What amounts to carrying on a business? The question crops up in a number of situations, one of which is identifying associated companies for the purposes of small companies’ relief – you don’t include any company which has not carried on any trade or business in the relevant period.
We know from Jowett v O’Neill and Brennan that putting £5,000 on deposit may not amount to carrying on a business. We now know (from the recent case of Salaried Persons Postal Loans) that the entirely passive receipt of rent from a single tenant (all the dirty work being carried out by the managing agent) may also not amount to the carrying on of a business.
Not carrying on a business is of course likely to be a Good Thing as far as Small Companies’ Relief goes. It may be a Bad Thing if you have incurred expenses which would otherwise be relievable as management expenses: relief for such expenses applies only if and to the extent that they are referable to an “investment business” and it seems to us that if you are carrying on no business, you cannot possibly simultaneously claim to be carrying on an investment business.
More fundamentally, is a company that passively receives rent but does not carry on a business subject to tax? Remember that tax is charged under Schedule A on “profits arising from a business carried on for the exploitation of any rights over land”. So the finding that no business is carried on must negate any Schedule A charge. This doesn’t necessarily mean that the rents are tax-free: Case VI of Schedule D generally catches income not caught elsewhere, and is apposite to include rental income that arises otherwise than from a business.
Interestingly, however, Case VI would not include all the various special charges that arise under Schedule A – things like the charge under ICTA S34 that taxes certain premiums as if they were in part rent. Nor (probably) is there provision under Case VI for interest paid to be deducted: and the specific interest relief for let land was abolished when Schedule A was modernised a few years ago. So the tax treatment of a company which receives rent but is not carrying on a business is both anomalous and obscure.
The activity of “receipt of rent other than in the course of a business” when carried on by a non-company also causes interesting problems on incorporation. Hitherto it has been possible to say with confidence that TCGA 1992 S162 (relief on incorporation of a business) applies to a Schedule A business as it does to any other business: however it will not, on the face of it, apply to the incorporation of a “non-business rental activity”.
Salaried Postal Loans has opened more cans of worms than at first meets the eye…
This article was later published by TaxationWeb.
