Determining the Nature of Trade for Tax Loss Relief: Insights from Degorce v. Revenue and Customs ([2017] WLR(D) 639): England and Wales Court of Appeal (Civil Division)

Introduction

Degorce v. Revenue and Customs ([2017] WLR(D) 639) is a pivotal case in English tax law that explores the intricate boundaries of what constitutes a "trade" for the purposes of claiming tax loss relief. The appellant, Mr. Patrick Degorce, a French national residing and working in the United Kingdom, entered into a series of complex transactions aimed at generating an allowable trading loss of approximately £20.1 million during the 2006/07 tax year. Promoted by the Goldcrest group of companies through the "Goldcrest Film Scheme," these transactions involved the acquisition and subsequent assignment of film distribution rights. HMRC challenged Mr. Degorce's claim for loss relief on the grounds that these activities did not constitute a genuine trade.

This commentary delves into the comprehensive judgment delivered by the England and Wales Court of Appeal, dissecting the court’s analysis, the application of relevant precedents, and the broader implications for future tax law interpretations.

Summary of the Judgment

The Court of Appeal examined the series of transactions entered into by Mr. Degorce under the Goldcrest Film Scheme. Key issues revolved around whether these transactions constituted a genuine trade, thereby allowing Mr. Degorce to claim substantial tax losses against his other income sources. The First-tier Tribunal (FTT) and the Upper Tribunal (UT) had previously dismissed Mr. Degorce's claims, determining that the transactions were not an "adventure in the nature of trade." The Court of Appeal upheld these decisions, emphasizing the lack of repetition in the transactions and the primary motive of sheltering income rather than engaging in a genuine trading venture.

Analysis

Precedents Cited

The judgment extensively referenced pivotal cases that shape the understanding of "trade" within UK tax law. Notably:

Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655: Established that the production and exploitation of a film is inherently a trading activity.
Marson v Morton [1968] 1 WLR 1343: Introduced the "badges of trade," a set of indicators used to determine whether an activity amounts to a trade.
Eclipse Film Partners No. 35 LLP v Revenue and Customs Commissioners [2015] EWCA Civ 95: Reinforced the necessity of evaluating the entire context of transactions to ascertain their trading nature.
Samarkand Film Partnership No. 3 v Revenue and Customs Commissioners [2017] EWCA Civ 77: Further clarified the multi-factorial approach to defining a trade.

These cases collectively underscore the importance of a holistic assessment over isolated transaction features in determining the presence of a trade.

Legal Reasoning

The court's reasoning hinged on whether Mr. Degorce's activities met the statutory definition of a "trade," as encompassed by "every trade, manufacture, adventure or concern in the nature of trade" under section 832(1) of the Income and Corporation Taxes Act 1988 (ICTA 1988). The FTT and UT found that the transactions lacked repetition and were primarily structured to generate tax relief rather than profit from genuine trading activities.

Key points in the reasoning included:

The absence of repetition in transactions, which often signifies ongoing trading activity.
The primary purpose of the transactions was to shelter income rather than to engage in profit-driven trade.
The complexity and one-off nature of the transactions did not align with the characteristics of a genuine trade.
The reliance on HMRC's assessment and lack of independent profit expectations undermined claims of trading intent.

Quote: "the only logical inference means that this was not an adventure in the nature of trade."

The Court of Appeal upheld these findings, reinforcing that tax motives alone do not constitute a trade unless corroborated by the nature and execution of the transactions.

Impact

This judgment has significant implications for taxpayers and tax practitioners, particularly those involved in complex investment schemes. Key impacts include:

Reaffirmation of Strict Standards: Emphasizes that tax-related motives alone are insufficient to establish a trade; genuine business activities and profit intentions are paramount.
Holistic Evaluation: Reinforces the necessity of assessing the entirety of transactions rather than isolated elements to determine their trading nature.
Badges of Trade Contextualized: Provides further clarification on how the "badges of trade" should be applied in practice, discouraging superficial assessments.
Precedential Clarity: Adds to the body of case law that guides the interpretation of "trade" in tax law, aiding in more consistent and predictable judgments.

Future cases will likely reference this judgment when evaluating complex financial transactions for tax purposes, ensuring that similar schemes are scrutinized with a focus on their true trading intent and business viability.

Complex Concepts Simplified

1. Trade and "Adventure in the Nature of Trade"

The term "trade" for tax purposes is not explicitly defined in UK legislation but has been interpreted through case law. An "adventure in the nature of trade" refers to activities that demonstrate a systematic pursuit of profit, comparable to traditional business operations.

2. Badges of Trade

Originating from Marson v Morton, the "badges of trade" are a set of indicators used to assess whether an activity constitutes a trade. These include the nature of the goods, frequency, intention to profit, and method of acquisition, among others. However, no single badge is conclusive; they must be considered collectively.

3. Tax Loss Relief

Tax loss relief allows taxpayers to offset losses from a trade against other taxable income, reducing the overall tax liability. To claim this relief, the losses must arise from a genuine trade carried out with the intention of making a profit.

4. Limited Recourse Loan

A loan arrangement where the lender's claim is limited to specific collateral, typically the business assets. In Mr. Degorce's case, the loan was secured against his film distribution rights.

Conclusion

The Degorce v. Revenue and Customs case serves as a crucial reference point in the delineation of what constitutes a trade for tax purposes. By upholding the findings of the FTT and UT that Mr. Degorce's transactions were primarily tax-driven and not indicative of a genuine trading venture, the Court of Appeal reinforced the stringent criteria required to qualify for tax loss relief. The judgment underscores the importance of a comprehensive, context-driven analysis over transactional mimicry when assessing the nature of business activities in tax law. Consequently, taxpayers engaging in complex financial schemes must ensure that their activities align with genuine business practices and profit motives to benefit from tax relief provisions.

Determining the Nature of Trade for Tax Loss Relief: Insights from Degorce v. Revenue and Customs ([2017] WLR(D) 639)