The BADR oxymoron: activity can be passive

Deafening silences.  Open secrets.  Exact estimates.  And to the secular pantheon of oxymorons we must now add passive activities.

Dr Assem Allam’s case before the Upper Tribunal [2021] UKUT 291 (TCC) covered a number of discrete issues.  We’ll perhaps look at some more of them in future briefings: but in this one we look only at the question that arose in respect of what was at the time Entrepreneurs’ Relief but has subsequently been renamed Business Asset Disposal Relief (‘BADR’).

Dr Allam’s entitlement to relief depended upon his company’s being a ‘trading company’ – defined as ‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities’.  The company was involved in both property development (unquestionably trading) and property investment (unquestionably not trading).  But was the non-trading activity ‘substantial’?

HMRC’s guidance asserts with confidence (albeit, as we shall see, misplaced) that ‘substantial in this context means more than 20%’.  20% of what – income? Assets? Directors’ time? Expenses? Any of the above?  All of the above? – is left vague.

The First-tier Tribunal (‘FTT’) had held that relief was not due: ‘although the company was clearly carrying on some trading activity or activity in preparation for trading, the proportion of the income of the company which comprises non-trading rental income and the proportion of its asset base which are devoted to properties which are let simply for their rental income demonstrate that its property investment and rental activities have real importance and cannot be ignored. Those activities are not trading activities and they have to be regarded as “substantial” in the context of the activities of the company as a whole’.

Dr Allam appealed to the Upper Tribunal (‘UT’).

The UT agreed with the FTT that ‘substantial’ means ‘of material or real importance in the context of the activities of the company as a whole’ and expressly disavowed the kind of numerical threshold suggested by HMRC’s guidance.  Rather, it was a ‘balancing exercise’ which required looking at all relevant factors ‘in the round’.

Dr Allam’s Counsel contended that ‘activities’ of a company can mean only the actions of its directors and employees: actual human activities.  Building on a similar argument that had been accepted in the earlier case of Potter, he asserted that passive investment – whether having money on long-term fixed-interest deposit or holding property let on a long-term full repairing lease – involved little or no ‘activity’ and could not disqualify an otherwise trading company from relief.  The term ‘passive activity’ which had been used by the FTT in the present case to justify its decision was oxymoronic: an activity cannot be passive.

The UT were having none of it.  The Tribunal in Potter had been wrong to have placed such weight on ‘the absence of any physical activity in relation to the investment bond’.  In the context of the legislation, ‘activity’ should not be construed so narrowly.  In the present case, the FTT’s use of the term ‘passive activity’ might have been an infelicitous way of expressing itself, but what was required was ‘an overall consideration of what it is that the relevant company does’ in commercial terms.

Looking at the matter in that way, the UT could find nothing to criticise in the FTT’s decision.  It had looked at all the relevant factors and made a value judgement.  It was entitled to give weight to the turnover from non-trading activities and the capital employed in them.  Although the expenses incurred were predominantly trading rather than non-trading expenses, that was not of itself a measure of the activities: ‘incurring expenses may indicate physical activity but for the reasons given above the test is not solely concerned with physical activity’.

Unfortunately for advisers, the case therefore closes off what had seemed at one time to be quite a promising line of argument in mixed trading and non-trading companies.  And, as a UT decision it has the authority of precedent which the FTT decision in Potter always lacked.

Bittersweet to have been given such clarity.

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Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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