At what point can it be said that an embryonic business has begun to trade? A tax tribunal pondered that fundamental issue in a case concerning a claim for entrepreneurs' relief on the sale of a nascent business asset.

An investor sold his minority stake in a limited liability partnership (LLP) that was established for the purpose of building and operating a biomass energy plant. His claim for entrepreneurs' relief – which would have greatly reduced his liability to Capital Gains Tax arising from the sale – was rejected by HM Revenue and Customs.

Ruling on his challenge to that decision, the First-tier Tribunal (FTT) noted that the investor was entitled to entrepreneurs' relief if he could establish that the LLP was engaged in 'trade' for a period of 12 months prior to the sale. Trade is defined by Section 989 of the Income Tax Act 2007 as including any venture in the nature of trade.

The sale took place before the Environment Agency issued a permit to operate the plant. Clearance work had started on the disused industrial site, but construction of the plant had yet to commence and it would take about two and a half years of building and commissioning work before it could become operational.

By the time of the sale, however, the LLP had entered into 56 commercial contracts relating to such matters as the construction, operation and financing of the plant and the acquisition of waste wood that would be burnt to produce energy.

In dismissing the investor's appeal, the FTT nevertheless found that the LLP had not started trading prior to the sale. It noted that acts involved in setting up a business, such as establishing a decision-making structure, purchasing plant, arranging finance and getting ready to face customers, do not themselves amount to commencing or carrying on a trade.

Prior to the sale the LLP had yet to begin operational activities, in the sense of dealings with third parties immediately and directly related to the supplies to be made by the plant which it was hoped would yield a profit. The contract to acquire waste wood was contingent on the plant's construction and in any event involved the making of supplies to the LLP, rather than the other way around.