ETASSUM52110 - Enterprise Management Incentives (EMI): Excluded activities: Dealing in goods otherwise than in ordinary wholesale and retail distribution

Paragraph 17, Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

An ordinary trade of wholesale and retail distribution is outside the exclusion of dealing in goods. In determining whether a trade is an ordinary trade of wholesale or retail distribution the following features must be considered.

‘Wholesale’ and ‘retail’ distribution are defined as follows.

  • A trade of wholesale distribution is one in which the goods are offered for sale and sold to persons for resale by them or for processing and resale by them, to members of the general public for their use or consumption
  • A trade of retail distribution is one in which the goods are offered or exposed for sale and sold to members of the general public for their use or consumption.

The word ‘goods’ is not defined in the legislation. It may be regarded as having a very wide meaning in this context, covering virtually any tangible asset other than those mentioned in other parts of the list of excluded activities.

It may be useful to note that the meaning of the word ‘goods’ has been considered for other tax purposes, notably in relation to Industrial Buildings Allowances, and there has been some case law consideration of the meaning in that context. In the IBA context, the Courts have quoted with approval the statutory definition in the Sale of Goods Act, which says that ‘goods’ includes, “all personal chattels (i.e. tangible moveable assets) other than things in action and money; and in particular ‘goods’ includes emblements (crops the rights to which are held by a tenant), industrial growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale; and includes an undivided share in goods.”

Features that may indicate that the trade is normal wholesale or retail distribution are:

  • the vendor buys goods in larger quantities than he sells them,
  • the goods are bought and sold in different markets,
  • the vendor employs staff and incurs expenses in addition to the cost of the goods and, if appropriate, remuneration.

Features that may indicate that the trade is not normal wholesale or retail distribution are:

  • there are purchases or sales from people connected to the vendor,
  • purchases are matched with forward sales or vice versa,
  • the goods are held by the vendor for longer than is usual for goods of the kind in question,
  • the trade is carried on at a place or places not commonly used for such a trade,
  • the vendor does not take physical possession of the goods.

In the vast majority of cases, it is clear whether a trade is an ordinary wholesale or retail trade of distribution without referring to the list. No method of evaluating the listed features is prescribed. Not all the listed features will always be relevant, and the presence or absence of a particular feature will not be conclusive.

A trade should not be regarded as disqualified on the grounds that the type of goods is such that only a small and specialised group of the general public is likely to be interested in using or consuming them.

In addition to this list of features, the legislation provides that in one particular set of circumstances a trade is not an ordinary trade of wholesale or retail distribution. Where a trade consists ‘to a substantial extent’ of dealing in goods of a kind which are either collected or held as an investment (for example, fine wines, antiques or vintage cars), and a ‘substantial proportion’ of the goods are held for a period which is significantly longer than the period for which a vendor would reasonably be expected to hold them while endeavouring to dispose of them at their market value then it is not an ordinary trade of wholesale or retail distribution. This is intended to exclude assets which may be held with a view to capital appreciation rather than as genuine trading stock. Therefore if a substantial proportion of the ‘investment’ goods are not being actively marketed at a realistic price, the trade is disqualified even if a ‘normal’ trader in that field would be holding such stock for maturity and actively marketing it.