HMRC loses Upper Tribunal appeal over the meaning of ‘business’

The Upper Tribunal decision in HMRC v GCH Corporation Ltd and others is an important judgment because it confirms that an LLP does not need to be carrying on a trade in order to satisfy the “business with a view to profit” requirement in section 59A TCGA 1992. The Upper Tribunal dismissed HMRC’s appeal and upheld the First-tier Tribunal’s reasoning.

The facts were relatively straightforward. The taxpayers transferred loan notes into an LLP. HMRC argued that the LLP was not carrying on a trade or business with a view to profit, meaning section 59A did not apply and the transfers gave rise to immediate chargeable gains. The LLP’s activities consisted principally of acquiring, holding and selling investments with the intention of making profits. It had purchased shares, sold some at a profit and received dividend income. It had also been established as part of a tax planning arrangement.

The Upper Tribunal agreed with the First-tier Tribunal that:

• The LLP was not carrying on a trade.
• Nevertheless, it was carrying on a business.
• That business was conducted with a view to profit.
• Accordingly, section 59A applied and the transfers into the LLP did not trigger the capital gains tax consequences HMRC contended for.

Why this matters

Perhaps the most significant aspect of the judgment is its discussion of the meaning of “business”.

The Tribunal confirmed that:

• “Business” is a much broader concept than trade.
• Investment activity can constitute a business.
• A business does not cease to be a business simply because one purpose is tax efficiency.
• The correct question is whether there is a genuine commercial activity undertaken with a view to making profits.

That is entirely consistent with long-established tax authorities recognising that “business” extends beyond trading activities.

Tax motive

HMRC also argued that the LLP’s purpose was essentially tax mitigation.

The Upper Tribunal rejected that analysis. It accepted that the tax planning motive existed, but held that this did not prevent the LLP simultaneously carrying on a genuine investment business intended to generate profits.

That is an important reminder that UK tax law generally distinguishes between:

• arrangements that are commercially genuine but tax-efficient; and
• arrangements that are purely artificial.

The existence of tax planning does not automatically negate genuine commercial activity.

Discovery assessments

The taxpayers cross-appealed on HMRC’s discovery assessments.

The Upper Tribunal agreed with the First-tier Tribunal that HMRC had made a valid “discovery” under section 29 TMA 1970. Consequently:

• HMRC lost on the substantive capital gains issue.
• HMRC succeeded on the procedural discovery point.

Overall, both HMRC’s appeal and the taxpayers’ cross-appeal were dismissed.

Relevance to landlord incorporations

Although the case concerns section 59A, not section 162, the Tribunal’s discussion of what constitutes a business is potentially useful in the landlord incorporation context.

It reinforces several propositions that are frequently encountered in section 162 cases:

• “Business” is wider than “trade”.
• Investment businesses are capable of qualifying as businesses.
• Profit-seeking investment activity can amount to a business even if relatively passive.
• The presence of tax planning does not, by itself, prevent genuine commercial activities from constituting a business.

However, there is one important qualification.

Section 162 TCGA has its own body of case law, particularly cases concerning whether a property letting business is sufficiently active to qualify as the transfer of a business as a going concern. The authorities most commonly relied upon in landlord incorporation cases, such as Ramsay v HMRC, Ramsay v HMRC (business relief case) and Elizabeth Moyne Ramsay v HMRC, remain directly relevant.

For that reason, I would describe HMRC v GCH Corporation as persuasive rather than decisive for section 162. It strengthens the general proposition that Parliament intended “business” to have a broader meaning than “trade”, but it does not determine whether a particular landlord’s activities satisfy the business test under section 162. That question will still depend on the facts of each case and the established section 162 authorities.

Read the official case summary here.

Read the full Upper Tribunal decision here.

In HMRC v GCH Corporation Ltd and others, the number of hours devoted to the activity was not a live issue at all. HMRC’s appeal focused on the legal meaning of “business” in section 59A TCGA and whether an investment LLP could be carrying on a business with a view to profit. The Tribunal considered the nature and purpose of the LLP’s activities, not the amount of time spent by its members.

By contrast, in Elisabeth Moyne Ramsay v HMRC, the factual evidence of the taxpayer’s activities was central because the case concerned whether a property letting business qualified as a “business” for section 162 incorporation relief. The Upper Tribunal referred to the First-tier Tribunal’s finding that Mrs Ramsay devoted around 20 hours per week to the business, but it did not establish a legal threshold of 20 hours. Rather, it emphasised that the degree of activity as a whole was what mattered.

Indeed, the GCH judgment expressly discusses Elisabeth Moyne Ramsay. The Upper Tribunal cites it as authority that:

• the meaning of “business” is context-specific;
• “business” is generally broader than “trade”;
• the narrower interpretation adopted in Rashid was not appropriate for section 162; and
• the ordinary commercial meaning of “business” can include an investment business.

The interesting point is that HMRC did not seek to argue in GCH that insufficient hours had been worked. Instead, their argument was one of statutory interpretation: that the LLP’s investment activities were incapable of amounting to a business. The Upper Tribunal rejected that submission.

This is one reason why the GCH decision is helpful in the section 162 context. It reinforces the proposition that the existence of a “business” is not determined simply by counting hours worked. Time spent may be relevant evidence in a property letting case, as it was in Ramsay, but it is not the legal test. The legal test remains whether, viewed objectively and in its statutory context, the activities amount to carrying on a business. That is entirely consistent with the observation in Ramsay that “it is the degree of activity as a whole which is material to the question whether there is a business”, rather than the number of hours alone.

Property118’s own Tribunal case

Some readers may be wondering whether this is the long-awaited Tribunal decision relating to Property118’s own appeal against HMRC’s use of the Disclosure of Tax Avoidance Schemes (DOTAS) legislation.

It is not.

The Property118 case concerns entirely different legal issues and remains awaiting judgment following the hearing earlier this year. As soon as the First-tier Tribunal’s decision is published, we will provide a detailed analysis of the judgment and explain what it means for landlords, professional advisers and the wider property sector.

In the meantime, decisions such as HMRC v GCH Corporation Ltd and others continue to demonstrate that the courts are prepared to apply the statutory meaning of “business” according to established legal principles, rather than the narrower interpretation sometimes advanced by HMRC. We remain confident in the legal arguments presented in our own appeal and look forward to the Tribunal’s judgment being handed down.

What does this mean for your own property business?

While Tribunal decisions such as this help to clarify the law, they rarely provide a simple yes or no answer for individual landlords. Whether a particular property business qualifies for relief under section 162, whether incorporation is appropriate, or whether an entirely different strategy would better achieve your commercial objectives will always depend on the specific facts.

That is why Property118’s consultancy service focuses on the individual circumstances of each client rather than applying a one-size-fits-all approach. We analyse your existing portfolio, financing arrangements, long-term objectives and succession plans before discussing the options available, together with the advantages, disadvantages and practical implications of each.

If you would like an independent assessment of your own circumstances, you can book a confidential one-to-one consultation with an experienced Property118 consultant using the link below.

BOOK YOUR CONSULTATION TODAY