In Ardeshir Naghshineh v HMRC [2018] TC06631 the First Tier Tribunal (FTT) allowed sideways loss relief claims for a farming business where losses were made for 17 years; at the start of the loss-making period the reasonable expectation was that the farm would not become profitable until after the period for which relief was being claimed.
Sideways loss relief is not available unless the trade is commercial.
A trade is commercial if:
- It is carried on a commercial basis,
- With a view to the realisation of profits.
Where a farming business makes losses for five years in a row, Loss relief is not available in the sixth and subsequent years unless the ‘reasonable expectation of profits’ test is met.
This requires that a competent person carrying on the activities in the tax year in question:
- Would reasonably expect future profits, but
- Could not, at the start of the loss-making period, have reasonably expected the activities to become profitable until after the end of the current period.
In 1995 Mr Naghshineh purchased a farm as a conventional working agricultural farm. He added to the land over the years and by 2007 owned 438 acres.
- As a businessman he had no experience of running a farm and never lived on the farm. In 2007 he employed a general manager who he made redundant in 2010 as costs were out of control.
- From early in his ownership to 2007 the farm was run on an organic basis, he then reverted to conventional farming due to a downturn in the organic food market and an inability to secure additional funding.
- Over the years Mr Naghshineh carried on various agricultural and non-agricultural activities on the farm including the rearing of livestock, egg production, holiday lets, the sale of boxed produce and a farm shop. By 2017 there was a micro-brewery, toy-maker and a mustard business on site.
- The farm made losses from acquisition in 1995; it first became profitable in 2012/13. An expert witness reported that no profit could have been expected from the overall business until late 2012.
- Mr Naghshineh made sideways loss relief claims totalling £1,464,324 for the five year period in question (2007/08-2011/2012, reducing his tax liability by £597,140.21.
- HMRC accepted he was carrying on the trade of farming on a commercial basis with a view to profit but denied the loss relief; there was no expectation of profit before 2010. Mr Naghshineh appealed.
The FTT allowed the appeal agreeing with the expert witness that profits could not have been expected until after the end of 2012:
- The reasonable expectation of profit test must be considered from 1995.
- Only the activities being undertaken in the year in question should be considered in determining whether there was a reasonable expectation of profits at the start of the loss making period. Subsequent unforeseen, and unforeseeable events could not be considered. The judge cited the Upper tribunal case of Bryan Scambler & Rebecca Scambler v HMRC in support of this view.
Links to our guides:
Losses (sideways): restriction for uncommercial trades
Losses, trade losses and sideways relief
Farmers: what expenses can I claim?
External link: