Introduction

The case of Ingenious Games LLP and Others versus Revenue and Customs ([2019] UKUT 226 (TCC)) addresses pivotal tax issues concerning Limited Liability Partnerships (LLPs) engaged in the production of films and games. The LLPs, promoted by members of the Ingenious Media Group, sought to claim trading losses over several tax years, arguing that their activities constituted a trade carried on with a view to profit. HM Revenue and Customs (HMRC) challenged these claims, leading to an appeal adjudicated by the Upper Tribunal (Tax and Chancery Chamber).

Summary of the Judgment

The Upper Tribunal dismissed the LLPs' appeal and upheld HMRC's objections, concluding that the LLPs were not carrying on a trade with a view to profit. The tribunal found that the LLPs' activities were primarily speculative financial arrangements designed to generate tax loss relief for individual investors, rather than genuine commercial trading endeavors aimed at profitability. Consequently, the vast majority of the LLPs' claimed trading losses were disallowed for tax purposes.

Analysis

Precedents Cited

The judgment extensively referenced landmark cases such as Ensign Tankers v HMRC, Eclipse Film Partners LLP v HMRC, and Barclays Mercantile Business Finance Ltd v Mawson. These cases establish that determining whether an entity is carrying on a trade involves both objective and subjective assessments, focusing on the intention to make a profit and the nature of the activities conducted.

Legal Reasoning

The tribunal applied the established test for "carrying on a trade with a view to profit," emphasizing that the LLPs' primary objective was tax avoidance through structured financial transactions rather than active participation in commercial activities aimed at generating profits. The contractual arrangements revealed that the LLPs were vehicles for tax loss relief, with limited operational involvement in film and game production. The Upper Tribunal found that the LLPs' expenditures were capital in nature and not wholly and exclusively incurred for trading purposes.

Impact

This judgment reinforces the principle that tax authorities will scrutinize the substance and genuine intention behind business activities, not merely the contractual or structural forms. LLPs structured primarily for tax benefits without genuine commercial objectives are unlikely to be recognized as trading entities, thereby disallowing associated trading loss claims. This serves as a critical reminder for business entities to ensure that their operations are substantiated by genuine commercial activities with demonstrable profit intentions.

Complex Concepts Simplified

• With a View to Profit: This phrase refers to the intention or purpose of an entity to engage in activities that will generate a profit. It is a key factor in determining whether an entity's activities constitute a trade for tax purposes.
• Incurred Expenditure: This refers to expenses that an entity has become legally obligated to pay or has suffered the economic burden of, regardless of the source of funds used to cover those expenses.
• GAAP (Generally Accepted Accounting Practice): These are standardized accounting principles that companies must follow when compiling financial statements, ensuring consistency and transparency in financial reporting.
• Capital vs. Revenue: Capital expenditures refer to investments in assets that provide long-term benefits, while revenue expenditures are operational costs incurred in the day-to-day running of a business.

Conclusion

The Upper Tribunal's decision in Ingenious Games LLP and Others highlights the critical importance of aligning business structures with genuine commercial objectives. LLPs designed primarily for tax loss relief through speculative financial transactions are not recognized as trading entities, leading to the disallowance of their claimed trading losses. This judgment underscores the necessity for businesses to substantiate their operational activities with real commercial engagements aimed at profitability to withstand tax authority scrutiny.