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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Trade losses - restriction of relief: uncommercial trades - not on a commercial basis

S66 Income Tax Act 2007 (ITA 2007)

The object of S66 ITA 2007 is to deny relief for losses arising from activities which can be seen clearly to lack commercial inspiration. The Chancellor of the Exchequer, at the time the original legislation was enacted, stated in the course of a Parliamentary debate:

‘We are after the extreme cases in which expenditure very greatly exceeds income or any possible income which can ever be made in which, however long the period, no degree of profitability can ever be reached.’

The restriction applies to trades, professions and vocations but does not apply to losses made in the exercise of functions conferred by or under an Act.

The test in S66(2) ITA 2007, whether the trade is commercial, is two legged: the trade must be carried on throughout the basis period for the tax year:

  1. on a commercial basis, and
  2. with a view to the realisation of profit.

So before considering the test in S66(2) ITA 2007, you must be satisfied that a trade is carried on. Statute provides little guidance on what amounts to a trade. The overall conclusion from case law is that this is a question of fact. You should always examine critically claims that a trade exists where the claim may have been made to get relief that is only available to businesses. Guidance on trades is at BIM20070-BIM20075.

Commercial basis

The first part of the test, that of carrying on the trade on a commercial basis, was considered satisfied in the past if the activities that were carried on amounted to a trade. The basis for this was judicial comments like that of the Lord President in The British Legion, Peterhead Branch, Remembrance and Welcome Home Fund v CIR (35 TC 509):

`In my view, a person cannot be said to be engaged in carrying on a trade or a concern in the nature of trade within the meaning of the Income Tax Acts unless, in a reasonable sense, he is conducting business on commercial principles.’ (514)

But following the High Court decision in Wannell v Rothwell [1996] 68TC719 we now accept that in very unusual cases the activities may constitute a trade even though they are uncommercial.

The meaning of commercial basis was expanded by Robert Walker J in Wannell v Rothwell where he states at page 733B-D:

`I was not shown any authority in which the Court has considered the expression “on a commercial basis”, but it was suggested that the best guide is to view “commercial” as the antithesis of “uncommercial”, and I do find that a useful approach. A trade may be conducted in an uncommercial way either because the terms of the trade are uncommercial (for instance, the hobby market-gardening enterprise where the prices of fruit and vegetables do not realistically reflect the overheads and variable cost of the enterprise) or because the way in which the trade is conducted is uncommercial in other respects (for instance, the hobby Art Gallery or Antique Shop where the opening hours are unpredictable and depend simply on the owner’s convenience). The distinction is between a serious trader who, whatever his shortcomings in skill, experience or capital, is seriously interested in profit, and the amateur or dilettante. There may well be many borderline cases for the Commissioners to decide, and such borderline cases could as well occur in Bond Street as at a car boot sale.’

‘Commercial’ is not the same as ‘profitable’. We take it to mean, conducted in the way that we would expect a business of the same type to be carried on. A distinction may also be drawn between individual transactions and the trade itself; individual transactions may have the character of commerciality but overall the way in which the trade is conducted may lack commerciality. Indeed, even where the trader is serious about what he does but does not act in the way someone in that type of trade would act, we take the view that the trade is not being conducted on a commercial basis. See BIM85715 where the way in which the trade is carried on changes during the basis period for the tax year.Fact-finding is vital in exploring whether the trade is carried on on a commercial basis. One important question to be addressed is whether there are any non-commercial reasons for becoming involved in a particular business, for example, has the trader a general interest in sailing which might explain the venture into yacht chartering.

In the Special Commissioners’ case of McQueen v HMRC (2007) Sp C 601 the Commissioners, on the basis of the evidence, accepted that motor rallying activities in which the taxpayer engaged were undertaken for the purposes of his coach business and as such the expenditure was incurred ‘wholly and exclusively’ for the purposes of the coach trade. The point at issue was not whether the car rallying activities amounted to a trade, or whether they were carried on on a commercial basis. This case has no relevance to either trading or commercial basis.

View to the realisation of profits

Consideration of other, non-commercial, reasons is also important when examining the second leg to the test in S66(2) ITA 2007. See BIM85710 for guidance on the second leg to this test.