Property Focus | Agriculture Update

“Are you selling a bundle, or are you just selling odd sticks?” This was the question that came before the First Tier Tax Tribunal in William S G Russell v The Commissioners for Her Majesty’s Revenue & Customs [2012] UKFTT 623 (TC) when determining Mr Russell’s eligibility for Entrepreneurs Relief when disposing of part of his farm.

As agricultural property becomes more valuable and opportunities for development begin to come to the fore again, practitioners advising farmers will frequently find themselves called upon to give some fairly complex tax advice to clients seeking to mitigate capital gains tax. One particular subject is the applicability (or not) of Entrepreneurs Relief when selling all or part of the farm, for development purposes or otherwise.

Mr Russell owned and farmed 53.5 acres of farmland in partnership with his brother and sister-in-law, with the day-to-day agricultural operations being carried out by a contractor. Messrs and Miss Russell agreed to sell just under a third of the land (around 16.5 acres) to a developer for £1,290,000: a cool £77,685 per acre and well above the agricultural value. The partnership continued to farm the remaining land through the contractor.

Mr Russell claimed Entrepreneurs’ Relief on the value of his third share of the sale proceeds. However, HMRC successfully argued that the disposal of the land did not constitute a sale of part of the farming business, even though the partnership saw its profits fall significantly afterwards.

The starting position is that the sale of a business (or a significant part of it) would normally attract capital gains tax on the increase in value of the business, being the difference between the price received for the business asset and what was originally paid or invested, less any costs incurred in buying, selling or improving the asset. Once this figure is calculated, it may be that reliefs are applicable to the ‘gain’ so as to reduce the amount that would otherwise be taxable at a maximum rate of 28 per cent.

Entrepreneurs’ Relief is a means by which small and medium-sized businesses can get some capital gains tax relief on, among other things, disposals of assets used in a business when they form part of a disposal of the whole or part of a business. Its introduction by the last government was designed to encourage entrepreneurship in the UK by reducing the tax payable on any gains made upon the sale of a business. It is often considered by advisers assisting in the disposal of farming assets to reduce the tax payable, whether or not as part of the sale of a farming business.

There is an important distinction, however, between:

1. The sale of a business as an entity in itself or part of a business as an identifiably separate going concern; and

2. The mere sale of a business asset.

While the former will generally be eligible for Entrepreneurs Relief, HMRC is keen to ensure that, so far as is possible, the second will not. The difference is exemplified by Rowlatt J in Graham v Green (HMIT) 9TC 309: “Really a different conception arises, a conception of a trade or vocation which differs in its nature from the individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without perhaps an abuse of language, there is something organic about the whole which does not exist in its separate parts”. At Mr Russell’s appeal, the First Tier Tribunal was required to decide whether or not the sale of the land was the disposal of part of the business as opposed to the disposal of an asset.

While HMRC argued that the sale of the farmland was simply a disposal of an asset of the business, Mr Russell maintained that the sale of the land represented a sale of an actual part of the business. He relied on the undisputed evidence of a significant drop in the partnership’s profits. The contention was that not only had the land been sold but part of the business had also been transferred. The fact that the last was going to be used for development after the sale was not material, according to the Tribunal.

Both parties relied on the ratio in McGregor (HM Inspector of Taxes) v Adcock [1977] STC 206 in which it was held that in certain circumstances, the “extent of the [farmer’s] activities after the sale would be so wholly different from what they were before the sale that the inevitable conclusion would be that there had been a disposal of part or even the whole of the business”.

Mr Russell’s contention was that the profits of the partnership had fallen by such a degree since the sale of the land that the disposal was sufficiently material to constitute a disposal of part of the business, while HMRC submitted that the sale was a mere factor which should be considered: it should not automatically follow that a significant disposal constitutes the sale of part of a business.

?Higher threshold??An indication of the alacrity with which HMRC seems to be trying to flush out Entrepreneurs’ Relief claimants can be found in the case of M Gilbert v HMRC [2011] (UK FTT 705 (TC). Here, Gilbert represented a number of suppliers and carried on a business selling those suppliers’ food for a commission. He purported to sell part of his business to another company, claiming Entrepreneurs’ Relief on the gain made. The ‘business’ sold included:

1. stock;

2. goodwill;

3. contracts; and

4. details from his ? customer database.

HMRC decided in the first instance that Entrepreneur’s Relief was not available. It considered that, notwithstanding the items sold, Gilbert’s business continued largely as it had done before; albeit with a reduced income, as had the Russells’ farming business. It therefore decided that the sale was not of a recognisable part of the business and instead amounted to the sale of assets forming part of a larger whole.

In considering the position on appeal, the tribunal asked whether, in the circumstances, a “viable section” of Gilbert’s entire business would be recognised as a business if separated from the whole. It concluded that in the circumstances, it would. The principal reason for this was that the sale by Gilbert included goodwill, trademarks, business information and current contracts, it was not simply a sale of stock. In particular, Mr Gilbert included his customer database in the sale. The tribunal considered that this was a “crucial asset” in distinguishing a sale of a going concern from a mere sale of assets.

The tribunal in Russell did not apply the ‘viable section’ test to the assets that were sold and, even if it had, it does not appear that it would have led to a different conclusion. It remains that Mr Russell sold land which formed part of his business; he did not sell the part of the business which concerned the land. The ‘viable section’ test is, however, useful for practitioners to consider in instances where there is a query as to the eligibility of a sale of farmland for the benefit of Entrepreneurs Relief. This may apply where, for example, a farmer is selling land as part of a sale of a contracting business.

What is clear is that the resulting loss of profit from the sale of a farm business asset will not alone get the taxpayer home on a claim that part of the business was sold with that disposal. If the business continues in the same form as previously, albeit across a smaller area of land, that business has not been ‘sold’ for the purposes of Entrepreneurs Relief.

?New planning fees order?Finally, (and on the subject of landowners contemplating development) planning fees are to rise, generally speaking, by around 15 per cent with the introduction of the Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) (England) Regulations 2012. The new regulations affect the payment of fees for the following applications, site visits and requests made after 22 November 2012:

? applications for planning permission and approval of reserved matters;applications to make non-material changes to planning permissions;applications for consent for the display of advertisements;

? requests for certificates of lawful use or development and certificates of appropriate alternative development under section 17 of the Land Compensation Act 1961; andrequests for confirmation that a condition or conditions attached to a grant of planning permission has or have been complied with.

Under the new fee order, the cost of a full application for building up to 50 dwellings rises from £335 per dwelling to £385 per dwelling.

Of specific interest to practitioners advising farming clients, there has also been a rise in the cost of applying for permission for the erection of buildings on land “used for agriculture for agricultural purposes”. Where the gross floor space to be created by the development is more than 465 m2 but less than 540 m2, the cost of the application has risen from £335 to £385. Where the development will be more than 540 m2 but less than 4,215 m2, the cost rises to £385 for the first 540 m2 and £385 for each additional 75 m2.

The rise could be considered a slightly unusual move from a government which is committed to “getting Britain building”. However, it is worth bearing in mind that, when the application fees were last amended, the rise at the time was in the region of 25 per cent. This is a fact that may make the new fee schedule a little easier to stomach.