DECISION
The Appeals
1.
The Appellant appealed against HMRC’s decisions on 10 October 2011 to
amend his self assessment tax returns for 2007/08 and 2009/10, and to issue a
further assessment for tax in 2008/09. HMRC’s decisions resulted in a revised
figure for tax due in each of the years in question, namely, £4,647.89
(2007/08), £6,556.96 (2008/09), and £6,069.20 (2009/10).
2.
The issue is whether the Appellant was entitled to set off the trading
losses in tax years 2007-08, 2008-09 and 2009-10 from his Yacht Charter
business as a sole proprietor against his other income.
3.
The Appellant contended that his business was carried out on a
commercial basis with a reasonable expectation of the realisation of profit. In
those circumstances the trading losses in each year could be set off against
his general income for the year in question. HMRC disagreed, stating that the
Appellant’s trade was not commercial within the meaning of section 66 of the
Income Tax Act (ITA) 2007. Thus the Appellant was entitled to carry forward the
trading losses incurred in the Yacht Charter Business and set them against any
future profit in the same trade but not permitted to set off the losses against
general income in the years in question.
4.
The Tribunal heard the Appeal on 6 December 2012 but unfortunately there
was insufficient time to hear the Appellant’s final submissions. The Tribunal
directed the Appellant to supply his submissions in writing by 4 January 2013
with HMRC having a right of reply. The parties complied with the directions.
The Appellant supplied with his final submissions witness statements from his
neighbours regarding the mooring of Josefine, the ship chartered by the
Appellant. The Tribunal is not permitted to admit these statements after the
evidence has been closed. The Tribunal, however, did not consider that the
statements added to the Appellant’s case. The Tribunal stated that it would
reconvene in the absence of the parties and determine the Appeal on the
evidence already received and the closing statements. The Tribunal indicated
that it would endeavour to release its decision by no later than 18 March 2013.
The Tribunal met on 28 February 2013.
The Law
5.
Section 83 of ITA 2007 enables a person who has made a loss in a trade
in a tax year to claim relief for that loss by carrying it forward to reduce
later income of the same trade.
6.
Section 64 of ITA 2007 enables a person who carries on a trade in a tax
year, and makes a loss in that trade to claim earlier relief by setting off
that loss against any other income of that tax year in which the loss is
incurred or of the previous year or if the loss is large enough of both tax
years.
7.
The relief under section 64 of ITA 2007 is not available unless the
trade in which the loss has been incurred is commercial. Section 66 of ITA
2007 provides as follows:
“Restriction
on relief unless trade is commercial
(1) Trade loss relief against general income for a loss
made in a trade in a tax year is not available unless the trade is commercial.
(2) The trade is commercial if it is carried on
throughout the basis period for the tax year—
(a) on a
commercial basis, and
(b) with a
view to the realisation of profits of the trade.
(3) If at any time a trade is carried on so as to afford
a reasonable expectation of profit, it is treated as carried on at that time
with a view to the realisation of profits.
(4) If the trade forms part of a larger undertaking,
references to profits of the trade are to be read as references to profits of
the undertaking as a whole.
(5) If there is a change in the basis period in the way
in which the trade is carried on, the trade is treated as carried on throughout
the basis period in the way in which it is carried on by the end of the basis
period.
(6) The restriction imposed by this section does not
apply to a loss made in the exercise of functions conferred by or under an Act.
(7) This section applies to professions and vocations as
it applies to trades”.
The Facts
8.
The Appellant was a highly skilled blacksmith who had set up a
blacksmith business under the trading name of Iron Awe in 1992. The
Appellant supplied bespoke iron works and traditional restoration to a range of
eminent customers, including the Colleges of the University of Oxford, English Heritage, The National Trust, Princess Diana’s Private Secretary, and Sophia,
Queen of Spain. The Appellant needed three years before he was able to realise
a profit in his blacksmith business. Around 1999 the Appellant decided to sell
Iron Awe, and look for a business where the project would stay with him,
and not reliant on employees who required long apprenticeships. In the
meantime the Appellant had renovated derelict buildings on a former mixed use
farm which enabled him to set up an office rental business. Mr Bowman described
the Appellant as a serial entrepreneur.
