Tribunal allows taxpayers' appeals as they were carrying on a business with a view to profit

06 February 2025. Published by Jasprit Singh, Senior Associate

In GCH Corporation Ltd and others v HMRC [2024] UKFTT 922 (TC), the First-tier Tribunal (FTT) allowed the taxpayers' appeals as GCH Active LLP (the LLP) was "carrying on a trade or business with a view to profit" at the time loan notes were transferred to it and the requirements of section 59A, Taxation of Chargeable Gains Act 1992 (TCGA), were therefore satisfied. The transfers were therefore capital contributions, rather than disposals, and no chargeable gain arose.

Background

The appellants were GCH Corporation Ltd (the Company), the LLP and three settlements created by Mr Gregory Hutchings, for the benefit of his family (the Trusts). The appellants participated in a tax mitigation arrangement. As part of that arrangement, loan notes were transferred to LLP by its members, some of whom acted through a nominee, HK Timbers (Holdings) Ltd (HKT). In addition to participating in the arrangement, HKT intended that the LLP would trade shares for a profit. The LLP's business was defined as "acquiring, holding and selling shares, securities and other assets with a view to profit". Before the transfers, using money lent by HKT, the LLP had bought five shareholdings, sold two shareholdings at a profit and received dividends. HKT had undertaken research on potential share acquisitions, but it had not made further acquisitions before the LLP was liquidated. 

HMRC issued the following closure notices and assessments, on the basis that the transfer of the loan notes to the LLP gave rise to a disposal for capital gains tax purposes:

(i)   A closure notice to the LLP amending the LLP's tax return to reflect that it was tax opaque and so should have submitted a corporation tax return and not a self-assessment return, and reducing the tax returned to nil.

(ii)  A closure notice to the Company amending the Company's tax return to reflect the fact that a transfer by the Company to the LLP of loan notes was, in consequence of the LLP's tax opacity, a disposal, and amending the Company's return to reflect tax due of £399,114.82.

(iii) Assessments issued under section 29, Taxes Management Act 1970 (TMA), to each of the Trusts assessing them to tax in respect of their transfers of loan notes to the LLP amounting to disposals of those loan notes. 

The appellants appealed the above to the FTT. 

The primary issue for determination by the FTT was whether, at the time the loan notes were transferred to the LPP, it was "carrying on a trade or business with a view to profit", for the purposes of section 59A, TCGA (the Primary issue). 

The FTT also considered whether HMRC had made a valid discovery, for the purposes of section 29, TMA (the Secondary issue). 

FTT decision

The appeals were allowed.

As the FTT allowed the appeals on the Primary issue, the Secondary issue did not need to be determined but, for completeness, the FTT also considered that issue and determined it in favour of HMRC. 

The Primary issue

In relation to the Primary issue, it was common ground that if the requirements of section 59A(1), TCGA, were satisfied by the LLP, so that it was tax transparent at the time the loan notes were transferred to it, no additional tax would be due from the appellants. It was also accepted that the burden of proof was on the appellants to establish that the provisions of section 59A(1) were satisfied. 

The FTT considered the following three questions:

1. whether the LLP was carrying on a trade;

2. whether the LLP was carrying on a business; and 

3. whether, if the LLP was carrying on trade or business, it was carried on with a view to profit.

With regard to the first question, the FTT considered the 'badges of trade' and concluded that the LLP's activities were not sufficient to amount to a trade.

On the second question, the FTT concluded that the LLP was carrying on a business for the purposes of section 59A. The FTT referred to certain facts which supported this conclusion, such as the fact that the LLP was established for the purpose of making a return from dealings in high yielding public company shares, its  activities were consistent with that business purpose, and the meaning of 'business' is broader than the meaning of 'trade' and does not exclude investment business which, by its nature, can be relatively passive. The fact that the LLP was set up, in part, to facilitate the loan note tax mitigation arrangement was not sufficient to alter the fact that the LLP was carrying on a business. 

With regard to the third question, the FTT concluded that the LLP was carrying on business with a view to profit. The FTT noted that here the business purpose of the LLP included the intention to make a profit and it did in fact make a profit. 

The Secondary issue

The burden of proof was on HMRC to prove that the discovery assessments were validly made. 

The appellants argued that there had not been a 'discovery' by HMRC for the purposes of section 29, TMA. Specifically, the appellants argued that the HMRC officer concerned did not reach her own conclusion as to the tax liability that she sought to assess, but rather had simply adopted HMRC's internal view of the technical position. 

The FTT disagreed with the appellants and concluded that the officer clearly explained both how she arrived at her conclusions and why she did not consider it necessary to amend the precise wording used by her predecessor to set out the technical position. Accordingly, the FTT was satisfied that there had been a 'discovery, for the purposes of section 29. 

Comment 

This decision provides some reassurance and clarity to LLPs that actively manage share investments, that they are likely to be carrying on a 'business'.  The FTT's analysis of the meaning of 'business', which the FTT confirmed does not exclude investment business in the context of section 59A(1), TCGA, may have broader implications for other taxpayers engaged in managing share investments. 

The FTT should also be applauded for carrying out an objective analysis of the relevant facts and law. It did not allow itself to be unduly influenced by the fact that the appellants had participated in a tax mitigation arrangement. 

The decision can be viewed here

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