Allam: new light on the test for trading activities

Speed read

Business asset disposal relief (and its predecessor, entrepreneurs’ relief) is precluded when a company’s activities ‘include to a substantial extent activities other than trading activities’. Until recently, the only case on this issue was the First-tier Tribunal decision in Potter in which the FTT focused on the statute’s use of the word ‘activities’ and found that this requires an assessment of what the company actually does. The FTT drew a distinction between investments that require some work (such as letting property or actively managing investments), and the type of investment bond in that case which simply locked money away until the bonds matured. This test was recently revisited by the Upper Tribunal in Allam. Here, the UT found the test to be a holistic one, having regard to the commercial activities of the company and not just at the physical activities of the directors. Contrary to the FTT in Potter, however, the UT thought that the holding of bonds in that case could be an activity. An important point that has not yet been addressed is why the safeguarding of surplus trading profits is regarded as a non-trading activity.


In this article, I examine a recent Upper Tribunal decision on a key test for business asset disposal relief.


One of the major areas of difficulty with business asset disposal relief, and with its predecessor, entrepreneurs’ relief, has been the question of whether a company’s activities ‘include to a substantial extent activities other than trading activities’ (TCGA 1992 s 165A(3)). This is also relevant to the substantial shareholding exemption (TCGA 1992 Sch 7AC para 20(1)) and the exemption from CGT for disposals to an employee ownership trust (TCGA 1992 s 236I(2)).


The first case to consider this point was the First-tier Tribunal (FTT) decision in Potter [2019] UKFTT 554 (TC). Mr Potter’s company had virtually no trading income between 2008 and 2014, when the company was wound up. In that period, Mr Potter put a lot of work into trying to generate new business, without success. Accumulated profits of £800,000 were safeguarded by investing them in long-term investment bonds which paid £25,000 a year interest to the company. HMRC argued that, for most of the period between 2009 and 2014, the whole of the company’s income was this interest, and the bonds were by far the largest asset on the balance sheet. In line with its guidance (in its Capital Gains Manual at CG53116 onwards), HMRC said the company had substantial non-trading activity, and must, therefore, be treated as not being a trading company. The FTT, however, noted that the legislation specifically refers to the activities of the company, so they needed to ‘consider what the company actually does’ (para 74). In terms of activity, the judge said ‘there were no investment activities. The company was locked into the bonds during their term and the directors did not do anything in relation to them’ (para 80, emphases in the judgment). The judge went on to say that ‘when one stands back and looked at the activities of the company as a whole and asks “what is this company actually doing?” the answer is that the activities of the company are entirely trading activities.’ So, the company was found to be a trading company. More importantly, perhaps, by concentrating on the word ‘activities’ in the legislation, the FTT considered that this should be given the most weight of the factors referred to in HMRC guidance or, indeed, any other factors that one might take into account.


While Potter, being an FTT case, cannot set precedent, it was, nevertheless, the only jurisprudence we had until the Upper Tribunal decision in the case of A Allam [2021] UKUT 291 (TCC). There were several elements to the case but, for our purposes, the question was whether a company called ADL had substantial non-trading activities. The company owned a number of properties most of which were rented out, although the company intended to carry out some property development activities. For the period under consideration, almost all the turnover of the company came from rental income and the properties were all shown as fixed assets of the business, described as ‘property investment’ (paras 81 and 82 of the judgment).


One of Dr Allam’s grounds of appeal from the decision of the FTT was that the investment income from the properties was largely ‘passive activity’ (a phrase used by the FTT), which counsel for Dr Allam referred to as an oxymoron (para 97). Paragraph 96 of the decision is key: counsel for Dr Allam submitted ‘that the activities of the company are confined to the actions of its directors and employees; in other words, actual human activities’, but the UT said that ‘the question of what the company actually does must be looked at in commercial terms’. Thus, holding investment property and receiving rents could be an activity, albeit a ‘passive activity’. ‘There may be little action required on the part of the directors and employees in such an activity, but it remains an activity in commercial terms.’ The UT said that the test is a holistic one, ‘not confined to physical human activities, but requir[ing] an overall consideration of what it is that the relevant company does’ (para 98). In discussing Potter, the UT said that the case was illustrative, rather than authoritative, and it did not have to consider whether it was correctly decided. However, it considered that the FTT was incorrect in saying that the bonds did not involve any activity at all, as even checking for the payment of interest each year would constitute an activity (para 113).

So where are we now?

I think the fundamental difference between the two cases is that Mr Potter had simply put the surplus undistributed profits of the company into a safer form, while ADL, in Dr Alain’s case, was clearly carrying on a quite substantial business of letting property. It was always going to be very hard to persuade a tribunal that ADL was a trading company, given the relatively small level of property development activity (which largely appeared to consist of attempts to obtain planning permission for one of the sites). So, the decisions in both cases may well have been ‘right’, in my view, but it does leave the question open as to how to interpret the activities test in the legislation.

