“380 Set-off against general income (1) Where in any year of assessment any person sustains a loss in any trade, profession, vocation or employment carried on by him either solely or in partnership, he may, by notice given within twelve months from the 31st January next following that year, make a claim for relief from income tax on (a) so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or (b) so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, the whole of that income; but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and under paragraph (b) above.”
“384 Restrictions on right of set-off (1) Subject to subsection (2) below, a loss shall not be available for relief under section 380 unless, for the year of assessment in which the loss is claimed to have been sustained, the trade was being carried on on a commercial basis and with a view to the realisation of profits in the trade or, where the carrying on of the trade formed part of a larger undertaking, in the undertaking as a whole. … (9) Where at any time a trade is carried on so as to afford a reasonable expectation of profit, it shall be treated for the purposes of subsection (1) above as being carried on with a view to the realisation of profits.”
“381 Further relief for individuals for losses in early years of trade. (1) Where an individual carrying on a trade sustains a loss in the trade in (a) the year of assessment in which it is first carried on by him; or (b) any of the next three years of assessment; he may, by notice given on or before the first anniversary of the 31st January next following the year of assessment in which the loss is sustained, make a claim for relief under this section. (2) Subject to section 492 and this section, relief shall be given under subsection (1) above from income tax on so much of the claimant’s income as is equal to the amount of the loss or, where it is less than that amount, the whole of that income, being income for the three years of assessment last preceding that in which the loss is sustained, taking income for an earlier year before income for a later year. (3) Relief shall not be given for the same loss or the same portion of a loss both under subsection (1) above and under any other provision of the Income Tax Acts. (4) Relief shall not be given under subsection (1) above in respect of a loss sustained in any period unless the trade was carried on throughout that period on a commercial basis and in such a way that profits in the trade (or, where the carrying on of the trade forms part of a larger undertaking, in the undertaking as a whole) could reasonably be expected to be realised in that period or within a reasonable time thereafter.”
“Carry-forward against subsequent profits (1) Where a person has, in any trade, profession or vocation carried on by him either alone or in partnership, sustained a loss (to be computed as mentioned in subsections (3) and (4) of section 382) in respect of which relief has not been wholly given either under section 380 or any provision of the Income Tax Acts— (a) he may make a claim requiring that any part of the loss for which relief has not been so given shall be set off for the purposes of income tax against the income of the trade, profession or vocation for subsequent years of assessment; and (b) where he makes such a claim, the income from the trade, profession or vocation in any subsequent year of assessment shall be treated as reduced by that part of the loss, or by so much of that part as cannot, on that claim, be relieved against such income of an earlier year of assessment.”
“Subject to the provisions of the Tax Acts, in computing the amount of the profits to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of— (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation; …”
“42 Computation of profits of trade, profession or vocation (1) For the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation must be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in computing profits for those purposes.”
“111. … It is necessary to stand back and look at the whole picture and, having particular regard to what the taxpayer actually did, ask whether it constituted a trade. 112. The Income Tax Acts have never defined trade or trading further than to provide that (in the words of TA 1988, s 832(1) which was applicable to the relevant tax year) trade includes every trade, manufacture, adventure or concern in the nature of trade. 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. 113. 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 … 114. In Marson v Morton[1986] STC 463 at 470-471,[1968] 1 WLR 1343 at 1348-1348 Sir Nicolas Browne-Wilkinson V-C set out a list of matters which have been regarded as a badge of trading in reported cases. He emphasised, however, that the list was not a comprehensive statement of all relevant matters nor was any one of them decisive in all cases. He said that the most they can do is to provide common sense guidance to the conclusion which is appropriate; and that in each case it is necessary to stand back and look at the whole picture and, having regard to the words of the statute, ask whether this was an adventure in the nature of trade … The cases by reference to which the list was compiled are not sufficiently analogous to the facts of the present case to make the list of value in these proceedings. … 117. Finally, on legal principles, it is elementary that the mere fact that a taxpayer enters into a transaction or conducts some other activity with a view to obtaining a tax advantage is not of itself determinative of whether the taxpayer is carrying on a trade: Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes)[1992] STC 226 at 241,[1992] 1 AC 655 at 677 (Lord Templeman).”
