Proper Application of Income Tax Act Sections 67 and 68(3) on Farming Loss Relief

Introduction

The case of Christopher John French & Margaret Alexander French v. The Commissioners for Her Majesty's Revenue & Customs ([2014] UKFTT 940 (TC)) presents an intricate examination of the application of the Income Tax Act 2007, specifically focusing on sections 67 and 68(3). The appellants, a husband and wife farming partnership, faced challenges from HMRC regarding the offsetting of farming losses against other income over multiple tax years. The core dispute revolves around whether the appellants ceased their farming trade between 2001 and 2004 and how the objective tests within the legislation apply to their situation.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) ruled in favor of Christopher and Margaret French, allowing their appeals against HMRC's challenges. The tribunal concluded that there was a cessation of farming trade between 2001 and 2004, negating the applicability of certain provisions that would otherwise restrict the offsetting of losses. Additionally, even if there had been a continuous farming trade with a 13-year run of losses, the tribunal found that the specific circumstances of the appellants' competence and efforts in restructuring their farming activities satisfied the conditions under section 68(3) Income Tax Act 2007. Consequently, the tribunal permitted the sideways and carry-back offset of the disputed losses.

Analysis

Precedents Cited

The judgment references several key cases to interpret the provisions of the Income Tax Act:

CIR v. Forsyth Grant, 25 TC 369: Highlighted that the nature of the licensee's activities on leased land is pivotal in determining the continuity of the farming trade.
Bennion v. Roper, 46 TC 613: Emphasized that the extent of farming activities undertaken by the licensee affects whether rental income is considered farming income.
Donald v. Thomson, 8 TC 272; Mitchell v. CIR, 25 TC 380; and Drummond v. CIR, 32 TC 263: Further reinforced the criteria for determining the continuity of the farming trade based on the user’s activities.

These precedents guided the tribunal in discerning that the mere act of leasing land does not inherently sustain the farming trade unless the leasee engages in substantial farming activities akin to the appellants.

Legal Reasoning

The tribunal meticulously analyzed sections 67 and 68(3) of the Income Tax Act 2007. Section 67 introduces an objective test to restrict the sideways offset of farming losses after five years unless specific conditions are met. Section 68(3) outlines exceptions where a competent farmer can still offset losses by demonstrating proactive efforts to achieve profitability.

Key aspects of the tribunal’s reasoning include:

Cessation of Trade (2001-2004): The tribunal found that the appellants ceased active farming during this period, which effectively resets the continuity of their farming losses. This cessation meant that the five-year loss period was not unbroken, allowing the appellants to legally offset losses against other income.
Interpretation of Subsection 68(3): The tribunal emphasized a purposive interpretation, ensuring that the law achieves its intended objective. They concluded that subsection 68(3) should compare the actual farmer’s efforts and timelines with a notional competent farmer conducting the same activities, maintaining fairness and coherence in application.
Competence and Proactive Measures: The appellants demonstrated exceptional competence in transitioning from dairy to arable farming, including leasing land to a more equipped farmer to prepare the soil. Their proactive measures to sustain and improve the farm’s viability were pivotal in satisfying the conditions under section 68(3).

Impact

This judgment has significant implications for the interpretation of farming loss relief under the Income Tax Act. It clarifies that:

Cessation of Farming Activities: A temporary cessation of farming can reset the continuity of loss periods, allowing farmers to offset losses against other income subsequently.
Interpretative Flexibility: Courts may adopt a purposive approach to statutory interpretation, ensuring that the spirit of the law is upheld, especially in complex agricultural cases.
Competence Matters: The determination of a farmer’s competence and proactive efforts in achieving profitability can influence the eligibility for loss relief, emphasizing the law’s intent to support genuine and committed farming enterprises.

Future cases will likely reference this judgment when assessing similar disputes, particularly regarding the interpretation of continuity in farming trades and the application of specific tax relief provisions.

Complex Concepts Simplified

Sections 67 and 68(3) Income Tax Act 2007

Section 67: Limits the ability to offset farming losses against other income after five consecutive years of losses unless specific conditions are met.

Section 68(3): Provides exceptions to Section 67’s limitation by allowing loss offsets if a competent farmer is actively working towards profitability, demonstrating that the farming operation is not a perpetual loss.

Sideways Offset

A "sideways offset" refers to the ability to apply losses from one source (e.g., farming) against income from another source within the same tax year, thereby reducing overall taxable income.

Notional Competent Farmer

A hypothetical farmer used as a benchmark to assess whether actual farmers are making reasonable efforts to achieve profitability. This concept ensures that loss relief is granted to those genuinely striving to make their farming operations sustainable.

Conclusion

The French v. Revenue & Customs judgment underscores the importance of statutory interpretation that aligns with legislative intent. By recognizing the cessation of farming activities and adopting a purposive approach to interpreting loss relief provisions, the tribunal ensured that genuine efforts to transition and sustain farming operations are duly acknowledged. This decision not only provides clarity on the application of sections 67 and 68(3) but also reinforces the principles of fairness and competence in the agricultural sector. Farmers facing similar challenges can look to this ruling as a precedent, emphasizing the necessity of proactive measures and competent management in maintaining eligibility for tax reliefs.