"A person may make a claim for trade loss relief against general income if the person— (a) carries on a trade in a tax year, and (b) makes a loss in the trade in the tax year ("the loss-making year")."
"For income tax purposes, if a limited liability partnership carries on a trade, profession or business with a view to profit— (a) all the activities of the limited liability partnership are treated as carried on in partnership by its members (and not by the limited liability partnership as such), (b) anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and (c) the property of the limited liability partnership is treated as held by the members as partnership property. References in this subsection to the activities of the limited liability partnership are to anything that it does, whether or not in the course of carrying on a trade, profession or business with a view to profit."
"We have rather to apply to the facts the legal concept of "trade."…This may be called a concept of common law. Trade has for centuries been, and still is part of the national way of life: everyone is supposed to know what "trade" means: so Parliament, which wrote it into the Law of Income Tax in 1799, has wisely abstained from defining it and has left it to the Courts to say what it does or does not include."
"a Hollywood studio or vehicle formed by independent producers and other financiers and which entered into contractual arrangements with an LLP in relation to the production and distribution of a film."
"17. The LLPs contend that the legal, accounting and taxation effect of these arrangements can be summarised as follows: (1) Each LLP had capital of 100… consisting of the amounts contributed by the individual members and the [ Corporate Member ]. (2) Each LLP incurred expenditure of 100 in making a film pursuant to its obligations under the relevant [ Commissioning and Distribution Agreement, or "
"48. For the reasons set out in detail below, we have decided the Trading Issue entirely in favour of HMRC. That finding is sufficient to dispose of the entirety of the appeals, because the subject matter of these appeals is the LLPs' claims for trading losses in the relevant tax years which have been denied by HMRC in the closure notices… 49. However, the View to Profit Issue is relevant to the question as to whether the LLPs are to be treated as partnerships (and its members as partners)…and taxed accordingly. That depends on whether the relevant LLP was carrying on a business with a view to profit in the relevant tax year. The issue also raises questions on which authority is lacking and guidance is appropriate. We have therefore set out in some detail our views on that issue… 50. Because of the way in which we have determined the Trading Issue we also do not need to determine the other issues, but in case this matter goes further we have set out our views on those issues relatively briefly."
"Inevitably, where as in this case there is voluminous documentary evidence (we were told over 1 million pages the vast majority of which we fortunately received in electronic form) the heavy burden on the LLPs to establish a negative (such as that there was no evidence for a particular finding) is particularly difficult to satisfy…"
"73. … in a decision as long as the one that we are concerned with in this case, and bearing in mind the amount of evidence made available to the FTT, it was impossible for the FTT to capture every element of its impressions. It is also the case that some of its findings may have been better expressed. However, we are unable to conclude that, taken cumulatively, such of the Ground 2 challenges as our later findings demonstrate have been made out amount to an error of law of such materiality that we should exercise our discretion to set aside the FTT's findings on the matters to which those errors relate. 74. In summary, extreme caution is required to be exercised before setting aside conclusions based on careful evaluative findings of fact made on the basis of extensive evidence, in contrast to the position where an ex facie error of law is identified."
"131. In this case, in construing the contractual arrangements, the key questions to bear in mind include (i) what an LLP was required to pay to the PSC; (ii) what rights the LLP acquired under the arrangements; and (iii) what the LLP's role was in the film or game production process. In addressing these questions, the FTT was entitled to look carefully at the true effect of the arrangements and was not prevented from doing so either by the fact that there were a number of different agreements or by the fact, urged on us by the LLPs, that individual features of the arrangements, such as the use of sub-contractors, SPV production companies, non-recourse loans or security arrangements, are common in the film industry. 132. In the light of our discussion above, we consider the position both on the basis of conventional contractual construction and legal principles and, having regard to the Trading Issue in particular, by reference to an overall assessment of the nature of the arrangements entered into by the LLPs. 133. We set out at [134] to [163] below a summary of our conclusions on the contractual arrangements, with a more detailed analysis of the funding and income distribution arrangements in the Appendix to this decision [ which runs from [564] to [634] ]. Unless otherwise indicated, the provisions referred to are those in the documentation for Hot Fuzz ."
