Gill
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 May 2018 |
| Neutral Citation | [2018] UKFTT 245 (TC) |
| Date | 01 May 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0245 (TC)
Judge Philip Gillett
Imran Afzal, counsel, instructed by Gordon Dadds LLP, appeared for the appellant
Patrick Boch, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Losses – Dealing in financial instruments and securities – Trading – The badges of trade – Commercial basis – With a view to profits – ITA 2007, s. 989 – ITA 2007, s. 64 – ITA 2007, s. 66 – Graham v Green (HMIT) (1925) 9 TC 309 – Cooper (HMIT) v Stubbs (1925) 10 TC 29 – IR Commrs v Livingston (1926) 11 TC 538 – Lewis Emanuel & Son, Ltd v White (HMIT) (1965) 42 TC 369 – Ransom (HMIT) v Higgs (1974) 50 TC 1 – Marson (HMIT) v Morton [1986] BTC 377 – Salt v Chamberlain (HMIT) (1979) 53 TC 143 – Cooper (HMIT) v C & J Clark Ltd [1982] BTC 130 – Wannell v Rothwell (HMIT) [1996] BTC 214 – Manzur [2011] TC 00830 – Eclipse Film Partners No 35 LLP v R & C Commrs [2015] BTC 10 – Ali [2016] TC 04816 – Mills; TeamOrigin LLP [2017] TC 05844 – Seven Individuals v R & C Commrs [2017] BTC 513.
The First-Tier Tribunal (FTT) found that the appellant had commercially undertaken a trade with a view to profit including during the year of appeal.
A closure notice was issued dated 17 June 2016, which was appealed. The closure notice was issued on the basis that the HMRC considered the Appellant was not trading or he he was not doing so on a commercial basis or with a view to the realisation of profits (ITA 2007, s. 66) for sideways or carry-back loss relief to be available.
The issues before the FTT were:
- Was the Appellant trading during 2010–11?
- If the Appellant did trade during 2010–11, was the trade throughout the year?
- Was any trade carried on a commercial basis and with a view to the realisation of profits?
The Appellant had a long history of undertaking transactions in financial instruments and securities. The activity has begun at the time the Appellant was at university. The Appellant first started buying and selling shares in 1995 using funds lent from his father. Whilst there were initial losses, the Appellant consistently generated profits. The activity was his full time “job” and as the volume of trades increased, more advanced systems were obtained, and brokerage accounts changed/opened. To permit larger trades, the Appellant was granted loans from the broker. Over time different trading strategies were implemented resulting in generating significant profits. The Appellant undertook considerable research and training.
There was uncertainty and volatility in the markets in the appeal year, 2010–11. The Appellant contended that made it difficult to use his normal strategies and realise profit. The Appellant therefore considered and used alternative strategies, some of which made small profits and others made losses:
- £9,388.37 profit trading market maker stocks;
- £1,054,572 from gold sales;
- £271,673 loss from gold options;
- £337,541 loss from Gold fx trading;
- £306,499 profit from shares in Supergroup
- $197.020 loss from Proshares contracts for difference;
- $2,105,747 loss from Proshares Ultrashorts;
- $348,561 loss from Proshares Put Options and Call Options;
- £9,388.67 profit on UK stocks
- £55,429.13 loss on UK contracts for difference;
The total losses during 2010–11 were £4,625,670.
The FTT considered the badges of trade in detail and with reference to case law. The FTT found that:
- The Appellant had a deliberate and organised scheme of profit-making;
- Whilst that scheme may not have delivered profits during the appeal year, profits were realised in previous years;
- HMRC's contention that to be regarded as trading it was necessary to demonstrate operations were carried on in the same way as those which are characteristic of ordinary trading in that line of business was incorrect;
- The trade was carried on a commercial basis because the Appellant had a very serious interest in making a success of the trade;
- Whether the Appellant traded with a view to realising profits is a subjective test whether the motives were to make profits. The Appellant had made profits from utilising strategies in previous years and that did not lead the FTT to question motive.
The FTT also directed that HMRC bear the reasonable costs of the appellant making the application given it was accepted that new material should have been disclosed earlier.
The case helpfully considers important case law and demonstrates the differences between an activity that is not undertaken commercially to one that is.