9.
The Appellant came from a naval family and had been sailing since
boyhood. His grandfather, Gordon Carter, was the youngest serving Lieutenant
in the Royal Navy at the battle of Jutland. The Appellant’s search for a new
project naturally turned towards the sea where after extensive research he identified
a gap in the market, namely the chartering of traditional wooden hull sailing
ships.
10.
The Appellant took some time in identifying the appropriate ship.
Eventually he acquired Josefine, a gaff rigged ketch of 66 feet in
length which was first registered in 1931 and constructed by Anderson and
Ferdinandsen in Denmark. Her first forty years were spent fishing in the Baltic
and North Sea. From 2000 to 2002 Josefine was completely rebuilt and
refitted on the South Coast and relocated to Gibraltar. In 2003 the Appellant
purchased Josefine for around ₤70,000 which comprised
₤50,000 from a re-mortgage of his home and ₤20,000 from the sale
proceeds for Iron Awe.
11.
In May 2006 the Appellant qualified as a RYA Commercially Endorsed
Yachtmaster which enabled him to skipper a commercial vessel of up to 24 metres
waterline length with a weight of 200 tonnes. The training for this
qualification was extensive and required the Appellant to have completed at
least 50 days at sea covering a minimum of 2,500 nautical miles which included five
passages over 60 nautical miles. The Appellant was also required to have had
five days experience as skipper and to have passed the Yachtmaster Offshore
practical exam. The Appellant took the exam on Josefine.
12.
Josefine had to conform to the UK Maritime and Coastguard Agency
(MCA) Codes of Practice before it could be used on a commercial basis or ply
for hire in UK waters. In August 2006 Josefine was accredited as an MCA
Code 2 vessel which allowed it to sail 60 miles off-shore and carry a maximum
12 day passengers during the day or seven passengers overnight. Josefine
has had to be maintained to a high standard to keep its MCA accreditation.
13.
Before commencing a charter business the Appellant devised a business plan
with his accountant where he identified a break even point of 20 day charters
per annum. The Appellant estimated that the ship would be available for charter
on 137 days per annum of which 122 days would be in the season of April
–October.
14.
The Appellant’s prices were ₤720 per day for a private charter
(₤60 per person), and ₤840 per day (₤70 per person) for a
corporate charter. Josefine had a maximum capacity of 12 passengers per
day. The Appellant fixed his prices having regard to the charges made by his
competitors.
15.
From August 2006 to May 2009 the Appellant operated out of Watchet, West Somerset, a classic yacht charter business for private customers. The business offered
the opportunity of skippered classic boat charter for periods of half day or
longer.
16.
The Appellant organised the charter business by setting up a company, B Original
Ltd, of which the Appellant was the sole director and shareholder. to handle
the corporate charters. The Appellant as a sole trader carried out the private
charters. The Appellant believed that a corporate image was better suited to
corporate clients.
17.
The website and the material advertising the charters were under the
name of sailjosefine.com which was the trading name of B Original Ltd.
Also all charter bookings were made through sailjosefine.com.
18.
An agreement was made on 1 April 2007 between the Appellant and
B Original Ltd. The agreement gave
(1)
The company the right to film production, corporate charter and
corporate marine services.
(2)
Mr Atkinson the rights to private charter work and private marine
services.
(3)
Mr Atkinson responsibility for insurance and general upkeep of the
vessel.
(4)
Both parties the responsibility to keep the vessel in proper seaworthy
condition.
19.
The agreement also specified that ongoing expenses relating to
maintenance, repairs or renewals including staff costs/overheads would be
fairly apportioned and billed to B Original Ltd from time to time.
20.
B Original
Ltd employed a Personal Assistant /Secretary to the Appellant in his
capacity as Managing Director of B Original Ltd trading as sailjosefine.com.
21.
