Factual and Procedural Background
This judgment concerns a second appeal by three limited liability partnerships ("the LLPs") challenging the Upper Tribunal's decision dated 26 July 2019. The LLPs, referred to as "IG", "ITP", and "IFP2", were involved in tax avoidance schemes marketed by Company A to wealthy individual taxpayers during the tax years 2002/03 to 2009/10. These schemes operated in the film and video/computer games industries, exploiting the characteristic commercial uncertainty and loss-making nature of most film productions.
The schemes aimed to enable higher-rate UK taxpayers to claim sideways loss relief on trading losses made by the LLPs, thereby sheltering income from income tax. The relief required that the LLPs carried on a trade with a view to profit. The LLPs contended that their activities constituted trading with a view to profit, relying on a legal and commercial model ("Ingenious basis") whereby the LLPs contributed 100% of the film budget and received up to 54.45% of gross distributable income. HMRC disputed this, asserting a different legal effect ("30:30 basis") whereby the LLPs contributed and received only 30% of the budget and income respectively, characterising the LLPs' activities as investment rather than trading.
The First-tier Tribunal ("FTT") held that on the 30:30 basis the LLPs were trading with a view to profit (except IG, which was found not to be trading), but that the LLPs did not account properly under GAAP and that most expenditure was capital in nature, limiting allowable trading losses. Both parties appealed to the Upper Tribunal ("UT") on points of law, with the UT ultimately finding in favour of HMRC on the trading issue and view to profit, setting aside the FTT's findings. The LLPs sought permission to appeal to this court, which was granted only on the trading and view to profit issues.
Legal Issues Presented
- Whether the LLPs' activities constituted a trade for income tax purposes.
- Whether the LLPs carried on the relevant activities with a view to profit.
Arguments of the Parties
Appellant's Arguments
- The LLPs argued that their activities constituted a trade because they engaged in organised, repeated, and speculative transactions involving film production and exploitation, including negotiation, contract entry, and financial risk.
- They contended that the true legal effect of the transactions was the Ingenious basis (100% budget contribution for up to 54.45% of income), which supported a view to profit and trading losses.
- The LLPs asserted that the subjective intention of the controlling minds was to make a profit on the actual transactions entered into, which the FTT found to be on the 30:30 basis.
Respondent's Arguments
- HMRC argued that the LLPs' activities were investment rather than trading, as the LLPs merely acquired and held rights to income streams without meaningful control or active trading operations.
- They maintained that the true legal effect was the 30:30 basis, reflecting the LLPs' actual economic exposure and entitlement.
- HMRC contended that the LLPs did not carry on business with a genuine view to profit, but rather to obtain tax advantages, and that the subjective intention to profit on the 30:30 basis was absent.
- They challenged the FTT’s findings as lacking evidential basis and argued that the UT was correct to set aside the FTT’s conclusions.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Ransom v Higgs [1974] 1 WLR 1594 |
Definition and characteristics of "trade" as a common law concept for tax purposes. |
Guided the court’s approach to identifying trade by examining the nature of activities and applying badges of trade. |
| Edwards v Bairstow [1956] AC 14 |
Standard for challenging factual findings on appeal (error of law must be shown). |
Applied to assess whether the FTT’s factual findings on trading and view to profit could be overturned. |
| Ensign Tankers Ltd v Stokes [1989] 1 WLR 1222; [1992] 1 AC 655 |
Whether a partnership was carrying on a trade despite fiscal motives; commercial reality over form. |
Used as a key analogy; court distinguished between commercial purpose and fiscal motive and considered the true legal effect of transactions. |
| Marson v Morton [1986] 1 WLR 1343 |
Badges of trade as indicia for determining trading activity. |
Adopted by the FTT and court to analyse the LLPs’ activities. |
| Eclipse Film Partners No. 35 LLP v HMRC [2015] EWCA Civ 95 |
Deference to FTT’s evaluative conclusions on whether activities constitute trade. |
Supported the principle that appellate courts should not lightly interfere with fact-based trading determinations. |
