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Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP considers the meaning of ‘business’ when considering the count of associated companies, and some possible implications.When calculating corporation tax liabilities for client companies, it can sometimes be difficult for practitioners to accurately determine the number of associated companies for corporation tax purposes. For example, it may be necessary to consider whether a company was carrying on a business during the accounting period, or whether it can be disregarded when counting the number of associated companies (TA 1988, s 13(4)).

Rental income

In Salaried Persons Postal Loans Ltd v HMRC Comrs [2005] SpC 504, a company (M Ltd) traded for many years until ceasing in 1995. It moved business premises in 1966, and let out the old premises. The same tenant occupied the premises from 1966 onwards. Following the cessation of trading in 1995, M Ltd’s only source of income was rental income from its former business premises, in respect of which it incurred agent’s fees for collecting rents etc plus accountancy costs. The Revenue contended that M Ltd was carrying on a business, but the Special Commissioner allowed the taxpayer’s appeal. It was relevant to consider why the company received income and what it actually did to receive the income. M Ltd had merely continued letting its old trading premises, which it had done for nearly 30 years.

Bank Interest

This decision follows Jowett v O’Neill and Brennan Construction Ltd [1998] STC 482 concerning the passive receipt of bank interest on funds derived from former trading, which was also held not to amount to a business activity for the purposes of TA 1988, s 13(4). A characteristic of both cases is the fact that both income sources were entirely passive, i.e. in the Jowett case putting money on deposit and receiving rental income did not involve an investment business or the carrying on of a trade or business, nor did the receipt of rental income in Salaried Persons Postal Loans (accounted for by the agent). In addition, both income sources were derived from former trading activities.

Whilst the decisions in both cases are potentially helpful in the context of associated companies and small companies’ relief, they could prove to be something of a double-edged sword, as they call into question the meaning of a ‘business’.

’Business’

The capital gains tax relief provisions upon the incorporation of a business (TCGA 1992, s 162) refer to a ‘business’ as opposed to a ‘trade’. In the Capital Gains Manual HMRC state (at paragraph 65713): ‘It is a question of fact whether a particular activity does constitute a business. It is not easy to draw the line, but we would resist claims that the passive holding of investments or an investment property amounted to a business.’ However, a rental income business would appear to qualify for these purposes, assuming that it is actively carried on as such.

There are various other references to ‘business’ in the taxing statutes, such as in respect of reconstructions involving the transfer of a business (TCGA 1992, s 139) and management expenses for a ‘company with investment business’ (TA 1988, s 130). The question whether a company is carrying on a business may require some care, as the answer might not always be as obvious as perhaps it should be.

January 2006

Mark McLaughlin CTA (Fellow) ATT TEP

The above article is adapted from ‘Busy Practitioner’ (January 2006), a monthly publication from Tottel Publishing.