This month, we consider the types of business that qualify for various tax reliefs and the thresholds which must be met. In Putney Power Ltd and another, EIS relief was denied by the FTT on the basis that the taxpayers had failed to commence trading within the requisite time limits – concluding that a trade commences only when the trader is 'open for business'. In Dimitrakis G Demetriou and another, the FTT considered that a fishery business did not qualify for BPR on the basis that it was mainly an investment business. Equity Advisory Ltd illustrates the high threshold for departing in tax litigation from the default position of open justice, even where this concerns a non-party. Finally, two recent FTT decisions (Hill and Farmer) remind us that the test for whether a taxpayer has a reasonable excuse for non-compliance with their tax obligations is an objective one, and so genuine reliance on an advisor or an honest (if mistaken) belief that they are not in default will not necessarily meet the threshold.
What is trading?
As readers will know, equity investors must meet certain prescribed conditions to obtain relief under the Enterprise Investment Scheme ('EIS'). This includes the need to invest in a company that is carrying out a qualifying trade or will do so within two years of the investment; this was the issue in dispute in Putney Power Ltd and another v HMRC [2024] UKFTT 870 (TC).
HMRC denied that shares issued respectively by Putney Power and Piston Heating Services qualified for EIS, arguing that the companies had not commenced their trade by 4 April 2018 (the relevant EIS deadline).
HMRC said that because the power stations constructed by the appellant companies for their trade of generating and selling electricity were not producing electricity by the EIS deadline, neither was trading. The appellant companies took the position that a trade can commence at an earlier stage than when supply begins: framework agreements with potential customers were sufficient. The FTT agreed with HMRC. A trade commences when the trader is 'open for business'. A trader cannot be open for business until they are ready to provide goods or services and this requires the trader to have assembled whatever infrastructure (if any) is necessary for them to provide the goods/services (though this need not be completed, as long as it is operational). Once the trader has assembled their operational infrastructure (if required), they open for business by taking a step that exposes them to real operational risk and reward. However, taking this step does not accelerate commencement of trade if the trade infrastructure is not completed.
On the facts, neither company was involved in the exchange of goods or services for reward, nor were they ready to face customers by the deadline – Putney had not completed construction of the power plant (and Piston was even further behind). The fact that Putney had entered into contracts for the purchase of gas and the sale of electricity and made arrangements to commit to provide electricity to the Grid once the plant was operational was not sufficient in the absence of infrastructure which would enable it to deal with its customers as intended/contracted.
Be wary of assuming that a non-binding 'advance assurance' that EIS relief will be available is a guarantee that shares will qualify for EIS
The FTT noted that the very clear timing requirement established in the EIS legislation is a decision taken by Parliament. It is not for the court to seek to extend the meaning to create additional flexibility.
In reaching this conclusion, the FTT disagreed with the FTT's decision (relating to entrepreneurs' relief) in Wardle v HMRC [2024] UKFTT 543 (TC) (as discussed in our 19 July 2024 briefing). In that decision the FTT held that entering into contracts amounted to 'operational activity', albeit no sale had yet been made by the business, and this was sufficient for a trade to have started even if the business was not in a position to deliver under those contracts. HMRC is reported to be appealing that decision.
There are two key lessons here:
- Be wary of assuming that a non-binding 'advance assurance' that EIS relief will be available is a guarantee that shares will qualify for EIS (especially if, as in Putney, there is a material variation to the planned business activity that is not then communicated to HMRC – a point which did not matter in this case but which counsel for HMRC in this case said was expressly an issue in another situation).
- Before the deadline, a putative trader must both (i) be operationally ready to provide goods/services and (ii) have taken a commercial step in the preparation of providing those goods/services, i.e. exposing themselves to the risk and reward of trade.
A fishy business? No, a fishy investment
The FTT denied Business Property Relief ('BPR') in respect of a deceased taxpayer's business, in Dimitrakis G Demetriou and another v HMRC [2024] UKFTT 830. The case turned on whether a wild fishery business consisted 'wholly or mainly of making or holding investments' since such types of business are excluded from qualifying for BPR.
The business in question required customers to pay a fee (annually or on a daily basis), in return for which they could fish in the part of the river owned by the taxpayer. Customers were offered fishermen's huts, a toilet, a car park and storage for fishing equipment (as well as equipment for the maintenance of the land and river).
The FTT considered a number of the activities which were carried out, including the provision of the infrastructure, the management of the landscape and the management of bookings, and concluded that these were all investment activities on the basis that they were all directed at maintaining or enhancing the capital value of property and obtaining regular income.
Other activities were found to be non-investment (including first aid, hospitality and fishing advice); however, these were 'not of sufficient significance to tip the balance of the business overall from an investment business to a non-investment business'. It should also be noted that the FTT commented in passing that this was a business carried out for love rather than money, pointing to the declining income generated by the activity.
Despite this decision being consistent with a long line of cases (often relating to caravan parks or other holiday letting businesses) characterising the generation of income from land and property as investment, the FTT's reference to declining income as part of the factual matrix raises concerns as to whether this is a feature that HMRC might seek to latch onto to argue that a business falls into the exception to BPR. Declining profitability should not de facto prevent the availability of BPR.
The decision in Equity Advisory Ltd illustrates the high threshold for departing in tax litigation from the default position of open justice, even where this concerns a non-party
Open justice: implications for third parties
We have commented previously on the tension between open justice and privacy in the context of tax cases. Past decisions, such as HMRC v The taxpayer [2024] UKUT 12 (TCC) (discussed in our 16 February 2024 briefing) and L v HMRC [2024] UKFTT 401, Osmond and another v HMRC and another [2024] UKFTT 413 and Osmond and another v HMRC and another [2024] UKFTT 414 (mentioned in our 21 June 2024 briefing), have all emphasised that the principle of open justice is 'a very potent one' and that any departure from it can be justified only in limited circumstances.
