Read the original guidance here:
HMRC SDLT: SDLTM23201 – Reliefs: Group, reconstruction or acquisition relief

Reconstruction and Acquisition Relief: Understanding Undertakings

What is an ‘Undertaking’?

An ‘undertaking’ refers to the business activities, trade, or enterprise of the company being acquired. For an entity to be considered an undertaking, it must be involved in running a business that the acquiring company will continue to operate, and this should be in a substantially unchanged manner.

– The term ‘undertaking’ involves the transfer of business operations from one company to another.
– It is expected that the acquiring company will continue the business activities of the target company.

Understanding Business

In HMRC terms, the word ‘business’ has a broad definition. It covers many activities, including trades, occupations, or any form of employment. The definition connects closely to the idea of carrying on business operations.

– Business includes more than just traditional trading activities; it encompasses a range of common activities.
– According to Lord Diplock in the case of American Leaf Blending Co. v Director General, Privy Council 1978, to conduct a business, there must be some level of active engagement.

Active Management of Investments

The scope of ‘business’ can also extend to situations involving investment activities. Active management of investments may qualify as a business under the right circumstances. This view has legal backing, as seen in the case of Martin & Another v CIR (SPC5/1995).

– Just collecting rent from properties does not necessarily mean someone is running a business.
– There needs to be a demonstration of continuous activity that appears to follow sound business principles for investment activities to be classified as a business.

What Constitutes a Part of an Undertaking?

Determining whether the assets transferred as part of a deal involve the undertaking of the target company often depends on specific factual circumstances. If the assets can function independently as a viable business, they may be recognised as part of the undertaking.

– The assessment is based on whether these assets can exist as a self-sufficient business.
– A simple division of assets or investments is typically not enough to qualify as part of an undertaking.

Examples of Undertakings

To clarify these principles, consider the following examples:

1. Example of an Active Business:
– A company that operates a chain of cafes is acquired by a larger food corporation. The acquiring company continues to run the cafes consistently with how they were managed before the takeover. In this case, the cafés and the staff who manage them represent the undertaking being transferred.

2. Example of Investment Activity:
– An individual owns several rental properties. If this person simply collects rent without any management or maintenance activities, this ownership alone would not constitute a business. But if the individual actively manages renovations and tenant relationships, this engagement could qualify as running a business.

3. Example of Asset Partitioning:
– If a company solely divides its assets, like office equipment or unsold inventory, and transfers them without any operation or management ongoing, these actions wouldn’t typically be recognised as transferring part of an undertaking.

Key Principles Related to Undertakings

When evaluating undertakings under the reconstruction and acquisition relief rules, several principles come into play:

– Continuity of Operations: The acquiring company must keep the operations running in a way that mirrors the previous management. This includes maintaining staff, business practices, and customer relationships.

– Viability: The assets transferred must have the capacity to operate as a standalone business. A viable business entails generating revenue and sustaining its operations independently.

– Active Engagement: The concept of an undertaking hinges on showing active management of business operations. Passive ownership or mere collection of assets is typically insufficient.

Specific Circumstances for Consideration

It’s also essential to consider specific scenarios that can further clarify what constitutes an undertaking and how it relates to acquisition relief.

1. Business Structures:
– Different structures, such as sole traders, partnerships, or limited companies, may affect how undertakings are assessed, but the principle of continuity remains vital across all forms.

2. Nature of Activities:
– Depending on the type of business—whether retail, services, or investments—the assessment of what constitutes ongoing operations can vary.

3. Transfer of Employees:
– Keeping employees who were part of the business before acquisition and integrating them into the new structure helps demonstrate that the undertaking is being carried forward.

Conclusion on Assessing Undertakings

In summary, when assessing undertakings for reconstruction or acquisition relief, the focus lies on the continuity of the business operations being transferred. The broader definition of ‘business’ encompasses various activities, and even investment-related operations can be included if they are actively managed. Understanding these concepts will assist individuals and businesses in navigating their obligations and rights under HMRC guidelines effectively.