When Does a Trade Begin? Lessons from Putney Power

In its March decision in Putney Power Limited and Piston Heating Services Limited (a case concerning the qualifying conditions for the Enterprise Investment Scheme (EIS)), the UT has provided valuable guidance on an important concept in tax law – when does a company begin to carry on a trade?

Although the UT agreed with the overall conclusion of the FTT – that neither company had commenced a trade – the UT set aside the decision of the FTT on the basis that it had mistakenly applied the law.

Remaking the decision, the UT ruled that the question required "the kind of multi-factorial examination that is frequently found in taxing statutes"; applying the ordinary meaning of words in legislation to all the facts and circumstances of an individual case, to decide what a company is doing and when. There is no 'bright-line', principles-based, formula or test to determine when a company commences its trade.

Applying a multi-factorial evaluation of the facts in this case, the UT had no difficulty in concluding that neither company's trade had "begun to be carried on" within the necessary two-year period for EIS relief to be available.

The full judgment can be found here: Putney Power Limited & Anor v HMRC [2026] UKUT 105 (TCC).

Both Putney Power Limited ("PPL") and Piston Heating Services Limited ("PHSL") intended to generate electricity from gas, selling it at times of peak demand (a process called gas-peaking). 

Several investor individuals had subscribed for shares in the companies, providing them with important start-up capital finance to help them prepare and start their trading activities. The individuals claimed tax relief under the EIS.

To qualify for EIS relief, several conditions (including several in relation to the investors’ subscription for shares) need to be met. One condition is that the monies raised from the issue of shares are used for a "qualifying business activity" of the company (or a subsidiary of the company).

It was agreed that the companies had always intended, and did go on, to carry on a qualifying gas-peaking trade. The sole question in the case was whether the companies' trades had begun within the two-year period required. On the facts in this case, the critical date was 4 April 2018.

PPL had made significant progress in its efforts to start trading. By May 2017, it had concluded several binding contracts including agreements for plant construction, generator purchase, gas supply, electricity offtake, capacity market participation, and site leases. Construction on a plant had begun by September 2017 but contractor delays meant the plant was not operational until 31 August 2018. PHSL made less progress before 4 April 2018, signing non-binding 'heads of terms' and registering for capacity market participation in relation to a site that it ultimately had to abandon. Construction at PHSL's eventual site did not begin until October 2018. Neither company had an operational gas-peaking plant by 4 April 2018.

HMRC's argument was that neither company's trade had 'begun within two years' and that EIS was, therefore, not available. The FTT had agreed. The companies appealed against the FTT's decision on the basis that it had gone "about its task in the wrong way".

EIS relief is a significant and valuable tax incentive. Where the statutory conditions are met, an individual investor can claim income tax relief equal to 30% of the amount subscribed to acquire their shares. EIS is intended to incentivize investment in smaller, higher risk, trading companies. However, such is the value of EIS relief, in situations involving preparing to carry on a trade, its availability is made subject to the two-year deadline for the trade to commence. This ensures tax relief is not given too far in advance of the trade (that the relief is designed to encourage) commencing.

Beyond EIS, whether a trade exists and has commenced is relevant across several elements of the UK tax code. It can, for example, determine when a company's first accounting period begins, when losses start to accrue, the availability of capital allowances, the qualifying status of Enterprise Management Incentive (EMI) options, the eligibility for Business Asset Disposal Relief (BADR), and the application of the Substantial Shareholding Exemption (SSE).

The FTT had decided (as a matter of fact) that both companies were preparing to carry on, and went on to carry on, a gas-peaking trade.

However, the critical issue was that the EIS rules clearly distinguish between "preparing to carry on" and actually "carrying on" a trade without offering any further guidance on when the line is crossed and a trade is 'begun'.

Both Tribunals, then, simply had to decide how to identify when a trade begins.

