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The Need To Prove Commerciality

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Julie Butler - Expert Author

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24 June 2014

A recent Tribunal case has examined the question of commerciality and losses, R Murray (TC3474) with a focus on stud farming and racing.

With the current enthusiasm shown by HMRC to look closely at equine activities, especially losses, it is not in the least surprising that the eligibility of tax relief on a trading loss claim has been taken all the way to Tribunal.

In order to claim tax relief on trading losses the business must be trading on a commercial basis with a view to making a profit (ITA 2007, s 66). The taxpayer has to be able to prove that there is a reasonable expectation of profit from the trading operation.

A claim for cumulative losses

The taxpayer was a racehorse breeder and trainer. Mr Murray began the business in 2005 but did not notify HMRC until he submitted his 2007/08 tax return. In the return for that year, he claimed cumulative losses of £51,378. The taxpayer claimed further losses totalling £81,406 for the tax years 2008/09, 2009/10 and 2010/11. The problems with both racehorse breeding and racehorse training is that there are high infrastructure costs, ie running costs, and the ability to achieve targets for sales can be problematic.

The First-tier Tribunal noted that the taxpayer had assumed that his breeding and training activities would be sustainable if the tax relief losses were allowable. HMRC enquired into the taxpayer’s 2010/11 return and decided the losses were not allowable because he was not trading on a commercial basis with a view to making a profit (ITA 2007, s 66).

HMRC pay close attention to loss claims

There is a basic understanding in the equine world that claims for tax losses are being closely looked into by HMRC due to their eligibility to be offset against total income. In the equine world there are large trading losses being recorded and in order to achieve tax relief they need justification due to the lack of apparent commerciality within the operation. It is a fair assumption that all tax losses for the equine industry will be under scrutiny by HMRC and it is key in order to protect the tax loss claims that there are:

•                Business plans to show that a profit can be achieved under the current structure

•                Revised business plans responding to the actual trading results

•                Accounts showing a profit for the operation

In the Murray case the judge considered that, although there may have been a reasonable expectation of profit at the start of the taxpayer’s business, by 2010/11 the economic downturn, together with the high running costs and consistent losses, led to no hope of profit. The lack of any income supported the concerns of any chance of profit and proof of commerciality. Although sympathetic to the taxpayer’s predicament, the judge considered that the business was not commercial and therefore the losses were not allowable. The taxpayer lost the case and did not achieve tax relief on the losses.

All advisers submitting loss claims on behalf of all clients must ask objective questions with regard to potential profit and not just accept the results and the claims. There must be strong work around the potential defence of all loss claims, with evidence to support the chance of future profit.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).



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Article Published/Sorted/Amended on Scopulus 2014-08-06 09:01:33 in Tax Articles

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