Judgment summary
This is an appeal from a decision of the First-tier Tribunal (FTT), published as [2024] UKFTT 870 (TC), concerning whether Putney Power Limited (Putney) and Piston Heating Services Limited (Piston) had begun to carry on trades on or before 4 April 2018 for the purposes of the enterprise investment scheme (EIS) under Part 5 of the Income Tax Act 2007 (ITA 2007) (1).
The FTT had concluded that neither company had begun to carry on its trade by that date. The Appellants appealed on the sole ground that the FTT erred in principle in reaching that conclusion (1).
The Upper Tribunal (Mr Justice Richards and Judge Rupert Jones) held that the FTT did err in law by treating certain judicial observations from other cases as establishing binding legal tests or principles (such as a requirement for 'trade infrastructure' to be assembled, or that a trader must be 'open for business'), rather than treating them as useful factors in a fact-specific, multi-factorial evaluation (76).
Having set aside the Decision for material error of law, the Tribunal remade it using the FTT's unchallenged findings of primary fact. It concluded that neither Putney nor Piston had begun to carry on its trade on or before 4 April 2018, reaching the same outcome as the FTT but by a different route (94, 102-105, 106).
Background
The question of when the Appellants began to carry on their trades arose because individuals who acquired shares in the Appellants sought EIS relief under Part 5 of ITA 2007 (3).
Section 175 of ITA 2007 requires that money raised from a share issue be employed wholly for the purposes of a 'qualifying business activity'. The Appellants relied on 'Activity A' in section 179(2)(b) of ITA 2007, which covers preparing to carry on a qualifying trade that is intended to be carried on and is 'begun to be carried on' within two years after the relevant date. The parties agreed the relevant deadline was 4 April 2018 (3, 4).
Putney proposed to carry on a 'gas-peaking' trade, generating electricity from gas at the Copse Road site and selling it at times of high demand, together with earning 'capacity market income' by agreeing to make generation capacity available (11-13, 27).
Putney signed Heads of Terms with AGR Peak Power Limited on 14 October 2016, conducted due diligence between November 2016 and May 2017, and reached 'financial close' in May 2017, entering a framework of interlinked contracts including an Engine Supply Agreement with JCB Power Products Limited, a Balance of Plant Agreement with AGR, gas and grid connection agreements, an option for a 21-year lease of Copse Road, and framework agreements with Gazprom Marketing & Trading Limited (the Gazprom Agreements) (15-19).
The Gazprom Agreements referred to a 'start date' defined as 'From commissioning, expected to be 1st January 2018', and did not oblige Putney to purchase or sell any specific quantity of gas or electricity, though clause 3.1.6 prevented Putney from doing anything likely to reduce the plant's ability to generate electricity (20, 21).
Construction at Copse Road began in September 2017. Putney pre-qualified into the capacity market in around December 2017, paying £80,590 in credit cover, and entered the Flexitricity Agreement in January 2018 for future transfer of capacity market contracts once operational (22-24).
Construction deadlines were missed, and as at 4 April 2018 the Copse Road site was not operational; it became operational only on 31 August 2018 (25).
Piston proposed a similar combined heat and power (CHP) trade. By 4 April 2016 it had entered an agreement with Triple Point for business administration services. In July 2016 it held meetings regarding potential sites, including the Ely Site and the Caswell Site (where the plant was eventually built) (30, 31).
By the EIS deadline, Piston had entered a business administration fee agreement with Triple Point, registered for the capacity market in relation to the Ely Site (paying a deposit), and signed heads of terms with AGR for the Ely Site, which it later decided not to pursue without penalty (32).
Piston had not, by 4 April 2018, entered any contracts directly related to the Caswell Site, and construction there did not begin until October 2018. Contracts for construction, gas and grid connection, a 10-year lease, and gas/electricity trading with Gazprom were entered on 3 October 2018 (33, 34).
Core dispute
The central issue was whether Putney and Piston had each 'begun to carry on' their respective trades on or before 4 April 2018, as required by section 179(2)(b)(ii) of ITA 2007, none of the FTT's factual findings being challenged (1, 9, 10).
The Appellants' single ground of appeal was that the FTT's test for when a trade commences, as set out at paragraph 202 of the Decision, was incorrect. Specifically, they argued the FTT was wrong to conclude that a trade is not set up before the putative trader is able to supply the relevant goods or services (paragraph 202(2)) and that a matrix of contracts cannot be equated with established trade infrastructure (paragraph 195) (62).
The Appellants contended that, once the FTT's asserted legal 'principles' were disregarded, the FTT's own findings (at paragraphs 188 and 189) that the matrix of contracts exposed Putney to a 'real possibility of future operational risk or reward' led inexorably to the conclusion that Putney's trade had begun before 4 April 2018 (79).
