In Ernest Thomson & Ors v HMRC [2018] TC 6598 the First Tier Tribunal decided three taxpayers who dealt in contracts for difference were not trading; they were not able to offset losses against income from other sources.

Trading losses can be offset, in the current year, or previous tax year, against other income:

  • There is no relief for trade losses unless activities are undertaken on a commercial basis with a view to realising profits.
  • Sideways loss relief (relief against other income or profits) may be restricted if tax avoidance is a motive.

Mr Thomson, Mr Worsfold and Mr Mungavin all entered into a contract for difference (CFD) investment through an investment company based in the Seychelles as part of a tax avoidance scheme:

  • They contended that they entered into the CFDs in the course of a trade of dealing in derivatives and that the CFDs resulted in them making a loss that could be set against their other taxable income.
  • Between them they claimed £962,284 of losses against current and prior year total income.
  • HMRC disallowed the loss claims and charged penalties for incorrect returns totalling £133,958.

The FTT found that these activities were not commercially pursued with a view to a profit.

  • They were, in effect, bets on matters over which they had no control.
  • The appellants did not carry out the transactions in the way a person “seriously interested in profit” would and they had “insufficient expertise to make sound judgements as to how to make a profit from online CFDs”. The tax loss was more important to them than making a profit on the CFDs.
  • They were also not “adventures in the nature of trading.” 
  • HMRC was correct to impose penalties though they were reduced for two of the taxpayers.

The judge did not have to consider the tax avoidance motive point as he was clear that the losses were not trading losses in the first place.

Links to our guides:

Losses, trade losses and sideways relief
Losses (sideways): restriction for uncommercial trades
Is it a trade, a business, or an investment activity?
Spotlight 28 on CFDs in employment

External links:

Ernest Thomson & Ors v HMRC [2018] TC 6598