The First-tier Tribunal has issued its decision in the case of M Gilbert (t/a United Foods) v HMRC, one of the first cases concerning a claim for entrepreneurs' relief to reach the First-tier Tribunal. The Tribunal was asked to decide whether a taxpayer had disposed of part of his business or, as HMRC argued, simply sold some of the assets used to carry on the business. The distinction is significant as, provided certain conditions are met, the disposal of part of a business will qualify for entrepreneurs' relief giving rise to a 10% rate of tax, instead of a rate of 18% or 28% where the relief is not available.
In this case the taxpayer provided sales representation services to nine catering wholesalers. In August 2008, one of the wholesalers entered into an agreement with the taxpayer to acquire the part of his business that related to the wholesaler's products. The sale agreement described the transaction as a sale of a going concern and the assets sold included the customer database and associated goodwill, trade marks that the taxpayer had registered relating to the wholesaler's products, business records and the benefit and burden of unperformed contracts.
The taxpayer subsequently submitted his tax return and claimed entrepreneurs' relief in respect of the capital gain realised on the sale. HMRC notified the taxpayer that the disposal did not qualify for entrepreneurs' relief as it was not enough for him to make disposals 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. HMRC contended that the business carried on by the taxpayer after the disposal was the same as that carried on before, albeit on a smaller scale. The taxpayer claimed that there were in fact nine separate and identifiable businesses, one of which he had sold. On that basis, he appealed to the First-tier Tribunal.
The disposal of a business involves more than the sale of business assets, but the question before the Tribunal was how much more was required. In allowing the appeal, the Tribunal rejected HMRC's approach of focusing on the nature of the retained business rather than the viability of the assets transferred and held that the viability of the part transferred was the key to determining whether there was a sale of part of a business. The Tribunal found that what characterises a sale as a going concern is a sale of goodwill, where it exists, and that the sale of the customer database was crucial in distinguishing this transaction as a sale of a going concern from a mere sale of assets.
If the Tribunal's analysis is correct, and it is accepted by HMRC, the decision will be a significant one and good news for taxpayers who sell their business in stages. However, a decision by the First-tier Tribunal is not binding and it remains to be seen whether HMRC will accept this approach. It should be noted that every case will turn on its own particular facts and taxpayers intending to dispose of their business in stages should take advice prior to agreeing a sale and take whatever steps they can to ensure that the disposal qualifies for entrepreneurs' relief.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.