Discovering a partnership’s trade or business post GCH Corporation Ltd – Stewarts Law

In an article that was recently featured in Taxation magazine on December 2nd, the case of GCH Corporation Ltd (TC9317) was reviewed by Matthew Greene and Guy Bud. This case shed light on the distinction between trading and doing business in the eyes of the First-tier Tribunal. Interestingly, the October 2024 Budget introduced a new provision to prevent similar tax planning strategies in the future.

The terms ‘trade’ and ‘business’ are integral to the tax system, often intertwined in various contexts. The case of GCH Corporation Ltd provides a unique and informative example of how these terms can have different implications for tax purposes.

The background of the case involves Greg Hutchings, a former executive at Tomkins plc, who amassed a significant portfolio of shares through GCH Corporation Ltd and three family trusts. In anticipation of a takeover of Tomkins, Hutchings sought advice on minimizing tax implications. He was advised to establish a limited liability partnership, GCH Active LLP, in 2010 to engage in trading public company stocks similarly to hedge funds or asset management businesses. Following Tomkins’ sale, the LLP made profitable transactions with shares of unrelated companies but did not engage in further trading activities during its nine-month existence. The LLP ultimately saved approximately £2.7m in capital gains tax and was notified to HMRC under the tax avoidance schemes regime.

The questions raised in the taxpayer’s appeal focused on whether the LLP was carrying on a trade or business for profit and the validity of the discovery assessment made by HMRC. HMRC had to prevail on both issues to succeed in the First-tier Tribunal.

Regarding the substantive issue of whether the partnership was engaged in a trade or business, the tribunal considered multiple factors based on legal precedents. They assessed the frequency and nature of share transactions, the execution of transactions, the source of finance, and the intentions behind the transactions. After a thorough analysis, the tribunal concluded that the LLP was not conducting a trade, emphasizing that their decision was solely based on the activities of Hutchings and the LLP, without bias towards tax mitigation purposes.

While the LLP was ruled out as conducting a trade, it was deemed to be carrying out business activities. This distinction allowed the taxpayer to prevail in the case.

This case serves as an insightful example of how the intricate definitions of trade and business can impact tax liabilities and underscores the importance of understanding these distinctions in financial matters.