CTM03590 - Corporation Tax: small companies: whether trade or business carried on
For the purposes of associated companies, determining whether a company has carried on any trade or business should be considered on an accounting period by accounting period basis. Where a company would be associated for part of an accounting period only, consideration should be restricted to activity in that part only.
Meaning of in business
For the purposes of ICTA88/S13 (4) most companies will either be trading or have a readily identifiable business. In the main, companies that should be excluded from the count of associated companies should comprise:
- wholly dormant companies, and
- non-trading holding companies that meet specific conditions set out in Statement of Practice SP5/94 (see below)
Questions may, however, arise in some situations for companies that are not trading but may be in business. To consider whether a company is in business principles from decided cases provide a helpful basis to start from
Case |
Dicta |
CIR v The Marine Steam Turbine Co Ltd 12TC174 |
Rowlatt J said that the word business 'has two distinct meanings. It may mean any particular matter or affair of serious importance ...[or] in another and very different sense, as meaning an active occupation or profession continuously carried on, and it is in this sense that the word is used in the Act' (p.179). |
CIR v The Korean Syndicate Ltd 12TC181, |
In a Court of Appeal judgement Atkin L J thought that if any emphasis were placed on the word 'active' it would unduly limit the meaning of the word 'business' saying 'I am not sure that it was intended for a precise definition, but if it were so intended, I think the words [used by Rowlatt J in the Marine Steam Turbine case] would be too narrow ... there is nothing in the Act which says that the business must be actively carried on’ (p.205) |
American Leaf Blending Co Sdn Bhd v Director General of Inland Revenue [1978] 3 All ER 1185, |
Lord Diplock said, 'in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business ... The carrying on of `business` no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between' (p1189). |
Business is a wider concept than trading. To be in business a company should be actively in business as opposed to being essentially passive, although the emphasis that should be placed on being active was a matter of debate in the cases above. The normal conclusion when a company lays out its assets and earns an income return is that it is carrying on a business. There may, however, be exceptional cases where, on the facts, a company is not carrying on a business. Several recent cases demonstrate the importance of findings of fact and provide guidance on the factors that may be relevant to considering whether a company’s activities amount to a business in these exceptional circumstances.
In the case of R&C Commissioners’ v Salaried Persons Postal Loans [2005] STC (SCD) 851 the company traded in money lending until 1995 after which it continued to let former premises which had been let continuously after it had relocated in 1966. The Special Commissioner made a finding of fact that the continued letting of the premises did not constitute carrying on a business; although it was relevant that the company’s actions in letting the property were authorised by it’s Memorandum of Association, this was not determinative. The High Court held that it did not inevitably follow that a company was carrying on a business because it received a particular type of income such as rent which was generated from holding a particular type of asset such as land. The High Court held that in the light of the property not being purchased as an investment, limited property related activity in the relevant years and the premises being a small part of overall assets the Special Commissioner was entitled to reach the view that the company was not in business.
In the Special Commissioner’s decision of Land Management Ltd v Fox [2002] SpC306 it was found on the facts that a company letting residential freehold property was in business. Factors indicating that it was in business included the company’s Memorandum of Association which specified that it was incorporated for the purpose of undertaking business of an investment nature, the receipt of interest from an associated company, rent and bank interest and incurring expenditure on repairs, insurance and in two of the years professional fees. The approach taken was to examine the activities of the company separately and then look at the activities as a whole. The same conclusion was reached in both cases that the company was in business.
In the case of Jowett v O'Neill and Brennan [1998] STC482 a company received income as bank interest but was held not to be in business. The circumstances of the case were that the company held money in an interest earning bank deposit account as its sole asset in the year in question. The sums held were profits that had accumulated during previous trading which had ceased in the period in question, and the company subsequently commenced a new and different trade in a later period. The case demonstrates that the receipt of income may not provide a conclusive indicator that a company is in business. Equally, however a company does not have to receive income to be within ICTA88/S13 (4); the holding of assets (particularly if they are capable of producing income or gains) or the laying out of expenses may be evidence of a business.
These cases demonstrate the importance of undertaking a detailed review to look at both specific activities of a company in the period in question and the overall context of what a company actually does and why; for example:
- Is the company fulfilling the purpose for which it was originally set up?
- What is the source of any income? Why were any assets generating an income acquired by the company?
- What actions have been undertaken by the company in the period in question? What decisions have been taken by persons in the company? Have investments been actively managed?
- What expenses have been incurred by the company in the period in question?
- What actions are authorised by the company’s Memorandum of Association?
Close Investment Holding Companies
Note that regardless of whether it is in business a close company that simply holds investments such as a bank deposit account will fall within the definition of a close investment holding company at ICTA88/S13A , and will be liable at the full rate of CT (see CTM60700+)
Investment Companies
Some companies will seek a deduction for management expenses under ICTA88/S75, which requires that the company be an 'investment company', that is a company 'whose business consists wholly or mainly in the making of investments' (ICTA88/S130). In such cases, it is a reasonable inference that the company is also carrying on a business for the purposes of ICTA88/S13 (4).
Reorganisations
Where a company wants to take over the trade of another company it may do so by first acquiring the company’s shares and then transferring the trade to itself. This is commonly known as a hive up. In some cases the transfer of the trade takes place on the same day as the acquisition of the shares.
Whether or not the acquired company was carrying on a trade or business during the period after acquisition of the shares and before transfer of the trade is a matter of fact. But the normal sequence of events in a hive up is that the predecessor must carry on the trade (even if only of a few minutes) while it is in common ownership with the successor. There is no justification for the argument that very short periods of trading should be overlooked.
Non-Trading Holding Companies
Under SP5/94, from 6 April 1999 onwards, you should accept that a non-trading holding company is not carrying on any business, and therefore it can be excluded from the count of associated companies for an accounting period, provided that throughout the period all the following apply:
- it has no assets other than shares in companies which are its 51% subsidiaries, and
- it is not entitled to a deduction, as charges or management expenses, in respect of any outgoings, and
- it has no income or gains other than dividends which it has distributed in full to its shareholders and which are, or could be, franked investment income received by that company (ICTA88/S832 (1) and (4A)), and
- the 51% subsidiaries are 51% subsidiaries under ICTA88/S13ZA (1), (2), (3) and (4).
If one or more of these conditions are not met, it does not necessarily follow that the company must be regarded as an associated company; the company can still argue that it is not carrying on a business. In such cases, you will have to consider the particular facts in the light of the general principles outlined previously.
