Degorce v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 August 2015 |
| Neutral Citation | [2015] UKUT 447 (TCC) |
| Date | 24 August 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Hon Mr Justice Hildyard, Judge Colin Bishopp
Mr Jolyon Maugham, counsel, instructed by Reynolds Porter Chamberlain LLP, appeared for the appellant
Mr Michael Gibbon QC and Mr Michael Jones, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax Whether taxpayer carried on a trade If so whether trade commercial Whether carried on with a view to profit Whether GAAP correctly applied Whether expenditure incurred wholly and exclusively for purposes of trade First-tier Tribunal deciding all issues against taxpayer Whether findings should be upheld Yes Appeal dismissed.
The Upper Tribunal (UT) upheld the First-tier Tribunal (FTT) decision on whether a film scheme worked to generate income tax losses to shelter a taxpayer's income in Degorce TAX[2013] TC 02593. The UT upheld the FTT's decision that: the taxpayer was not trading; if he had been trading it was not on a commercial basis and he had no reasonable expectation of profit; the taxpayer's profits were not calculated in accordance with generally accepted accounting practice (GAAP); and the expenditure on the film rights was not wholly and exclusively incurred for the purpose of the trade.
Mr Degorce (the appellant) was one of 12 users of a scheme designed to create artificial losses by the purchase and sale of film rights. Through a complex series of transactions the users bought film distribution rights for an inflated figure, immediately assigned them back at a loss, and claimed sideways relief on the loss against their other income under the Income and Corporation Taxes Act 1988 (ICTA 1988), s. 380(1).
HMRC disallowed Mr Degorce's claim on the basis that the scheme did not work because his activities did not amount to trading, but were instead the acquisition of a potential income stream. The FTT (in Degorce TAX[2013] TC 02593), held that Mr Degorce was not carrying on a trade and was therefore unable to claim a trading loss. The FTT found that in applying the badges of trade the nature of the transactions was not of a trading nature. For example, the transaction was a one-off as there was no element of repetition and there was no evidence relating to the taxpayer's activities as a hedge fund manager involving the film industry before or after the transaction, the film rights were resold without any modification and were only held for a very short time. Mr Degorce also did not carry on a business on a commercial basis and there was also no basis upon which he could have had any reasonable expectation of profit. The FTT also found that Mr Degorce's profits were not calculated in accordance with GAAP and the expenditure on the film rights was not wholly and exclusively incurred for the purpose of the trade. The FTT held that the purpose of Mr Degorce's transactions was to shelter taxable income.
Mr Degorce appealed to the UT on the grounds that the FTT decision contained misdirections of law and irrational or absent findings of fact and failed to give adequate reasons for their conclusions. Whilst the UT accepted some of Mr Degorce's counsel, Jolyon Maugham's criticisms of the FTT's ruling it upheld the FTT decision and disallowed Mr Degorce's appeal.
The UT did not consider that the trade issue in this case gave rise to matters of principle on which it was appropriate to offer guidance. The question whether a person is carrying on a trade is essentially a question of fact and there is already copious guidance at the highest level, on the approach which must be adopted. The task for the UT was therefore of enquiring whether the FTT had correctly applied the guidance in determining the facts and evaluating them. The question the UT had to address was not whether it, hearing and reading the same evidence, might have come to a different conclusion, but whether there was evidence before the FTT sufficient to support their conclusions. The FTT's finding of fact can only be overturned on appeal in exceptional circumstances, such as where if as part of the UT's function to provide guidance on matters of principle it is necessary for it to reconsider the FTT's findings of fact.
The decision of the UT in this case is another win for HMRC in their battle against film investment schemes and indicates how difficult it is for taxpayers to succeed in arguing that their activities amount to trading when they have limited involvement in a business.
[1] This is an appeal from a decision of the First-tier Tribunal (the F-tT) (Judge Dean, as she now is, and Mrs Farquharson) released on 4 March 2013. The F-tT determined a reference made by the parties pursuant to s 28ZA of the Taxes Management Act 1970 (TMA) of two questions which arose from an enquiry opened by the respondents, HMRC, into the appellant's, Mr Patrick Degorce's, income tax return for the year 200607. But for a continuing investigation into other matters not relevant to this appeal, that enquiry would have led to the closure of the enquiry by amendment of Mr Degorce's return so as to disallow his claim for loss relief of 20,151,186. That was the amount of the loss he said he had sustained as a sole trader in film distribution rights during that year. As nothing turns on precise figures we shall generally adopt round numbers in what follows.
[2] The scheme that Mr Degorce had entered into was known as the Goldcrest Film Scheme or the Goldcrest Pictures Scheme; Goldcrest is the name of the group which promoted the scheme. It was undisputed that the scheme fell within the provisions of Part 7 of the Finance Act 2004 (which provide for the disclosure to HMRC of tax avoidance schemes and are known as the DoTAS provisions), and it was duly disclosed to HMRC. The essence of the reason given by HMRC for disallowing the claim, and the primary case they advanced before the F-tT and before us, is that the scheme did not work because Mr Degorce's activities did not amount to trading.
