M Gilbert v HMRC [2011]

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03 January 2012

Introduction

In M Gilbert v HMRC [2011](UK FTT 705 (TC)), the Appellant's appeal was allowed by the First-tier Tribunal against the disallowance of Entrepreneurs' Relief by HMRC on the sale of part of the Appellant's business.

Facts

The Appellant had carried on a business of selling food on commission, representing nine different suppliers. In 2008, he agreed to sell part of his business to one of the suppliers (Fayrefield Foods Limited ("FF Ltd"). The sale agreement defined "business" sold as that part of the Appellant's business consisting of the sale of FF Ltd products to customers.

The agreement stated that the purchase was to include the customer database relating to the business and goodwill, the trade marks which the Appellant had registered relating to various brands and business information, together with the benefit and burden of unperformed contracts and the records.

After the sale the Appellant could no longer use the trademarks nor have any contact with the customers of FF Ltd.  

In his 2008/09 tax return, the Appellant showed a gain from the disposal of the assets of £285,000, and sought to claim Entrepreneurs' Relief which reduced the amount of the gain by four-ninths.  

HMRC enquired into the return and decided that Entrepreneurs' Relief was not available.  The Appellant appealed.  

Submissions

HMRC's Submissions

HMRC argued that for the Appellant to qualify for Entrepreneurs' Relief it was not enough for him to make a disposal of assets used in the business: there needed to be the disposal of an identifiable part of the business which on its own was separately definable.

Whilst the Appellant sold the brands and customer base, HMRC's view was that, in the scheme of how the business itself operated, those disposals did not amount to the disposal of a separately definable business.  

HMRC accepted that if the changes to the business caused by the sale of the assets could lead to the conclusion that the position after the sale was wholly different from the position before the sale, then it might be reasonable to say that the business after the sale was not the same as the one before, and therefore part of the business must have been sold.

However, HMRC contended that the operation of the business in this case did not appear to have changed wholly or even noticeably after the disposal of the brands/customer base.  HMRC submitted that on the facts the same business was being carried on after the sale as before.

Therefore there was not a material disposal within the meaning of the legislation so that Entrepreneurs' Relief was not available.

Appellant's Submissions

The Appellant submitted that effectively there were nine separate businesses. The sale by the Appellant was of all the business connected to FF Ltd and various brands.  The Appellant argued this was clearly a separate and definable part of the business.  

Judgment

Taking into account each parties' submissions, the only question for the Tribunal was whether there had been a "disposal of....part of a business".  Assessing the facts, the Tribunal found that the Appellant did dispose of the business as a going concern, judging that the business sold was a "viable section" (referencing Lord Walker's Maco Door comments) of the business recognisable as a business even when separated from the whole.

The Tribunal reached this conclusion because the transfer of business included the customer database, goodwill, trade marks, business information, and the benefit and burden of unperformed contracts and records.  Particularly, the sale of the customer database was regarded as a crucial asset in distinguishing a sale of a going concern from mere sale of assets.   

The appeal was allowed.  

Analysis

The First-tier Tribunal reviewed "business" tests from various areas of tax law (capital allowances in Maco Door, industrial buildings allowance in Bestway Holdings Ltd, the VAT TOGC rules in Article 5 of the Value Added Tax (Special Provisions) Order 1995), and decided that the "viable section" test in Maco Door is the one that should be used in this case.

The Tribunal commented that one way of testing whether there is a "viable section" is to consider what would be the case if the transferee was an empty shell until the transfer.  Would the activities of the transferee using only the assets transferred be capable of constituting a trade or business? The Tribunal judged that in this case they thought they would.   

It will be interesting to see whether the "viable section" test is applied in future Entrepreneurs' Relief tribunal cases which question whether part of a business has been transferred or not.  

If you have any queries, please contact Natalie Stoter in the Corporate tax team on natalie.stoter@burges-salmon.com.

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