“… it is elementary that the mere fact that a taxpayer enters into a transaction or conducts some other activity with a view to obtaining a tax advantage is not itself determinative of whether the taxpayer is carrying on a trade.”
“The Income Tax Acts have never defined trade or trading farther than to provide that trade includes every trade, manufacture, adventure or concern in the nature of trade. As an ordinary word in the English language ‘trade’ has or has had a variety of meanings or shades of meaning. Leaving aside obsolete or rare usage it is sometimes used to denote any mercantile operation but it is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services.”
“I think the test which must be used to determine whether a venture such as we are now considering is, or is not, ‘in the nature of trade’ is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.”
“Trade has for centuries been, and still is, part of the national way of life; everyone is supposed to know what ‘trade’ means; … ‘Trade’ cannot be precisely defined, but certain characteristics can be identified which trade normally has. Equally some indicia can be found which prevent a profit from being regarded as the profit of a trade sometimes the question whether an activity is to be found to be a trade becomes a matter of degree, of frequency, of organisation, even of intention, and in such cases it is for the fact finding body to decide on the evidence whether a line is passed. The present is not such a case: it involves the question as one of recognition whether the characteristics of trade are sufficiently present. … Trade involves, normally, the exchange of goods, or of services, for reward, not of all service, since some qualify as a profession, or employment, or vocation, but there must be something which the trade offers to provide by way of business. Trade, moreover, presupposes a customer (to this too there may be exceptions, but such is the norm), or, as it may be expressed, trade must be bilateral—you must trade with someone. … Then there are elements or characteristics which prevent a trade being found, even though a profit has been made - the realisation of a capital asset, the isolated transaction (which may yet be a trade). In recent years a transaction, even one of property dealing, which amounts to no more than a planned raid on the revenue (see FA & A B Ltd v Lupton ) 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.”
“The word ‘speculation’ is not, I think, as a matter of language, an accurate antithesis either to the word ‘trade’ or to the word ‘investment’: either a trade or an investment may be speculative. On the other hand, it is certainly true, at any rate in the case of an individual, that he may carry out a whole range of financial activities which do not amount to a trade but which could equally not be described as an investment, even upon a short-term basis. These activities include betting and gambling in the narrow sense. They also include, it seems to me, all sorts of Stock Exchange transactions. For want of a better phrase, I will describe this class of activities as gambling transactions.”
“Where the question is whether an individual engaged in speculative dealings in securities is carrying on a trade, the prima facie presumption would be … that he is not. It is for the fact-finding tribunal to say whether the circumstances proved in evidence or admitted take the case out of the norm.”
“… it was suggested that the best guide is to view ‘commercial’ as the antithesis of ‘uncommercial’, and I do find that a useful approach. A trade may be conducted in an uncommercial way either because the terms of trade are uncommercial (for instance, the hobby market-gardening enterprise where the prices of fruit and vegetables do not realistically reflect the overheads and variable costs of the enterprise) or because the way in which the trade is conducted is uncommercial in other respects (for instance, the hobby art gallery or antique shop where the opening hours are unpredictable and depend simply on the owner's convenience). The distinction is between the serious trader who, whatever his shortcomings in skill, experience or capital, is seriously interested in profit, and the amateur or dilettante.”
“96. ‘Commercial’ and ‘with a view to profit’ are two different tests but that does not mean that profit is irrelevant when considering whether a trade is being carried on on a commercial basis. The reference in Wannell v Rothwell to the serious trader who is seriously interested in profit is not only relevant to deciding whether a person is a serious trader or an amateur or dilettante. We consider that the FTT were right when they said, at [253], that the serious interest in a profit is at the root of commerciality. We also consider they were correct in regarding ‘profit’ in the context of commerciality as a real, commercial profit, taking account of the value of money over time, and not simply an excess of income over receipts. 97. The FTT were, in our view, right to conclude that a trade that involved transactions that were intended to produce a loss in net present value terms, with no compensating collateral benefits, was not conducted on a commercial basis. No one who was seriously interested in running a business or trade on commercial lines would pay£10 for an income stream with a net present value of£7 unless there were some good reason to do so. Of course, in this case the reason why the partnerships were willing to do this was because they believed that tax relief would be available to the partners.”
