Trading "with a view to the making of a profit" - an objective or subjective test?

In Beacon Estates (Chepstow) Ltd v HMRC [2014] UKFTT 686 (TC), the First-tier Tribunal (Tax Chamber) ('FTT') allowed the taxpayer's appeal, holding that 'with a view to' in section 393A(3), Income and Corporation Taxes Act 1988 ('ICTA')[1] imports an objective test when considering relief for trading losses.

Background

Beacon Estates (Chepstow) Limited (the 'taxpayer'), decided to diversify its business by purchasing a luxury motor yacht. It intended that the yacht would be marketed and managed by a yacht broker. This was a very different business venture to that in which the taxpayer was usually involved.

For various reasons, the taxpayer suffered losses in the majority of its accounting periods between 1998 and 2012 in relation to its yacht chartering business. However, it made a profit in the years ended 31 March 2001 and 2002, immediately before a 'catastrophic engine failure' followed by the global financial crisis in 2008 led to a prolonged period of further losses. On completion of an enquiry into the taxpayer's returns, HMRC assessed the taxpayer's liability to corporation tax for the years ended 31 March 2009, 2010, 2011, and 2012, and in doing so disallowed various losses claimed. The taxpayer appealed these assessments.

Relevant statutory provisions

There were two key statutory provisions which fell to be considered in this case.

The first was section 393A(3), ICTA, which provided in material part that:

'(3) a loss incurred in a trade in any accounting period shall not be relieved … unless …

(b) for that accounting period the trade was being carried on on a commercial basis and with a view to the realisation of gain in the trade.

(4) For the purposes of subsection (3) above - (a) where at any time a trade is carried on so as to afford a reasonable expectation of gain, it shall be treated as being carried on at that time with a view to the realisation of gain.

The second was section 44, Corporation Tax Act 2010 ('CTA'), which applies for accounting periods ended after 1 April 2010, and provides that relief for trade losses against total profits:

'(1) … is not available for a loss made in a trade unless for the loss-making period … the trade is carried on

(a) on a commercial basis, and

 (b) with a view to the making of a profit in the trade or so as to afford a reasonable expectation of making such a profit' (emphasis added).

The parties' submissions

The taxpayer submitted that the legislation envisaged a two-part test, namely that the trade must either subjectively be carried on with a view to making a profit or objectively carried on so as to afford the reasonable expectation of profit. Such an interpretation had previously been described as 'tenable' by the FTT in Glapwell Football Club Ltd v HMRC[2], albeit the FTT in that case went on to hold that it would lead to a 'perverse result' and accordingly rejected it. However, the taxpayer submitted that the FTT in Glapwell was wrong to reject such an interpretation and therefore should not be followed in the present case. The taxpayer submitted that this much was clear from section 44(1)(b), CTA, which used the word 'or'. If Parliament had intended only one test rather than two, it would have used the word 'and' rather than 'or'.

The taxpayer also submitted that, although made in relation to different legislative provisions, the FTT should follow the House of Lords decision in MacDonald (Inspector of Taxes) v Dextra Accessories Ltd & others[3], by interpreting 'with a view' to mean 'allow a realistic possibility' or 'what might realistically happen'.

HMRC submitted that the reasoning in Glapwell was correct and should be followed. They contended that the chartering business would not have been able to operate as a standalone business and was only able to carry on for as long as it did (thereby incurring losses) because it was supported by the taxpayer's other business interests. It had not been conducted 'with a view' to the realisation of gain or making a profit, and the taxpayer could only have had a reasonable expectation of the realisation of gain or profit in the trade if it relied on a number of 'unreasonable' assumptions.

FTT's decision    

The FTT considered, as it had in Glapwell, the two-part construction of section 393A(3), advanced by the taxpayer, to be a 'tenable interpretation'. It noted that the observations of the House of Lords in Dextra had not been brought to the FTT's attention in Glapwell when it rejected that interpretation as leading to a 'perverse result'. Having considered those observations, the FTT concluded the objective element of the test referred to by the House of Lords should be applied in this case: whether the trade was carried on 'with a view' to the realisation of gain or making a profit in the trade must be judged by reference to an objectively reasonable view so that it is interpreted to mean 'allow a realistic possibility' or 'what might realistically happen'.

The FTT concluded that the taxpayer had been trading with a realistic possibility or reasonable expectation of making a profit or gain from its chartering activities and allowed the taxpayer's appeal.

Comment

This is a good win for the taxpayer and provides some helpful guidance.

First, the FTT followed the principle that 'with a view to' meant 'a realistic reasonable possibility that' as put forward in Dextra.

Secondly, the fact that a company is carrying on the business on a commercial basis is not sufficient. In Beacon, HMRC accepted the commercial basis element but disputed the view to profit element.

Thirdly, the reasonable expectation of profit meant what might realistically happen but there was no specified time limit for the profit to happen and any profit did not need to be sufficient to recover losses previously made.

It is likely that HMRC will seek to appeal this decision to the Upper Tribunal.

[1] Rewritten to sections 37(5), (6), 44(1), (2) and (4), Corporation Tax Act 2010.

[2] [2013] UKFTT 516 (TC).

[3] [2005] STC 111.