Roulette V2 Charters LLP
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 August 2019 |
| Neutral Citation | [2019] UKFTT 537 (TC) |
| Date | 15 August 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 537 (TC)
Judge Tony Beare, Ms Elizabeth Bridge
Mr Oliver Marre appeared for the appellant
Mr Max Simpson, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Income tax – Loss relief – Loss in a trade – Whether yacht chartering trade carried on on a commercial basis and with a view to the realisation of profits for the purposes of ITA 2007, s. 66 – Held that the appellant intended to realise profits (so that the condition in s. 66(2)(b) was met) but that the prospects of profits were so remote that the trade could not be said to have been carried on on a commercial basis for the purposes of s. 66(2)(a) – Appeal dismissed.
The First-tier Tribunal (FTT) found that Roulette V2 Charters LLP (the Appellant) was not carrying on its trade of yacht-chartering on a commercial basis as there was little if any likelihood of a profit.
The Appellant is a limited liability partnership. It made losses in its trade of yacht-chartering. Mr Silver, a member of the Appellant, claimed relief (under ITA 2007, s. 64) against his general income for the losses allocated to him. HMRC issued closure notices denying the claims for relief on the basis that the activities carried on by the Appellant were not commercial, as required by s. 66(1).
Section 66(1) provides that trade loss relief against general income is available where the trade is commercial. Sub-section 2 explains that a trade is commercial where it is carried on throughout the basis period:
- on a commercial basis (test 1); and
- with a view to the realisation of profits (test 2).
The Appellant argued that, based on HMRC's Statement of Case, HMRC had accepted that the Appellant met test 2; therefore, it was only necessary to address test 1. The FTT rejected this argument; in light of earlier correspondence between the parties, HMRC's Statement of Case should be construed in such a way that it can be said that HMRC's view is that neither test is satisfied.
The FTT found in favour of the Appellant with regard to test 2. In applying this test, the FTT was obliged to consider whether the Appellant intended to realise profits in its trade and not whether that intention was “reasonable or realistic”. On this basis, the FTT found that the Appellant did trade with a view to the realisation of profits and therefore met test 2.
The likelihood of a profit was more relevant to test 1 where the FTT found against the Appellant: “the terms of the trade were uncommercial – because there was no way in which charter income would be able to cover the expenses of the Appellant – and the manner in which the trade was conducted was, at least in certain respects, amateurish”.
In summary, the Appellant failed to satisfy both tests set out in s. 66(2) and consequently s. 66(1) applied to prevent a claim for loss relief under s. 64. The Appellant's appeal was dismissed.
Trade loss relief against general income requires that the trade is conducted on a commercial basis. This means that the trader must intend to make a profit and that there is a realistic possibility of a profit. In this case, the taxpayer passed the first test but failed the second one: a “prudent trader”, when presented with the evidence that income would not cover expenses, would have brought the activities to an end at a early stage in the life of the business.
[1] This decision relates to an appeal against closure notices which were issued by the Respondents to the Appellant under section 28B of the Taxes Management Act 1970 (the “TMA”) for the tax years of assessment (each, a “tax year”) ending 5 April 2012, 5 April 2013, 5 April 2014, 5 April 2015 and 5 April 2016. Each of the closure notices, which were issued on 17 October 2017, set out the conclusion that, by virtue of the application of section 66 of the Income Tax Act 2007 (the “ITA”), the losses shown in the accounts of the Appellant for the periods of account of the Appellant which constituted the basis periods for the tax years to which this appeal relates were not available to be set off against the general income in those tax years of the member of the Appellant to whom 100% of the losses were allocable for income tax purposes, a Mr Trevor Silver.
[2] On 15 November 2017, the Appellant appealed against the closure notices and requested a review. On 21 November 2017, the Respondents confirmed their view of the matter. On 13 February 2018, the Respondents notified the Appellant of the result of their review, which was to uphold their original conclusion in each closure notice in full. On 14 March 2018, the Appellant notified the First-tier Tribunal of its appeal against the conclusion reached in each of the closure notices.
