Seven Individuals v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 March 2017 |
| Neutral Citation | [2017] UKUT 132 (TCC) |
| Date | 31 March 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0132 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Nugee
Jolyon Maugham QC, instructed by Simkins LLP, appeared for the appellants
Jonathan Davey QC, Imran S Afzal, Nicholas Macklam, and Sam Chandler instructed by the General Counsel and Solicitor for HM Revenue and Customs, appeared for the Respondents
Income tax – Reference – Whether trades carried on on a commercial basis (Income and Corporation Taxes Act 1988 (ICTA 1988), s. 380, 381 and 384 and Income Tax Act 2007 (ITA 2007), s. 64, 66, 72 and 74) – No – Whether partners non-active (ICTA 1988 , s. 118ZE, 118ZH and ITA 2007, s. 103B) – Yes – Whether one of main purposes to obtain sideways relief (ITA 2007, s. 74ZA) – Yes – Appeal dismissed.
The Upper Tribunal (UT) has dismissed the appeals by seven individuals (as representative members of Icebreaker Limited Liability Partnerships (LLPs)) against the decision of the First-tier Tribunal (FTT) in Acornwood LLP [2014] TC 03545 confirming the FTT's finding that sideways loss relief under the Income Tax Act 2007 (ITA 2007), s. 64 (general relief) and s. 72 (early years relief), and former provisions in the Income and Corporation Taxes Act 1988 (ICTA 1988), s. 388 and 384 respectively, was not available to the individual members because the trades were not carried on on a commercial basis and with a view to profit. Although this disposed of the appeal, the UT also confirmed the FTT's findings that the members were “non-active partners” (ICTA 1988, s. 118ZE and 118ZH and ITA 2007, s. 103B) and that ITA 2007, s. 74ZA (anti-avoidance) was also engaged because the Icebreaker scheme was a tax avoidance scheme.
This was the second part of an appeal against the decision of the FTT in Acornwood LLP [2014] TC 03545 which involved lead appeals by five LLPs claiming sideways loss relief for payments made for the exploitation of intellectual property rights which they claimed to be trading losses. The FTT's decision had followed the decision of the UT in Icebreaker 1 LLP v R & C Commrs [2011] BTC 1,579 and the LLPs involved in this appeal were similarly known as “Icebreaker partnerships”.
The FTT's decision had dealt with issues arising both at partnership level (the partnership level issues), namely whether the LLPs could include certain expenditure in the calculation of their trading losses, as well as issues arising at member level (the member level issues), namely whether the individual members (referrers) could claim sideways loss relief in respect of the trading losses.
The first part of the appeal against the FTT's decision, in respect of the partnership level issues, was dismissed by the UT in Acornwood LLP v R & C Commrs [2016] BTC 517. However, whilst the LLP's arguments were largely rejected, the appeal had been allowed in respect of some of the expenditure paid by the partnerships to the exploitation companies which, accordingly, did give rise to some trading losses and although the quantum of the losses involved was significantly diminished, the remaining losses could not be regarded as trivial. Accordingly, the member level issues remained live and significant.
The UT first noted the relevant legislation. ICTA 1988, provided for sideways loss relief under s. 380 generally and under s. 381 in respect of the early years of a trade. S. 380 was subject to restrictions under s. 384 and s. 381 was subject to restrictions within s. 381. The restrictions provided that relief under s. 381 was not to be given unless the trade was carried on … on a commercial basis and in such a way that profits in the trade … could reasonably be expected to be realised in that period or within a reasonable time period; and that a loss was not available for relief under s. 380 unless the trade was being carried on on a commercial basis and with a view to the realisation of profits in the trade … and that a trade was to be treated as being carried on with a view to the realisation of profits where it was carried on so as to afford a reasonable expectation of profit.
ICTA 1988, s. 118ZE and 118ZH also provided a restriction on relief for non-active partners, who did not devote a significant amount of time to the trade, being an average of at least ten hours a week personally engaged in activities carried on for the purposes of the trade. It was noted that if the individuals were held to be non-active members, they could not avail themselves of sideways loss relief.
