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HMRC internal manual

Business Income Manual

Meaning of trade: general: importance of risk

The recent First-tier Tribunal decision in Eclipse Film Partners No 35 LLP v HMRC [2012] UKFTT 270 (TC) also concerned a tax avoidance device but in this case HMRC sought to show that the partnership was not trading.

The partnership had entered into a complex series of transactions relating to the licensing of the rights to two films. Disregarding the remote possibility that the partnership would receive profits based on the profitability of the two films, the Tribunal found (at para 401) that:

‘The profit over a twenty-year period, year by year, is determined at the outset, and is determined without any reference to the success or otherwise of the exploitation of the rights sub-licensed.’

In determining whether or not the partnership was trading, the Tribunal concluded (at para 398) that:

‘We consider that an element of speculation is a characteristic of the concept of trade - if a taxpayer is trading, what he does must, normally at any rate, be speculative in the sense that he takes a risk that the transaction(s) may not be as profitable as expected (or may indeed give rise to a loss).’

The transactions entered into by the partnership lacked such a speculative aspect. The Tribunal also considered (at para 409) the principles set out in Ransom v Higgs (see BIM20102):

‘It is sufficient for us to conclude that on a realistic view of the facts - that is, on any commercially meaningful basis - Eclipse 35 had no “customer” and did not offer to provide any goods or services by way of business.’

Accordingly, the Tribunal held that the partnership was not trading. Instead, the partnership was carrying on a non-trade business within S609 Income Tax (Trading and Other Income) Act 2005.