CG53116 - Substantial shareholdings exemption: the trading company/group/subgroup requirements - when are non-trading activities substantial
TCGA92/SCH7AC/PARA20, TCGA92/SCH7AC/PARA21 & TCGA92/SCH7AC/PARA22
A common consideration in deciding whether a company, group or
subgroup counts as trading is whether the extent of the entity's
non-trading activities is 'substantial'. The penultimate paragraph
at CG53072 explains the background to the general approach of
legislation that relies on excluding cases where something is
'substantial'. It also makes clear that the 10% limit on what may
count as a 'substantial shareholding' applies only for the purposes
of paragraph 8 (1) Schedule 7AC TCGA 1992.
Most companies groups and subgroups will have some
activities that are not trading activities. The legislation
provides that such companies and groups still count as trading if
their activities “… do not include to a substantial
extent activities other than trading activities”.
The phrase “substantial extent” is used in
various parts of the TCGA 1992 to provide some flexibility in
interpreting a provision without opening the door to widespread
abuse. In this context ‘substantial’ means more than
20%.
A company, group or subgroup whose non-trading activities
amount to more than 20% of its total activities (excluding intra-
group or intra-subgroup activities) does not meet the trading
requirement. Some or all of the following are among the indicators
that might be taken into account in reviewing a particular company,
group or subgroup’s status.
- The level of turnover received from non-trading activities (CG53116a).
- Whether the value of non-trading assets was substantial in relation to the value of all assets (CG53116b).
- The expenditure incurred or time spent by officers and employees on non-trading activities (CG53116c).
- The company’s history (CG53116d).
Balance of indicators
These indicators should not be regarded as individual definitive tests to which a 20% “limit” applies. They are factors, or indicators, that may be useful in establishing whether there is substantial overall non- trading activity. It may be that some indicators point in one direction and others the opposite way. You should weigh up the relevance of each in the context of the individual case and judge the matter “in the round” (see approach of the Special Commissioner in the IHT case of Farmer and another (exors of Farmer dec'd) v IRC SpC 216). If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the First-tier Tribunal. It is anticipated that such cases will be relatively rare.