I feel, however, that Potter is closer to the big question about BAD relief, which is whether a large sum of cash on the balance sheet would be a substantial non-trading activity. I think the key here is the UT’s view in Allam that we must look at the commercial activities of the company, not just at the physical activities of the directors. By that measure, it was clear in Potter that all of the physical activity related to trying to revive the trade. Similarly, in the cases that I have reviewed, it is invariably the case that most of the activities of the directors relate to the trade of the company, with only a very tiny bit of resource applied to the surplus cash. So even applying the new commercial activities test to Potter, we come up with the same answer.

A more fundamental point that has not yet been addressed is why the safeguarding of surplus trading profits is somehow a non-trading activity. To my mind, the profits derived from the company’s trade are a form of trading asset. Therefore, looking after that cash, whether it’s simply kept on deposit account or is invested in long-term bonds, is still a trading activity. Conversely, of course, if the company were to invest in property for letting, the money has been transformed from trading money into investment assets.

It is, of course, possible that this element of Dr Allam’s case will be appealed, in which case we might get another decision to consider. For the moment, however, despite some original concern that the UT’s decision contradicted the decision in Potter, I am comfortable that one could look at the commercial activities of a company in cases like Mr Potter’s, and other cases with substantial surplus cash, and come to the same decision, which is that large cash holdings do not taint the availability of BAD relief. 


Sourced from my article in Tax Journal, Issue 1559 (available at:

£27bn Covid relief fraud ‘may be tip of iceberg’

A report out this week by the cross-party Public Accounts Committee (PAC) reveals how relaxed controls combined with the speed of the coronavirus financial support packages created “a perfect storm for thieves”, with at least £27bn lost to fraud.


The coronavirus-linked sum is on top of around £50bn lost annually to criminals and through mistakes, according to government estimates, which counts for more than 40% of all reported crime in the UK.

Banks were also slammed for their careless approach to dishing out the money as they “don’t have enough skin in the game” to be concerned about losses, the committee found.

“This report makes very uncomfortable reading,” said Pete Miller at The Miller Partnership. “By that I mean uncomfortable as a taxpayer concerned about the way in which my taxes are being used by the government. We might disagree over the government’s spending priorities but I’m sure none of us are happy about over £50bn of taxes being lost to fraud or error.”

Despite their different definitions, there is little to distinguish “between people grappling with complex government forms in the hope of obtaining a grant, loan or some other subsidy to which they are entitled as against people deliberately targeting frailties in the system to obtain money to which they are not entitled”, Miller said.


“The report refers to fraud and error costing the taxpayer between £29.3bn and £51.8bn in 2018-19, of which £2.5bn and £25bn arose outside DWP and HMRC, although the latter figures are based on assumptions by Cabinet Office,” Miller said. “It is difficult to have any confidence in these numbers.”

The report states there are around 16,000 counter-fraud professionals throughout the civil service. “While 77% of them work within DWP and HMRC – which is logical, as these are the departments most obviously open to fraud or error – there must be some low hanging fruit in other government departments, if some of those staff were redeployed,” Miller said. “Most worrying to me is that we are told that it is optional for government departments to consult the Cabinet Office’s counter fraud function (CFF), which is absurd and shows a lack of common sense.”


“I’m sure I am not alone in thinking that any counter fraud function within government should be mandatory for all government departments and that the higher the risk, the more important it is to consult,” Miller told AccountingWEB. “One of the key messages throughout this report is a lack of coordination between government departments on issues relating to fraud and error.”


Extract from an article by Mark Taylor, published on

Read the full article here

Taxing matters

HMRC once advertised that “tax isn’t taxing”, which is catchy but untrue. 

Regardless of the rights and wrongs of the KPMG case, it has almost certainly arisen because tax is complicated, because the tax rules are frequently not clear and because the tax code doesn’t always fit easily with the reality of commercial transactions. 

We don’t really know what happened in this case but it’s not surprising that things go wrong occasionally.

So what can we advisors do to mitigate our risk? 

Firstly, only advise in areas where you are competent to do so. While KPMG has teams of people covering every aspect of the tax code, we don’t. If you’re asked to advise outside your comfort zone, you should either decline or insist on getting advice from an expert; don’t try and wing it! 

Secondly, make sure your client is aware of any risk areas, so that they have been properly warned about the risk and the tax at stake. If appropriate, consider a non-statutory clearance from HMRC or a formal opinion from a tax expert, to reduce the risk as far as possible. 

Even an expert opinion can’t guarantee the tax position, as we saw in the recent M Group Ltd case (TC08054), where Counsel’s opinion didn’t persuade (and nor did my article in Taxation). But specialist advice can prevent you from getting it wrong and should eliminate the risk of a penalty for a carelessly incorrect return. 

At the end of the day, however, mistakes are made, simply because tax is taxing, and that’s why we all carry professional indemnity insurance!


Extract of the article by Mark Taylor for AccountingWeb. Read the entire article by clicking this link (May 2021).

(Photo by BalkansCat, Getty Images)