“The question whether such a trade is being carried on on commercial lines is not to my mind answered simply by pointing to a hope by the trader to make profits. A trade run on commercial lines seems to me to be a trade run in the way that commercially minded people run trades. Commercially-minded people are those with a serious interest in profits, or to put it another way, those with a serious interest in making a commercial success of the trade. If therefore a trade is run in a way in which no one seriously interested in profits (or seriously interested in making a commercial success of the trade) would run it, that trade is not being run on commercial lines.”
“…the concept of a trade carried on on commercial lines has an objective element to it, and cannot be satisfied by proof merely that the trade is well organised and that the trader had a purely subjective hope or desire to make a profit.”
“[The FTT] were well aware that the evidence was that it was possible that any one (or more) of the projects could achieve enormous success or very large profits, and that if it had done so, the trade of the relevant LLP would have been profitable and hence a commercial success. They nevertheless concluded that such success was a rarity and speculative … The only remaining question is whether they supported the conclusion that the trades were not being carried on on a commercial basis … once it is accepted that the correct test is whether the trade is being carried on in a way that commercially-minded people might, I do not see that their conclusion involves any error of law, or was not open to them.”
“It is manifest that some transactions may be so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction. The result will be not that a trading transaction with unusual features is revealed but that there is an arrangement or scheme which cannot fairly be regarded as being a transaction in the trade ...”
“… if the greater part of the transaction is explicable only on fiscal grounds, the mere presence of elements of trading will not suffice to translate the transaction into the realms of trading. In particular, if what is erected is predominantly an artificial structure, remote from trading and fashioned so as to secure a tax advantage, the mere presence in that structure of certain elements which by themselves could fairly be described as trading will not cast the cloak of trade over the whole structure.”
‘At all material times Montpelier, which was engaged in the business of tax consultancy and in particular the creation of tax avoidance arrangements including the four specific arrangements referred to by Mr Rawbone [emphasis added] …’
“The individual would have to become a derivative trader and consequently the individual has to have an understanding of the financial markets and the ability to actually become a trader. From this trade, the individual will create a trading loss that can be used to offset tax paid on income earned over the current year plus up to three years previous.” 58. The FTT in Thomson held that the arrangements constituted a tax avoidance scheme, holding at [58]: “We have concluded from the evidence that Montpelier’s sales team regarded the Pendulum arrangements as a device to enable individuals to generate tax losses without realising actual economic losses. In order for those arrangements to succeed, Montpelier’s sales team considered that users would first need to establish a trade of dealing in derivatives. Since Montpelier held that view of the arrangements, we have concluded that they would have communicated it to their clients, including the appellants, when suggesting the arrangements to them.”
“Pendulum does not direct its communications to or engage in business with citizens or residents or corporate or other entities of the United States of America …” (12) Appendix 9 to the Master Agreement headed ‘United States Persons’ provided relevantly: “Pendulum Investment Corporation is not licensed to and does not hold itself out as ready to and will not knowingly do business with … any corporation, partnership or other legal entity formed under the laws of the USA (‘US Person’) … All such persons are expressly prohibited by Pendulum Investment Corporation … from having any contractual dealings with Pendulum Investment Corporation whatsoever”
“I signed my forms, gave them back to Welbeck and what happened to them after that I don’t know anything about”
“In 2004, when this structure was being contemplated, I asked the question [of Mr Gittins] as to whether any sums that I owed, first of all to Pendulum, would be a specific commercial and enforceable debt, and I asked if the loan facility would result in an enforceable debt.”
“I am getting a few questions around the loan after 50 years. I know that in reality it won’t be called.”
“White board Now at this point in time you still have a long-term derivative contract and loan in your name. There are a number of exit strategies, the most likely one being that you sell the contract back to the Seychelles company - by doing this you are forfeiting any chance of future profits and therefore no tax to pay. The interest free loan will still be assigned to you and this will be repayable in 50 year [sic] time. This is a full recourse loan, and it must be as otherwise it would not be seen as a true liability. However it is uncertain what will happen to both the Seychelles company and the Swiss company in the future. There is a very”
“It is … likely to assist the tribunal if an expert giving evidence complies withCPR 35 and states that he has done so … But a failure to do so will not, unless the tribunal considers that such evidence will only be acceptable in particular circumstances if full compliance is demonstrated, necessarily result in the evidence being excluded; such failure will instead raise questions of weight.”