[3] Mr Degorce was only one of twelve users of the scheme, all of whom have appealed against decisions made by HMRC in respect of their relevant income tax returns. Mr Degorce's appeal was selected as a suitable lead appeal and a direction was made in accordance with rule 18 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, designating it as the lead appeal while the other eleven have been designated as related appeals. Those appeals remain in the First-tier Tribunal.
[4] The issue between the parties is encapsulated in the two questions referred to the F-tT, which were as follows:
a) Whether any Case I [of Schedule D] trade losses arose from the sole trader film distribution activity; and
b) If so, the amount allowable for tax purposes.
[5] The parties agreed before the F-tT, and agree before us, that the referred questions break down into five primary issues:
a) whether, during the year ended 5 April 2007, Mr Degorce carried on a trade (the trade issue);
b) whether, if the answer to (a) is yes, the trade was carried on on a commercial basis (the commercial basis issue);
c) whether, if the answer to (a) is yes, the trade was carried on with a view to the realisation of profits or, in the alternative, whether it was carried on so as to afford a reasonable expectation of profit (the view to profits issue);
d) whether the profits of the trade for the year of assessment 200607 were calculated in accordance with generally accepted accounting practice (GAAP) (the GAAP issue); and
e) whether Mr Degorce's expenditure on rights in two films, Tropic Thunder and The Love Guru, was wholly and exclusively laid out or expended for the purposes of the trade (the expenditure issue).
[6] HMRC add a supplementary issue, which arises if Mr Degorce succeeds on issues (a), (b) and (c), but fails on issue (d) (that is, the answer is no), namely what would the profits (or, more accurately, losses) have been had they been calculated in accordance with GAAP.
[7] The F-tT determined the trade issue against Mr Degorce, and then went on to determine the remaining issues from the starting point that, although their findings of fact on the trade issue were correct, the conclusion to be drawn from them (contrary to what they had in fact concluded) was that he had been trading. They determined all of the remaining issues against him as well. They did not answer HMRC's supplementary question, but did express some views about the approach to it which should be adopted. It is now accepted that the F-tT's conclusion on the trade issue was determinative, and that their conclusions in respect of the other issues were not matters of decision. We are asked to adopt the same approach as the F-tT: that is, address the remaining issues should we agree with them on the trade issue; we shall of course need to deal with them as matters for determination should we disagree with the F-tT on the trade issue. We shall not, however, deal with HMRC's supplementary issue, since we do not consider we are equipped to do so in the context of an appeal.
[8] Mr Degorce was represented before us by Mr Jolyon Maugham and HMRC by Mr Michael Gibbon QC leading Mr Michael Jones.
[9] The F-tT's decision sets out, at [38] to [70], a description of the complex series of transactions into which Mr Degorce and others entered on 5 April 2007, together with some information about the background to Mr Degorce's participation in the scheme. The F-tT's description of the facts is complicated by the fact that some of the transactions with which it deals related not only to Mr Degorce but also to other users of the scheme, a complication we think we can leave out of account, and the F-tT entered into rather more detail than we think is necessary for the purposes of this appeal. Their narration of the transactions is, however, not challenged and we can therefore summarise those of them...
To continue reading
Request your trial
-
Patrick Degorce v The Commissioners for HM Revenue and Customs
...COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER) MR JUSTICE HILDYARD AND JUDGE BISHOPP [2015] UKUT 0447 (TCC) Royal Courts of Justice Strand, London, WC2A 2LL Ms Hui Ling McCarthy (instructed by Enyo Law LLP) for the Mr Michael Gibbon QC and Mr M......
-
Poll
...Mr Poll nor his advisers responded to these letters. [22] The litigation referred to by HMRC was the case of Degorce v R & C Commrs [2015] BTC 528. The decision of the First-tier Tribunal ([2013] TC 02593) was released on 4 March 2013. The Upper Tribunal decision ([2015] BTC 528) was releas......
-
Thomson and Others
...could fairly be described as trading will not cast the cloak of trade over the whole structure. [187] In Degorce v R & C Commrs [2015] BTC 528, the Upper Tribunal characterised the distinction as being between: … the transaction which has the character of trading even though it may be motiv......
-
Ball UK Holdings Ltd v Revenue and Customs Commissioners
...issues in other tax appeals, referring to Smith v R & C Commrs [2011] BTC 1,742, in particular at [70], Degorce v R & C Commrs [2015] BTC 528 at [128] to [131], Greene King plc v R & C Commrs [2014] BTC 515 at [38] and [56] to [58], and GDF Suez Teesside Ltd v R & C Commrs [2017] BTC 507 at......
-
Film Distribution Rights
...Degorce v HMRC [2015] UKUT 0447 (TCC) the Upper Tribunal (UT) upheld the decision of the First-tier Tribunal (FTT) that Mr Degorce's film distribution activities did not amount to trading, with the consequence that he could not claim sideways relief for losses arising from those The UT obse......
-
Weekly Tax Update - 15 August 2016
...other schemes in the Eclipse 35,(Eclipse Film Partners No 35 v HMRC [2015] EWCA 95) Proteus and Samarkand [2015] UKUT 211 and Degorce [2015] UKUT 447 (TCC) cases where the LLPs were held simply to have purchased income streams and who were therefore not This part of the decision will not he......