Foundation Partners (GP)v The Commissioners for HM Revenue and Customs [2022] UKUT 00167 (TCC) [2022] UKUT 00167 (TCC)
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
[2022] UKUT 00167 (TCC)Case No UT/2021/000074
Between
FOUNDATION PARTNERS (GP)AppellantTHE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMSRespondent
Before
MR JUSTICE FANCOURTUPPER TRIBUNAL JUDGE JONATHAN RICHARDSDate 27 June 2022Category: Tax
[148]We turn finally to the other way in which Mr Aaronson put Eclipse 35's case, namely that the acquisition of the licence to the Rights and the sub-licensing of them for consideration and with a view to profit constituted inherently and as a matter of law carrying on a trade. We do not agree, and we do not consider that the cases relied upon by Mr Aaronson justify his submission. We have summarised above the general principles and approach in this type of case, namely that what is necessary is an evaluation of the precise facts against the background of the meaning of the statute. Henderson LJ made a similar point at [59] of his judgment in Samarkand Film Partnership No 3 and others v HMRC [2017] EWCA Civ 77 (“Samarkand”): 59…. At the most basic level, it is now clear from Eclipse, if it was not clear before, that the question whether what the taxpayer actually did constitutes a trade has to be answered by standing back and looking at the whole picture: see [111]. Although it is a matter of law whether a particular activity is capable of constituting a trade, whether or not it does so in any given case "depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles": see [112]. It follows that it can never be appropriate to extract certain elements from the overall picture and treat them, viewed in isolation, as determinative of the issue. But that, in essence, is what Mr Furness is inviting us to do, when he says that the purchase and leaseback (or onward lease) of a film are inherently trading activities. There is no dispute that such activities are capable of forming part of a trade, and in many contexts the only reasonable conclusion would be that they did form part of a trade. But when the whole picture is 15 examined, the conclusion will not necessarily be the same. The exercise which the FTT has to undertake is one of multi-factorial evaluation, and their conclusion can only be challenged as erroneous in point of law on Edwards v Bairstow grounds: see Eclipse at [113] Second, the FTT evidently found that the facts it was considering were very different from those present in Ensign. It may well be that, in Ensign, there was a core commercial activity, of acquiring and exploiting films, that was supplemented by avoidance arrangements designed artificially to boost the amount of capital allowances to which investors were entitled. However, in this case, the FTT made express findings that there was no core commercial activity at all. The entirety of the arrangements to which Foundation was party were “uncommercial from the ‘get go’”. Foundation cannot come close to disturbing that finding simply by pointing to the fact that Foundation made a payment of £7,496,400.96 that IPCS was able to deploy as it saw fit. It is not permissible simply to single out one relevant factor, identify it as a trump card, and argue that it demonstrates that the FTT’s evaluative conclusion was wrong: the FTT’s task was to examine all relevant circumstances. As Lewison LJ memorably put it in Fage v Chobani [2014] EWCA Civ 5 such an approach impermissibly invites this appellate tribunal to go “island hopping” in a “sea of evidence.” The “sub-contractor” argument Foundation argues that the FTT erred in law by failing to identify that the activities carried on by IPCS as contractors under the terms of the Construction Sub-Contract should have been attributed to Foundation for the purposes of assessing whether Foundation was carrying on a trade. Although Mr Rivett referred to the law of agency in his written skeleton argument, we did not understand his argument to depend on the proposition that IPCS (or indeed any “sub-sub-contractors” that IPCS appointed) was Foundation’s agent. Rather, the essence of Foundation’s argument was that activities carried out by IPCS or sub-sub-contractors were(i) trading in nature and(ii) should be attributed to Foundation and treated as Foundation’s own activities. We reject that argument for two essential reasons: (1) It relies on the proposition that the activities of IPCS and sub-sub-contractors can be described as “inherently trading”. That proposition is not correct in the light of the judgments of the Court of Appeal in Eclipse and Samarkand that we have quoted in paragraphs 65 and 66 above. What Foundation had was a contractual right to require IPCS to comply with the Construction Sub-Contract; what, if