Ingenious Games LLP & Ors v. Revenue And Customs: Reaffirmation of Subjective 'View to Profit' in Determining Trade for Tax Purposes

Introduction

The case of Ingenious Games LLP & Ors v. Revenue And Customs ([2021] EWCA Civ 1180) adjudicated by the England and Wales Court of Appeal (Civil Division) on August 4, 2021, centers on complex tax avoidance schemes orchestrated by the Ingenious Media Group. The appellant limited liability partnerships (LLPs) challenged decisions of the First-tier Tribunal (FTT) and the Upper Tribunal (UT) which had denied their claims for trading losses. The core issues revolved around whether the LLPs were engaged in a trade for income tax purposes and if they were conducting their business with a view to profit. The judgment reaffirmed the importance of a subjective "view to profit" in determining the existence of a trade, influencing the treatment of tax avoidance arrangements.

Summary of the Judgment

The Court of Appeal delivered a comprehensive judgment addressing the appeals brought forward by Ingenious Games LLP and related entities against HM Revenue and Customs (HMRC). The LLPs had engaged in schemes intending to shelter income from higher-rate taxpayers by claiming "sideways" loss relief, relying on accounting treatments that allocated substantial first-year losses to individual members. HMRC challenged these schemes, arguing that the LLPs were not genuinely engaging in a trade with a view to profit.

The initial decision by the FTT had upheld HMRC's position, favoring a 30:30 basis of profit and loss allocation over the LLPs' Ingenious basis, which posited a 100:financial input basis. The Upper Tribunal affirmed the FTT's findings but highlighted errors in legal reasoning, particularly concerning the subjective test for a "view to profit." The Court of Appeal ultimately allowed the appeals of ITP and IFP2, restoring the FTT's decision, while dismissing IG's appeal.

Analysis

Precedents Cited

The judgment extensively referenced several key cases that have shaped the understanding of what constitutes a trade for tax purposes:

Ransom v Higgs [1974] 1 WLR 1594: Defined "trade" as a concept of common law, emphasizing its undefined nature and reliance on courts to interpret its application.
Ensign Tankers Ltd v Stokes [1989] 1 WLR 1222: Explored the separation of trading losses from partnership debts, establishing that fiscal motivations do not inherently negate the existence of a trade.
Eclipse Film Partners No. 35 LLP v HMRC [2015] EWCA Civ 95: Reinforced the principle that tribunals of fact have significant discretion in determining whether an activity constitutes a trade.
Samarkand Film Partnership No. 3 v HMRC [2017] EWCA Civ 77: Illustrated that complex tax-avoidance schemes lacking genuine commercial substance do not constitute trading activities.
Degorce v HMRC [2017] EWCA Civ 1427: Confirmed that even sophisticated, packaged schemes designed for tax avoidance will not be deemed trades if lacking commercial substance.

These precedents were pivotal in guiding the court's analysis, particularly in distinguishing genuine trade from investment or tax-driven activities.

Legal Reasoning

The court's legal reasoning centered on the interpretation of "trade" and the requisite "view to profit" as stipulated in sections 863(1) of the Income Tax (Trading and Other Income) Act 2005 and the Limited Liability Partnerships Act 2000. The Court emphasized:

Subjective Test for 'View to Profit': The intention to profit must be a genuine subjective intention of the LLPs, irrespective of any ancillary fiscal motives. This aligns with the principles laid out in the Partnership Act 1890 and subsequent case law, such as Ransom v Higgs.
Totality of Activities: The court underscored that determining whether an activity constitutes a trade requires an objective assessment of all circumstances, focusing on commercial substance rather than formal arrangements or labels.
Badges of Trade: While these indicators (e.g., repetition, organization, risk-taking) are factors in the analysis, they are not definitive on their own. The court assigned appropriate weight to each within the broader context.
Impact of Fiscal Motivations: Fiscal motives alone do not negate the existence of a trade. However, if fiscal considerations overwhelmingly shape the nature and substance of activities, it could undermine the commercial character of the transactions.

Applying these principles, the court scrutinized the LLPs’ transactions, determining that on a 30:30 basis, the activities had genuine commercial intent and a realistic potential for profit, thereby satisfying the requirements for being classified as a trade.

Impact

This judgment has significant implications for tax law and the treatment of LLPs engaging in similar schemes:

Clarification of 'View to Profit': Reaffirms the necessity of a genuine subjective intention to profit in determining the existence of a trade, beyond any tax motivations.
Tribunal Discretion: Reinforces the substantial discretion of Tribunals of fact, limiting appellate interference unless clear legal errors are evident.
Tax Avoidance Schemes Scrutiny: Heightens the scrutiny on complex tax-avoidance arrangements, ensuring they possess genuine commercial substance rather than being mere financial engineering for tax benefits.
Compliance for LLPs: LLPs must ensure that their business activities are not only compliant in form but also in substance, demonstrating authentic commercial intent to sustain tax relief claims.

The decision serves as a precedent deterring the use of sophisticated financial arrangements solely aimed at tax reduction without substantive commercial activity.

Complex Concepts Simplified

View to Profit

The "view to profit" is a critical element in identifying whether an LLP is engaged in a trade for tax purposes. It requires that the primary intention behind the business activities is to earn a profit. This intention must be genuine and not merely a facade for tax avoidance. It is assessed subjectively, meaning the actual intentions of the LLP's members are examined.

Trade

"Trade" refers to commercial activities conducted with the intention of making a profit. Unlike investments, trades involve active engagement, risk-taking, and the pursuit of profit through the provision of goods or services. The determination of whether activities constitute a trade is based on the overall commercial substance rather than just specific transactions or arrangements.

Badges of Trade

These are indicators that may suggest whether an activity is a trade. Common badges include:

Repetition and continuity of transactions
Organization and structure of the business
Risk-taking in financial investments
Intent to make a profit
Provision of goods or services

However, no single badge is conclusive. Courts evaluate them collectively within the context of all activities.

Conclusion

The Court of Appeal's judgment in Ingenious Games LLP & Ors v. Revenue And Customs underscores the judiciary's commitment to ensuring that tax relief mechanisms are not exploited through arrangements lacking genuine commercial intent. By reaffirming the importance of a subjective "view to profit" and scrutinizing the commercial substance of LLPs' activities, the court set a clear precedent deterring tax avoidance practices that masquerade as legitimate trading activities.

For legal practitioners and entities operating within the UK's tax framework, this decision emphasizes the necessity of aligning business structures and operations with authentic commercial objectives. It also highlights the limited scope for appellate interference, thereby encouraging meticulous compliance at the tribunal level.

In the broader legal context, the judgment reinforces foundational principles of partnership law and tax regulation, ensuring that the spirit of legislative provisions is upheld against schemes primarily designed for fiscal advantage.