Summary

The First-tier Tribunal had not made any material error of law when deciding that a taxpayer who participated in a film finance tax avoidance scheme had not been carrying on a trade capable of giving rise to trading losses. The Upper Tribunal had been entitled to view an error of law by the FTT as immaterial and to uphold its decision that the taxpayer had not been trading in film rights.

Facts

The appellant taxpayer appealed against a decision that he was not engaged in a trade when he entered into certain transactions at the beginning of April 2007 pursuant to a tax avoidance scheme.

The taxpayer had entered into a series of transactions designed by the promoters of the scheme to produce an allowable trading loss in the 2006/07 tax year which he could claim to set off against his income from other sources which was expected to be substantial. The scheme had been disclosed to HMRC under the DOTAS provisions. The scheme involved the taxpayer undertaking the trade of purchasing and exploiting distribution rights in high quality commercial films. HMRC challenged the efficacy of the scheme on the ground that the taxpayer, by entering into the package of transactions, was not carrying on a trade of the distribution and exploitation of film rights, but had merely, albeit by elaborate means, purchased an investment in film distribution rights. The question whether he was carrying on any film distribution activity which could give rise to trade losses was referred to the First-tier Tribunal, which held that he was not. On appeal, the Upper Tribunal identified an error of approach by the FTT on the basis that it had dealt with the transaction as a one-off, even though the taxpayer had been involved in similar activities in the following tax year which were the subject of an enquiry by HMRC. The FTT said that it would be unsafe to accept the taxpayer's assertions about his activities before and after 2006/07 in the absence of any detailed examination of the evidence. The Upper Tribunal held that evidence of similar activities could not be disregarded where the tax consequences of those activities were under investigation. However, the Upper Tribunal upheld the FTT's decision that what the taxpayer had done in 2006/07 under the scheme was not an adventure in the nature of trade. The taxpayer obtained permission to appeal on the basis that the Upper Tribunal decision on the trade issue was erroneous in law. Subsequently he sought to add a new ground of appeal to the effect that the FTT had made a material error of law in determining the trade issue without regard to his film-related activities from 2005 to 2009 and that the trade issue should be remitted to the FTT for redetermination.

Held

(1) The taxpayer should be permitted to advance his new argument. It had its roots in the way the trade issue had been explored in evidence and dealt with in argument before both Tribunals; it was an argument of law, based on the facts found by, and the evidence adduced before, the FTT. It would not be unfair to HMRC to entertain the new argument (see paras 29-34 of judgment).

(2) The FTT had adopted the correct approach by considering the "badges of trade" set out in Marson (Inspector of Taxes) v Morton [1986] 1 W.L.R. 1343; that approach was consistent with the subsequent authoritative restatement of the relevant principles which should be applied in deciding whether activities undertaken by a taxpayer constituted a trade for tax purposes, Marson considered and Eclipse Film Partners No.35 LLP v Revenue and Customs Commissioners [2015] EWCA Civ 95 and Samarkand Film Partnership No.3 v Revenue and Customs Commissioners [2017] EWCA Civ 77 followed (paras 50-54).

(3) If the Upper Tribunal found that the FTT had made an error of law, it then had a broad discretion under the Tribunals, Courts and Enforcement Act 2007 s.12 whether or not to set aside its decision. That was the clear import of the words "may (but need not) set aside" in s.12(2). It would be wrong in principle to interpret the scope of that discretion by reference to the previous law on tax appeals under the Taxes Management Act 1970. However, the Upper Tribunal could not properly leave the decision of the FTT to stand, once it was satisfied that the error of law was material in the sense that it might have made a difference to that decision (para.95).

(4) The FTT had erred in declining to take account of the taxpayer's other film-related activities on the ground that they were subject to an enquiry by HMRC and had not been the subject of any decision. On the other hand, the FTT explicitly stated that it lacked the detailed evidence to make reliable findings about his earlier and later activities. It had been entitled to focus on the April 2007 transaction as the only transaction that was before it and to find that there was no element of repetition because that transaction was self-contained. It would have been wrong to evaluate that transaction in isolation, but the activities before and after added little because the preceding transactions were carried out through an LLP and the subsequent transactions involved entering into further film scheme packages of the same type which did not throw any useful light on the question whether the first such transaction had a trading character. The FTT had considered the wider context when examining what the taxpayer actually did. Its error of approach was immaterial. There was no realistic possibility that it would have reached a different overall conclusion if it had correctly directed itself that the existence of any enquiries by HMRC into the taxpayer's film-related activities before or after April 2007, and the absence of any findings by any court or tribunal in relation to those activities, were irrelevant. Furthermore, the Upper Tribunal had not erred in law. It had been entitled to view any FTT error as immaterial and to hold that the taxpayer had not been trading in film rights (paras 96-107).

Appeal dismissed