Commerciality - Combined Businesses And Smoke Screen
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has been paying a lot of attention to the offset of
losses sideways (ITA 2007 s 64 and s 72) and, in so doing, the question
commerciality is raised. Particular
attention has been paid by HMRC, for example, to Studs, hobby farming
Trainers who also combine their main trade with a farming operation.
than have tax losses disallowed, some
businesses (either consciously or by default) have merged profitable
with unprofitable businesses that they do not want to relinquish.
The proprietors want to
achieve the tax relief.
The overall benefit
of sideways tax loss
relief being offset against total income is achieved indirectly or
excuse the pun) through the side door.
can be argued that sponsorships by a profitable
business or a non profitable business are effectively this type of
smoke screen, putting in monies from profitable business into a non
business so that commerciality can be achieved.
An example of such sponsorship is shown in the 1996
Commissioners case Executive Network
(Consultants) Ltd v O’Connor SpC 56.
In Executive Network a
made payments to a riding school business (the wife of the controlling
shareholder) and claimed deduction of these payments on the basis that
were sponsorship payments. The
sponsorship payments were disallowed for corporation tax purposes on
that it was not allowable because it could not be proved to be wholly
exclusively for the purpose of a company’s trade.
looking at Executive
did consider the fact that ‘personal benefit played a part in the
make the sponsorship payments’. The
payment by the company was strongly influenced by the deficit of the
direct approaches to
offsetting losses can be taken where the unprofitable legal entity was
used by another family member to incorporate another business activity.
The overall result
is a net profit from the
two businesses and that tax losses which would perhaps not pass the
commerciality test have possibly been utilised incorrectly.
of Losses - Training
do try and review in detail business accounts
which include a number of activities, one of which, for example, is
and is being propped up by the other profitable activities. A
clear example of a
profit being offset
against an un-commercial loss is farming and the racehorse trainer
(where he is
often just training his own horses).
HMRC has mounted a number of enquiries into farmers
trainers who have included the expenses from training their horses in
accounts of the farming business.
Confusion can arise when a trainer is training for himself
as opposed to
somebody else, i.e. there is no external commerciality.
However, the trainer would argue that the
reason he owns the horses is simply waiting to find the right owner and
arrangement is commercial. There
clear evidence of trying to find an owner, selling the horse at a
showing that it was commercial. Any
costs incurred by a trainer in connection with training horses he owns,
it can be shown that he is going to find an owner for the horse) should
deductible for tax purposes. If
trainer only owns part of a horse then a portion of the associated
be allowed for tax provided the other owners actually pay a training
their share. If the
other party merely
paid for part of the purchase cost of the horse and does not pay a
HMRC takes the view that none of the costs will be allowable for tax
purposes. These can
clearly be very “muddy
waters” and advisers must take the necessary steps to protect their
e.g. in their fact find about the commercial activity and ideally
accounts should be produced wherever different trades are included.
of Losses - Farming
farming there can often be some element of the farm
which is non-profitable but for some reason (perhaps sentimentality,
etc) the farmer does not want to cease the unprofitable element and it
actually being supported by the other activities.
Some accountants have been quite surprised
when HMRC have launched an attack into a set of business accounts which
more than one activity to find that one element is loss making (no
many clever arguments are presented for the overheads being offset
other activities to make the unprofitable activity
profitable). This can be in innocent
good faith with the
client actually “lying to themselves” about the profitability of one
the activity or at the other extreme it can be just incorrect planning
part of the taxpayer!
Steps to protect correct tax loss claims
practical steps to consider are:
out a good “fact find”
when taking on a client in the first instance and continuing to
nature of the activity and whether more than one trade exists within
contained within one set of books and records delivered into the
where there are separate trades or activities, especially when there is
that there is a propping up of a loss making operation.
About the Author
Supplied by Julie
F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire,
Tel: 01962 735544. Email; firstname.lastname@example.org,
the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine
ISBN: 0406966540, and Stanley: Taxation
of Farmers and Landowners (LexisNexis).
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Article Published/Sorted/Amended on Scopulus 2012-07-25 09:03:11 in Tax Articles