The Appellant’s personal tax returns for years ending 31 March 2007,
2008, 2009 and 2010 showed the following turnover and business expenses for the
Appellant’s charter business in his capacity as a sole proprietor for the years
in question:
|
Year
to
|
Boat
Service
Turnover
(₤)
|
Total
Expenses
(₤)
|
Profit
(loss)
(₤)
|
Net
profit (loss)
for tax purposes (₤)
|
|
31/03/2007
|
706
|
31,243
|
(30,537)
|
(42,889)
|
|
31/03/2008
|
1,681
|
15,982
|
(14,301)
|
(22,468)
|
|
31/03/2009
|
860
|
15,090
|
(14,230)
|
(26,957)
|
|
31/03/2010
|
5,437
|
17,941
|
(12,504)
|
(22,935)
|
22.
The trading and profit and loss accounts for B Original Ltd for the same
years showed the following entries:
|
Year
to
|
Turnover
(₤)
|
Cost
of sales (₤)
|
Other
operating
Costs
(₤)
|
Profit
(loss)
(₤)
|
Net
profit (loss)
for tax purposes (₤)
|
|
31/03/2007
|
2,416
|
0
|
10,808
|
(8,392)
|
(8,392)
|
|
31/03/2008
|
15,334
|
5,055
|
5,320
|
4,959
|
4,959
|
|
31/03/2009
|
7,702
|
7,302
|
5,226
|
(4,826)
|
(4,826)
|
|
31/03/2010
|
0
|
0
|
0
|
0
|
0
|
23.
The combined figures for the Appellant and B Original Ltd were as
follows:
|
Totals (₤)
|
Turnover (₤)
|
Expenses (₤)
|
Loss (₤)
|
Appellant’s
Loss (₤)
|
|
31/03/2007
|
£3,122
|
£42,048
|
(38,929)
|
(52,000)
|
|
31/03/2008
|
£17,015
|
£26,357
|
(9,342)
|
(4,000)
|
|
31/03/2009
|
£8,562
|
£27,618
|
(19,056)
|
(11,000)
|
|
31/03/2010
|
£5,437
|
£17,941
|
(12,504)
|
(8,500)
|
24.
The tables under paragraphs 21 and 22 gave two figures for profit/loss.
The first set of figures represented the commercial profit and loss, namely,
the profits in the accounts after depreciation and interest before capital
allowances. This set of figures was the relevant one for the purposes of
section 66 of ITA 2007. The second set of figures represented the tax loss
claimed by the Appellant, which would have included the capital allowances in
respect of the purchase of Josefine.
25.
The table in paragraph 23 provided the combined picture for the
Appellant and B Original Ltd. The loss cited was the commercial loss. The table
contained a column setting out what the Appellant said was the loss, which he
referred to as the tax loss. The Tribunal sets out its findings below on the
discrepancies between HMRC’s and the Appellant’s figures. The Tribunal also
considers that the Appellant has not applied uniformly the definition of tax
loss across the years in question. The Tribunal is of the view that the
Appellant has included the amount claimed for capital allowances in the figure
given for the year ended 31 March 2007 but not in subsequent years.
26.
The Appellant disputed the turnover and operating costs for B Original
Ltd in the year ended 31 March 2007 arguing that there was no corporate charter
work before 31 March 2007. The figures in the row for the year ended 31 March
2007 were taken from B Original’s Financial Statements for the year ended 31
March 2008, in which the detailed Profit and Loss Account recorded the figures
for 2007. In any event the Tribunal was not concerned with the year ended 31
March 2007. HMRC did not make an enquiry in time in respect of the Appellant’s
self assessment return for 2006/07 which meant that the question of the
Appellant’s set off of trade losses against general income for that year was
not before the Tribunal.
27.
The Appellant in his analysis of Errors in Facts as understood by
HMRC
cited lower figures for the total expenses of the sole proprietorship and B
Original for the three years under Appeal. In the years ended 31 March 2008 and
2009 the expenses cited by the Appellant were respectively about ₤5,000
and ₤7,000 less than those relied upon by HMRC. The Tribunal finds that
the expenses given by HMRC were accurate being derived from the Appellant’s
self assessment returns and B Original’s published Financial Statements. In the
year ended 31 March 2010 the Appellant’s self assessment return showed expenses
to the value of ₤17,941, whilst the Profit and Loss Account for the
charter business recorded expenses totalling ₤13,938. The Tribunal on
balance prefers the evidence supplied in the Appellant’s self assessment return
because this was declared as correct by the Appellant.
