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A Thorne In The Side - Validity Of Loss Claims


Julie Butler - Expert Author

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Published originally  6 January 2015

For many reasons including the fact that HMRC are under escalating pressure from central government to increase tax revenues collected, tax loss claims are becoming ever more under scrutiny from HMRC.  Agricultural tax losses, particularly from the equine breeding sector, seem to be under increasing threat from HMRC enquiries resulting in some claims being disallowed.  Indeed, “hot on the heels” of the Murray income tax loss claim tribunal case in which such action was taken, the recent Thorne case indicates the mounting pressure the industry as a whole is under to prove commerciality in order to obtain a tax relief.

Equestrian Breeder and Farmer’ – the facts

In the case of Thorne v Revenue & Customs [2014] UKFTT 730 (TC), Ms Thorne included a self-employment income page in her 2008-09 tax return for her trade as an ‘equestrian breeder and farmer’, showing a loss of £79,424.

Ms Thorne therefore made a claim for loss relief under the Income Tax Act 2007 (ITA 2007), s64(1) and (2) to set off these losses against other income for 2008-09. For the three years prior to 2007-08, Ms Thorne’s trade was included in her tax returns under the description of ‘equestrian breeder’. However, from 2007-08 the trade was re-titled and described as ‘equestrian breeder and farmer’, with the farming element relating to a new asparagus farming operation.

HMRC initially refused the claim by Ms Thorne for sideways loss relief, on the basis that the trade was not commercial under ITA 2007, s66 and was considered to have little chance of receiving significant future cash inflows.  HMRC also argued that the equestrian and asparagus trades should be assessed together as they were not legally separate businesses and had been included in one self-employment return with an amalgamated claim to sideways relief. Ms Thorne decided to appeal this decision, taking the case to the First Tier Tribunal (FTT).

‘Just an Amateur’

HMRC did not dispute the existence of Ms Thorne’s trade, but argued that during 2008-09 the enterprise had not been carried out on a commercial basis with a view to the realisation of profits. Reference was made to the case of Wannell v Rothwell [1996] 68TC719. HMRC submitted that with regard to the equestrian side of the trade, Thorne was not seriously interested in profit but was ‘just an amateur’, participating in what could be considered a hobby and such an operation was therefore beyond the scope of the UK taxation system and the tax losses not allowable.

HMRC reported that the equestrian trade had produced losses in the five years to 2009. In addition, given that it would take three years from planting the asparagus in that year to obtain the first crop, it was difficult to envisage how Ms Thorne ever had an expectation of profit in the 2008-09 trading period.

Action Plan

The facts of this case help remind the need for tax advisers to carefully distinguish between separate trades, and present evidence to show exactly how they can be differentiated. The generic need for loss making businesses to produce business plans to demonstrate commerciality and support the claim of future profits is highlighted by this case. If such plans showed potential profitability problems then there should be evidence of what steps could be and have been taken to mitigate against them and a strategy devised to ensure that future trading could be more profitable. The need for a “Loss Memorandum” showing for how many years a business had made a loss would also have been a useful planning tool, enabling the professional adviser to highlight the fact that the five years (or eleven years for horse breeding) of allowable losses limit were close to being breached, and that the client should take action to ensure a profit was made to satisfy HMRC that a commercial venture was being undertaken. It is key to ensure that the subjective and objective tests can be passed by the taxpayer.

Start-up costs and not legally separate trades

Returning to the facts of the Thorne case, Ms Thorne argued that the reasonable expectation of profit test had been met by her business. She argued that the majority of losses related to the high start-up costs of the asparagus trade and HMRC had incorrectly focused on the equestrian trade losses. As a result Ms Thorne said that the sideways loss relief should be split into two categories.

The FTT decided that as the equestrian breeding and asparagus farming trades were not legally separate and the loss claim was amalgamated in the tax return to cover both trades, the claim should indeed be considered in relation to one composite trade. 

The Composite Loss Claim

On consideration of the composite trade, the FTT found that the business was not run on a commercial basis because although the asparagus farming did meet the definition of a business earnestly undertaken with the aim of generating profits, the equestrian breeding was not and met the definition of a hobby rather than a commercial operation. Ms Thorne argued that she did have a view to the realisation of profits for the asparagus business; she thought it would be profitable. However, when considering the two businesses together, the FTT found it was difficult to see how Ms Thorne could have had this view, as there were increased losses in the equestrian business compared to previous periods, and it would take years to obtain the first crop of asparagus and thus receive cash inflows.

Disallowed Losses

The claim for tax losses against other income was not allowed. The HMRC position was therefore upheld by the FTT, and the taxpayer’s sideways loss claim was denied accordingly. It should be noted that there have been many recent enquiry cases where a very profitable business has been amalgamated with a loss making equine business and HMRC have been very keen to separate such entities, in order to disallow the equine losses from the individual’s tax return.  The case of Thorne, however, does demonstrate the professional challenges currently being faced within the agricultural and equine industry. Professional advisers must be prepared to support loss claims with hard evidence and business plans to ensure the claim will be accepted by the tax authorities. Managing client expectations can be very difficult.

Hansard to support the claims

Many have mentioned the importance of Hansard which is the official parliamentary record. This can be called upon to assist in interpreting the meaning of tax legislation. It can be useful to remind HMRC that when the legislation was introduced into parliament the Chancellor of the Exchequer said:

“We are after the extreme cases in which expenditure very greatly exceeds income or any possible income which can ever be made in which, however long the period, no degree of profitability can ever be reached.”

This can be found in paragraph BIM85705 of HMRC’s Business Income Manual. There are not many decided cases on ‘uncommercial’ trades. However, evidence to support the view to the realisation of profits is still important in every loss claim supported.

Practical Tips

The practical tips have to be for all advisers to consider all tax loss claims with regard to commerciality if this is not already being undertaken. Warnings must be made to clients and practical evidence of the “view to the realisation of profits”. The most fundamental method to demonstrate that the business will make a profit must be the preparation of business plans showing future profit. With so little evidence being prepared, HMRC definitely has this area of tax relief in their sights. It is likely that all sizeable losses will be questioned by HMRC and the adviser has to be prepared with evidence and well prepared arguments.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

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 2015-11-03 12:23:57 in Tax Articles

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