From 6 April 2007, ITA 2007 rewrote the provisions in s. 64 (deduction of losses from general income) and s. 66 (restriction on relief unless trade is commercial), which specify a trade must be carried on on a commercial basis and with a view to the realisation of profits and in the latter context would be so treated if it was carried on so as to afford a reasonable expectation of profit. Similarly, early years provisions were re-written in s. 72 (relief for individuals in first 4 years of trade) and s. 74 (restrictions on relief unless trade is commercial), which provide that the trade be carried on on a commercial basis and in such a way that profits could reasonably be expected to be made in the basis period or within a reasonable time afterwards. The non-active partner provisions were also re-enacted in ITA 2007, s. 103B which require the individual spends an average of at least 10 hours a week personally engaged in activities carried on for the purposes of the trade. S. 103B was then amended by Finance Act 2008, so as to require, additionally, that the activities be carried on on a commercial basis and with a view to the realisation of profits. Finally, ITA 2007, s. 74ZA provided a targeted anti-avoidance rule from 21 October 2009 that no sideways relief was to be given where the loss arises in consequence of relevant tax avoidance arrangements, defined as arrangements the main purpose or one of the main purposes of which is the obtaining of a reduction in tax liability by means of sideways relief …
The UT then noted that there were essentially three questions that had been appealed:
- In respect of each individual, whether his or her LLPs trade was carried on on a commercial basis and with a view to profit (the commercial basis question);
- Whether each individual was active (the active member question); and
- Whether the arrangements had a main tax avoidance motive (the s. 74ZA question).
The UT noted that there were two limbs to the commercial basis question, first was the trade carried on on a commercial basis (the commerciality limb) and second, whether the trade was carried on with a view to profit/in such a way that profits could reasonably be expected (the profits limb).
The FTT had found that the profits limb was not satisfied because none of the appellant partnerships or their members could have had a reasonable expectation of realising profits and, therefore, the commerciality limb did not need to be decided. Nevertheless, the FTT answered the point finding that a trade that was virtually certain to lead to a loss could not be commercial.
The UT found that whilst the FTT's finding that no reasonable expectation of profit was sufficient to deny relief under the early years provisions, which required “profits of the trade could reasonably be expected”, the same was not true of the general provisions, which required the trade be carried on “with a view to the realisation of profits”. This was looking at the aim or purpose of the relevant person (subjective) not whether profits could reasonably be expected (objective).
The UT also found it odd that given it was the commerciality limb that HMRC had argued upon (not the profits limb), the FTT had devoted most of their analysis to the profits limb, concluding that they did not need to determine the commerciality limb but then found that it was not satisfied nonetheless. It was this finding of the FTT that was the point of the appeal. Accordingly, the UT examined the FTT's reasoning behind this finding which was that there were no revenue predictions at the outset, the member's lacked relevant expertise but mainly, the fact that a loss was virtually certain. The UT noted that questions of fact were for the FTT, which included not only questions of primary fact (such as whether the trade was virtually certain to make a loss) but also evaluative questions (such as whether a trade that was virtually certain to make a loss could realistically be described as commercial) and held the FTT had not shown any error of law in their conclusion on the commerciality limb.
Accordingly, the appeal on the commerciality question was dismissed which knocked out all claims for relief meaning that, strictly, the other questions need not be considered, however, the UT determined to deal with them in any event.
On the active member question, it was accepted that the members had spent at least ten hours on various activities, however, the FTT had held that time spent on certain management activities, such as resolutions to approve accounts and reappoint auditors had no effect on the trading activity and did not meet the statutory criteria. With regard to other activities which might loosely be referred to research activities such as listening to music, reading periodicals and attending sports events or concerts, said to be for the purposes of recommending potential projects to fellow members, the FTT had found that with no consensus from fellow members that that further funds would be committed should a suitable project be identified, the activities were not undertaken in pursuit of a business aim. The FTT had also found that the activities were unfocused, of questionable utility and not only did not advance the trade of the partnership, had no realistic prospect of ever doing so.
The UT found that the FTT were incorrect to find that the management activities were not for the purposes of the trade; if...
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