28.
On 23 March 2009 the Appellant ceased using B Original Limited for the
yacht chartering business. In May 2009 the Appellant relocated the business to Plymouth, and chartered Josefine as a sole proprietor.
29.
The Appellant’s reasons for transferring the business to Plymouth and bringing it under the umbrella of sole proprietorship were as follows:
(1)
Watchet marina experienced a higher incidence of being silted up which
limited the opportunities for charters.
(2)
Plymouth presented a more attractive business proposition with its Naval
history connections, good transport links, an active business community and
large visitor base.
(3)
A substantial reduction in overheads and fixed costs of about
₤10,000 by running the charters under the one umbrella of the sole
proprietorship.
30.
The Appellant supplied figures for the yacht chartering business for the
year ended 31 December 2011 which were ₤8,000 (turnover), ₤4,500
(expenses) and ₤3,500 (profit). The Tribunal is not convinced that these
figures represented an accurate position of the Appellant’s business as at 31
December 2011. First, the period covered was different from the accounting
period used in other years with a year ended 31 March rather than 31 December.
Second the Appellant did not provide the Tribunal with the documentation to
support the figures given. Finally the Appellant’s Trading and Profit and Loss
Account for the year ended 31 March 2011 showed ₤589 (turnover),
₤13,079 (expenses) and ₤12,409 (loss).
31.
The Appellant supplied from Josefine’s log book the detail of the
numbers and frequencies of the charters for the year ended 31 March 2008. The
log book showed that there were 18 occasions when Josefine sailed with guests
of which the total number carried was 143. There were four occasions when Josefine
sailed with the permitted maximum of 12 guests. The total distance
travelled for those 18 charters was 878 nautical miles. There were just three
private charters during the year ended 31 March 2008, as compared with at least
15 corporate charters.
32.
HMRC pointed out that there were ten occasions during the year ended 31
March 2008 when Josefine sailed without guests. The Appellant explained
that these occasions related to days spent on systems testing, crew training,
and travelling to and from places for the charter.
33.
HMRC also suggested that the Appellant’s trips to Brixham (Devon) and Paimpol (France) took place for the Appellant’s private use. The Appellant
disagreed. The Appellant stated that Josefine took part in the Brixham
Trawler Race as a marketing exercise and only after his booking with the owner
of the hotel, Buckland tout Saints, fell through. Similarly Josefine was
booked for a private charter at the Paimpol maritime festival which was not
fulfilled because of gearbox failure.
34.
The parties supplied no analysis of the log book for the years ended 31
March 2009 and 2010. The Tribunal estimates from the income received in those
years that there were one or two private charters in 2009, and around nine in
2010. The number of corporate charters in 2009 was around nine with none in
2010 following the Appellant’s decision to bring the entire chartering business
within the sole proprietorship.
35.
The Appellant stated that the poor performance of the chartering
business was due to the recession and the recent unpredictable summer weather
conditions characterised by heavy rainfalls. The Appellant argued that he could
not have anticipated an economic meltdown and the adverse weather conditions
when he set up the business in 2006.
36.
The Appellant produced extracts of weather statistics from the UK Meteorological
Office but did not provide a detailed analysis of the information supplied.
HMRC noted that the records showed a relatively consistent level of summer
sunshine and mean temperature in the South West England and South Wales for the
years under Appeal. The Tribunal observes that the Meteorological Office
recorded wet summers in England and Wales for 2008 and 2009, whilst 2010 was
the driest year since 2003.
37.
The Tribunal makes the following findings of fact:
(1)
The Appellant was an experienced entrepreneur.