"136. Although at first sight the LLP appears to take on an obligation to pay 100 to the Production Account we conclude, based on our analysis set out in more detail in the Appendix, that the LLP only has to pay 30 and is never exposed to the risk of paying any more than 30. We come to that conclusion on the conventional approach to the construction of the [ Production Services Agreement ] by reference to the factual matrix, without any reference to the Ramsay principle. 137. Neither in our view does the LLP ever obtain any substantive legal or equitable rights to BDR, which are paid to or retained by the [ Commissioning Distributor ] as lender in satisfaction of the repayment obligations of the [ Corporate Member ] under the Loan Agreement. Those rights are assigned by the LLP from the outset of the arrangements. Although that was effected by means of an assignment by way of security (with an equity of redemption), in practice those rights will be exhausted in repaying the sums due under the Loan Agreement to the [ Commissioning Distributor ]. As we explain in more detail in the Appendix, a scenario under which the option to prepay the loan from other sources is exercised is quite unreal… 138. In our view it makes no material difference to the issues to be decided whether the payment of 70 was characterised as a loan made by the [ Commissioning Distributor ] as lender to the [ Corporate Member ], or as a capital contribution by the [ Corporate Member ] to the LLP. The LLP is never obliged to pay 70, and BDR amounts are never realistically amounts to which the LLP can be said to be entitled. 139. These conclusions fit with the economic and factual realities. It is clear from the findings of the FTT and the terms of the contractual arrangements that the [ Commissioning Distributor ] (and its associated entities) was not prepared to take any risk that would arise if the funds passed through the LLP (either the funding advanced to the PSC or the BDR which came from the [ Commissioning Distributor ] through the Waterfall). Neither would the LLP take any risk that it might have to pay any part of the 70. As demonstrated by the FTT in tables that it set out at [251] in relation to ITP and [264] in relation to IFP2, the true position was that GDI [ gross distributable income ] was split as to 70 to the [ Commissioning Distributor ] and 30 to the relevant LLP."
"The true nature of the transactions, viewed realistically, was that they did not involve the acquisition, ownership and disposal of film rights."
"In summary: the [ Commissioning Distributor ] had control over the creative content of the film. The LLP had a right to be heard but was incentivised not to interfere."
"163. In our view, the FTT was entitled to conclude that, reading the [ relevant agreements together ], the LLP just had to "pay and sit back and wait" once the agreements were signed. The LLPs say that is not the case with reference to the Completion Guarantor, which was a third party for independent films and was not necessarily associated with the [ Commissioning Distributor ]. However, in our view, that does not help the LLPs. The point correctly made by the FTT at [239] and [240] was that the LLP had a limited role in relation to the production of films and either the [ Commissioning Distributor ], or the [ Commissioning Distributor ] and the Completion Guarantor, in practice called the shots."
"Trade is infinitely varied; so we often find applied to it the cliché that its categories are not closed. Of course they are not: but this does not mean that the concept of trade is without limits so that any activity which yields an advantage, however indirect, can be brought within the net of tax… "
"In considering whether a person " carried on " a trade it seems to me to be essential to discover and to examine what exactly it was that the person did."
"That means what the LLPs did, not their members, and not what was done by Ingenious for itself or other persons. It will involve a weighing of a number of factors, the relevance and importance of which will depend on the circumstances. There is no complete list of those factors and no rule that any one or more of them are decisive…"
"I emphasise again that the matters I have mentioned are not a comprehensive list and no single item is in any way decisive. I believe in order to reach a proper factual assessment in each case it is necessary to stand back, having looked at those matters, and look at the whole picture and ask the question – and for this purpose it is no bad thing to go back to the words of the statute – was this an adventure in the nature of trade? In some cases perhaps more homely language might be appropriate by asking the question, was the taxpayer investing the money or was he doing a deal?"
