In Peter Silvester v HMRC  TC04682 a farmer was denied sideways loss relief, despite changing his business model. HMRC was entitled to make a discovery assessment on losses, even though losses were reported every year.
Mr Silvester's farm had made losses every year since 2000.
- Section 67 ITA 2007 prevents sideways loss relief for farming losses if a loss (before any capital allowances) was made in each of the previous five years.
- Relief is not denied if activities meet 'reasonable expectation of profit' tests in section 68.
HMRC made discovery assessments in respect of returns for 2008/09 and 2009/10 and denied loss relief.
- Mr Silvester's partnership business was breeding pure bred sheep.
- In 2005 the partnership concluded that the business was not working and was unlikely to generate profits, and so they switched to breeding for the meat market.
- The business was affected by the foot and mouth outbreak in 2008, two episodes of lamb rustling and land being despoiled by wild boars.
- The partnership eventually became profitable in 2010.
Mr Silvester argued first that as section 67 is headed 'Hobby farming' it didn't apply to him and that his trade was conducted on a commercial basis so his activities passed the section 68 tests.
- The FTT said that the heading 'Hobby farming' in the legislation was only meant as a brief description of the contents of the following sections, but did not restrict their scope.
- Section 67 could therefore apply to farming activities carried out on a commercial basis where there have been losses in each of the previous five years.
- The section 68 tests on reasonable expectation of profit are in two parts:
- a) the first is met if a competent person carrying out the activities in the current year could reasonably expect profits. HMRC accepted that this test was met in 2008/09 and 2009/10.
- b) the second is met if a competent person carrying out the activities at the beginning of the loss-making period (2000/01) would not have expected to make profits until the year after the end of the current year (2008/09 or 2009/10). HMRC argued that this test was not met.
The FTT concluded that Mr Silvester was competent farmer:
- He ran his business on a commercial basis. He expected to make profits when he started out, long before the end of the 2008/09 and 2009/10 loss-making tax years.
- He did not meet the second leg of the test in s 68(3)b because he changed his business in 2005. This proved that he had only realised that his business model was unprofitable in 2005 and not at the start of his loss-making period as required by the test.
HMRC had been out of time to make an assessment with regard to the 2008/09 year as there had been no carelessness or deliberate mistake. To raise a discovery assessment under s29 TMA 1970 an officer of HMRC had to have been reasonably expected to be aware, on the basis of information available to them at the time, that the partnership had made losses in each of the previous five years.
Mr Silvester argued that they were aware as he had filed tax returns for each year from 2000/01 onwards with accounts and tax returns showing the losses.
HMRC argued that this did not constitute 'information made available' as defined in s29(6) and s29(7).
On the basis of the information provided to HMRC on past tax returns, HMRC could not be expected to be aware of the existence of a series of losses extending back to 2000/01 nor of the taxpayer's aspirations when starting a business in that year. The discovery assessment was therefore valid.
Care should be taken when relying upon HMRC manuals and guidance. These are not law, merely an interpretation of the law, and can be amended by HMRC at any time. In arguing his case, Mr Silvester relied upon earlier versions of HMRC manuals which supported his claim that the legislation in ss67 and 68 was intended only to catch hobby farmers, and he was not aware that the manuals had changed before the case was heard by the FTT.
It probably seems very unfair for the taxpayer, that having realised that the business was not working, and then having changed his business model that the tribunal should then revisit his original business started in 2000. Sadly the badly drafted section 68(3)b prevails, with hindsight there are work arounds, see Losses (sideways) and uncommercial trades.
Case reference Peter Silvester v HMRC  UKFTT TC04682