(2)
The Appellant ensured that his ship, Josefine, met the rigorous
requirements for carrying passengers on a commercial basis. Josefine was
maintained at all times to those high standards. The Appellant also invested
significant time and resources in gaining the necessary qualifications to
skipper a commercial ship.
(3)
The Appellant took professional advice on a business plan for the yacht
chartering venture prior to start up. He also researched competitors’ pricing,
which informed his prospective income profile for his new business.
(4)
In 2007/08 and 2008/09 the Appellant split the yacht chartering business
between two separate legal entities. The Appellant as sole proprietor traded in
charters to private individuals. B Original Limited, of which the Appellant was
the sole director and shareholder, was responsible for the charters sold to
corporate bodies.
(5)
An agreement made on 1 April 2007 between the Appellant and
B Original Ltd governed the commercial relationship between the two
entities. A key term of that agreement was that ongoing expenses relating to
maintenance, repairs or renewals including staff costs/overheads would be
fairly apportioned between them. The agreement also stated that the Appellant
would bill B Original Ltd from time to time for its share of the expenditure.
(6)
The advertising for the yacht chartering business and its website were
under the trading name of B Original Limited, sailjosefine.com. The
charter bookings in 2007/08 and 2008/09 were made through sailjosefine.com.
(7)
In 2009/10 the Appellant ran the yacht chartering business as a sole
trader. This decision was taken with a view to reducing the overheads
associated with the organisation of the business as two separate entities.
(8)
In May 2009 the Appellant relocated the business from Watchet in North
Somerset to Plymouth. The move was motivated by commercial considerations. Plymouth had the benefits of a developed infrastructure and a wider market, particularly
corporate clients.
(9)
The number of charters secured by the Appellant in the years under
Appeal was below the Appellant’s identified break even of 20 charters per
annum. The number of secured charters was 18 in the year ended 31 March 2008,
about 11 in the year ended 31 March 2009, and about nine in the year ended 31
March 2010. The charters won in the year 31 March 2008 did not operate at all
times to the maximum number of passengers. In that period there were only four
occasions when Josefine carried 12 passengers. The Appellant’s break
even of 20 charters per annum was calculated on the basis of carrying the
maximum number of passengers on each charter.
(10)
In years 2007/08 and 2008/09 the Appellant as a sole proprietor secured three
and about two private charters respectively. In contrast the number of
corporate charters for B Original Limited in those years was 15 and around
nine. The Appellant, however, incurred higher overheads, maintenance and
running costs than B Original Ltd during those two years despite earning less
income from the chartering of Josefine than what B Original Limited
earned.
(11)
The apportionment of the expenses associated with the chartering of Josefine
between the Appellant and B Original Limited bore no relationship to their
respective uses of Josefine for charters.
(12)
There was no evidence that the Appellant billed B Original Limited for
the use of his asset, Josefine.
(13)
In the three years under Appeal (2007/08, 2008/09 and 2009/10) the
Appellant trading as a sole proprietor did not achieve a profit. The expenses
in those years exceeded the income by a multiple of 9.5 in 2007/08, 17.5 in
2008/09, and 3.3 in 2009/10.
(14)
B Original Limited made a profit of ₤4,959 in 2007/08 but a loss of ₤4,826 in
2008/09. The combined venture of the Appellant and B Original Limited, however,
suffered a loss in each of those years with the loss increasing in 2008/09 by
almost 104 per cent on the previous year.
(15)
The Appellant’s decision in 2009/10 to bring the yacht chartering
business under the umbrella of the sole proprietorship coupled with the
relocation reduced the combined business expenses by ₤9,677 or 35 per
cent.
(16)
The Appellant provided satisfactory explanations for Josefine sailing
without passengers. The Tribunal accepted that the Appellant’s trips to Brixham
(Devon) and Paimpol (France) in 2007/08 were for commercial purposes, and that
the promised charters at these venues did not take place because of
circumstances beyond the Appellant’s control.
(17)
There was no persuasive evidence of the Appellant using Josephine for
his private use.
