In HMRC v Ardeshir Naghshineh [2020] UKUT0030, the Upper Tribunal (UT) refused sideways relief for farming losses. A competent farmer would have had a reasonable expectation of profits several years before the loss-making periods.

Sideways loss relief is not available unless the trade is commercial, that is unless 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 or following years. An exception is when the ‘reasonable expectation of profits’ test at s68 ITA 2007 is met. 

Mr Naghshineh purchased a farm as a conventional working agricultural farm in 1995.

  • He had no experience of running a farm so employed a manager when he could afford to.
  • Over the years he carried on various activities on the property, switching between different types of farming as well as introducing non-agricultural activities.
  • The farm made losses from its acquisition in 1995 but became profitable in 2012/13.
  • Mr Naghshineh made sideways loss relief claims totalling £1,464,324 for a five year period.

The FTT allowed the losses:

  • The reasonable expectation of profit test must be considered from 1995.
  • Only activities undertaken in the years in question should be considered to see if there was a reasonable expectation of profits in 1995. Later events could not be considered.

HMRC appealed to the Upper Tribunal on the grounds that the FTT erred in law, taking into account a period during which Mr Naghshineh was only planning to carry on activities.

The UT said this was the wrong question and considered two further points not raised by the parties.

  • Did the FTT meet the requirement to consider the activities carried on in each separate year of losses? In particular, did they take account of a change from organic to conventional farming?
  • Did the FTT take the correct date as “the prior period of losses” given that they took the accounting end date of 31 March 1995 and not the start of the tax year, 6 April 1994 or 1995?

The UT set aside the FTT decision, refusing Mr Naghshineh’s appeal. It set out an approach to applying the reasonable expectation of profits test at s68:

  • Determine what activities were actually being carried on in each year of loss. This should be the individual activities, not some general categorisation such as “organic farming”.
  • Assume those activities were being carried on at the beginning of the loss period. The FTT said this was 31 March 1995.
  • Ask how long a competent farmer, as at 31 March 1995, would have expected it would take for the activities to become profitable. This must consider the nature of the whole of the activities and the way in which they were carried on in the relevant loss year. The test is only met if the answer is that it would have taken until after the end of the relevant loss year and they could not reasonably have reached a different view.

The UT concluded that the FTT decision contained material errors in law. The expert opinion was that it would have taken Mr Naghshineh 4 years to fully convert the farm to organic farming and then another ten years for the organic farm to become profitable. This meant that there would have been, at the beginning of the loss period in 1995, a reasonable expectation of profits long before the periods for which loss relief was being claimed were reached. As a result the test at s68 was not met and the losses were not allowable.

As an aside and since it did not affect the decision, the UT said that the correct date for determining the prior period of losses was 6 April 1994, not 31 March 1995.

Links to our subscriber guides:

Losses (sideways): restriction for uncommercial trades

Losses, trade losses and sideways relief


Farmers: what expenses can I claim?

External link:

HMRC v Ardeshir Naghshineh [2020] UKUT0030