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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 with a view to the realisation of profit

S66 Income Tax Act 2007 (ITA 2007)

The second leg of the test in S66(2) ITA 2007, with a view to the realisation of profits, is expanded in S66(3) ITA 2007: if at any time a trade is carried on so as to afford a reasonable expectation of profit, it is carried on at that time with a view to the realisation of profits.

‘With a view to’ was considered, in the EBT case Macdonald (HMIT) v Dextra Accessories Ltd & others TCL 3759, to embrace a range of realistic possibilities, indicating that the view must be a reasonable one.

The criterion of the expectation of profit does not specify any period within which the trade must be expected to realise a profit and it is sufficient there is some realistic possibility of profit being earned at some future date, however distant. The fact that it is distant is not a ground for refusing relief. ‘Profit’ in this context is the commercial profit in the accounts, not the tax adjusted profit; that is, the profit before capital allowances but after depreciation and interest.

There are two possible ways to displace the trader’s assertion of expectation of profits: either it is not a reasonable expectation, or there is another reason for carrying on the trade.

It is not a reasonable expectation

You may be able to show that there is no possibility of profit ever regardless of however long the trade is carried on, so the expectation of profit is unfounded, by closely examining any business plan, profits projection or whatever is provided as the basis for the trader’s expectations of profit. You are justified in pointing to past results when considering whether the trader’s expectation of profit is reasonable. Where there has been a change in the way the trade is carried on, see BIM85715.

There is another reason for carrying on the trade

A trader who makes losses with no realistic possibility of making a profit may have some other reason for carrying on the trade. For example, it may be that the trade is a hobby (which in itself may fall foul of the commercial basis part of the test see BIM85705) or gives the trader personal enjoyment. It may also be the case that the trader is simply seeking to offset personal expenditure or to increase the value of a capital asset.

In the Special Commissioners’ case of Delian Enterprises v Ellis [1999] SpC186 the Revenue was unable to prove that the trader was carrying on a hobby. This was specifically mentioned by the Special Commissioner as a factor in his decision. In another Special Commissioners’ case Brown v Richardson [1997] SpC129 and TB31F the expressed intentions of the trader were not found to be conclusive. In this case the Special Commissioner found that the income generated was intended to offset expenditure rather than with a view to the realisation of profits.