The second appellant (KLA) carried on a trade of business coaching from 1 October 2003 until the partnership dissolved on 22 December 2009. KLA’s partners were the first appellant (KL) and a company (RC). KLA entered into a 36-month agreement with a customer (T) to provide management training on 14 January 2009. The agreement between KLA and T stated that the training would be discontinued on the service of a termination notice by T and the payment of an early termination fee. The relevant provision stated: ‘Written notice must be received by KLA on or before 1st November 2009. Non-refundable deposit + £1,000,000 early termination fee to be paid to KLA within fourteen days of notification; Otherwise 100%’. T gave notice of early termination on 20 October 2009 and paid the £1 million early termination fee to KLA on 29 October 2009.

HMRC assessed the partnership on the basis that the termination payment was made in respect of a trade and was