In Ardeshir Naghshineh v HMRC [2022] EWCA Civ 19, the Court of Appeal dismissed a farmer’s sideways loss relief claims. The case should have failed for lack of evidence but in any event, based on the evidence which was available, the reasonable expectation of profit test was not met.

Where a farming business makes losses for five years in a row, Sideway Loss Relief is not available in the sixth or following years. An exception is when the ‘reasonable expectation of profits’ test at s.68 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 acquired more land and carried on various activities on the property, switching between different types of farming and 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 of £1,464,324 for the five year period from 2007-08 to 2011-12.

The First Tier Tribunal (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 (UT) who set aside the FTT decision, concluding that the FTT decision contained material errors in law.

  • The expert opinion was that it would have taken Mr Naghshineh four years to convert the farm to organic farming 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 reaching the periods for which loss relief was being claimed. As a result, the losses were not allowable.

The Court of Appeal dismissed the appeal. The case turned on the reasonable expectation of profit test and the purposive construction of s.68(3) ITA 2007, and specifically, subsection (b) which provides that the test is met if:

"(3)( a) a competent person carrying on the activities in the current tax year would reasonably expect future profits but

 (b) a competent person carrying on the activities at the beginning of the prior period of loss could not reasonably have expected the activities to become profitable until after the end of the current tax year."

A competent person is defined as a competent farmer or market gardener.

The ‘prior period of loss’ is defined as the five tax years before the current tax year. If losses, excluding capital allowances, were also made in successive tax years before those five tax years, the period comprising both those successive tax years and the five tax years before the current tax year, are included in the period calculation. In this case, it had already been agreed that the prior period commenced on 6 April 1994.

  • Section 68(3)(b) does not test the competence of the individual farmer. It tests the reasonable expectation of the length of time for farming activities, as they are carried on in the year of loss, to come into profit and taken from the beginning of the prior period of loss.
  • The purpose of that test is to cap the length of time, beyond the five-year rule, that sideways relief is available for loss-making farming or market gardening activities which may otherwise be commercial and may otherwise be likely to make a profit in time. The cap will depend on evidence focussing on the amount of time reasonably expected for those activities, i.e. the ones which are being carried on in the current year, to come to profit, taking their hypothetical start date at the beginning of the prior period of loss.
  • The FTT had taken the amount of time to reach profit as seventeen years. In fact, neither court had the necessary evidence to determine this point and the appeal should have been dismissed for lack of evidence. The UT, instead of dismissing the case had revisited the evidence it did have, and assessed the amount of time at ten years, and it was entitled to exercise its discretion in this way. On either approach, the loss claims failed.

Useful guides on this topic

Losses (sideways): restriction for uncommercial trades
What are the restrictions to sideways loss relief? When do they apply? What is an uncommercial trade?

Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?

Farming: Overview
What is farming? What are the tax consequences and tax considerations of farming?  What are the features of agricultural tenancies?

Farmers: what expenses can I claim?
What expenses can farmers claim for tax purposes? Are there special tax and accounting rules for farmers? What are the rules for VAT for farmers?

External link

Ardeshir Naghshineh v HMRC [2022] EWCA Civ 19


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