Case developments: clarifying when a trade commences
The Upper Tribunal (UT) has now delivered its judgment in Putney Power Ltd & Piston Heating Services Ltd v HMRC [2026] UKUT 105 (TCC), providing clarification on when a trade is “begun to be carried on” for tax purposes. The date of commencement of trade is important for a range of tax provisions, with the specific case considering the period of time by which a company was required to be trading for enterprise investment scheme (EIS) reliefs. However, the date of commencement of trade is also relevant for corporation tax reporting, loss reliefs, availability of capital allowances and multiple other reliefs, including business asset disposal relief.
The UT found that the First‑tier Tribunal (FTT) had adopted an incorrect ‘bright line’ test for determining whether a trade had commenced. The UT ultimately remade the decision, instead undertaking a multi-factorial assessment by reference to the specific facts and circumstances of the businesses, and reached the same conclusion, namely that neither Putney nor Piston had begun trading by the EIS deadline of 4 April 2018.
While this decision provides some clarity, the departure from a ‘bright line’ test and adoption of a fact-sensitive multi-factorial assessment to be applied across different industries and businesses means that determining the correct date for the commencement of trade is going to continue to be complex for taxpayers.
Background
Under the EIS legislation, a company issuing EIS‑qualifying shares must ensure that the relevant trade has begun within two years of the share issue. The FTT had previously concluded that neither company met this requirement and therefore EIS reliefs were not available to the shareholders of the companies. Our earlier article reviewed that decision, noting that the FTT emphasised various ‘bright line’ tests for determining when a trade commences. The UT has now clarified the limitations of these concepts and re‑emphasised the need for a broader, fact‑sensitive analysis.
Key findings of the Upper Tribunal
1. The FTT’s use of specific ‘bright line’ tests was in error
The UT held that the FTT went wrong by elevating certain indicators to ‘bright line’ tests, such as infrastructure, supply readiness and being open for business – effectively making these into fixed requirements for a trade to have commenced. These concepts have historically been treated as ‘helpful factors’ rather than hard‑edged rules. The UT explained that there is no universal legal test requiring full infrastructure or operational readiness before trading can commence. Instead, tribunals must undertake a multi-factorial evaluation focused on commercial reality.
2. Commencement of trade is fundamentally a question of fact
The UT stressed that determining when a trade starts is always fact‑specific, guided by the activities actually undertaken. While the existence of infrastructure or the ability to supply customers may be relevant, they are not an exhaustive test and other indicators need to be taken into account and may differ from business to business. This aligns with earlier case law that avoids rigid formulae and instead examines whether the taxpayer’s actions amount to the carrying on of a trade rather than preparation for it.
3. Execution of contracts did not amount to commencing trade
The core argument put forward by Putney concerned whether Putney’s “matrix” of contracts, including agreements on gas supply, electricity offtake, construction and capacity market participation, demonstrated that trading had begun notwithstanding that Putney could not make supplies under these contracts. The UT held that although these contracts were significant and commercially sophisticated, they remained preparatory. They positioned the company to trade in the future but did not themselves constitute the act of trading.
4. Inability to generate revenue was a strong indicator against trading
Putney had no operational generating plant at the relevant date. It could neither produce nor sell electricity. Piston was even earlier in its project lifecycle; it had not secured its site or construction arrangements. The UT concluded that both companies were incapable of earning income from their intended trades by 4 April 2018. While the UT emphasised that the ability to generate revenue is not a strict legal test, it remains a powerful factual indicator.
UT conclusion: both companies were still preparing to trade
Having corrected the FTT’s legal approach, the UT nonetheless reached the same substantive conclusion: neither company had begun trading. The UT therefore dismissed both appeals. The decision reaffirms that ‘contractual readiness’ is not equivalent to carrying on a trade where no operational activity has yet begun and that activities must be looked at in the round, applying a multi-factorial approach to determining whether trading has, in fact, commenced.
Moore Kingston Smith comment
While the UT’s decision provides a clear, commercially realistic view of the application of the law, the lack of any firm tests that can be applied to determine whether a trade has commenced creates complexity. The requirement for a subjective multi-factorial analysis results in a ‘test’ that remains complicated to apply by taxpayers in practice and is likely to be subject to ongoing challenge and debate.
The UT decision dispels the notion of rigid commencement tests and refocuses analysis on what the company was actually doing. Given the importance of the date of commencement of trade (or period for which a trade is undertaken) for determining correct reporting of tax and the availability and timing of valuable tax reliefs, it is important that taxpayers take advice and carefully consider when a trade actually commences. This will be particularly important to capital-intensive business or start-up businesses, which can often be undertaking activities in developing their products for sale for a long time before being in a position to make commercial sales.