"As an ordinary word in the English language "trade" has or has had a variety of meanings or shades of meaning. Its meaning in tax legislation is a matter of law. Whether or not a particular activity is a trade, within the meaning of the tax legislation, depends on the evaluation of the activity by the tribunal of fact. These propositions can be broken down into the following components. It is a matter of law whether some particular factual characteristic is capable of being an indication of trading activity. It is a matter of law whether a particular activity is capable of constituting a trade. Whether or not the particular activity in question constitutes a trade depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles. To that extent the conclusion is one of fact, or, more accurately, it is an inference of fact from the primary facts found by the fact-finding tribunal."
"It follows that the conclusion of the tribunal of fact as to whether the activity is or is not a trade can only be successfully challenged as a matter of law if the tribunal made an error of principle or if the only reasonable conclusion on the primary facts found is inconsistent with the tribunal's conclusion. These propositions are well established in the case law…"
"(1) The case concerned a film, Escape to Victory being made by Lorimar [ which was a Hollywood studio ]. (2) Ensign became a partner in Victory Partnership, a limited partnership, and together with other partners contributed capital equal to 25% of the budget for the film ($3.25m ). (3) On the same day 16 further documents were entered into involving eight further parties. The most important of these were: (a) a loan agreement between Lorimar and Victory Partnership under which Lorimar agreed to lend Victory Partnership 75% of the cost of the film; (b) a production services agreement between Lorimar and Victory Partnership under which Lorimar agreed to complete the making of the film and Victory Partnership agreed to pay Lorimar 25% of the budget immediately and the remaining 75% in stage payments; and (c) a distribution agreement between Victory Partnership and two distributors under which the Victory Partnership granted the distributors exclusive distribution rights over the film in return for the gross receipts after deducting distribution fees and expenses. (4) The agreements provided that the loan was to be provided to Victory Partnership in tranches as Victory required the funds to meet the budgeted cost of the film, but that those sums be paid into a special restricted bank account of Victory Partnership and on the same day repaid to Lorimar. The payments into the account were described as the making of the loan, and the payments out as the funding of expenditure on the film. The loan was expressed to be repayable only from 75% of the net proceeds of distribution (termed a non-recourse loan). By a letter the distributors were irrevocably directed to pay 75% of the net receipts to Lorimar. Those payments were documented as repayments of the non-recourse loan. The central issue in the case was whether the Victory Partnership was entitled to first-year capital allowances in respect of the whole of the cost of the film."
"In purely financial terms, Victory Partnership was in effect a sleeping partner with a minority interest. It was putting up 25 per cent of the costs and taking a 25 per cent equity participation. In legal terms, however, [ Lorimar ] was not an equity participant, for it was making its contribution by way of loan. … Whatever may have been the substance of the transaction in financial terms, however, this was not the way in which it was structured. Victory Partnership was not in fact a sleeping partner with a minority interest in a joint venture. It did not acquire merely a 25 per cent interest in the ventures. Nor did it pay only 25 per cent of the cost. It would not have suited the purpose of those from whom it was obtaining its finance for it to do so. Instead it acquired a 100 per cent interest in the venture and it paid 100 per cent of the total budgeted cost, though it did so with the assistance of a 75 per cent loan from a creditor whose associated company took a 75 per cent equity participation in view of the unfavourable terms of repayment."
"the commissioners' whole decision betrays a confusion between the motives of the taxpayer company and the purpose or object of the transaction which led them to concentrate on the motives of the taxpayer company and the Thomas Tilling group in investing in the partnerships instead of on the purpose or object of the transactions into which the partnerships entered."
"This is the more surprising because the commissioners recorded at the outset not only the taxpayer company's inevitable admission that its investment was tax motivated and the Crown's concession that the question was not whether the taxpayer company was carrying on a trade but whether the limited partnerships were doing so, but also the crucial issue as lying between the parties' rival contentions: (i) that of the taxpayer company, that whatever fiscal motive may have induced it to go into films, once it had done so everything that was done was done on a proper commercial basis; and (ii) that of the Crown, that what was done was so moulded by fiscal considerations that the whole character of the transactions relating to the films was denatured to such an extent that they ceased to be commercial. Despite this, by far the greater part of the commissioners' decision is concerned with establishing the obvious and admitted fact that the taxpayer company's motivation was fiscal rather than commercial or in drawing adverse inferences from conduct which merely reflected that fact, and relatively little is devoted to any proper attempt to evaluate the commerciality of the transaction in question."