[3] There is one procedural point which we should make at the outset. When the Respondents send a closure notice under section 28B of the TMA, they are obliged to make the amendments to the limited liability partnership's self-assessment return which reflect the conclusion set out in the closure notice and then to make the amendments to the self-assessment returns of each relevant member of the limited liability partnership which reflect the amendments to the limited liability partnership's return (see sections 28B(3) and 28B(4) of the TMA). It is not clear to us that either of those things has been done in this case. Nevertheless, it is clear from the language used in section 31(1)(b) of the TMA that the right of appeal set out in that section extends not only to any amendment made by a closure notice under section 28B of the TMA but also to “any conclusion stated … by [that] closure notice”. It follows that we can see no procedural impediment to the making of this appeal by the Appellant as such.
[4] However, given that the conclusion in each closure notice against which the appeal has been made relates not to the question of whether the trading losses have arisen in the first place, but rather to the question of whether Mr Silver is entitled to set off those trading losses against his general income, we would have expected the present proceedings to have arisen from the amendments made to Mr Silver's self-assessment returns pursuant to section 28B(4) of the TMA which reflected the conclusion set out in each closure notice. The fact that this is not how the proceedings have commenced leads us to wonder whether any such amendments to Mr Silver's personal self-assessment returns have in fact been made. A somewhat similar issue arose in the case of Rowbottom (substituted for TJ Charters LLP) [2016] TC 04817 (“Rowbottom”). In that case, there were two points in issue – the question of whether the relevant losses arose to the limited liability partnership at all and the question of whether, if they did, sideways relief was available to the members of the limited liability partnership to whom the losses were allocated. This led the First-tier Tribunal in that case to say the following at paragraph [7] of its decision:
We say at this stage that it appears to us that neither issue is properly raised by this appeal as it stands. The closure notice disallows the losses to the partnership, TJC. It says nothing about the availability of losses for sideways relief to the partners in TJC. The issues between the parties, as it seems to us, need to be raised in an appeal brought by Mr and Mrs Rowbottom, and not by TJC. We have power under rule 9 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Rules”) to substitute a party if the wrong person has been named as a party. We consider that TJC is the wrong person to have been named as appellant in the appeal and Mr and Mrs Rowbottom should have been named as appellants instead (or in addition to TJC). We consider, however, that we have before us the necessary evidence and submissions to decide the real issues between the parties – viz: whether or not the trade losses of TJC are available for relief against the general income of Mr and Mrs Rowbottom. We also consider that it would be in accordance with the overriding objective of the Rules (to deal with cases fairly and justly) to direct a substitution pursuant to rule 9 of the Rules. Accordingly, in order that the real issues between the parties can be decided, we direct the substitution of Mr and Mrs Rowbottom for TJC as appellants in the appeal and proceed accordingly.
[5] The above has caused us to consider whether we should proceed in a similar manner and exercise the power referred to in the extract from Rowbottom set out above to substitute Mr Silver as the appellant in the appeal in place of the Appellant. We have concluded that this is not necessary on the facts in this case. It would seem from the above extract that, in Rowbottom, the relevant closure notice simply contained the conclusion that the relevant losses should be disallowed. It did not deal with the question of sideways relief at all. In contrast, each closure notice in this case did contain the conclusion that sideways relief was not available to Mr Silver and, as section 31(1)(b) of the TMA provides for a right of appeal against that conclusion, we see no reason why we need to substitute Mr Silver as the appellant in place of the Appellant.
[6] The Appellant is a limited liability partnership formed under the Limited Liability Partnerships Act 2000 (the “LLPA”) on 17 April 2008 to carry on the trade of yacht-chartering. The members of the Appellant are Mr Silver and Mr Robert Newsholme. It is common ground that:
- pursuant to section 2 of the LLPA, in order for a limited liability partnership to be formed:two or more persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document;that document (or a copy of it) must have been delivered to the registrar of companies; andthere must also have been delivered to the registrar of companies a statement...
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