BIM20103 - Meaning of trade: general: importance of risk

The First-tier Tribunal decision in Eclipse Film Partners No 35 LLP v HMRC [2012] UKFTT 270 (TC) concerned a case where 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 Court of Appeal in Eclipse Film Partners No 35 LLP v HMRC [2015] EWCA Civ 95 agreed (at para 143) with the partnership’s submission that:

carrying on a trade does not necessarily require that there must be risk.

Despite this, the Court of Appeal endorsed the view of the First-Tier Tribunal, saying:

It is apparent, however, from para 398 of their decision that the FTT’s view was that speculation is an indication of trade, not that it is essential. That is a perfectly legitimate approach.

This demonstrates that it is important to consider whether there is any risk to the activity carried on by a person when determining whether that person is carrying on a trade. Fixed returns from an activity which are not related to the success of that activity may indicate the absence of a trade. However, much like any other factor that needs to be considered when determining whether a person is trading, the existence of risk is only indicative and is not determinative.