"The fiscal advantage which the commissioners found so unpalatable was obtained by the element of "gearing" which inflated the amount of the first-year allowances beyond the sums which the partnerships had to finance out of their own resources… But that was the result of the use by the partnerships of borrowed money to finance their activities, not of anything uncommercial in the nature of those activities."
"the subject matter of the purchase was an uncompleted film, and the partnership arranged for it to be completed on its behalf with a view to its commercial exploitation. The returns were incapable of calculation. The film might have yielded substantial profits or no net receipts at all. Once fully exploited, the film would have negligible residual value. The transaction has all the characteristics of a typical though speculative trading transaction and none of the characteristics of an investment."
"(1) In order to constitute a transaction in the nature of trade, the transaction in question must possess not only the outward badges of trade but also a genuine commercial purpose. (2) If the transaction is of a commercial nature and has a genuine commercial purpose, the presence of a collateral or ulterior purpose to obtain a tax advantage does not "denature" what is essentially a commercial transaction. If, however, the sole purpose of the transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose. (3) Where commercial and fiscal purposes are both present, questions of fact and degree may arise, and these are for the commissioners. Nevertheless, the question is not which purpose was predominant, but whether the transaction can fairly be described as being in the nature of trade. (4) The purpose or object of the transaction must not be confused with the motive of the taxpayer in entering into it… (5) The test is an objective one… (6) In considering the purpose of a transaction, its component parts must not be regarded separately but the transaction must be viewed as a whole…"
"In the present case a trading transaction can plainly be identified. Victory Partnership expended capital in the making and exploitation of a film. That was a trading transaction which was not a sham and could have resulted in either a profit or a loss."
"182. Eclipse 35 was a limited liability partnership which contended that it carried on the trade of acquiring and exploiting film rights. The essence of the arrangements in that case were that a limited liability partnership raised money from individual investors and entered into arrangements with Disney whereby it acquired a licence of rights to a number of films pursuant to which it was obliged to pay royalties to Disney, and then immediately sub-licensed the rights to another Disney entity. As well as an entitlement to predetermined royalties, the limited liability partnership became entitled to highly speculative additional payments ("
"Against that background the FTT's conclusion that Eclipse 35 was not in reality carrying on a trade was justified and indeed correct. Eclipse 35 did not discharge the evidential burden of showing that it was engaged in trade in any realistic or meaningful way. The possibility of obtaining a share of Contingent Receipts did not give the business of Eclipse 35, looking at it as a whole, a trading character: having regard to the business as a whole, the right to Contingent Receipts was no more than a potential additional return on a fixed term investment."
"(a) By entering into the Hedge, IFP2 was in effect buying interests in the income streams from the films rather than the right or obligation to produce them. (b) It was acceptable for any creative influence over the production of the film residing in the LLPs to be exercised jointly with one or more other LLPs. (c) The negotiation of these agreements would not have been a simple process. They were complex arrangements. It was not analogous to buying an investment."
"There [ i.e. in Appendix 1 ] we conclude that activity conducted by the LLPs through those persons can be described as constituted by the following principal elements: (a) Considering for green-lighting films proposed by Ingenious entities. In that context we note here that we do not regard the LLPs as having gone out to search for new films [ with one possible exception ]; (b) Complex, serious and detailed negotiation of the commercial terms of agreements for the making of film; (c) Entering into contracts for the making of films and in relation to their exploitation under which substantial sums were put at risk; (d) Keeping an eye on what was going on in the making of the films and in particular paying some attention to the costs of production but without any significant involvement in the creation of the films; (e) Receiving revenue and reviewing revenue statements from films; (f) Accounting and administration."
"We explained that the work involved in putting together a deal for a Studio film and finalising its documentation was less than for an Independent film. For a Studio film Ingenious had a lesser role in the film: the Studios were huge, diversified multinationals with all the requisite resources to produce films without reference to anyone else; they wanted the involvement of the LLPs for their money and to lay off risk; the LLPs and Ingenious had no role in putting the film together, what they did was by comparison closer to buying an income stream in a complex way."
