Introduction »

ER success

Entrepreneurs’ Relief (ER) was increased from April 2011 to charge qualifying gains of up to £10m per person at only a 10% rate of tax. Compared to other tax rates, this is clearly a great deal but it is important to meet the necessary conditions. In a recent case on ER, one particular scenario was covered.

ER can potentially apply to a disposal of ‘...the whole or part of a business...’ but not the sale of business assets per se. The case concerned the meaning of ‘what is part of a business?’.

The taxpayer provided sales representation to nine manufacturers and suppliers, mainly UK catering wholesalers, on a commission basis. He represented them in relation to about 120 customers.

An agreement was reached with one supplier to sell them the customer database relating to their business, the related goodwill, trademarks and business information, together with the benefit and burden of unperformed contracts and the records. After the sale, the taxpayer could no longer use the trademarks or have any contact at all with those customers. The taxpayer stated that, after the sale, his gross commissions reduced by 55% and his customer base reduced to only 35.

HMRC argued that, in order for the taxpayer to qualify for ER, it was not enough to make disposals of assets used in the business. There had to be a disposal of an identifiable part of the business which on its own was separately definable. HMRC did not consider that this disposal amounted to the disposal of a separately definable business. The business carried on after the disposal was the same as that carried on before, albeit on a smaller scale. In order to qualify for ER there has to be the sale of part of a business.

A non-compete clause in the sale agreement ensured that the taxpayer complied. The sale was of all the business connected to certain brands and this was clearly a separate and definable part of the business.

The taxpayer argued that there were effectively nine separate businesses and that the sale was of a definable separate part of those businesses. He no longer had the trademarks and could no longer approach customers.

The Tribunal were satisfied that the disposal did qualify because it was the disposal of a going concern. They stated:

‘What characterises a sale as a going concern is a sale of goodwill where it exists and he sold the goodwill. He also sold his customer database, a crucial asset in distinguishing a sale of a going concern from a mere sale of assets.’

So success for the taxpayer but not without a fight! Make sure you don’t miss out on 10%.

Introduction »