HMRC's position was that the relevant statutory question is fact-specific and multi-factorial, that no binding legal test derives from cases such as Birmingham Cattle, Ransom v Higgs, Khan v Miah, Mansell, or Tower MCashback beyond limited established propositions, and that neither Appellant could earn income from its intended trade by 4 April 2018.
Court findings
The Upper Tribunal held that the correct approach requires a multi-factorial examination of when a trade is 'begun to be carried on', using ordinary English words, with no comprehensive legal test derivable from prior first-instance or Special Commissioners' decisions such as Birmingham Cattle, Mansell, or Khan v Miah, save for limited established propositions (such as the trade/preparation distinction and the need for a counterparty) (36-46, 47-59).
The Tribunal found that while parts of the FTT's Decision correctly described a fact-specific, commercial-substance approach, other passages (notably paragraphs 172, 176-179, 181-183, 195-199, 202-203) elevated concepts such as 'trade infrastructure', being 'open for business', and the ability to 'supply' goods or services into binding legal principles or a 'test', which is not supported by the authorities relied upon (64-75).
The Tribunal concluded that this represented a material error of law, and set aside the Decision (76, 77).
Having set aside the Decision, and since neither party sought remittal and the FTT's factual findings were unchallenged and comprehensive, the Upper Tribunal remade the decision itself (78).
In relation to Putney, the Tribunal found that Putney was incapable of earning any income from either strand of its intended trade (electricity generation or capacity market income) on or before 4 April 2018, since the Copse Road facility was neither completed nor operational and no capacity allocation had been received. The matrix of contracts entered into, including the Gazprom Agreements and Flexitricity Agreement, formed part of Putney's preparations to trade rather than the carrying on of the trade itself, since Putney was not obliged to purchase or sell any specified quantity of gas or electricity under those agreements, and no payment was made or received on signing (81-90).
The Tribunal rejected Putney's analogy with a bespoke furniture maker taking orders before purchasing materials, finding that the nature of Putney's gas-peaking trade, requiring near-simultaneous generation and sale of electricity, did not support treating the Gazprom Agreements as a 'forward sale' (86-90). It also found HMRC's practice regarding petroliferous trades irrelevant to Putney's specific trade (91-92).
The Tribunal concluded Putney was still preparing to trade as at 4 April 2018 and had not begun to carry on its trade (94).
In relation to Piston, the Tribunal found the position even clearer than for Putney. Piston had no ability to generate electricity and no operational plant by 4 April 2018, had not entered any contracts directly related to the Caswell Site (construction, gas/grid connection, lease, or supply/purchase agreements), and no binding commitments existed that would result in financial risk or reward (96-99, 103).
The Tribunal rejected reliance on Micro Fusion 2004-1 LLP v HMRC [2008] STC (SCD) 952 as establishing any principle of law regarding when a trade begins, noting the FTT's unchallenged finding that Piston's arrangements did not expose it to any real possibility of future operational risk or reward, unlike Putney's (100-104).
The Tribunal concluded that Piston was still preparing to trade as at 4 April 2018, with its preparations less advanced than Putney's, and had not begun to carry on its trade (105).
Outcome
The Upper Tribunal set aside the FTT's Decision for material error of law but remade the decision using the FTT's unchallenged findings of fact (77, 78, 106).
The Tribunal concluded that neither Putney nor Piston had begun to carry on its trade on or before 4 April 2018. Both Appellants' appeals against HMRC's decisions were dismissed, reaching the same conclusion as the FTT albeit for different reasons (94, 105, 106).
Major issues / areas of contention
- Whether Putney and Piston had 'begun to carry on' their respective trades on or before 4 April 2018 for the purposes of section 179(2)(b)(ii) of ITA 2007.
- Whether the FTT erred in law by treating concepts such as 'trade infrastructure', being 'open for business', or the ability to 'supply' goods or services as binding legal tests rather than as factors in a multi-factorial evaluation.
- Whether prior decisions such as Birmingham Cattle, Ransom v Higgs, Khan v Miah, Mansell, and Tower MCashback established binding propositions of law governing when a trade commences.
- Whether a matrix of contracts entered into before the EIS deadline, which if performed would establish trade infrastructure, could itself be equated with established trade infrastructure or the commencement of trading.
- Whether the Gazprom Agreements constituted a 'forward sale' of electricity analogous to advance orders taken by a bespoke manufacturer.
- Whether Micro Fusion 2004-1 LLP v HMRC supported the proposition that a trade can commence before it is possible to earn profits from sales or exploitation of rights.