| Samarkand Film Partnership No. 3 v HMRC [2017] EWCA Civ 77 |
Confirmation of FTT’s multi-factorial approach and deference to its findings on trading. |
Reinforced the approach of respecting the FTT’s assessment of complex trading facts. |
| Degorce v HMRC [2017] EWCA Civ 1427 |
Similar principles on trading activities and factual evaluations. |
Referenced to support the consistency of legal principles applied. |
| FA & AB Ltd v Lupton [1972] AC 634 |
Transactions motivated solely by tax avoidance are not trading transactions. |
Applied to assess whether fiscal motive denatured the LLPs’ activities from trading. |
| Young (M) Associates v Zahid [2006] EWCA Civ 613 |
Requirement of association with a view to profit for partnership existence. |
Supported the interpretation of "view to profit" as an essential element of partnership. |
| Cobalt Data Centre 2 LLP v HMRC [2019] UKUT 342 (TCC) |
Interpretation of "view to profit" as a subjective test in partnership context. |
Referenced for the legal standard on subjective intention to profit. |
| Backman v The Queen 2001 SCC 10 |
Distinction between motivation and intention; subjective intention to profit suffices even if tax motivated. |
Supported the court’s view that subjective intention to profit is decisive regardless of tax motivation. |
Court's Reasoning and Analysis
The court undertook a detailed analysis of the factual matrix, the contractual arrangements, and the relevant legal principles governing the characterization of trade and the requirement of carrying on business with a view to profit.
On the trading issue, the court endorsed the FTT's comprehensive multi-factorial assessment of the LLPs' activities, including negotiation, contract entry, risk assumption, and repeated transactions. The court rejected the Upper Tribunal’s (UT) approach which treated the LLPs' activities as investment rather than trade, finding that the UT erred by substituting its own evaluative judgment for that of the FTT without identifying a material error of law. The court held that the FTT’s conclusion that the LLPs ITP and IFP2 were carrying on a trade on the 30:30 basis was open on the evidence.
The court further clarified that the 30:30 basis and the Ingenious basis represent different legal characterizations of the same underlying transactions, with the 30:30 basis reflecting the true legal effect as found by the FTT. The court rejected the UT’s view that the FTT erred by reaching apparently inconsistent conclusions on the two bases, noting that the FTT was entitled to assess commercial purpose objectively on the correct legal analysis.
Regarding the LLP IG, the court found no error in the FTT’s conclusion that it was not carrying on a trade and dismissed its appeal.
On the view to profit issue, the court affirmed that the test is purely subjective: the actual intention or purpose of the LLPs’ controlling minds to make a profit is determinative. The court rejected the FTT’s earlier inclusion of an objective "override" test requiring a realistic possibility of profit, aligning instead with the UT’s correct articulation of the purely subjective test.
However, the court found that the UT erred in overturning the FTT’s finding that the LLPs had a subjective view to profit on the 30:30 basis. Despite the LLPs’ case being advanced on the Ingenious basis, the FTT made unchallenged findings that the true legal effect was the 30:30 basis and that the controlling minds knew and intended this economic reality, including a realistic possibility of profit. The court held that these findings provided sufficient evidential basis for the FTT’s conclusion, and the UT was wrong to substitute its own view.
The court emphasized that the fiscal motivation underlying the schemes does not negate the existence of a genuine subjective view to profit. It further rejected the UT’s criticism that the FTT’s reasoning involved an impermissible leap in logic, clarifying that the FTT’s conclusion was a legitimate fact-finding exercise based on the totality of the evidence.
Holding and Implications
The court ALLOWED the appeals of the LLPs ITP and IFP2 on both the trading and view to profit issues, restoring the FTT’s decisions in their favor. The appeal of IG was DISMISSED.
The direct effect of this decision is to reinstate the FTT’s findings that ITP and IFP2 were carrying on a trade with a genuine subjective view to profit on the 30:30 basis, which supports their claims for trading losses in the relevant tax years. No broader implications or new legal precedents were established beyond affirming the correct application of established legal principles to the complex facts of this case.