(18)
The Tribunal accepts that the recession and the weather had an adverse
impact on the profitability of the yacht chartering business. The Appellant,
however, did not provide a detailed analysis of the precise effect of these
variables on the business. The Tribunal was not convinced that the recession and
weather were the sole reasons for the low take up of private charters,
particularly in 2007/08, and 2008/09.
Consideration
38.
The issue in this Appeal is whether the Appellant in respect of his sole
proprietorship business was entitled to set off the trading losses incurred in
2007/08, 2008/09 and 2009/10 against general income for the years in question.
Section 66 of ITA 2007 prohibits such set offs where the trade was not “commercial”.
In this respect the Tribunal is examining the commerciality of the Appellant’s
sole proprietorship not the combined venture with B Original Limited.
39.
Section 66 ITA 2007 does not prevent the Appellant from carrying forward
the trading losses to reduce later income from the same trade. Section 66 ITA
2007 simply limits the options available to the Appellant for managing his
trading losses. The ability to carry forward losses goes someway to meeting the
Appellant’s observation that all businesses require a start up period before
becoming profitable.
40.
It is also important to note that HMRC did not challenge the character
of the Appellant’s expenses for the years in question as expenditure wholly and
exclusively incurred for the purposes of trade. HMRC made no private use
adjustment of the expenses claimed by the Appellant. The question of whether
the Appellant had purchased Josefine primarily for his private
use appeared to be an underlying theme throughout the Appeal, and as a result
deflected attention away from the principal issue in this Appeal. The Tribunal
is satisfied that the Appellant’s purchase of Josefine was for business
purposes. There was no evidence that the Appellant had used Josefine for
private use. The issue in this Appeal was whether the Appellant’s business was
“commercial”.
41.
The commercial test in section 66 ITA 2007 involves two distinct
elements which both have to be satisfied in order to meet the test. The two
elements are set out section 166(2) ITA 2007 which provides as follows:
“The trade is
commercial if it is carried on throughout the basis period for the tax year—
(a) on a
commercial basis, and
(b) with a view
to the realisation of profits of the trade”.
42.
Mr Justice Robert Walker in Wannell v Rothwell (1996) 68 TC
719 explained the meaning of commercial basis at page 733 B to 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”.
43.
The second element of the test with a view to the realisation of
profits, is expanded upon in section 66(3) of the ITA 2007 which states
that
“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”.
44.
The Special Commissioner in Walls v Livesey (Inspector of Taxes) [1995]
STC (SCD) 12 referred to section 384(1) of ICTA 1988, the predecessor to
section 66 ITA 2007, and decided that with a view to the realisation of
profits and a reasonable expectation of profit comprised two
separate requirements in respect of the second element of profit in section
66(2). The Special Commissioner ruled that the former was a subjective test,
whilst the latter was an objective one. The Special Commissioner at paragraphs
5 and 6 said:
“5. The issues in this appeal come to this, whether
the taxpayer can satisfy, firstly, the words 'with a view to the realisation of
profits' which appear in s 504(2)(a) (so as to be entitled to treat his letting
activities as a trade for tax purposes) and in s 384(1) (so as to be entitled
to obtain relief for losses under s 380); and, secondly, the words 'in such a
way that profits in the trade ... could reasonably be expected to be realised
in that period or within a reasonable time thereafter' (so as to be entitled to
obtain relief for losses under s 381).
6. These two statutory expressions are not the same
and in my opinion they provide two tests. The first is a subjective test and
the second an objective test. So, whilst a taxpayer might well be found to be
trading with a view of the realisation of profits, it could be found that he
failed the objective test. However, in considering the latter test one has to
bear in mind that the statute presupposes that losses could well be suffered
for four years when an individual begins trade and, according to the nature of
the trade and the economic circumstances it may be that losses could be
suffered over a longer period but if so, one has to consider whether profits
could reasonably be expected to be realised within a reasonable time afterwards
having regard to the way in which the trade was carried on”.
45.