"Whatever else in determining whether something is a trade, the tribunal must stand back and take an unblinkered view of all the circumstances: the totality of the person's activity and enterprise. That is not a result of any particular facet of the Ramsay doctrine but of the nature of the word "trade" – archetypically whether someone is trading is a conclusion based on commercial substance rather than form. Trade is not a narrow legal concept but a broad commercial one: transactions planned and executed as a single transaction must be viewed as a whole."
"To our minds what principally distinguishes the LLPs from Eclipse 35 is the nature of the LLP's receipts. Eclipse received a fixed royalty whose amount was independent of the success of the film… but the LLPs' whole return was speculative and substantial. There are also differences in what the LLPs did. Eclipse entered into agreements in relation to two films; the LLPs evaluated films, and negotiated and entered into many agreements; Eclipse had a marketing services agreement which was moribund; the LLPs played a small administrative role: they also gave approvals – albeit fairly automatically, they interfered a bit, they looked at budgets; they may have done this in order to look like producers, but the question is not why they did it, but what they did."
"396. By contrast the LLPs through the Operator conducted complex negotiations for their contracts, in varying degrees they evaluated the films – they were not just any old films, and were concerned about the size of their budgets. They entered into more than one contract. The nature of what they did was different."
"400. But Mr Milne made clear that the LLPs were not arguing that they were producers in that sense. This was not a dispute about a name. Instead they relied on what they actually did as being the activity of a trade by whatever name (if there was a name) that activity could be described. 401. In a similar vein we recall Mr Milne describing the LLP as "seeking commissions" for films and we note that the [ Commissioning and Distribution Agreement ] starts by saying that the [ Commissioning Distributor ] "has commissioned" the LLP to make the film. We would not call the LLP's activity seeking commissions or being commissioned, but the question is: was what they actually did a trade? Not, what sort of trade was it?"
"422. Mr McKenna's evidence was that the LLPs' creative input took place before the contracts were signed. We accept that there may have been some such activity in relation to Independent films but we saw no relevant evidence of it in relation to Studio films where the film was developed by the Studio and was ready to go when Ingenious stepped in. 423. For Independent films we accept that Ingenious [ played ] a greater role in putting together the finance for the film and that to an extent the Ingenious personnel undertaking that activity may have done it in part for the LLP (although it was also clear that in part it was also done for other Ingenious vehicles as, for example, where a sale and lease back of the film was also organised). 424. Overall we think it can be said that there was some work done by the LLPs which was akin to work done on an object which was to be sold." (9) This factor (breaking down into lots) did not point to trade: see FTT/425. (10) This factor (whether the purchaser intended to sell) also did not point to trade. In so concluding, the FTT said at FTT/428: "
"437. We must now stand back and look at the whole picture having particular regard to what an LLP actually did. 438. In relation to Independent films there was more substance to the LLPs' activities; for Studio films the activities had more of the characteristics of arranging and monitoring investments in an income stream (that was particularly the case where an LLP came into the picture at a very late stage when almost all the elements of the film had been pulled together and principal photography was about to start). But the two activities were part of the one business. Taking all this together we conclude, on balance, that the LLPs were trading: the Operator did more than act as an investment manager of a portfolio of investments: through its actions and those of its agents the LLPs engaged in speculative, organised, repeated transactions in a way which involved work beyond that which would have been involved in the mere making of an investment."
"Thereafter the investor would suffer no further loss (ignoring for the moment the non-film business) but would realise a net after-tax profit on any distribution by the LLP. It seems to us that when Mr McKenna described it as a business opportunity with a tax advantage, he understated the benefit of the tax advantage – which was substantially to remove, rather than to mitigate, the risk of investment."
