Business

There is no statutory definition of ‘trade’. The only statutory reference to the term is that ‘trade’ includes a ‘venture in the nature of trade’. This absence of a formal definition decides if an activity is a trade more difficult. However, over time the courts have set some established guidance. 

It is clear from the significant amount of case law on this subject that a decision on whether there is a trade is a grey area. However, even having established that a trade, or a venture in the nature of trade, exists, the next question to consider is the scope of that trade.

HMRC’s internal guidance on this matter states as follows:

In many cases the nature and extent of a particular trade is never explicitly considered. This is particularly the case where there is no dispute about the nature of the trade, whose scope is implicitly understood and accepted.

However, the scope of a particular trade is fundamental when questions arise concerning:

• whether particular receipts are income of the trade,
• whether expenditure is incurred wholly and exclusively for the purposes of the trade, or
• whether expenditure is capital or revenue for tax purposes.

One trader’s sale, or purchase, of a fixed capital asset may be another trader’s sale, or purchase, of trading stock.

There are special statutory demerger provisions that are designed to make it easier to divide and place into separate corporate ownership the trading activities of a company or group of companies. Using these provisions, an exempt demerger will be deemed to take place and the distribution will normally be exempt for Income Tax purposes and usually not give rise to any CGT as the gains are effectively rolled over.

The provisions do not apply where a trading activity is to be sold or becomes owned by a person other than the existing member of the original company.

The provisions allow the removal of the distribution charge in appropriate circumstances, making the distribution an ‘exempt distribution’. This applies to trading activities only. Companies that make use of the demerger provisions range from small private companies to some of the UK’s largest public companies.

The legislation also provides for a clearance procedure. Using this a company that wants to demerge trading activities can obtain advance confirmation from HMRC that the distribution that will arise will be an exempt distribution.

The use of these demerger provisions, when available, can be beneficial and help companies avoid adverse consequences of other more complex demerger options.

Valuing goodwill is a complex process and there are many different methods which can be used and that vary from industry to industry. Goodwill is a way of placing a monetary value on the business's reputation and customer relationships. Or as HMRC say in their guidance, in accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired.

HMRC’s approach to valuation of goodwill suggests that there should be no expectation of a synergy-based value on an open market value basis unless synergy in a particular market is common place.

HMRC’s manuals state that when valuing the goodwill of a business the valuer should have regard to the following:

• the full sale and purchase documentation relating to the transfer of both tangible and intangible assets
• succession arrangements
• the valuation approach used – e.g., capitalisation of profits, super profits or a trade specific method
• the activities of the business and role of the owners within it
• the financial statements/accounts (including the detailed trading and profit and loss account) for the 3 years before valuation
• any other relevant financial information
• appropriate yield and multiples of comparable companies and sectors
• the commercial and economic background at valuation date
• how the personal goodwill of the owner has been reflected in the valuation
• any other relevant factors.