Keyl v HMRC – discontinuance of trade and Annual Investment Allowance

Mon 07 Sep 2015

The case of Keyl v HMRC considers the application of the general exclusion from claiming annual investment allowances (AIA) in a period where the activities of the business are permanently discontinued, and in particular, considers whether the discontinuance of a trade at the end of an accounting period falls within that accounting period.

Mr Keyl was engaged in air conditioning installation and maintenance as a sole trader before transferring the business to a newly incorporated company. Following the transfer, Mr Keyl continued to provide some maintenance and warranty services to the customers for whom he had installed air conditioning units in the previous 12 months.

His last period of account as a sole trader was for the year ended 31 March 2009 while the first set of accounts for the company began on 1 April 2009. In the year ended 31 March 2009, the business acquired a van – AIA was claimed on the cost of the van and the van was subsequently transferred to the company (along with all other plant and machinery) with effect from 1 April 2009.

HMRC challenged the claim for AIA on the basis that General Exclusion 1 within Section 38B CAA 2001 prevents expenditure from qualifying for AIA where it ‘is incurred in the chargeable period in which the qualifying activity is permanently discontinued’.

The case was heard at the First-tier Tax Tribunal on 19 March 2014 and was found in favour of HMRC. This decision was found on the basis that, although Mr Keyl continued to undertake maintenance and warranty work after 31 March 2009, this was not the same trade as he had previously carried out (and had transferred to the company) and that the previous trade had therefore been discontinued.

The taxpayer submitted that if the trade was permanently discontinued, then the relevant date of the discontinuation would be 1 April 2009 (as the business had prepared accounts for the full year to 31 March 2009, it could not have discontinued in that period). However, the FTT decided that the trade must have been discontinued before 1 April 2009 (as the company started to carry out that same trade in its own right upon that date). This point was further developed on the basis of scintilla temporis, stating that the original trade must have ceased prior to it being continued by the company and as such, it ceased in the scintilla of time before midnight on 31 March 2009 and the company commenced its trade in the scintilla of time after midnight – meaning effectively, there was a moment of time (i.e. midnight) when the trade was neither carried out by Mr Keyl as a sole trade or the company.

The taxpayer was granted permission to appeal the decision of the First-tier Tax Tribunal on the single point of law that there was no scintilla of time between the discontinuance of a trade by one person and the continuance of it by another. The case was heard before the Upper Tax Tribunal on 2 June 2015.

The decision issued by the Upper Tax Tribunal was that the reference to the scintilla temporis by the First-tier Tax Tribunal was unnecessary and potentially confusing. The Tribunal concluded that midnight was both the last moment of one day and the first moment of the next, therefore the discontinuance of the trade by one party and the commencement of the trade by another happened simultaneously.

Furthermore, it was decided that the discontinuance of a trade at the end of a chargeable period was a discontinuance in that period – the point at which the trade was discontinued (midnight on 31 March 2009) was the last moment of the accounting period ending upon that date.

Accordingly, Mr Keyl’s appeal was dismissed with the result that the AIA would not be available on the purchase of the van in the period ended 31 March 2009. 

Comment

This is an unfortunate result for Mr Keyl, because if he had waited to purchase the van once the business had been transferred to the limited company, AIA would have been available – as it indeed also would had the purchase had taken place in the previous period.  Unfortunately the rules are the rules, and these apply regardless of whether the outcome seems fair or not.