Rowbottom and Another (substituted for TJ Charters LLP)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 January 2016 |
| Neutral Citation | [2016] UKFTT 9 (TC) |
| Date | 07 January 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Walters QC, Sonia Gable
Anthony Middleton, Ormerod Rutter, appeared for the Appellant
Anthony O'Grady, Presenting Officer, HM Revenue and Customs, appeared for the Respondents
Income tax – Trade loss relief against general income – Trade of chartering a vessel for day charters – Whether the trade was commercial within the meaning of the Income Tax Act 2007 (ITA 2007), s. 66 – Held no – Whether the trade was carried on during the relevant periods with a view to the realisation of profits in the trade – Held no – Whether the trade was a trade of leasing plant or machinery within ITA 2007, s. 75 – Held no in relation to 2009, but yes in relation to 2010 – Appeal dismissed.
The First-tier Tribunal (FTT) dismissed a couple's appeal against HMRC's decision to disallow trade loss relief against their general income for losses suffered by the LLP of which they were members. The FTT found that the trade of the LLP, chartering vessels for day charters, was not being carried on on a commercial basis.
The appellants (Mr and Mrs Rowbottom) became members of T J Charters LLP (TJC) when it was set up by Mr Rowbottom in May 2008. TJC bought a vessel called Lady Louise for approximately £1/2m, which it was hoped could be hired out for day charters by corporate entities, such as banks, hosting promotional days for clients, and also be available for personal use from time to time. A projected profit and loss account for the first year was prepared, showing a projected profit; a skipper was budgeted for but not motoring expenses. When the vessel was delivered Mr Rowbottom was about to go on holiday and it took until October 2008 to get the boat appropriately licensed for charter, by which time the 2008 season had been missed. TJC had an agreement with Mamarine, whereby Mamarine would provide the contacts in the corporate market, which Mr Rowbottom did not have, and would deal with customers wishing to hire Lady Louise. The chartering business was not a success and suffered losses in each of the three tax years ended 5 April 2011. Mr Rowbottom had a gut feeling that the chartering business could do well and put the losses down to the collapse of Lehman Brothers in September 2008 and unusually bad weather in 2009. Mr and Mrs Rowbottom claimed losses for each of the three years against their general income, but HMRC disallowed the claims.
The FTT had to consider whether trade loss relief was available in respect of losses from TJC's trade against the general income of Mr and Mrs Rowbottom, as members of TJC, this turned on: (1) whether the restriction on relief provided by ITA 2007, s. 66 applied, i.e. whether the trade was carried on throughout the relevant period (a) on a commercial basis, and (b) with a view to the realisation of profits in the trade; and (2) whether, assuming the restriction on relief provided by ITA 2007, s. 66 did not apply, was the trade one of leasing plant or machinery, such that the sideways relief restriction in ITA 2007, s. 75 should apply.
With reference to the guidance given by Robert Walker J in the case of Wannell v Rothwell TAX[1996] BTC 214, the FTT decided that the question of whether or not the trader in question was a serious trader … seriously interested in profit was to be answered by reference to objective factors, such as whether the pricing was commercial and the trade was otherwise conducted in a commercial fashion. The FTT agreed with HMRC's contention that TJC had not shown that its trade was carried on on a commercial basis. In particular it noted that:
the projected profit and loss account did not represent a business plan such as it would have expected to be produced in advance of a business which would involve the purchase of an asset for £1/2m. It seemed to show a lack of serious research and not to correspond with the way the business was actually conducted;
the projected profit and loss account did not envisage the arrangement which was actually come to with Mamarine;
the projected profit and loss account was unrealistic as to the prospect of the number of charters that could be obtained and the fees that could be charged;
although the financial crisis probably did have a depressing effect on the business, this explanation for the shortfall between the projected and actually achieved prices was too vague;
the delay in getting the boat appropriately licensed for charter was evidence that the trade was not being carried on on a commercial basis;
the inclusion of very significant motoring costs attributable to Mr Rowbottom's leasing of a vehicle, in the trading account was indicative of the fact that the trade was not being carried on on a commercial basis.
The FTT did not consider it necessary, in order to show that a trade was being carried on on a commercial basis, that it must be shown that the business was run in such a way that it could support the proprietors, particularly in a case such as this, where it was clear that Mr and Mrs Rowbottom had other significant sources of income.
The FTT's decision that the trade of TJC was not being carried on on a commercial basis during the relevant time was sufficient for it to dismiss the appeal, however it also found that subjectively TJC was not carrying on the trade in the relevant period with a view to the realisation of profits in the trade and for 2009–10 TJC carried on a trade of leasing assets.
As a preliminary issue, the appeal in this case was actually brought by the LLP but the FTT directed the substitution of Mr and Mrs Rowbottom as the appellants under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 9.
Although the LLP produced a projected profit and loss account for its first year of trading, the FTT found that it was not adequate to amount to a business plan such as it would have expected given the initial outlay of £1/2m on a boat. The lack of such a plan contributed to the FTT's decision that the trade was not being carried on on a commercial basis.
[1] This is, in form, an appeal by the original Appellant, the partnership T J Charters LLP (TJC), against the decision of the Respondents (HMRC) to deny income tax relief for losses (which included capital allowances) claimed by TJC – that is, £90,329 in the year ended 5 April 2009; £140,264 in the year ended 5 April 2010; and £76,646 in the year ended 5 April 2011. That decision was communicated in a closure notice dated 23 July 2013, sent by D.K. Butson, HM Inspector of Taxes to Mr Anthony Rowbottom, as nominated partner of TJC. Mr Rowbottom gave oral evidence at the hearing of the appeal.
[2] During the hearing of the appeal, Mr O'Grady, for HMRC, handed up to us a Revised Statement of Case. From that document it appears that although HMRC had formerly taken the point that TJC did not operate a trade, HMRC now accepts that TJC was indeed operating a trade during the periods in dispute, that trade being one of boat hire.
[3] The Revised Statement of Case is prepared on the basis that there remain two issues for decision.
[4] The first is whether trade loss relief is available in respect of losses from TJC's trade against the general income of Mr Rowbottom and his wife, Mrs Julia Rowbottom, as partners in TJC, pursuant to section 64 Income Tax Act 2007 (ITA). This issue turns on whether the restriction on relief provided by section 66 ITA applies – that is, whether the trade carried on by TJC in which the trade losses arose was commercial throughout the relevant periods. TJC submits that it was; HMRC submit that it was not.
[5] The second issue is whether, assuming the restriction on relief provided by section 66 ITA does not apply, sideways relief is available to Mr and Mrs Rowbottom in respect of so much of the losses as derive from trade leasing allowances, having regard to the restriction in section 75 ITA requiring an individual seeking to benefit from such sideways relief to meet the time commitment test.
[6] During the hearing of the appeal, Mr Middleton, for TJC, accepted that HMRC were correct that that the time commitment test in section 75 ITA had not been met. He said, however, that section 75 had no application to this case because it could only apply when a trade was a trade of leasing plant or machinery. He submitted that the trade carried on by TJC was not such an asset leasing trade, but was instead something more, and that besides hiring out a boat, TJC provided ancillary services, and this made the trade not one which was (for the purposes of section 75 ITA) the provision of the boat for leasing.
[7] 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...
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