Intention the Key in Claiming Loss Relief

Tax law allows trading losses to be relieved against other income in a variety of ways, and although there is complexity in that law, the principle that 'losses can be offset against other income' is often considered to be axiomatic.

However, as a recent tax case shows, that supposition is not so. It involved a businessman who set up a yacht-racing team, as a limited liability partnership (LLP), to compete in the Americas Cup. Although the team had considerable income from sponsorship and the sale of merchandise and so on, it racked up millions of pounds of losses.

A claim was made to offset the share of the loss borne by a businessman investor (who was also the CEO and Chairman of the LLP) against his personal income.

For a claim for loss relief to succeed (except where losses are carried forward to be set against future profits of the same trade), the business must be a trade carried on with a 'view to realisation of a profit'. This does not require an expectation that the trade will be profitable immediately, but it must be expected to be profitable in the long term.

HM Revenue and Customs denied that the operation was carried on as a trade at all and argued that if it was, it was not carried out on a commercial basis with a view to realising a profit.

The First-tier Tribunal (FTT) concluded that the evidence presented was sufficient to conclude that the LLP was carrying on a trade for the relevant years. However, given the small likelihood of profit, the FTT concluded that the claimant 'was not acting on a commercial basis because someone seriously interested in profit would not engage in a trade with such a likelihood of profit or level of return'.