Background
Gregory Hutchings, a veteran industrialist, and his family entities — GCH Corporation Limited and three family settlements — held substantial stakes in Tomkins plc. When Pinafore Acquisitions Ltd launched a takeover of Tomkins in late 2010, the Hutchings entities exchanged their Tomkins shares for Floating Rate Cash Secured Loan Notes issued by Pinafore, deferring but not extinguishing the accrued capital gains. Seeking to eliminate those gains, the parties implemented a scheme centred on GCH Active LLP, which had been incorporated on 26 August 2010 — two days after solicitors were instructed to obtain tax counsel’s advice — and which promptly purchased modest shareholdings (approximately £40,000 each) in five FTSE-listed companies.
The scheme’s mechanics turned on section 59A of the Taxation of Chargeable Gains Act 1992 (TCGA). If the LLP was carrying on a trade or business with a view to profit, it would be treated as a partnership for CGT purposes, so the May 2011 transfer of the Loan Notes (face value approximately £13.1 million) to the LLP would be a tax-neutral contribution rather than a disposal. On appointment of a liquidator — which occurred on 10 June 2011, just weeks after the transfer — section 59A(4) would strip away partnership treatment, and the LLP would be taxed as a company. Crucially, the LLP’s base cost in the Loan Notes would be the 2%-discounted price it had paid, effectively extinguishing the pre-contribution gains. The LLP (in liquidation) redeemed the Loan Notes on 13 June 2011. The scheme was disclosed to HMRC under the DOTAS rules.
HMRC challenged the scheme by issuing closure notices to the Company and the LLP and discovery assessments to the three Trusts, asserting that the LLP was not carrying on a trade or business with a view to profit at the time of the Loan Note transfer and that the gains therefore remained chargeable in the hands of the Company and the Trusts. The First-tier Tribunal (FTT), in its October 2024 decision ([2024] UKFTT 00922 (TC)), found that the LLP was not trading but was carrying on an investment business with a view to profit, and allowed the taxpayers’ appeals. HMRC appealed to the Upper Tribunal; the Respondents cross-appealed on the trading question and the Trusts cross-appealed on the validity of the discovery assessments.
The Court’s Holding
The Upper Tribunal (Mr Justice Edwin Johnson and Judge Ashley Greenbank) dismissed HMRC’s appeal. Applying the statutory language of section 59A(1) TCGA and the relevant case law — including the Court of Appeal’s analysis in Ingenious Games and others v HMRC [2021] EWCA Civ 1180 — the Tribunal upheld the FTT’s conclusion that “business” in section 59A(1) bears a broad, ordinary commercial meaning that encompasses investment activity and is not confined to trading. On the facts, the LLP’s acquisition and management of a portfolio of dividend-paying listed securities, combined with the profit motive evidenced by the LLP’s actual (if modest) profits and Mr Hutchings’s research into market investments, was sufficient to constitute carrying on a business with a view to profit at the time the Loan Notes were contributed. HMRC’s Grounds 1, 2, and 3 — challenging the FTT’s interpretation of “business,” its application of that concept to the facts, and its “view to profit” analysis — were all rejected.
On the procedural issue, the Tribunal held that no permission to appeal was required for the Trusts to raise in their Respondents’ Notice the argument that the discovery assessments were invalid — the Trusts were entitled to advance grounds on which they had been unsuccessful before the FTT in order to defend the same overall result. On the substance of the discovery issue, however, the Tribunal dismissed the Trusts’ cross-appeal, finding that HMRC officer Ms Marks had made a valid “discovery” within section 29(1) of the Taxes Management Act 1970 and that the conditions for issuing the discovery assessments were satisfied. This conclusion was, in practice, academic because HMRC’s main appeal on the substantive CGT question had already failed.
The Respondents’ cross-appeal on whether the LLP was also carrying on a trade — which would have provided an additional or alternative basis for upholding the FTT’s result — was not required to be decided in light of the dismissal of HMRC’s appeal on the “business” ground, and the Tribunal noted the FTT’s findings against the trading characterisation in any event.
Key Takeaways
- “Business” in section 59A(1) TCGA has a broad ordinary meaning that includes investment business; an LLP holding and managing a portfolio of listed securities for profit can satisfy the condition even if it is not carrying on a trade.
- The “view to profit” test under section 59A(1) is subjective: a genuine profit-seeking purpose suffices; tax mitigation need not be the sole or even dominant purpose, so long as a real profit motive also exists.
- The FTT’s evaluative factual conclusions (including the finding that the LLP did carry on a business) attract a high threshold for appellate intervention; where those findings were open to the FTT on the evidence, the Upper Tribunal will not substitute its own view.
- A respondent raising on a Respondents’ Notice grounds on which it was unsuccessful before the FTT — where those grounds, if successful, would achieve only the same overall result — does not require separate permission to appeal under the Tribunal Procedure (Upper Tribunal) Rules 2008.
- A valid section 29 TMA discovery assessment requires only that the HMRC officer formed a genuine belief that tax had been lost; the conditions were found met here notwithstanding the prior (defective) closure notice process.
Why It Matters
This decision reinforces that the gateway condition in section 59A(1) TCGA — carrying on a trade or business with a view to profit — is a relatively accessible threshold for LLPs that conduct any organised investment activity. Practitioners advising on LLP structures for CGT purposes will note that the Upper Tribunal has confirmed a broad reading of “business” in this context, potentially widening the range of arrangements that qualify for partnership treatment and the associated look-through for CGT purposes. At the same time, the Tribunal’s scrutiny of the facts underscores that the profit motive must be genuine and not merely incidental to a dominant tax-avoidance purpose, even if tax mitigation may also be in play.
For HMRC, the decision is a setback in its efforts to confine section 59A(1) to entities carrying on something close to a trade. More broadly, the case offers a detailed analysis of when an LLP’s investment dealings cross the threshold from mere asset-holding into a qualifying “business,” and it clarifies the procedural mechanics governing respondents’ notices and the need (or otherwise) for permission to appeal in the Upper Tribunal — points of recurring practical significance in complex multi-issue tax appeals.