The FTT's recent decision in Equity Advisory Ltd v HMRC [2024] UKFTT 784 (TC) also considers the balancing act between the principles of open justice and privacy. Here, it appears that part of the factual matrix applying to the substantive case included a payment made by a third party bank in settlement of a claim. The third party bank was concerned that the litigation process would inevitably result in details of these 'commercially sensitive matters' being brought into the public domain, and so applied to the FTT for an order that the eventual decision be redacted to remove the bank's identity, the settlement amount and 'any information likely to allow members of the public to identify either the Bank or the Settlement Sum'.
In dismissing the application, the FTT noted that decisions do 'sometimes name non-parties' and include 'details of their affairs which perhaps those other persons would have preferred not to be ventilated in a publicly accessible document'; however, 'that is part and parcel of the nature of public decision-making and there have to be strong reasons to redact'. The FTT accepted that the bank's identity and the size of the settlement could be redacted 'whilst preserving the textual integrity and intelligibility of the rest of the decision'. However, concerns were expressed about the possibility of 'jigsaw identification' and that, in order to protect against this, it was feasible that 'whole swathes' of information might require redaction. Whilst such an approach might, in certain situations, 'be just and fair', the FTT did not think this was the case here.
This decision illustrates the high threshold for departing in tax litigation from the default position of open justice, even where this concerns a non-party.
Penalties and reasonable excuse
Two recent FTT decisions remind us that the test for whether a taxpayer has a reasonable excuse for noncompliance with their tax obligations is an objective one, and genuine reliance on an adviser or an honest (if mistaken) belief that they are not in default will not necessarily meet the threshold.
In Hill and another v HMRC [2024] UKFTT 844 (TC), the taxpayers were scheme administrators for two pension schemes, operated on their behalf by Liddell Dunbar Ltd ('LD'). In January 2018, HMRC issued information notices to the taxpayers, but LD engaged a firm of tax advisers who informed the taxpayers that there 'should be no need to respond' to the information notices (on the basis that the pension scheme had been wound up).
'Whilst a taxpayer is not required to second-guess their adviser, or to obtain multiple opinions, it is clear that they are required to take reasonable care in relying on their adviser'
In December 2018, HMRC issued penalties of £300 to each of the taxpayers for failure to comply with the information notices, followed by daily penalties in February 2019. Throughout, the taxpayers were consistently advised that no action was required on their part.
FA 2008 Sch 36 para 45 provides that 'liability to a penalty ... does not arise if the person satisfies HMRC or ... the tribunal that there is a reasonable excuse for the failure'. However, 'where the person relies on any other person to do anything, that is not a reasonable excuse unless the first person took reasonable care to avoid the failure or obstruction'. Here, the taxpayers argued that they 'were not tax experts and were not in a position to challenge advice being given to them', and so they acted reasonably 'in following the advice that they were paying for'. However, the FTT noted that 'whilst a taxpayer is not required to second-guess their adviser, or to obtain multiple opinions, it is clear that they are required to take reasonable care in relying on their adviser'. Here, the FTT agreed with HMRC that the taxpayers had not taken objectively appropriate steps to consider whether it was reasonable to rely on the advisers: they took the advice at face value, did not request copies of correspondence with HMRC, failed to read the information notices in any detail or ask the advisers for further information. Accordingly, the penalties were upheld in full.
We have previously considered other decisions (including, for example, Cruise v HMRC [2023] UKFTT 41 (TC), Golden Grove Trust v HMRC [2023] UKFTT 27 (TC) and MPTL v HMRC [2022] UKFTT 472 (TC): see 17 February 2023 briefing) which emphasised that reliance on an adviser is not always a 'get out of jail free' card for the taxpayer. The decision in Hill reiterates this point – as indicated by Sch 36 para 45, although it is possible for a taxpayer to be found to have a reasonable excuse as a result of reliance on a professional adviser, this will only be the case if the taxpayer also takes reasonable care. Taxpayers cannot absolve themselves of all responsibility simply by engaging an adviser – as far as HMRC and the tribunals are concerned, the buck stops with the taxpayer (albeit secondary claims against an adviser may be a possibility for the taxpayer if professional standards have been breached).
In Farmer v HMRC [2024] UKFTT 790 (TC), the taxpayer again had a genuine desire to comply with their tax obligations; however, the decision illustrates that this, of itself, is not enough to meet the threshold for reasonable excuse.
Here, the taxpayer attempted to submit a paper tax return for the 2021/22 tax year on 27 April 2022. However, although the postal address used had at one time been connected with HMRC, this was no longer the case, meaning that the return failed to reach HMRC until 4 September 2023 – 318 days late – by which stage a number of penalties had been issued.
'For an honestly held belief to constitute a reasonable excuse, it must also be objectively reasonable for that belief to be held'
The FTT noted that, whilst the taxpayer's default may not have been intentional, this does not, by itself, amount to a reasonable excuse: 'for an honestly held belief to constitute a reasonable excuse, it must also be objectively reasonable for that belief to be held'. In the circumstances, the FTT concluded that the taxpayer had a reasonable excuse for late filing, but only up until the point at which the first penalty was received (in February 2023). At this stage, 'the initial late filing penalty notice should have prompted further action on the part of the Appellant' and the fact that the taxpayer took no immediate action meant that 'the failure was not remedied without unreasonable delay following the initial late filing penalty'. Accordingly, whilst the initial late filing penalty was set aside, all remaining penalties were upheld.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