In concluding that neither company had begun to carry on its trade by 4 April 2018, the FTT had sought:

• to derive a set of 'principles' from earlier case law — primarily, Mansell v Revenue and Customs Commissioners [2006] STC (SCD) 605 ("Mansell"), a decision referred to with approval in Tower MCashback LLP 1 & Anor v Revenue & Customs [2008] EWHC 2387 (Ch) ("Tower MCashback"), and then
  
  
• to apply those 'principles' as a rigid legal test for when a trade has commenced.

In Mansell, having first decided whether there was a trade, the Special Commissioners had then to distinguish between "setting up" and "commencing" a trade. They concluded that:

• "a trade cannot commence until it has been set up … and that acts of setting up are not commencing or carrying on the trade", and
  
  
• "a trade commences when the taxpayer… begins operational activities—and by operational activities I mean dealings with third parties immediately and directly related to the supplies to be made which it is hoped will give rise to the expected profits, and which involve the trader putting money at risk".

The FTT had, in effect, asked itself whether the companies' positions satisfied the requirements established identified in Mansell, and, concluding that they had not, dismissed their appeals.

The UT agreed with PPL and PHSL that the FTT had made a mistake in identifying 'principles' in Mansell, elevating them to a comprehensive legal "three-limb test", to decide whether the trades had begun.

Instead, the UT concluded that Mansell merely sets out "a sensible approach to a factual enquiry that tribunals … can find useful when distinguishing between acts that are part of preparations to trade, and acts that suggest that a trade has actually commenced", and that it was this 'sensible approach' that had been endorsed by the High Court in Tower MCashback.

PPL and PHSL argued that their various negotiations and contractual agreements exposed it to a real possibility of operational risk and reward and this was enough to constitute trading.

The UT disagreed. Applying the correct approach to interpreting the law and applying a multi-factorial examination to all the facts and circumstances, the UT remade the decision (based on the FTT's unchallenged facts). The UT emphasized that in making a decision, the nature of the trade mattered – gas-peaking activities involve selling electricity almost simultaneously with its generation.

For PPL, the UT concluded that the company could not generate electricity or earn any income from its trade by 4 April 2018; this was, considering the trade in question, a firm pointer against the trade having commenced. In addition, none of the agreements imposed any obligation to purchase or sell any specified quantity of electricity; they merely secured PPL's ability to trade in the future, which was preparation, not trading.

For PHSL, the decision was even "more stark" because by 4 April 2018 it had not entered any binding commitments that would result in financial risk or reward and had not even settled on the site it would eventually develop. The UT found no difficulty in concluding that PHSL's activities were merely exploratory and preliminary and still in the preparatory stage.

The UT decided, therefore, that neither company had begun to trade by 4 April 2018, and both appeals were dismissed (reaching the same conclusion of the FTT, albeit for different reasons).

A company is not trading simply because it has committed to trade. It must have moved from preparation into the actual conduct of its trade—and that remains a question of fact, applying a multi-factorial examination of all the circumstances relevant to the trade in question, not of legal formula.

Businesses should consider the following:

More broadly:

• There is no checklist or formula that will definitively answer the question when a trade commences. The UT decision makes it clear that the question is fact-specific and requires an evaluation of what the company was actually doing, assessed by reference to the nature of its particular trade.
  
  
• That said, an inability to earn revenue from the intended trade remains a strong indicator that a company is still in a preparatory phase, and the trade has not yet begun. Even where a business has raised and committed significant capital expenditure, it should proceed on the basis that it may not yet be trading for tax purposes where it cannot yet deliver a product or service to a customer.
  
  
• The date a trade commences can have real financial consequences. For example, it affects corporation tax accounting periods, loss relief, capital allowances and other reliefs.

Our tax and incentives teams have extensive experience advising start-up businesses on all aspects of UK taxes, raising capital investment, the structuring of transactions, and the availability of tax reliefs and incentives, including the EIS, SEIS, alongside established expertise on employee incentives.

If you would like to discuss the implications of the Putney Power Limited decision for your business or for any specific transaction, please do not hesitate to contact a member of the team.