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Comprehensive Attack Of Loss Claims

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Julie Butler - Expert Author

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23 January 2014

The need to be able to show a profit could be made in order to claim losses has once again been challenged in the First-tier Tribunal (FTT) platform. So often the losses are relieved in the environment of the sideways loss claim or group relief. The recent case of Glapwell Football Club (GFC) (TC2904) has emphasised the need for commerciality (CTA 2010 s.44) in order for a loss claim to be made.

In the Glapwell case the taxpayer, Glapwell Football Club Ltd (GFC) submitted returns claiming losses which it wished to use by way of group relief to its holding company, Denticheck. HMRC refused on the ground that the football club business was not being carried on commercially (CTA 2010, s.44). This example shows that it is imperative to demonstrate that the trading activity could make profit via business plans.

Potential to make a profit

The FTT agreed with HMRC’s viewpoint regarding this case. After looking through the accounts, the tribunal noted that, in the relevant accounting years for GFC, operating losses were made and staff costs exceeded turnover and operating income, increasing the club’s dependence on the holding company. As is normal where there are losses or questions of solvency, the question is asked as to what is shown in the accounts. The director’s report showed that, while accounts were prepared on a going concern basis, this was only by reference to the directors’ and shareholders’ intention to continue to support the club.

Financial support

For directors who financially support say a football club or any other sporting passion as part of a group structure, they must be careful that there is the potential for these entities to make profits and it must be proved that this potential can be evidenced. The FTT concluded that the trade was not being carried on with the expectation of gain, and the holding company was not entitled to claim relief in respect of losses made by the club. The taxpayer’s appeal was not allowed, the claim for loss relief being denied.

Expectation of gain is an essential criteria for tax losses to be allowed to be offset. Evidence of the expectation of profit can be made through the business plan. It is no secret that HMRC are undertaking a close review of loss claims of both an income tax and a corporation tax classification. Advisers beware!

The Robins case

Many advisers to farmers have considered that there have been attacks by HMRC from all angles on farming loss claims. The recent case of M Robins (TC2902) shows the need to look at the quantum of the loss claim.

The taxpayer had income from a farming partnership and a haulage business. His 2010/11 return was submitted in time and produced a tax liability of £6,331 due for payment on 31 January 2012, but this was not paid. The return for 2011/12 was also filed in May 2012 showing losses. With the subsequent return, the taxpayer claimed to carry back the losses from 2011/12 to 2010/11.

Quantifying the loss claim

The FTT said the legislation was “quite specific in requiring claims to be quantified”. A calculation had to be included, no matter how straightforward. The taxpayer’s adviser had previously written to HMRC on 24 January 2012, saying that the taxpayer had losses for 2011/12 which he would be setting against his 2010/11 profits. He would therefore not be paying the tax due on 31 January 2012. The penalty for late payment was followed through by HMRC. The penalty was imposed due to lack of clarity. HMRC imposed a late payment of the tax on the basis that the letter was not a valid claim within the meaning of TMA 1970, s42(1A) because the losses were not quantified. If they had been, the letter would have been sufficient and the tax due cancelled.

Practical Tip

Review the commerciality and validity of all loss claims made. Is there evidence to support the claims? Have the clients been warned about the HMRC increasingly aggressive approach to losses? Have the details of the calculation been checked? There are many elements of loss claims that HMRC are placing focus on, eg calculations around the sixth year of loss, checking the fiscal year basis etc.


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 2014-06-09 09:05:42 in Tax Articles

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