A taxpayer has won his appeal against an £87k tax bill after proving he was entitled to Entrepreneurs’ Relief (now called Business Asset Disposal Relief).

In John Douglas Wardle v HMRC, the First-tier Tax Tribunal (FTT) ruled in favour of Mr Wardle.

Here, I examine the case and share my advice for taxpayers and tax agents.

The Wardle v HMRC tax appeal

Mr Wardle had appealed against HMRC’s decision, in March 2023, to issue a closure notice denying his claim to Entrepreneurs’ Relief (ER) on disposal of part of his interest in Biomass UK No. 1 LLP. HMRC had determined the LLP didn’t trade at the date of the disposal, and, as a result, Mr Wardle owed capital gains tax (CGT) of £87,171.80.

Mr Wardle countered that HMRC had applied an incorrect authority in issuing its closure notice. And, in doing so, he argued the tax body had misinterpreted the evidence provided to them in support of his claim the LLP had been set up and begun operations more than two years before the relevant date of disposal on 28 February 2020.

Background to the case

  • Between 2008 and 2014, third parties obtained entry-level project rights for a waste-to-energy power plant at the Port of Hull (the ‘Hull Project’). The Project aimed to divert biomass waste from landfill and use it to produce electricity that would be exported into the wholesale market.
  • In early 2014, Mr Wardle’s involvement with the Hull Project began. He, as part of the development team, bought the Project from the third parties.
  • By late 2014, the Project was in a credible position to seek financing, and the Funder was selected by the end of January 2015.
  • On 18 August 2015, a new partnership agreement was signed, with Mr Wardle becoming the owner of 14.65% of partnership equity. The development rights to the Project were transferred to the LLP, and the Funder applied to HMRC to form a VAT Group with the LLP.
  • On 21 August 2015, before building work began, the LLP entered into about 56 contracts with various parties relating to the construction, operation and financing of the Hull plant (‘Financial Close’).
  • On 28 February 2020, Mr Wardle disposed of his remaining interest in the LLP.

The tribunal’s decision

The focus of the appeal was on the availability of Entrepreneurs’ Relief to reduce the rate of capital gains tax that Mr Wardle owed in respect of the disposal.

The First-tier Tax Tribunal said the burden of proof was on Mr Wardle to establish he’d been overcharged by the amendments made by the closure notice, otherwise the assessment would stand good.

The issue of the appeal was whether the disposal constituted a material disposal of business assets. Mr Wardle therefore had to show that on 28 February 2018 the LLP was a business.

The parties agreed that the sale of electricity and/or ROCs is a trade. However, HMRC didn’t accept the LLP was trading for the period of two years ending on 28 February 2020. It contended that on 28 February 2018 the LLP hadn’t set up the business because construction was incomplete, commissioning was outstanding, ROC accreditation hadn’t been obtained, electricity hadn’t been produced, and, accordingly, the LLP wasn’t in a position to trade with anyone. But, notably, HMRC didn’t argue for an alternative date for either set-up or the start of trade.

As to which previous case to refer to regarding when the LLP began to trade, the FTT chose to apply the Mansell test.

The FTT found in favour of Mr Wardle, stating it was satisfied the LLP traded in the relevant period and, consequently, the taxpayer was entitled to ER.

The tribunal said: “In summary, the train was on the tracks travelling to its destination. Its journey appears to us rather like a continuum, and having a genuine and very substantial commercial underpinning and purpose.”

My thoughts on the Wardle v HMRC appeal ruling

It’s heartwarming to see a decision in favour of the taxpayer.

Entrepreneurs’ Relief (now Business Asset Disposal Relief) is a very valuable relief, used when someone sells a business. It’s designed to encourage entrepreneurs to set up trading businesses.

While many people consider themselves to be trading in the common-sense meaning of the word, HMRC has very specific criteria to meet the trading definition.

In the Wardle v HMRC case, it appears the tribunal has agreed with the taxpayer’s common-sense definition, as the infrastructure in many industries (including energy producing) is an integral part of their trade. It’s interesting to see the different interpretations of the word ‘trading’ between the entrepreneur and HMRC. This is a good example of the grey area that is the definition of ‘trading’.

My advice for taxpayers about Business Asset Disposal Relief

It’s important to understand the HMRC definition of ‘trading’ because many tax reliefs, including Business Asset Disposal Relief (BADR), rely on the meaning.

However, the Wardle v HMRC appeal proves it’s possible to push back against that definition if your entity carries out a trade, even if it’s in the early stages of building the infrastructure.

It’s a very difficult area for taxpayers to explore. For example, HMRC will accept property development as a trading activity but not property rental (the latter can be classed as a business but not a trade). This might seem quite arbitrary and, again, there’s a grey area regarding when property development ends and property rental begins. So, you should get professional tax advice if you rely on reliefs.

My advice for tax agents about BADR and other tax reliefs

Your clients may, understandably, find the rules surrounding various reliefs confusing. So, it’s important for you to help them understand HMRC’s position.

But the Wardle v HMRC case shows there are grey areas and it’s possible to take a common-sense approach to concepts such as trading and to successfully challenge HMRC’s view.

As an adviser, you need to understand your client’s business and the approach they wish to take, and to warn of any potential risks.

Trusted tax advice

Our team of experienced tax advisers will help you make sense of BADR and other tax reliefs. We can also help with HMRC tax enquiries and investigations – and we offer a tax expert witness service.

Call us today on 07813 434195 or email stephanie.churchill@churchilltaxation.co.uk

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation