In Ingenious Games LLP and others v HMRC [2021] EWCA Civ 1180, the Court of Appeal (CA) explained the origin of the fabled film scheme as follows: ‘the schemes were designed to take advantage of the well-known fact that, although many films are made ... with the hope and intention that they will be commercially successful, only a small and unpredictable number of films do in fact achieve that aim.’
For the majority, commercial losses can be useful for tax purposes. This was the case in many of the creative projects into which the LLPs in the Ingenious litigation invested. The First-tier Tribunal (FTT) and Upper Tribunal (UT) aired the facts in Ingenious in detail. The CA’s concise and clear decision is – for now, at least – the last word on a number of important points of law.
First, whether a trade is carried out with a ‘view to profit’ is a subjective question of the trader’s intention. It need not be a primary purpose. In para 121 of Ingenious, the CA approved the view of the UT: ‘There is no need for profit to be the predominant aim ... it is necessary to consider at what point the line is crossed and there is in fact no view to profit. Some sort of “reality check” is needed.’
The key for taxpayers will be to ensure that they have good evidence of subjective intention, so that it can established as a matter of fact. The CA in Ingenious reminds us that the UT should interfere with factual decisions only if the FTT has misapplied the law or on an Edwards v Bairstow ([1956] AC 14) analysis, i.e. no reasonable tribunal could form the view on the evidence before it.
Secondly, the objective likelihood of profitability can be relevant. This is expressed by the CA (at para 122) as ‘the lack of any realistic potential for or likelihood of profit on an objective basis may call into question [the subjective intention].’ This should defeat only the more egregious schemes.
Thirdly, whether a trade had ‘commercial purpose’ is an objective question. The CA reminds us that a tax purpose is not in itself a bar to trading. The difficulty for taxpayers arises if the fiscal concerns were such that they prevented the enterprise from having a commercial purpose. In para 98, the CA relied on the test in House of Lords in FA & AB Ltd v Lupton [1972] AC 634 as to whether a transaction was ‘so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction’?
The plausibility of dual purposes arises often in tax litigation. The question is relevant, for example, also to motive defence tests against the transfer of assets abroad provisions or the attribution of offshore close company gains to participators. Taxpayers should remember that a commercial motive and a fiscal motive can co-exist.
Finally, the question of when an entity is trading remains multi-factorial. To this extent, the Marson v Moreton [1986] 1 WLR 1343 tests survive. Taxpayers must continue to keep in mind the familiar caveat that these are not exhaustive and should not be approached as a checklist.
HMRC has for some time behaved as though it has the wind in its sales on trading disputes where taxpayers have sought to utilise losses. The CA decision in Ingenious is a helpful reminder that the law should be applied even-handedly.
In Ingenious Games LLP and others v HMRC [2021] EWCA Civ 1180, the Court of Appeal (CA) explained the origin of the fabled film scheme as follows: ‘the schemes were designed to take advantage of the well-known fact that, although many films are made ... with the hope and intention that they will be commercially successful, only a small and unpredictable number of films do in fact achieve that aim.’
For the majority, commercial losses can be useful for tax purposes. This was the case in many of the creative projects into which the LLPs in the Ingenious litigation invested. The First-tier Tribunal (FTT) and Upper Tribunal (UT) aired the facts in Ingenious in detail. The CA’s concise and clear decision is – for now, at least – the last word on a number of important points of law.
First, whether a trade is carried out with a ‘view to profit’ is a subjective question of the trader’s intention. It need not be a primary purpose. In para 121 of Ingenious, the CA approved the view of the UT: ‘There is no need for profit to be the predominant aim ... it is necessary to consider at what point the line is crossed and there is in fact no view to profit. Some sort of “reality check” is needed.’
The key for taxpayers will be to ensure that they have good evidence of subjective intention, so that it can established as a matter of fact. The CA in Ingenious reminds us that the UT should interfere with factual decisions only if the FTT has misapplied the law or on an Edwards v Bairstow ([1956] AC 14) analysis, i.e. no reasonable tribunal could form the view on the evidence before it.
Secondly, the objective likelihood of profitability can be relevant. This is expressed by the CA (at para 122) as ‘the lack of any realistic potential for or likelihood of profit on an objective basis may call into question [the subjective intention].’ This should defeat only the more egregious schemes.
Thirdly, whether a trade had ‘commercial purpose’ is an objective question. The CA reminds us that a tax purpose is not in itself a bar to trading. The difficulty for taxpayers arises if the fiscal concerns were such that they prevented the enterprise from having a commercial purpose. In para 98, the CA relied on the test in House of Lords in FA & AB Ltd v Lupton [1972] AC 634 as to whether a transaction was ‘so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction’?
The plausibility of dual purposes arises often in tax litigation. The question is relevant, for example, also to motive defence tests against the transfer of assets abroad provisions or the attribution of offshore close company gains to participators. Taxpayers should remember that a commercial motive and a fiscal motive can co-exist.
Finally, the question of when an entity is trading remains multi-factorial. To this extent, the Marson v Moreton [1986] 1 WLR 1343 tests survive. Taxpayers must continue to keep in mind the familiar caveat that these are not exhaustive and should not be approached as a checklist.
HMRC has for some time behaved as though it has the wind in its sales on trading disputes where taxpayers have sought to utilise losses. The CA decision in Ingenious is a helpful reminder that the law should be applied even-handedly.
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