Wannell v Rothwell (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 29 March 1996 |
| Date | 29 March 1996 |
| Court | Chancery Division |
Robert Walker J.
Chancery Division.
Income tax - Trading losses - Individual intended to set up as a professional fund manager working from his home - Whether trading on a commercial basis - Income and Corporation Taxes Act 1970 section 170 subsec-or-para (1)Income and Corporation Taxes Act 1970, s. 170(1)(5); Finance Act 1978 section 30 subsec-or-para (1)Finance Act 1978, s. 30(1)(4)(Income and Corporation Taxes Act 1988 section 384 subsec-or-para (1) section 381 subsec-or-para (4)Income and Corporation Taxes Act 1988, s. 384(1)(9), s. 381(4)).
This was an appeal by a taxpayer from the decision of a deputy special commissioner that he had not shown that he was trading as a fund manager on a commercial basis.
In the spring of 1986 the taxpayer decided to set up on his own, as a first step to becoming a self-employed fund manager, employing staff and managing other people's money. He started, working from his home, with very basic equipment; a fax, a telephone and market reports. He relied on access to analysts and his broker. On a typical day he might have between eight and 16 conversations with his broker. For the rest of the time he would be reading and researching.
The question was whether the taxpayer's speculative financial activities constituted trading on a commercial basis within the meaning of theIncome and Corporation Taxes Act 1970 section 170 subsec-or-para (1) section 170 subsec-or-para (5)Income and Corporation Taxes Act 1970, ss. 170(1) and (5) and theFinance Act 1978 section 30 subsec-or-para (4)Finance Act 1978, s. 30(4) for the purpose of claiming loss relief.
The commissioner found that the taxpayer's aim was not to keep investments but to make a quick profit. The case fell very near to the borderline between trading and not trading, but because it was also necessary to decide whether any trading was on a commercial basis, he held that a case so close to the trading borderline, and which lacked commercial organisation did not fall within the provisions. The commissioner drew the general conclusion that the taxpayer was trading, but that he was casual in his approach, lacking self-discipline to the extent that the trade was not carried on commercially.
Held, dismissing the taxpayer's appeal:
Although there were pointers to a commercial trade, such as the taxpayer's aim to make quick profits and the fact that his transactions were at the prevailing market price, the commissioner found against him on the ground of lack of commercial organisation and possibly the small number of deals over the period. This was, as the commissioner who had heard the taxpayer give evidence said, a borderline case and it could not be said that his decision was wrong in law.
The following cases were referred to in the judgment:
Cooper (HMIT) v C & J Clark TAXTAX(1982) 54 TC 670; [1982] BTC 130
Edwards (HMIT) v Bairstow ELR[1956] AC 14
Graham (HMIT) v Green TAX(1925) 9 TC 309
Lewis Emanuel & Son Ltd v White (HMIT) TAX(1965) 42 TC 369
Ransom (HMIT) v Higgs WLR[1974] 1 WLR 1194
Salt v Chamberlain (HMIT) TAX(1979) 53 TC 143
Patrick Way (instructed by Gouldens) for the taxpayer.
Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.
1. On 28 November 1994 a deputy commissioner for the special purposes of the Income Tax Acts (Mr Paul W de Voil) heard the appeal of JFPL Wannell ("the taxpayer") against decisions of HM Inspector of Taxes on 2 December 1995 refusing loss relief for the years 1985-86, 1986-87 and 1987-88 as follows:
| Year | Loss relief claimed on 7 January 1988 | Provision |
| 1985-86 | £5,760 | |
| 1986-87 | £23,453 | |
| 1987-88 | £25,217 | s. 30, FA 1978 |
2. The question for the commissioner's determination, his findings of fact on the evidence adduced and his conclusions were set out in his written decision issued on 6 February 1995.
3. The taxpayer was represented by Mr Patrick Way of counsel and gave evidence on his own behalf. The inspector appeared in person.
[Paragraph 4 listed the documents put in evidence.]
5. The contentions made by the taxpayer were included in a skeleton case.
6. The following contentions were made by the inspector:
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(2) An individual can carry out a whole range of finance activities which do not amount to a trade, but which cannot be described as an investment, even on a short term basis. It is not the case that those activities have to be described as either trade or investment; there is a further category which can be described as "gambling transactions".
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(3) Whether an individual is trading is a matter of degree.
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(4) The financial world has developed so that capital profit is now more important than income. Thus, a lack of income would not be indicative of trading rather than investment.
