A new tribunal decision provides food for thought on the test for ‘substantial’.
One of the many uncertainties with Business Asset Disposal Relief (the relief formerly known as something else) is the definition of a trading company in TCGA 1992 s 165A(3) as:
‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’.
Section 165A(4) goes on to explain what trading activities mean, but there is no further assistance about what is meant by ‘to a substantial extent’.
The view of HMRC is set out in the Capital Gains Manual at CG64090 where they say:
‘substantial in this context means more than 20%’.
There is no authority for this 20% figure, and views range from it meaning ‘mainly’ down to something just above insubstantial. No assistance can be derived from tax legislation either. For the Substantial Shareholding Exemption, it means 10%; for Social Enterprise Relief, it means 30%; for SDLT, substantial performance it is ‘most’. (I could go on.)
The HMRC guidance refers to various indicators such as the income from non-trading activities; the company’s assets, and the expenses or time spent by employees in the different activities. HMRC say that on the basis of the decision in Farmer v HMRC (1999) SPC 216, it is necessary to weigh up the relevance of each indicator in the context of the individual case and judge the matter in the round.
That sounds sensible, but it is difficult to see how Farmer can really be any kind of authority. It was an inheritance tax case about a completely different relief in a completely different statute. So we are a bit on our own in determining the extent to which non-trading activities are substantial.
We had some help from the Upper Tribunal in the case of Allam v HMRC [2021] UKUT 291 (TCC), where it explained that we can pretty much forget the suggestion of 20%. It said: ‘it is not appropriate to apply any sort of numerical threshold as suggested by HMRC’s guidance’.
That is very welcome because the matter can now be dealt with on its merits and not on the basis of an arbitrary HMRC threshold.
The Upper Tribunal mentioned that the FTT did not refer to Farmer in terms and thought they were right not to do so. They said it is not helpful to put a gloss on the words of the statute, explaining the position as follows:
‘What is substantial in the context of trading and non-trading activities should be given its ordinary and natural meaning. Application of the test involves identifying the trading and non-trading activities and then considering how best to measure the non-trading activities to see whether they are substantial in the context of the company’s activities as a whole.’
Unfortunately, they did not say what was substantial. Clearly the 20% test does not apply, but what does? We have lots of guidance about the things that we might consider, but not the weight that we might give to any of them.
With this background, another BADR case, Eyre and others v HMRC [2025] UKFTT 566 (TC), published last week gives us some more to think about.
In Eyre, the company was concerned with a property transaction which HMRC argued was an investment activity and not a trade. The FTT decided the company was trading and the issue therefore came down to whether it had substantial non-trading activities.
The FTT noted that 100% of the company’s income was rental income and there were non-trade loans of significant amounts. The only specific figure mentioned was that 22% of the development of the property was earmarked for commercial letting. This figure was not of particular significance in the context of the 20% issue but the FTT, ‘standing back and looking at the company’s activities as a whole’ considered that the non-trading activities were ‘meaningful’. This is an odd thing to say when the test is ‘substantial’. The terms are not synonymous.
So now we have two tests for the purposes of BADR – ‘substantial’ and ‘meaningful’ – and we don’t know what either of them means. The only thing we know is that ‘substantial’/‘meaningful’ is not 20%; it could be more, or it could be less. I am not sure that many people will regard this as helpful.
A new tribunal decision provides food for thought on the test for ‘substantial’.
One of the many uncertainties with Business Asset Disposal Relief (the relief formerly known as something else) is the definition of a trading company in TCGA 1992 s 165A(3) as:
‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’.
Section 165A(4) goes on to explain what trading activities mean, but there is no further assistance about what is meant by ‘to a substantial extent’.
The view of HMRC is set out in the Capital Gains Manual at CG64090 where they say:
‘substantial in this context means more than 20%’.
There is no authority for this 20% figure, and views range from it meaning ‘mainly’ down to something just above insubstantial. No assistance can be derived from tax legislation either. For the Substantial Shareholding Exemption, it means 10%; for Social Enterprise Relief, it means 30%; for SDLT, substantial performance it is ‘most’. (I could go on.)
The HMRC guidance refers to various indicators such as the income from non-trading activities; the company’s assets, and the expenses or time spent by employees in the different activities. HMRC say that on the basis of the decision in Farmer v HMRC (1999) SPC 216, it is necessary to weigh up the relevance of each indicator in the context of the individual case and judge the matter in the round.
That sounds sensible, but it is difficult to see how Farmer can really be any kind of authority. It was an inheritance tax case about a completely different relief in a completely different statute. So we are a bit on our own in determining the extent to which non-trading activities are substantial.
We had some help from the Upper Tribunal in the case of Allam v HMRC [2021] UKUT 291 (TCC), where it explained that we can pretty much forget the suggestion of 20%. It said: ‘it is not appropriate to apply any sort of numerical threshold as suggested by HMRC’s guidance’.
That is very welcome because the matter can now be dealt with on its merits and not on the basis of an arbitrary HMRC threshold.
The Upper Tribunal mentioned that the FTT did not refer to Farmer in terms and thought they were right not to do so. They said it is not helpful to put a gloss on the words of the statute, explaining the position as follows:
‘What is substantial in the context of trading and non-trading activities should be given its ordinary and natural meaning. Application of the test involves identifying the trading and non-trading activities and then considering how best to measure the non-trading activities to see whether they are substantial in the context of the company’s activities as a whole.’
Unfortunately, they did not say what was substantial. Clearly the 20% test does not apply, but what does? We have lots of guidance about the things that we might consider, but not the weight that we might give to any of them.
With this background, another BADR case, Eyre and others v HMRC [2025] UKFTT 566 (TC), published last week gives us some more to think about.
In Eyre, the company was concerned with a property transaction which HMRC argued was an investment activity and not a trade. The FTT decided the company was trading and the issue therefore came down to whether it had substantial non-trading activities.
The FTT noted that 100% of the company’s income was rental income and there were non-trade loans of significant amounts. The only specific figure mentioned was that 22% of the development of the property was earmarked for commercial letting. This figure was not of particular significance in the context of the 20% issue but the FTT, ‘standing back and looking at the company’s activities as a whole’ considered that the non-trading activities were ‘meaningful’. This is an odd thing to say when the test is ‘substantial’. The terms are not synonymous.
So now we have two tests for the purposes of BADR – ‘substantial’ and ‘meaningful’ – and we don’t know what either of them means. The only thing we know is that ‘substantial’/‘meaningful’ is not 20%; it could be more, or it could be less. I am not sure that many people will regard this as helpful.
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