Hunt v Revenue & Customs (Capital gains tax - Payment under a guarantee in respect of loan to company)

Factual and Procedural Background

The Appellant appealed against a decision by the Respondents dated 6 February 2017, confirmed on 9 August 2017, which amended the Appellant's 2009-10 self-assessment tax return to deny a claim for relief under section 253(4) of the Taxation of Chargeable Gains Act 1992 (TCGA) for capital losses of £4,905,896. The losses arose from a payment of £17,602,601 made under a personal guarantee to a bank in respect of a loan to Company A, which was used to set up a trade. The central dispute was whether Company A had commenced trading, as the Appellant's entitlement to relief depended on this fact. Evidence included testimony from a witness who was Marketing Director of Company A and various documentary bundles. Company A undertook extensive preparations to launch a lottery business but never launched the lottery before going into administration. The loan was fully drawn down, guaranteed by the Appellant through a nominee company, and ultimately became irrecoverable. The Appellant sought relief for the loss incurred under the relevant tax provisions.

Legal Issues Presented

1. Whether Company A commenced trading for the purposes of capital gains tax relief under section 253(4) TCGA.
2. If Company A commenced trading, whether the payment made under the guarantee qualifies as an allowable loss under the TCGA provisions relating to qualifying loans.

Arguments of the Parties

Appellant's Arguments

• Company A did commence trading by engaging in operational activities beyond mere preparatory steps.
• Substantial expenditure and arrangements with third parties related directly to the intended supplies, such as production of play cards, agreements with retailers, advertising campaigns, IT infrastructure development, and contracts with broadcasters, constituted operational activities.
• The test for commencement of trade does not require that the business must have launched or generated revenue, only that it began operational activities involving financial risk.
• The fact that the lottery launched only after the business changed hands does not negate the operational activities undertaken by Company A.

Respondents' Arguments

• Company A did not commence trading as it failed to obtain the required licence from the Gambling Commission, a condition precedent to trading.
• The absence of a licence meant Company A could not legally operate the lottery, and thus the activities were preparatory rather than trading.
• Preparatory work and expenditure, no matter how extensive, do not amount to operational activities necessary to commence trading.
• Contemporaneous documents, including the Administrators Report and professional advice, supported the view that Company A had not begun trading.

Table of Precedents Cited

Court's Reasoning and Analysis

The court applied the Mansell test to determine whether Company A commenced trading. It accepted that the trade must be set up before operational activities can begin, and that operational activities involve dealings with third parties directly related to the anticipated supplies, accompanied by financial risk. The court found that Company A had a specific concept of the intended activity and had progressed beyond mere preparatory reviews or negotiations.

Company A had entered into contracts with third parties, developed IT systems, produced physical play cards, engaged retailers, arranged advertising and marketing campaigns, acquired lottery equipment, and incurred substantial expenditure placing money at risk. Although the Gambling Commission licence had not been obtained, which was a condition precedent under contracts with related entities, the court found this did not prevent operational activities from commencing.

The court concluded that the evidence demonstrated Company A had engaged in operational activities sufficient to constitute the commencement of trade for capital gains tax purposes. Consequently, the Appellant was entitled to the relief claimed under section 253(4) TCGA.

Holding and Implications

The court's final decision was to allow the appeal.

Holding: The Appellant's appeal is ALLOWED.

Implications: The decision confirms that extensive preparatory and operational activities, even absent a formal licence or launch, may suffice to establish commencement of trade under the Mansell test for capital gains tax relief purposes. The Appellant is entitled to claim relief for the capital loss arising from the payment made under the guarantee. No new precedent was established beyond the application of established principles, and the decision primarily affects the parties involved.