[1] This was an appeal against a decision of HMRC, contained in a closure notice dated 17 June 2016, that the appellant (“Mr Gill”) was not trading, or alternatively if he was trading then he was not doing so “on a commercial basis” or “with a view to the realisation of profits” as required by s.66 Income Tax Act 2007 (“ITA 2007”) for sideways or carry-back loss relief to be available.
[2] Prior to the hearing of the substantive appeal Mr Afzal, on behalf of Mr Gill, applied for a direction that HMRC should not be allowed to rely on a significant body of materials produced to the appellant shortly before the hearing.
[3] The new materials consisted of:
- A macroeconomic textbook, which was over 600 pages long. This was disclosed in hard copy on 7 March 2018.
- Various academic articles which in total were over 300 pages long. Some were provided in hard copy on 7 March 2018. Others were provided electronically: some on 20 March 2018 and yet further articles on 3 April 2018.
- Various graphs which were disclosed electronically on 20 March 2018.
- A series of spreadsheets which fell into two categories. Those described as non-fees spreadsheets were disclosed on 22 March 2018 and those described as fees spreadsheets on 26 March 2018. I was asked to note the following points:Many of the spreadsheets were printed double-sided such that, based on normal single-side printing, the materials were more than the existing 8 volumes of material which HMRC had previously prepared.Moreover, HMRC specifically confirmed that everything had been printed out but in fact the entirety of the fees spreadsheets were not printed, and in respect of the non-fees spreadsheets it appeared that the electronic data contained a greater number of tabs than those in the hard copies, implying that the hard copy was incomplete.
[4] Rule 15(2) of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (“Tribunal Rules”) provides that the “Tribunal may … exclude evidence which would otherwise be admissible where – (i) the evidence was not provided within the time allowed by a direction or a practice direction, (ii) the evidence was otherwise provided in a manner that did not comply with a direction or practice direction, or (iii) it would otherwise be unfair to admit the evidence”.
[5] The Directions issued by the Tribunal set a deadline for HMRC to provide its List of Documents (“LOD”), which was 21 April 2017.
[6] In this context Mr Afzal argued that:
- The book and articles should have been included in the LOD.
- The graphs and spreadsheets should either have been included in the LOD or at the very least should have been appended to a witness statement explaining how they were prepared.
[7] On this basis Mr Afzal submitted that the disclosure was significantly out of time.
[8] In addition, Mr Afzal argued that if HMRC knew that it was going to serve the new materials it should have applied for permission to adduce evidence out of time at the time when the hearing date was set, on 17 January 2018, and for the hearing window to be pushed back. Alternatively, if HMRC had only recently decided to adduce the evidence then that merely reinforced the fact that it should not be permitted to litigate by ambush and in breach of the applicable time limits.
[9] Finally I note that HMRC accepted it should have disclosed the new materials earlier. In correspondence concerning these materials Mr Boch said “I concede the documents should have been provided to you earlier” (7 March 2018) and “I agree that it would have been better for the material to have been disclosed earlier” (21 March 2018). I can only agree.
[10] It is also important to note that at a preliminary hearing Judge Brooks refused HMRC permission to adduce expert evidence because he considered that the evidence would not be helpful, because no expert could have a comprehensive view in relation to all types of trading strategies. However Mr Boch had said that HMRC wished to rely on this new material precisely because Judge Brooks had ruled against the use of an expert witness. I find the fact that these new materials were proposed to be used as a substitute for an expert witness, which was specifically ruled out by Judge Brooks, is somewhat disturbing.
[11] For his part, Mr Boch encouraged the Tribunal to have regard for the over-riding objective and to deal with cases justly and fairly.
[12] He explained that much of the raw data provided by the appellant was not useful in the way in which it had been presented and that the additional spreadsheets prepared by HMRC merely presented data which had already been provided but in a more accessible and useful format. Unfortunately there had been a number of errors in the data provided by the appellant, including decimal points in the wrong places, which had rendered the data unusable in its original form, and had also meant that it had taken HMRC staff a great deal of time to produce more usable data, which had led to the delay in providing the spreadsheets.
[13] Mr Boch also referred to the fact that at times it appeared from the data provided that Mr Gill was holding negative amounts of various securities. HMRC had therefore assumed that some trades had been omitted and had inserted “dummy trades” to avoid this problem. It appears that the fact that these negative values might have been caused by some other, legitimate, factor, such as Mr Gill shorting a particular security, had not been...
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