Patel v Revenue & Customs

Factual and Procedural Background

The Appellant, a psychiatric social worker employed full time by a local council, commenced two separate trades alongside his employment: Silver Spice in 2004, supplying ingredients and conducting cookery workshops, and Art Sutra in 2007, selling art and photographic images of Indian culture. Both were operated as sole trader businesses.

The dispute concerns the Appellant's entitlement to set off trading losses from these businesses against his employment income for the tax years 2006-07 to 2009-10 under the relevant tax legislation. The Respondents conducted an enquiry into the Appellant’s self-assessment tax return for 2009-10, resulting in amended assessments that disallowed loss relief. Discovery assessments were also raised for 2004-05 to 2008-09, with the Respondents conceding that the assessments for 2004-05 and 2005-06 were out of time. By consent, the appeals for those years were allowed, leaving the other years in dispute.

The Appellant’s businesses incurred consistent losses across the relevant years, funded by personal savings and an endowment policy payout. The Appellant asserted his intention to make a profit and ultimately reduce his social work hours to focus on the businesses. However, the Respondents challenged the commercial nature of the trades and the Appellant’s genuine intention to realise profits.

Legal Issues Presented

1. Whether the Appellant’s trades were carried on on a commercial basis for the relevant tax years.
2. Whether the trades were carried on with a view to the realisation of profits.
3. Whether the Appellant was entitled to loss relief under section 64 of the Income Tax Act 2007 and the corresponding provisions in the Income and Corporation Taxes Act 1988.

Arguments of the Parties

Appellant's Arguments

• The Appellant was not an amateur or dilettante but was seriously motivated by profit.
• The loss-making nature of the trades did not preclude them being carried on commercially.
• The efforts to register for VAT and protect the trade mark demonstrated a commercial approach beyond a hobby.
• The trades were pursued with the genuine intention of making profits to supplement income.
• The assessment of whether the trades were carried on with a view to profit should be made from the Appellant’s perspective during each tax year, without hindsight.

Respondents' Arguments

• The trades were not conducted on a commercial basis as the Appellant lacked a realistic prospect of profit.
• The Appellant was not seriously interested in profit given the scale of losses and lack of commercial decisions to address income shortfalls.
• The trades were effectively hobbies motivated by personal satisfaction and enthusiasm rather than profit.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully examined the factual matrix of the two trades, including the Appellant’s efforts, business structure, financial records, and motivation. It acknowledged that while certain factors such as professional packaging, trade mark registration, and website development suggested some commercial intent, these were insufficient to establish a commercial basis.

The court found that the Appellant’s trades never progressed beyond hobby status. The losses were substantial and consistently funded by personal savings rather than generated profits. The Appellant’s primary motivation was found to be personal satisfaction and sharing cultural and culinary enthusiasm rather than serious profit-making.

Regarding the requirement to carry on the trades with a view to realising profits, the court applied the subjective test from Kitching. It found that the Appellant’s intention to reduce social work hours and invest more time was conditional and speculative, insufficient to satisfy the statutory requirement. The court noted the absence of a reasonable expectation of profit and that the Appellant’s conduct, including continuing losses and lack of commercial adjustments, indicated a lack of genuine profit motive.

The court emphasized that the profits must be sought based on the way the trade was conducted during the basis period and could not rely on hoped-for future changes. The Appellant’s failure to close or materially alter the businesses despite ongoing losses further undermined his claim to a commercial approach.

Holding and Implications

The court held that the Appellant’s trades were not carried on on a commercial basis nor with a view to the realisation of profits for the tax years 2006-07 to 2009-10. Accordingly, the Appellant was not entitled to loss relief for those years and the appeal was dismissed in respect of them.

By consent, the appeal was allowed for the tax years 2004-05 and 2005-06 due to the Respondents’ acceptance that assessments were out of time for those years.

No broader precedent was established beyond the application of existing legal principles to the facts. The direct effect is that the Appellant cannot offset losses from the trades against employment income for the specified years.