In the recent case of Delaney [2024] UKFTT 00214 (TC), the First-tier Tribunal (FTT) found that the disposal of a business took place after significant changes were made to what was then called entrepreneurs’ relief (now business asset disposal relief), with the result that the taxpayer missed out on the 10% rate of capital gains tax (CGT). In coming to its decision, the FTT had to establish when the transfer took place in the absence of a formal agreement. The decision is a useful reminder of the need to ensure that documentation is prepared, for incorporations and more widely. 

The issue

In the 2014 Autumn Statement, then Chancellor George Osborne announced that entrepreneurs’ relief would no longer be available in respect of goodwill on the transfer of a business from an individual to a company related to the seller. In other words, the 10% rate of CGT would not apply on the sale of goodwill on an incorporation. The measure was legislated for by s169LA, Taxation of Chargeable Gains Act 1992 (TCGA 1992) with effect for disposals made on or after 3 December 2014.

Around that time, Ms Delaney was looking to incorporate her nursery business. The incorporation took place, but it was not documented in that a formal transfer agreement was not prepared. On what date then had the transfer happened? This question was given added importance by the changes to entrepreneurs’ relief. If the disposal was made on or after 3 December 2014, Ms Delaney could not claim entrepreneurs’ relief and her CGT liability would increase by £196,902 (see below). It fell to the FTT to determine whether or not Ms Delaney’s claim for entrepreneurs’ relief was valid. 

The facts

Ms Delaney began to trade in 1996, opening a nursery from premises in St James’ Norlands Church (St James’). She added a second nursery in 2001 from premises in St Clements Notting Dale Church (St Clements). The use of the premises was under the terms of personal licences that were renewed periodically. 

By 2011, the business was established and successful and it was suggested to Ms Delaney that she may wish to consider transferring the business to a limited company. In 2012, Ms Delaney entered into renewal negotiations for the St James’ and St Clements premises. She raised the possibility of the landlord (the church) granting a lease to a company rather than renewing her personal licences. 

The lease negotiations proved to be difficult; although the church had indicated it would grant a lease in respect of St James’, it would not do so for St Clements. In November 2013, Ms Delaney began to look for alternative premises from which she could run a combined business. Around the same time, Ms Delaney’s solicitors wrote to her setting out work they intended to carry out on her behalf, including incorporating a company to carry on the existing business and preparing an agreement for the sale of the business to the company (this was not done). MDNSL was incorporated on 21 November 2013.

Suitable premises were found in December 2013. Unfortunately, negotiations for the new premises did not run smoothly. The landlord pulled out in January 2014 only to return to the table in March 2014 and, as the property was in residential use, planning permission was required for a change of use. Terms were agreed by MDNSL on 9 September 2014. The lease provided that MDNSL would apply for planning permission and that, if planning permission was not granted, MDNSL was entitled to give one month’s notice of termination of the lease. Planning permission was granted on 11 December 2014. 

In June 2014, MDNSL had employed a headteacher with a delayed start date of 5 January 2015. From the date she joined to 31 August 2015, the headteacher supervised works to the new premises and prepared and submitted the (successful) Ofsted applications. Although Ofsted registration was essential for running the business, the FTT accepted Ms Delaney’s evidence that there was no real risk that registration would be refused. The head teacher was paid by Ms Delaney, not by MDNSL. From 1 September 2015, new contracts with parents were agreed with MDNSL. Although existing contracts were not novated to MDNSL, the parents paid MDNSL.

Accounts and tax returns

MDNSL’s accounts for the period to 31 August 2015 state that the company commenced trading on 1 September 2015. The 31 August 2016 accounts for MDNSL include the acquisition of the business at a cost of £1,105,000. This valuation was arrived at on 12 February 2016 by reference to Ms Delaney’s accounts for the three years ended 31 August 2015. MDNSL’s accounts for the earlier period from 21 November 2013 to 31 August 2014 show it as a dormant company.

