Summary

Two film partnerships were carrying on a "trade, profession or business with a view to profit" pursuant to the Income Tax (Trading and Other Income) Act 2005 s.863(1) and the Corporation Tax Act 2009 s.1273(1) and so were entitled to claim for trading losses. However, the trading losses asserted had not been computed correctly as a matter of Generally Accepted Accounting Principles. A related partnership which was involved in the production of computer games was found not to be carrying on a trade, so its appeal against HMRC's refusal of its claim for trading losses was dismissed.

Facts

The appellant limited liability partnerships (IG, ITP and IFP) appealed against closure notices issued by HMRC amending their tax returns to deny their claims for trading losses.

ITP and IFP were involved in film production and IG was involved in producing computer games. They expended hundreds of millions of pounds in those activities. The appellants' case was that, in their early years of operation, those activities resulted in trading losses which their investors could, in appropriate circumstances, set against their taxable income. They claimed losses of £1.62 billion. The Income Tax (Trading and Other Income) Act 2005 s.863(1) and the Corporation Tax Act 2009 s.1273(1) provided for an LLP to be treated for income and corporation tax purposes as a partnership between its members if it "carrie[d] on a trade, profession or business with a view to profit". The investors would be treated as partners, taxable on their share of the LLPs' profits and losses. Section 34 of the 2005 Act provided that, in calculating the profits of the trade, no deduction was allowed for expenses not incurred "wholly and exclusively for the purposes of the trade". The issues were whether the appellants (1) were carrying on a trade; (2) were doing so "with a view to profit"; (3) incurred expenditure equal to 100% of the budget of the film or game; (4) incurred expenditure wholly and exclusively for the purposes of their trade; (5) had computed their losses correctly as a matter of Generally Accepted Accounting Principles (GAAP), pursuant to s.25 of the 2005 Act.

Held

(1) On balance, ITP and IFP were trading. They did more than act as investment managers of an investment portfolio. They engaged in speculative, organised, repeated transactions in a way which involved work beyond the mere making of investments. HMRC had argued that the shape and character of the transactions had been so affected by fiscal considerations as to mean that they were fiscal and not trading in nature. That analysis could not stand in the light of Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 A.C. 655 and the tribunal's conclusions as to the rights and obligations which arose under the suite of agreements entered into in relation to each film or game. Objectively, the transactions had a commercial purpose. Their objective nature was a 30% or 35% investment for 30% or 35% of the gross distributable income (GDI) from the film. Despite ITP and IFP's fiscal motives in entering into them, the transactions could fairly be described as trading transactions, Ensign applied (see paras 355-452 of judgment). IG was not carrying on a trade. Its business activity involved some organisation, some modest repetition and was speculative in nature, but it was more the acquisition of a few financial assets dressed in a complex contractual framework than the conduct of trade (paras 1222-1231).

(2) The ordinary meaning of "with a view to" contained some element of subjective intention. The test did not require an overriding objective of making a profit: the existence of other hopes or intentions in the conduct of the business did not prevent the carrying on of the business having a "view" to profit. If the conduct of the business was such that there was no realistic possibility of profit, the business could not be said to be carried on with a view to profit, no matter what the taxpayer's subjective intentions were. If the conduct of the business was such that it was inevitable or almost certain that a profit would be made, that would be the carrying on of the business with a view to profit (paras 476-490). The appellants computed their profits and losses based on an assumption that they would incur the full budgeted cost of the film or game and would earn income of no more than 54.45% of the GDI. It was unrealistic to hope for profit calculated on that basis. The object of securing the tax benefits carried with it the pretence that profit could be calculated on that basis, but the participants knew that the economic effect of the transactions was a 30% or 35% investment for 30% or 35% of the GDI, and on that basis a profit was not unrealistic. The appellants had a view of the 30:30/35:35 result when they entered into the transactions. As a result, the business conducted by the appellants was conducted with a view to obtaining that result and with the hope of a profit on that basis (paras 824-831).

(3) ITP only incurred 35% of the budgeted cost of each film; IFP and IG incurred only 30% of the budgeted cost of each film and game respectively (paras 852-880, 1271).

(4) If the above conclusion was wrong and the expenditure incurred was 100% of the budgeted cost, then it was not incurred wholly and exclusively for the purposes of the trade or business. If the above conclusion was correct, the expenditure incurred was incurred for the purposes of the trade or business apart from an amount equal to 5% of the budget, which was incurred to provide the executive producer fee (paras 881-884, 1272).

(5) The profits were not computed in accordance with GAAP. The tribunal set out the changes which were required in order to produce profits or losses computed in accordance with GAAP, and thus, subject to other required adjustments, to produce profits and losses for the purposes of income tax (paras 1027-1104, 1273).

(6) IG's appeal was dismissed. ITP and IFP's appeals were allowed in part, and adjourned in order for the parties to agree the computations (para.1274).

Appeals allowed in part