"452. It does not seem to us that this analysis can stand in the light of Ensign and our conclusions as to the rights and obligations which arise under the agreements. In Ensign an ordinary 25%:25% transaction was dressed up as a 100% investment using money which bounced through Victory Partnership's bank account. The ordinary transaction was a trading transaction. When the clothes of the dressed up transaction were removed, the transaction which remained was the ordinary transaction. The House of Lords held that the attempts to dress it up did not denature it. 453. The same is true in this appeal. The ordinary transaction is [ on the 30:30 basis ]. It is dressed up to look like [ the Ingenious basis ]. On examination of the composite agreement it is seen that the legal obligation is to make a 30%… investment and the legal right to receive 30%… of [ gross distributable income ]. Once the clothes are removed, the ordinary transaction is revealed. If that ordinary transaction is a trading transaction then attempts to dress it differently do not prevent it from being a trading transaction. 454. We referred earlier to Millett J's summary of the law applicable when there was a fiscal purpose. Applying the relevant parts of that summary to the 30:30 transaction actually entered into by the LLPs: objectively it was a transaction which had a commercial purpose; despite the fiscal motive of the LLP in entering into it and dressing it up as something else, it was not denatured and could fairly be described as a trading transaction; the objective nature of the transaction had at its core a 30% investment for 30% of GDI; the shape and structure of that transaction was not determined by the fiscal purpose. 455. Mr Gammie says that the question of whether or not the LLPs were trading has to be answered by reference to the tax construct which was designed to give the impression of a 100% investment when only 30%… was contributed, not by reference to the commercial aims of all the other parties. We agree that the aims of the other parties are not relevant, but we consider that the transaction which must be examined is that which is embodied in the actual rights and obligations of the parties and their practical implementation, not the clothes in which they have been disguised, or by reference to a story designed to provide a sequential picture of the acquisition and disposal of rights and obligations, which is not relevant to the ascertainment of the nature of the LLPs' rights and obligations or their financial consequences. 456. If we are wrong and the legal effect of the agreements is as the Appellants contend (100 of expenditure for no more than 54.55% of GDI etc.) then we would conclude that the transactions lacked commerciality and that the fiscal motive of the LLPs (acquired by them from Ingenious personnel through the Operator) when taken in the balance would mean that they were not trading."
"In our view, in reality Green-lighting and negotiation, like sourcing films and assembling finance, were not reflected in any provision of goods or services for reward by the LLPs. They were simply services provided to the LLPs that facilitated the making of investments by them."
"In recent years a transaction, even one of property dealing, which amounts to no more than a planned raid on the revenue… has been held not to be by way of trade – a sophistication which I do not reject, but which must be carefully watched for illegitimate extension." (see 1611D). The FTT therefore had well in mind that fiscal motive in itself was no bar to the undertaking of a trade, and that the transactions in question would only lose their character as a trade if, as Lord Morris put it at 647G, they were "so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction."
"In particular, focus on organisation and repetition as indicators of trading, plus the amount of work involved, can lead to error: building a portfolio of investments can involve repetition and significant organisation, but it is still investment. Contrary to the suggestion by the FTT at [1351], investing in, for example, unquoted shares and securities, particularly private equity, real estate and infrastructure investments, can involve a significant amount of complexity, work on legal documentation and subsequent monitoring."
"We note that in Ensign … Lord Jauncey said that as Lord Templeman had pointed out expenditure "of [25%] on the making of the film in return for 25% of the net receipts carried all the characteristics of trade"
"An agreement that something shall be attempted with a view to gain, and that the gain shall be shared by the parties to the agreement, is the grand characteristic of every partnership, and is the leading feature of nearly every definition of the term."
"We consider the better view to be that the test is a purely subjective one. There is no need for profit to be the predominant aim. As is noted in Lindley & Banks, difficult questions can arise when any profit-making aim is subsidiary to other purposes. In those circumstances, it is necessary to consider at what point the line is crossed and there is in fact no view to profit. Some sort of "reality check" is needed. It is necessary to identify whether there is a "real" intention rather than something that was not, in fact or reality, aimed for. The question as to whether a trade was carried on "with a view to profit" also cannot be answered in isolation, divorced from the context of the business in question. The context of "carries on a trade…" directs attention at least to some extent to the way in which the trade is conducted. Furthermore, an indifference to whether a profit is realised is not sufficient to meet the test. In this case, therefore, the FTT would have had to have been satisfied that the LLPs had genuinely intended to seek a profit from their activities."
