioners in Land Management Ltd v Fox [2002] SpC306 found on the facts that a company letting residential freehold property was in business. Supporting factors included the company’s Memorandum of Association which specified that it was incorporated for the purpose of undertaking business of an investment nature, the receipt of interest from an associated company, rent and bank interest, and incurring expenditure on repairs, insurance and, in two of the years, on professional fees. The approach taken was to examine the activities of the company separately and then to look at the activities as a whole. The same conclusion was reached in both cases that the company was in business.

In Jowett v O’Neill and Brennan [1998] STC 482 a company received income as bank interest but was held not to be in business. The company held money in an interest earning bank deposit account as its sole asset in the year in question. The sums held were profits that had accumulated during previous trading which had ceased in the period in question, and the company subsequently commenced a new and different trade in a later period. The case demonstrates that mere receipt of income may not be conclusive. By contrast, a company does not have to receive income to be carrying on a business within CTA10/S25 (3) (formerly ICTA88/S13 (4)); the holding of assets (particularly if they are capable of producing income or gains) or the laying out of expenses may be evidence of a business activity.

These cases demonstrate the importance of undertaking a detailed review looking at both specific activities of a company in the period in question and the overall context of what a company actually does and why. Relevant factors are:

  • Is the company fulfilling the purpose for which it was originally set up?
  • What is the source of any income? Why were any assets generating income acquired by the company - was this in line with the business purpose?
  • What actions have been undertaken by the company in the period in question? What decisions have been taken by the board and senior management? Have investments been actively managed as part of business purpose?
  • What expenses have been incurred by the company in the period in question?
  • What actions are authorised by the company’s Memorandum of Association (under Companies Act 2006, in the Articles or registration documents)?