In David Cliff v HMRC [2019] TC07358 the First Tier tribunal denied claims for trading loss relief by a tax consultant investing in racehorses; he had not proved there were any losses and was not trading commercially with a view to profit.
Sideways loss relief allows trading losses to be offset:
- Against other income for the current tax year, the previous tax year, or both.
- Relief is only permitted for trades which are run on a commercial basis with a view to the realisation of profits.
For the years in question Mr Cliff was self-employed as a tax consultant, offering services to the equine industry. On his tax returns he described himself as self-employed as a “dealer in thoroughbreds”.
- He purchased ten shares in racehorses and racing partnerships making losses totalling £160,000 over a five-year period. He claimed to offset the losses against other income.
- He did not draw up a business plan or profit forecasts.
- The evidence supporting his losses was very limited with no detailed accounts.
- HMRC disallowed the losses issuing discovery assessments for the years 2008/09-2012/13, and penalties for inaccuracies totalling £17,655. Mr Cliff appealed and the FTT agreed to hear his late appeal.
The tribunal identified that the issues to be determined were:
- Did HMRC meet the requirements of S29 TMA 1970 for each of the discovery assessments?
- Did Mr Cliffs activities as a “dealer in thoroughbreds” constitute trading commercially with a view to a profit?
- Did HMRC meet the requirements of Sch24 FA2007 (penalties for errors) to issue a penalty to Mr Cliff for 2009/10, 2010/11, 2011/12 and 2012/13?
- Did Mr Cliff have a reasonable excuse which would exonerate him from the penalty?
The FTT dismissed the appeal, finding:
- The s29 requirements had been met. Mr Cliff was not a dealer in thoroughbreds so his description of his activities was incorrect.
- He did not make decisions as to which horses should be bought or sold, or when, and did not train or improve any horses he part owned.
- There was no need to determine if Mr Cliff was trading commercially with a view to a profit as he had failed to produce sufficient evidence to support that he incurred any trading losses at all. However, the judge went on to consider the point finding:
- the purchase and sale of shares in racehorses could not be a trade.
- Mr Cliff had not demonstrated that he was trading, that he was trading commercially or that he was trading with a view to a profit.
- The requirements of sch24 were met; Mr Cliff had acted deliberately. As he had not suggested any reasonable excuse, the penalties were upheld.
The judge commented that the lack of evidence to show that Mr Cliff had incurred any losses whatsoever was startling and an “inexplicable” and “gaping omission” given that he practiced as a tax consultant.
Links to our useful guides:
Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?
Losses (sideways): restriction for uncommercial trades
What are the restrictions to sideways loss relief? When do they apply? What is an uncommercial trade?
Discovery Assessment
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?
Penalties: Errors in Returns and Documents (subscriber version)
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?
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