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(5) Trading requires an organisation so that there is a structure by which a trader can make a profit. For example, a bookmaker is a trader but a punter is not; similarly a Stock Exchange market maker is a trader but a speculator on the stock exchange is not.
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(6) A trader must have customers.
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(7) The badges of trade should be viewed with caution as no single item is, in any way, decisive. In particular:
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(a) Subject matter is not conclusive. It is the status of the party entering into the transactions rather than the subject matter of those transactions which is important.
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(b) Length of ownership. This badge must be treated with caution because traders in different commodities will hold stock for different lengths of time. It is the nature of the stock that determines the length for which it is held and not the nature of the transactions in that stock.
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(c) Frequency of similar transactions. While this is not conclusive, in this case the figures point to non-trading activity.
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(d) Supplementary work has little relevance in this case.
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(e) Motive. The taxpayer's motive was to make money but this is not indicative of trading as the motive of investors and gamblers is also to make money.
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(8) When the taxpayer bought stocks and shares and held them for some months, these were normal Stock Market investments. When the taxpayer bought shares or commodity futures and sold them within a short period of time, these were speculative, gambling transactions. The taxpayer's activities were a mixture of investments and gambling transactions which fell short of trading.
(9) For trade to be carried on on a commercial basis it must be carried on in a business like manner. The taxpayer's attitude to the activity indicated that the basis was not commercial.
(10) For the losses sustained in 1985-86 and 1986-87. The taxpayer had not carried out the trade with a view to the realisation of profits. This test was an objective one and it was clear from the haphazard, casual and intermittent nature of the taxpayer's activities that he was unlikely to make a profit. The taxpayer was in the same position as any member of the public who speculated on the Stock Market and lost.
(11) For the losses sustained in 1987-88. Because of the haphazard, casual and intermittent nature of the taxpayer's activities they were not being carried on in such a way that the profits could reasonably be expected to be realised in the period from 6 April 1987 to 4 August 1987 or within a reasonable time thereafter. Again, the taxpayer was simply in the same position as any member of the public who speculated on the Stock Market and lost.
7. After the determination of the appeal the taxpayer on 22 February 1995 declared his dissatisfaction therewith as being erroneous in point of law and required the commissioner to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, s. 56.
8. The question of law for the opinion of the court is whether, on the facts as found, the commissioner erred in holding that the taxpayer had not carried on a trade on a commercial basis.
Mr JFPL Wannell appeals against the refusal by HM Inspector of Taxes of his claim of loss relief for the years 1985-86 to 1987-88. The question for determination was stated to be whether or not the transactions during that period constituted trading as a dealer in shares and commodities and financial futures; it became apparent in the course of the hearing that there was the further question of whether, if there was such a trade, it was carried on a commercial basis. Mr P Way, of counsel, instructed by Garside & Co, appeared for the taxpayer; Mr PL Rothwell, HM Inspector of Taxes, represented the Crown.
The following cases were cited in argument:
Cooper (HMIT) C & J Clark Ltd TAX[1982] BTC 130
Cooper (HMIT) v Stubbs TAX(1925) 10 TC 29
Eames (HMIT) v Stepnell Properties Ltd TAX(1967) 43 TC 678
Graham (HMIT) v Green TAX(1925) 9 TC 309
Hudson v Wrightson (HMIT) TAX(1934) 26 TC 55
Johnston v Heath TAX(1970) 46 TC 463
Lewis Emanuel & Son Ltd v White (HMIT) TAX(1965) 42 TC 369
Marson (HMIT) v Morton TAX(1986) 59 TC 381
Ransom (HMIT) v Higgs WLR[1974] 1 WLR 1194
Salt v Chamberlain (HMIT) TAX(1979) 53 TC 143
Turner v Last (HMIT) TAX(1965) 42 TC 517
Wisdom v Chamberlain (HMIT) TAX(1969) 45 TC 92
I found the following facts proved:
1. The taxpayer, who had owned shares since he was eight years old, secured a post with a commodity firm, LHW Holdings, in January 1983. He was first an account executive and then a trader, with a variety of duties, including advising clients on long term investments and short term trading opportunities in commodity futures and options. The proportion of commission to salary in his remuneration varied, but could be 60 per cent commission/40 per cent salary; in his best year his remuneration ran into six figures.
2. While in this post the taxpayer underwent in-house training. He had access to the analysts' committee; he was regularly exposed to market information...
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