In Glapwell Football Club Limited v HMRC [2013] TC02904 a claim for loss relief was denied on the basis that a trade was not being carried out with a view to the realisation of profits.

Trading loss relief against general profits is restricted if the trade is not being carried on a commercial basis or with a view to the realisation of a profit, or so to afford a reasonable expectation of profit. Under the original legislation in ICTA 1988 the word "gain" was used instead of "profit".

Glapwell Football Club Limited (GFC) was the loss making subsidiary of Denticheck Limited (D). GFC commenced trading in 2007 and ran a village football team with an annual turnover of £70,000 but match ticket sales and bar takings were insufficient on their own to cover the club's costs. The club had various problems from personnel to record keeping to local politics and made losses for the first three accounting periods, leaving it with a debt owing to its holding company of over £360,000 and accounts not being prepared on a "going concern" basis. Under three group loss relief claims GFC surrendered its losses to D. 

HMRC made a discovery assessment and whilst it accepted that GFC was carrying on its trade on a commercial basis, it refused loss relief on the basis that the business was not being carried on with a view to the realisation of gain in trade and particularly, that it was not being carried on at any relevant time so as to afford a reasonable expectation of gain.

The FTT considered the evidence:

The FTT disallowed group loss relief as GFC's activities had not been carried on with a view to the realisation of gain.

Commentary

The decision to deny loss relief may seem harsh given that many businesses make losses in their opening years however the FTT did not find sufficient evidence to back up the directors' claims that that they were planning development activities and so found according to the facts presented to them that there was no reasonable expectation of a profit (gain in the ICTA 1988 language). With hindsight it would have assisted the club if it had had regular board meetings in those early years to document the creation and writing of a business plan, and actually having a business plan from the outset may well have swayed the tribunal to come to a different conclusion.

The effect of the decision is that GFC's losses may be carried forward - presuming that there were later profits from the trade.

HMRC if often suspicious about commercial intent when there is a mix of sport and business. One danger may be that some people get too carried away with their hobbies to fully consider the tax implications, the other danger is that when you are making losses you assume that there will be automatic relief. Whilst there are special rules which restrict the availability of losses from farming and market gardening, HMRC will also block losses when it considers that an activity amounts to no more than a hobby. A hobby is generally classed as a non-commercial activity.

See Losses (sideway): restriction for uncommercial trades for more on uncommercial trades and hobbies in the context of income tax.