anything, that amounted to depended on an appraisal of all the circumstances in which the transactional documents were entered into. (2) Even assuming, without deciding, that Foundation should be treated as carrying on activities undertaken by IPCS and the sub-sub-contractors, those activities could necessarily only be those specified in the Construction Sub-Contract. Yet that agreement was, as the FTT found, entirely uncommercial. The FTT’s point was not that trading-type activities to be undertaken by IPCS and sub-sub-contractors did not “count” in determining whether Foundation was trading. Its point, rather, was that the Construction Sub-Contract, like the other agreements to which Foundation was party, was completely uncommercial. Neither the terms of the Construction Sub-Contract nor any activities actually undertaken by IPCS or sub-sub-contractors in accordance with the terms of that contract added anything in terms of trade or commercial substance to the analysis. 16 Whether the FTT should have found that any “financing” activity amounted to a trade Foundation argues that, even if its activities could be described as a “financing” of Project Adriatic, the FTT was bound to conclude that such an activity amounted to a trade. Any “financing” would involve Foundation providing funding to BAD in consideration of a right to share in future revenue derived from the hotel and condominiums. That, it argues, “involved the laying out of funds for an uncertain reward of a type which is intrinsically a trading activity”. We reject that argument. First, as we have explained, Foundation’s activities cannot be described as “intrinsically trading” for reasons given by the Court of Appeal in Eclipse and Samarkand. Second, it does not matter whether Foundation’s activities are described in summary as a “financing” or (as Foundation prefers) as “property development”. However characterised, the FTT found that those activities were totally uncommercial and that the principle in Lupton applied to prevent them amounting to a trade. The FTT was entitled to conclude from those findings that, however described, Foundation’s activities were not of a trading character. Conclusion and disposition For the reasons that we have given, Foundation’s appeal on the trading issue fails, essentially because there is no valid Edwards v Bairstow challenge to the FTT’s evaluation of its undisputed factual conclusions. The FTT was entitled to conclude that Foundation’s activities as carried out in 2008-09 did not answer to the definition of a “trade”. In those circumstances, there is no need for us to address Foundation’s challenge to the FTT’s conclusion as to the commencement of a trade. Once it is established that any activities Foundation was carrying out in 2008-09 did not amount to a trade, there is no point in considering when that non-existent trade could be treated as having commenced. Nor is there any need to address Foundation’s other grounds of appeal: (1) The question whether payments that Foundation made were incurred wholly and exclusively for the purposes of a trade does not arise since Foundation was not carrying on a trade. Nor, for reasons that we have mentioned in paragraph 36 above, is it straightforward to consider this ground of appeal on a “counterfactual” basis that proceeded on the assumption that, contrary to the FTT’s conclusion, Foundation was trading in 2008-09. (2) The question of whether payments are of a capital nature also does not arise in the absence of a trade. Moreover, this issue also cannot be addressed on a “counterfactual” basis since, whether a payment is capital in nature will depend on the precise nature of the relevant trade. (3) Conceptually, we could have addressed the FTT’s factual findings on GAAP as an abstract question, not dependent on the characteristics of any particular trade. The absence of a trade, however, means that the accounting treatment is not a live issue since, however Foundation’s loss is quantified as a matter of GAAP, it cannot constitute a trading loss for tax purposes. It is clear that the FTT was not assisted as it should have been by the expert evidence but, since we have not ourselves heard the evidence, we do not consider we are any better placed to address the difficult issues of GAAP raised in this appeal. Therefore, we say only that if we had concluded that the FTT had erred in law in deciding that Foundation was not carrying on a trade in 2008-09, we would have invited the parties to make submissions as to the terms on which there should be a remittal of accounting issues back to the FTT. 17 For the reasons we have given, Foundation’s appeal is dismissed. Signed on Original MR JUSTICE FANCOURT JUDGE JONATHAN RICHARDS RELEASE DATE: 28 June 2022 APPENDIX – DIAGRAMMATIC REPRESENTATION OF TRANSACTION