Tax Man's List: cessation of trade

• The date on which a business is ‘permanently discontinued’ (ICTA88/S63) is normally the date on which it ‘closes its doors’ in circumstances which turn out to be permanent. This is so even if at that time the proprietors intended or hoped to continue trading, but that expectation was not fulfilled (Marriott v Lane [1996] 69TC157

• A trading company that happens to be left with income-yielding assets after the cessation of its trade does not automatically become an investment company (or 'company with investment business'). See Carpet Agencies Ltd v CIR 38TC223. It will only become an investment company (or ‘a company with investment business’) if there is evidence that it has a business and that that business or (for periods starting on or after 1 April 2004) part of its business will be the making of investments.

• If you have a case where:

   
   
  • trading ceases, and
   
  • funds are held on deposit pending the liquidation of the company, or in the period between trades,
   
   

  you should normally argue that the company is not an investment  company or ‘company with investment business’.

• J Bolson & Son Ltd v Farrelly [1953]  34TC161, (see   BIM21030). The latter case also  highlights the need to look beyond the description of the activity  to consider what it is that the person actually does.
• The contrasting decisions in the cases of The Alianza Company  Ltd v Bell [1905] 5TC60 and 172, (see   BIM21035) and Golden Horse Shoe (New)  Ltd v Thurgood [1933] 18TC280, (see   BIM21040) also illustrate the need to  look beyond the superficial description of a trade and consider the  detail of the actual activities undertaken.

• The scope of a trade is essentially a question of fact. The approach adopted by the courts is to establish the person's stated intention and then consider whether the facts support that intention or not.

• At one time the Revenue took the view that the trade of an insurer ceased when the company stopped accepting new business, and that what it did after that date amounted to no more than the settlement of the contingent liabilities which it had undertaken during its trading life. This view is incorrect.
• The trade of an insurance company involves both the effecting and carrying out of  contracts of insurance. The negotiation and settlement of claims is  an integral part of the trade of insurance. Case law supports this  view. See for example Stewart v Oriental Fire and Marine Insurance  Company Ltd. (Lloyd’s Law Reports [1984] vol.2 p.109) or  Scher v. Policyholders Protection Board ([1993] All ER 407).
• Cessation of trade does not necessarily occur, therefore,  when a company ceases to accept new business. A company may be  treated as continuing to trade for so long as it maintains its  business structure, continues to manage its portfolio of  investments and negotiates and settles claims in the ordinary way.
• This may be clear evidence of an  intention to cease trading at some future time, but should not, of  itself, be regarded as constituting a cessation.

  • Is existing regulation under MIPRU or is this a replacement regulatory regime?
• On the other hand  the cancellation of an insurer’s permission will amount to a  cessation.
• See SUP 6 in the Supervision Sourcebook in the FSA  Handbook.

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• Normally a trade ceases when the sole proprietor dies (or the company carrying it on is put into liquidation).
• restricted to winding up the affairs of the deceased (or of the company) to the best advantage of the beneficiaries of the estate (or the company’s creditors and shareholders)
• The appointment of a receiver or an administrator of a company does not of itself bring about a cessation of trade since there is no legal restriction on trading by a receiver or an administrator

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• A period of trading activity may be followed by a period in which little or no activity takes place, which is then followed by further trading activity.
• The new activity may be so different in scale and/or nature from the old one that it cannot be the same trade and must represent the commencement of a new trade ( BIM70595) (Seaman v Tucketts Ltd [1963] 41TC422).
• Where, however, the new activity is similar in scale and nature to the old, it is relevant to look at all the circumstances in which the break occurred, including the length of the break and the intentions of the business proprietors (as shown by their actions) at the time the earlier activity ceased (Kirk &  Randall Ltd v Dunn [1924] 8TC663; Goff v Osborne & Co  (Sheffield) Ltd [1953] 34TC441; J G Ingram & Son Ltd v  Callaghan [1968] 45TC151; Robroyston Brickworks Ltd v CIR [1976]  51TC230).

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• It is sometimes suggested that a business, especially a profession, is defined by its title.
• This argument is incorrect. It is inconsistent with Seldon v Croom-Johnson [1932] 16TC740 at page 746, which recognises that some, though not all, businesses are ‘local’ and also rejects the identification of a business by a verbal label. It is also inconsistent with Viscount Simon’s dictum in Rex v General Commissioners of Income Tax for the City of London (ex parte Gibbs and Others) [1942] 24TC221 at page 239 which recognises that it is possible to succeed to some professions, (see  BIM54065 - Dentists: successions).  
  

• Trades are rarely static and can change their nature over the years so as to be unrecognisable from their origins. A change in the scale and/or nature of a trade, if substantial enough and taking place over a short period of time, can cause the permanent discontinuance of one trade and the commencement of a new and different one.
• The question of whether there has been ‘a major change in the nature or conduct of a trade’ carried on by a company is also relevant in the context of ICTA88/S768 (CTM06370).

• The appropriate question will normally be whether, as a matter of fact, a change represents the ‘organic growth’ of a trade. In the Rolls-Royce case (at pages 344-5) Walton J describes a hypothetical situation which illustrates this principle:

   

   

   it appears to me that there is all the difference in the world between an organic growth of a trade and a sudden and dramatic change brought about by either the acquisition or the loss of activities on a considerable scale. Let me illustrate what I mean by the case of a company owning a single village grocer’s shop. Over the years it acquires, a few at a time, additional shops; it then organises a central system of bulk buying for them; it may then possibly organise manufacturing facilities in respect of various lines for its chain of shops to sell; and it may well move into the realms of transport and run its own fleet of vans. If it can do all this without ever having discontinued one trade and commenced another - which is the assumption which has to be made in the present case and which may well be correct - well and good. The final trade of that company will, however, as a matter of business activity, bear but little relationship to its original beginnings. Then if, as a result of some crisis, that company has to get rid of all its activities by selling them off, leaving it with only the original village shop, I would myself be under no doubt whatsoever but that there had been a violent change in the trade of that company.
• The judgements of Lord Carmont and Lord Guthrie in Gordon & Blair, Ltd v CIR [1962] 40TC358 also stress that questions of cessation caused by a change in activities are a matter of degree. 
  
• it will not normally be appropriate to follow the approach of The Lord President (Clyde) in Gordon & Blair, which was to seek to identify some activity which is the essence of the trade, and ask whether or not that continues to be present.

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