“33. As in all cases, the parties and tribunal must bear in mind the provisions of the overriding objective of rule 2 of theTribunal Procedure (First-tier Tribunal) (Health, Education and Social Care Chamber) Rules 2008 (“the First-tier Tribunal Rules”) - that dealing with a case fairly and justly includes dealing with the case in ways which are proportionate to the importance of the case, the complexity of the issues, the anticipated costs and the resources of the parties. 34. Further, whilst I am, of course, mindful of the fact that theCivil Procedure Rules 1998 do not apply to First-tier Special Educational Needs and Disability Tribunals, and that un-necessary formality in those tribunal proceedings must be avoided, nevertheless, in my judgment Part 35 of the Civil Procedure Rules provides a useful backdrop in relation to case management decisions concerning expert evidence in such tribunals, and I draw upon it. 35. With that introduction, the starting point must be that expert evidence should be restricted to that which is reasonably required to resolve the appeal. If a party intends to seek to rely upon expert evidence, then pursuant to the duty under rule 2(4) of the First-tier Tribunal Rules, this should be communicated to the other party as soon as possible. If (as is likely in most cases) the issue falls within a substantially established area of knowledge, where it is not necessary for the tribunal to sample a range of opinion, it may well be that the evidence should be provided by a written report of a single expert jointly instructed by the parties. 36. … a tribunal judge may wish to decide whether and, if so, how to exercise his or her discretion to give directions as to expert evidence. In doing so, he or she will be mindful of: (i) rule 15(1)(c) of the First-tier Tribunal Rules, which provides that, without restriction on its general case management powers, “the tribunal may give directions as to … whether the parties are permitted or required to provide expert evidence, and if so whether the parties must jointly appoint a single expert to provide such evidence,” and (ii) the observations which I have made at paragraphs 33 - 35 above. It may well be that the parties would have to make out a strong case either for relying on expert evidence from an expert who had not been jointly instructed, or for requiring oral evidence of an expert at the hearing of the appeal. 37. Further, in giving any case management directions relating to expert evidence it would be helpful to all involved if the tribunal judge were to identify precisely the issues which the experts are to address.”
“270. Our understanding of Mr Wiltcher’s opinion, at a high level, is as follows: (1) The appropriate accounting standard to follow was the Financial Reporting Standards for Small Entities (“FRSSE”). That is a cut-down version of UK GAAP that is relevant to the accounts of smaller entities. (2) Applying FRSSE, Mr Thomson realised a loss on his Pendulum CFD equal to the difference between the cost of that CFD (£325,000 ) and its fair value at the end of the 2005-06 tax year of just£6,500 . A similar principle applied to Mr Mungavin and Mr Worsfold. (3) Finance costs on the Bayridge Loan would not have affected the calculation of any appellant’s profit or loss for the period. (4) Even though the Bayridge Loan was on terms favourable to the appellants, that loan had no effect on the appellants’ profit or loss for the period. That was because paragraph 12.3 of FRSSE requires borrowings (such as the Bayridge Loan) to be initially stated in the balance sheet at the fair value of the consideration received. The consideration that the appellants received when they took out their Bayridge Loan was the discharge of their obligation to Pendulum to pay the Margin Call Balance. There was no requirement in FRSSE to ascertain the fair value of the appellants’ liability under the Bayridge Loan. Therefore, Mr Thomson’s accounts should have initially recognised his Bayridge Loan as a liability of£308,750 (the amount of his Margin Call Balance) and, since finance costs were immaterial, that amount would never fall to be adjusted with the result that the Bayridge Loan did not affect Mr Thomson’s profit and loss computed under UK GAAP for the 2005-06 tax year. A similar principle applied to the other appellants. (5) FRS5, on which Mr Harrap placed great emphasis, was relevant and applied. However, it did not alter the fundamental requirement in paragraph 12.3 of FRSSE that the Bayridge Loan be stated as a liability equal in amount to the consideration that the appellants received. Therefore, FRS5 did not apply in the manner for which Mr Harrap argued.”