"Where the intention being tested is that of experienced businessmen, the lack of any realistic potential for or likelihood of profit on an objective basis may call into question whether there is a (subjective) view to profit. Experienced businessmen of course take risks, and different individuals will be willing to take differing levels of risk, but businessmen will generally seek to satisfy themselves that the risks are worth taking for the potential return on capital employed, at least if they are risking their own funds. The dynamics may differ where it is someone else's money that is at risk of being lost. HMRC repeatedly submitted that this was a case where the investment was being made with other people's money, namely that of the Exchequer in the form of the monies that the investors expected to receive from HMRC by way of tax repayments. And the extent of the risk taken may depend not only on the risk appetite of the investors but on the degree to which the individuals making the decisions are answerable for any failure, or incentivised by success."
"22. A determination of whether there exists a "view to profit" requires an inquiry into the intentions of the parties entering into an alleged partnership. At the outset, it is important to distinguish between motivation and intention. Motivation is that which stimulates a person to act, while intention is a person's objective or purpose in acting. This Court has repeatedly held that a tax motivation does not derogate from the validity of transactions for tax purposes…similarly, a tax motivation will not derogate from the validity of a partnership where the essential ingredients of a partnership are present…The question at this stage is whether the taxpayer can establish an intention to make a profit, whether or not he was motivated by tax considerations… 23. Moreover, in [ Continental Bank Leasing Corp v The Queen[1998] 2 SCR 298 ], this Court held that a taxpayer's overriding intention is not determinative of whether the essential ingredient of "view to profit" is present. It will be sufficient for a taxpayer to show that there was an ancillary profit-making purpose… 24. An ancillary purpose is by definition a lesser or subordinate purpose. In determining whether there is a view to profit courts should not adopt or employ a purely quantitative analysis. The amount of the expected profit is only one of several factors to consider. The law of partnership does not require a net gain over a determined period in order to establish that an activity is with a view to profit. For example, a partnership may incur initial losses during the start up phase of its enterprise. That does not mean that the relationship is not one of partnership, so long as the enterprise is carried on with a view to profit in the future."
"…to ascertain the existence of a partnership the courts must inquire into the whether the objective, documentary evidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on business in common with a view to profit."
"Ingenious personnel knew that the tax relief advertised to investors was dependent on losses being calculated by reference to expenditure of 100; but that was not the same as knowing that the commercial or legal effect was expenditure of 100 and income of 54.45% of GDI. In the same way that the fact that the controlling minds of the LLPs knew that they had to carry on their business with a view of profit does not mean that they had a view of profit, so too the fact that they knew that the advertised tax loss was dependent on determining profit on the Ingenious basis does not mean that they had a view of profit determined on that basis."
"We note the following as examples which were indicative that Ingenious personnel, and those who dealt with Ingenious, knew that in commercial and economic terms the film deals were deals in which the LLP put up 30% of the cost and received 30% of the net revenue (GDI), and therefore as indicative that they knew that any economic profit for the LLP derived from a comparison of those amounts, whatever the formal accounting policies adopted by the LLPs."
"The Ingenious personnel procured the LLPs to enter into transactions which had that effect. They must have known that this was the result. They must have intended this effect. They must have had a view to the effect those transactions created."
"It seems to us that this alternative test is satisfied: the LLPs had the hope and intention of carrying out, and carried out, actions (entering into the film contracts) which would give rise to a realistic possibility of making a profit on the 30:30 basis."
