For such a seemingly fundamental issue, the question of when a trade commences has been addressed relatively rarely in previous cases. But it has come to the fore in recent years, with FTT decisions in Putney Power v HMRC, Wardle v HMRC (three separate decisions) and York SD v HMRC. Now the Upper Tribunal (Richards J and UT Judge Jones) has conducted a thorough review of the authorities that touch upon the issue and has decided that they are of limited assistance outside their specific statutory and factual contexts.
This particular dispute arose in the context of EIS relief. The two appellants (Putney Power Limited and Piston Power Limited) were required by s. 179(2)(b) ITA 2007 to have begun to carry on their trades within two years of having issued relevant shares. Both appellants had a trade of generating electricity through “gas-peaking” power plants in the UK and selling the electricity generated. However, by the two-year deadline (known as the EIS Deadline), neither had built the power plant and therefore neither was in a position to take in the necessary raw material (gas), or to produce the electricity. The appellants argued that they had nevertheless begun their trades. Putney (which was further advanced than Piston) had entered into framework agreements with Gazprom to buy gas and sell electricity once the power plant was built. But there was no commitment as to the date when this would be achieved.
In a passage that will have application beyond the statutory question in these cases, at [40]-[46], the UT considered what approach the FTT should take when applying a multi-factorial test involving ordinary English words. In particular, FTTs are reminded that, while other decisions might provide inspiration in identifying the factors that tribunals and courts have found to be of assistance in applying the test, the focus must be upon the words of the statute; tribunals should take care not to allow other decided cases to put a gloss on the statutory words. The UT also advised FTTs to take care to distinguish between other decisions of first instance tribunals which are mere examples of the application of the statutory test, and those decisions of superior courts or tribunals that provide binding guidance on how the test should be applied.
Having reviewed the decisions of superior courts and tribunals that had considered the test of when a trade commences (or equivalent tests), the UT decided that there was no binding guidance that the FTT in this case was required to apply, beyond the proposition, derived from Ransom v Higgs, that a person cannot be trading until that person is ‘trading with someone’. Therefore, it concluded, the FTT had erred in this case in identifying a series of bright-line principles for when a trade can be said to have commenced (e.g. that a company cannot have started a trade until its necessary trading infrastructure has been established).
The UT therefore set aside the FTT’s decision and remade it on the basis of the FTT’s unchallenged findings of fact. Having eschewed bright-line principles, the UT found that the fact that Putney was not able to generate electricity from gas by the EIS Deadline was a “firm pointer against the proposition that it had begun to carry on that trade by then” [83]. Further, it found that entering into a matrix of contracts on a date referred to as “financial close”, including the framework agreements with Gazprom, formed part of Putney’s preparations to trade, rather than commencing its trade [85].
Given that Putney’s plan was to sell electricity as soon as it was produced, but no earlier, and that it was not forward-selling electricity, the fact that on the EIS Deadline it could not yet produce electricity or generate income led the UT to conclude that by the deadline it was still preparing to trade and had not begun to carry on its trade. The position of Piston was starker still: it had not entered into any contracts relating to the site where its plant was to be built. On that basis neither Putney nor Piston had fulfilled the statutory requirements for EIS relief and their appeals were dismissed.
The decision can be read in full
here.