Ms Delaney reported her capital gain on the disposal of the business in her tax return for 2015/16. In the return, Ms Delaney noted that the transfer had taken place on 1 September 2015 and that she had claimed entrepreneurs’ relief in respect of the gain on the basis that there was an unconditional obligation to sell the business prior to 3 December 2014. In later correspondence with HMRC, Ms Delaney’s accountants stated that the disposal had been incorrectly reported in the return for 2015/16 and should have been reported in the return for 2013/14. However, before the FTT, counsel for Ms Delaney asserted that this statement had been made without authority and was incorrect. 

The arguments

Ms Delaney and HMRC agreed that the business was disposed of by way of a contract inferred by conduct. Section 28, TCGA 1992 provides that the date of disposal of an asset for CGT purposes is: 

• in the case of an unconditional contract, when the contract is made (and so not, if different, when the asset is transferred); and
• in the case of a contract that is conditional, when the condition is satisfied. 

For Ms Delaney, it was argued that she and the company entered into an unconditional contract on 21 November 2013 when the company was incorporated (and certainly no later than 9 September 2014), and the transfer was effected on 31 August 2015. Therefore, applying s28, the date of disposal was 21 November 2013 (and certainly before 3 December 2014).

For HMRC, it was asserted that an unconditional contract was entered into on 31 August 2015, and certainly not before 3 December 2014. All of the steps taken by Ms Delaney before 3 December 2014, from securing the lease to hiring the headteacher, were preparatory and not sufficient to establish a binding commitment to acquire the business. Further, if a contract was made before that date, it was ultimately conditional on the company securing Ofsted registration as trading would have been impossible without it.

The decision

Dismissing the appeal, the FTT found that there was “insufficient certainty” as to Ms Delaney and the company’s intentions prior to 3 December 2014. The steps taken by the company in the run-up to that date merely put it in a position to buy the business; it was not certain at that point that the transfer would take place as the company awaited planning permission and Ofsted registration, and a mechanism for deciding the consideration for the transfer had not yet been agreed. 

Ms Delaney had failed to discharge the burden of proof on her to establish that the contract was made before 3 December 2014. Therefore, entrepreneurs’ relief was not due in respect of the disposal of goodwill.

Wider points

On the face of it, this case is about the changes to entrepreneurs’ relief made in late 2014 that took effect on the day that they were announced. However, there is a wider point to be made about ensuring documentation is in place to evidence intentions and/or actions. This is particularly relevant where the date of a transaction or event impacts on the tax liability, as it did in this case to the tune of close to £200,000. 

Early on in the process, Ms Delaney’s solicitors had indicated that they would prepare a business sale agreement. This wasn’t done and the suggestion is that this was seen to be an unnecessary cost as there was no risk of disagreement between Ms Delaney and the company. 

The FTT considered that decision to be “naïve”, and anyone advising on an incorporation in future would be wise to bear in mind the following words from the FTT: “A limited company offers protection to the owners which is absent in an unincorporated entity with the consequence that a limited company has a far wider group of stakeholders than an unincorporated business including customers, the landlord of leased property, lenders, employees etc. It is the company (and thereby the wider stakeholders of that company) whose interests would have been protected by a business sale agreement.”

This issue of a lack of documentation comes up frequently before the courts – see my recent article on a capital allowances case on camping pods – and it puts the taxpayer at an immediate disadvantage where the burden of proving that an action took place, or an intention was held, on or by a specific date lies with them. 

Concluding comments

It is impossible not to feel sympathy for Ms Delaney as the incorporation was delayed by protracted negotiations with landlords and the need to apply for planning permission and Ofsted registration. Had the church agreed to lease the initial premises to the company, the transfer may have taken place well before December 2014. In the end, the date of disposal was too late to secure entrepreneurs’ relief and – adding insult to injury – too early to benefit from the reduction in the higher rate of CGT from 28% to 20% from April 2016. Leaving aside the issues around the lack of documentation, there is something to be said here about the impact significant changes in tax policy in such a short period can have on taxpayers. 

Further reading

See the Bloomsbury title Incorporating and Disincorporating a Business. Find out more about the Bloomsbury content available to ICAEW member firms.

Stephen Relf, Technical Manager, Tax