In Sherrington and others v HMRC [2020] UKFTT 128 (TC) (9 March), the FTT rejected claims for loss relief, on grounds that the appellants were not carrying on a trade with a view to profit and that, even if that view was incorrect, the activities were not carried on on a commercial basis.
HMRC had issued closure notices refusing the appellants’ claims for loss relief. Those losses arose in connection with a scheme under which the appellants entered into contracts with a Seychelles company (P). Those contracts provided the possibility of a profit by effectively making a bet that the FTSE 100 would reach a certain level at specified dates in the future. The appellants’ payments into the scheme were financed by interest-free loans from a Delaware company, repayable either if and when the appellants became entitled to a payment from P during the lifetime of the contracts, or potentially 50 years from the start of the relevant contract.
The appellants were ’unsuccessful’ and argued that they had made losses in the course of their self-employment as derivative traders and sought to set those losses against their other taxable income.
The key question was whether the appellants had been carrying on a trade on a commercial basis with a view to profit.
Dismissing the appeals, the FTT found that ’activities that are pure speculation, without the application of a profit-making system, may not amount to the carrying on of a trade’. The true objective of the contracts was to generate a loss for the appellants ‘in respect of which they did not bear the full economic cost, but which reduced their liability to tax’. The financial benefit of those loss claims was significantly greater than the benefit that would accrue in the event of the appellants’ investments being successful. The purpose of the contacts was not to provide a realistic prospect of making a profit, but rather to enable the participants to realise a loss for tax purposes.
The FTT concluded that the appellants were not carrying on a trade in relation to the contracts with P. Their ‘casual attitude’ to due diligence, contractual documentation and risk showed that the activities were not carried on on a commercial basis and this was reinforced by the FTT’s conclusion that they had entered into the contracts solely or mainly in order to generate a loss.
Why it matters: This case concerns a complex avoidance arrangement involving contracts dependent on movement in the FTSE 100 and interest-free loans not repayable for 50 years. The taxpayers claimed that they had made a trading loss on the contracts, which they sought to set against other income. Given recent decision on avoidance schemes of this nature, it is not surprising that the tribunal found against the taxpayers on grounds that the transactions were not trading in nature. The analysis of the meaning of trade from para 27 onwards is well worth reading as an up to date exposition of current judicial thinking in this area. Those who act as expert witnesses will be well advised to read paras 190–197, where the tribunal expressed dissatisfaction with the way that exert witness evidence was given.
In Sherrington and others v HMRC [2020] UKFTT 128 (TC) (9 March), the FTT rejected claims for loss relief, on grounds that the appellants were not carrying on a trade with a view to profit and that, even if that view was incorrect, the activities were not carried on on a commercial basis.
HMRC had issued closure notices refusing the appellants’ claims for loss relief. Those losses arose in connection with a scheme under which the appellants entered into contracts with a Seychelles company (P). Those contracts provided the possibility of a profit by effectively making a bet that the FTSE 100 would reach a certain level at specified dates in the future. The appellants’ payments into the scheme were financed by interest-free loans from a Delaware company, repayable either if and when the appellants became entitled to a payment from P during the lifetime of the contracts, or potentially 50 years from the start of the relevant contract.
The appellants were ’unsuccessful’ and argued that they had made losses in the course of their self-employment as derivative traders and sought to set those losses against their other taxable income.
The key question was whether the appellants had been carrying on a trade on a commercial basis with a view to profit.
Dismissing the appeals, the FTT found that ’activities that are pure speculation, without the application of a profit-making system, may not amount to the carrying on of a trade’. The true objective of the contracts was to generate a loss for the appellants ‘in respect of which they did not bear the full economic cost, but which reduced their liability to tax’. The financial benefit of those loss claims was significantly greater than the benefit that would accrue in the event of the appellants’ investments being successful. The purpose of the contacts was not to provide a realistic prospect of making a profit, but rather to enable the participants to realise a loss for tax purposes.
The FTT concluded that the appellants were not carrying on a trade in relation to the contracts with P. Their ‘casual attitude’ to due diligence, contractual documentation and risk showed that the activities were not carried on on a commercial basis and this was reinforced by the FTT’s conclusion that they had entered into the contracts solely or mainly in order to generate a loss.
Why it matters: This case concerns a complex avoidance arrangement involving contracts dependent on movement in the FTSE 100 and interest-free loans not repayable for 50 years. The taxpayers claimed that they had made a trading loss on the contracts, which they sought to set against other income. Given recent decision on avoidance schemes of this nature, it is not surprising that the tribunal found against the taxpayers on grounds that the transactions were not trading in nature. The analysis of the meaning of trade from para 27 onwards is well worth reading as an up to date exposition of current judicial thinking in this area. Those who act as expert witnesses will be well advised to read paras 190–197, where the tribunal expressed dissatisfaction with the way that exert witness evidence was given.
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