"830. However, we find that an expectation of a profit calculated on the 30:30 basis was realistic and not fanciful. On that basis the LLP was, in relation to Studio Films, roughly in the same position as the Studio in relation to production activity (i.e. setting distribution costs and margin aside). The levels of box office performance required to make a profit on that basis were high but not wholly fanciful. 831. The object of securing the tax benefits carried with it the pretence that profit could be calculated on the Ingenious basis, but the participants knew that the economic effect of the transactions was 30:30 and on that basis a profit was not unrealistic. 832. While there were some features of the way the business was conducted which did not display a wholehearted pursuit of profit for the LLP, for example the 'flex' given to Fox and the need to find films close to 5 April to use the capital raised, the lack of any financial comparisons by the green-lighting committee, and the imposition of the EP fee for the benefit of Ingenious (see Chapter IX: Expenditure), we did not find these so egregious as to preclude a conclusion that on this basis the business was conducted with a view to profit. 833. We find that Ingenious' personnel had a view of the 30:30 result when they procured that the LLP entered into the film contracts. As a result the business conducted by the LLP was conducted with a view to obtaining that result and with the hope of a profit on that basis. 834. We therefore conclude that if profit is properly to be calculated on the 30:30 basis, the LLPs conducted their businesses with a view to such a profit; but if it is calculated on the Ingenious basis, they did not."
"349.We return later to the evidence on which the FTT based its conclusions at [827] and [828] that it was not proved that the subjective intentions of the LLPs were to deliver a profit on the Ingenious Basis. It did however find at [833] that the business conducted by the LLPs was conducted with a view to obtaining a "30:30 result" when the Ingenious personnel procured that the LLPs entered into the film contracts, with the result that the business conducted by the LLPs was conducted with a view to obtaining that result and with the hope of a profit on that basis. 350.We do not consider that the FTT was correct to look at the question on the 30:30 Basis. The controlling minds approached the transactions on the Ingenious Basis and the documents were drafted with the intention of reflecting that approach. The business was therefore "carried on", as referred to in s 863 ITTOIA 2005, on that basis. 351.The controlling minds of the LLPs knew that the tax test required a view to profit on the Ingenious Basis. The suggestion that the LLPs intended to make a profit on the 30:30 Basis is at odds with the LLPs' case and with all the evidence. The fact that the controlling minds understood that the LLPs were really putting up 30% of the funds for 30% of the revenue does not mean that they intended that the LLPs would make a profit on that basis. The only serious driver for profit was to meet the tax test, and intending to make a profit on the 30:30 Basis was inconsistent with the desired tax treatment. 352. At [820] the FTT gave a number of examples which they said were indicative that Ingenious personnel, and those who dealt with Ingenious, knew that in commercial and economic terms the film deals were deals in which the LLP put up 30% of the cost and received 30% of the net revenue. The FTT said that this knowledge was indicative that those persons knew that any economic profit derived from a comparison of those amounts. From those examples, at [821] the FTT concluded that the Ingenious personnel procured the LLPs to enter into transactions which had that effect, must have known that this was the result, must have intended this effect, and must have had a view to the effect those transactions created. At [825] the FTT, relying on a finding that "profit" in s 863 has a meaning independent of the understanding of the person whose subjective view is being tested, concluded that the LLPs had the hope and intention of carrying out, and carried out, transactions (the 96 film contracts) which would give rise to a realistic possibility of making a profit on the 30:30 Basis. 353.In our view there is an impermissible leap in the logic in those paragraphs, which is reflected in the conclusions that follow at [830] to [834]. The fact that the parties knew that the economic effect of the transactions was 30:30, and the existence of a realistic possibility of profit on that basis, are not by themselves legitimate bases to infer that there was a view to profit on a subjective basis. The FTT's conclusion cannot be saved, as the LLPs suggested it could, by saying that a sub-conscious intention can be enough. In our view, the achievement of a profit was not inevitable or inextricably bound up with either the Ingenious Basis or the 30:30 Basis. 354. Accordingly, the FTT's conclusion at [834] that the LLPs conducted their business with a view to profit on the 30:30 Basis, but not on the Ingenious Basis, is based on an error of law."
"The suggestion that the LLPs intended to make a profit on the 30:30 basis is at odds with the LLPs' case and with all the evidence "
"that at the point when GDI equalled budget: "you would imagine intrinsically that the [ Commissioning Distributor ] is going to break even – or a little bit more – at that point""
"If the Studio would break even then (subject to the cost of the [ Executive Producer ] fee etc – Mr Reid's "a little bit more") so would the LLP on a 30:30 basis."