This Tribunal is not convinced by the Special Commissioner’s reasoning
that with a view to the realisation of profits and a reasonable
expectation of profit comprised separate requirements. In the Tribunal’s
view, the structure of section 66 suggests that the wording of a reasonable
expectation of profit in section 66(3) is intended to be an amplification
of the meaning of with a view to the realisation of profits and imports
an objective quality to the profit element of the commercial test in section
66(2) of ITA 2007.
46.
Under section 66(4) ITA 2007 where
a trade forms part of a larger undertaking, the Tribunal is entitled to
consider the profits of the trade as referring to the profits of the
undertaking as a whole. Section 66(4) provides a sharp dividing line between
the treatment of the two elements of the commercial test. Thus in the
Appellant’s case, the “commercial basis” element can only be considered from
the perspective of the Appellant’s sole proprietorship, whereas the “realisation
of profits” element can take account of the profits for both the sole
proprietorship and B Original Limited.
47.
Finally section 66 ITA requires
the Tribunal to examine the commercial test throughout the basis period for the
tax year. Thus the test has to be considered afresh for the basis period of
each tax year, which in the Appellant’s case was the period from 1 April to 31
March in 2007, 2008 and 2009.
48.
Turning to the facts found in
this Appeal, although the Tribunal is required to consider each year in
dispute, the Tribunal intends to deal with 2007/08 and 2008/09 together since
the relevant circumstances for each year were virtually identical. The Tribunal
starts with the question of whether the Appellant carried on his sole
proprietorship in the private chartering of Josefine on a “commercial
basis”.
49.
The Tribunal acknowledges that
in both years the Appellant approached the private charters in a business like
manner in respect of his training as a skipper of a commercial vessel,
maintaining the vessel to the standards required for the carrying of fare
paying passengers, the formulation of business plans and the pricing of
charters based on research of his competitors. These facts were, however,
outweighed by the organisation of the venture with the split between private
and corporate charters which were delivered by separate legal entities, the Appellant
and B Original Limited. The allocation of business expenses between the two
entities did not reflect a fair attribution in accordance with their respective
uses of Josefine. The Appellant failed to observe the terms of the
agreement with B Original Limited by not billing the company from time to time
for the outgoings and others expenses associated with the vessel. The higher
trading profile given to B Original Limited in respect of the website,
advertising and invoicing which had the effect of minimising the business opportunities
for the Appellant.
50.
The Tribunal is required to
assess whether the Appellant’s business as a sole proprietorship was carried
out on a “commercial basis”. The Tribunal finds that the Appellant’s
arrangements with B Original Ltd were such that the Appellant was starved of
business and used for the offsetting of expenditure. Thus the Tribunal is
satisfied that in 2007/08 and 2008/09 the sole proprietorship was not being
run in such a way that a profit could be made and ,therefore, the Appellant did
not meet the “commercial basis” element of the test as laid down in section
66(2) ITA 2007.
51.
In view of its finding in paragraph 50
above there is no obligation on the Tribunal to consider whether the “view to
the realisation of profits” element was met in regard to the undertaking of the
whole in 2007/08 and 2008/09. The Tribunal finds that in each year an overall
loss was made with an increased loss in 2008/09. Also the combined
income for both entities fell significantly far below the total annual
outgoings of provisioning, crewing, maintaining and running Josefine.
The expenses were also inflated by the decision to have two separate legal
entities delivering the business. The Tribunal is, therefore, satisfied that if
the Appellant and B Original were to be regarded as a larger undertaking, the
undertaking as a whole had no reasonable expectation of being profitable in
2007/08 and 2008/09. As the sole proprietorship already fails the “commercial
basis” test this latter test is of no consequence for those years.
52.
The Tribunal considers that different circumstances applied to the
situation for the year 2009/10. The Appellant dispensed with B Original Limited
for the supply of corporate charters, and ran the business under the one
umbrella of the sole proprietorship. In so doing the Appellant reduced the
business expenditure by over a third, raised the trading profile of the sole
proprietorship and ensured the proper allocation of business costs. The
Appellant also relocated the business to Plymouth which was a far better
trading proposition than Watchet with its more developed infrastructure and
bigger visitor and corporate markets. The Tribunal finds that these changes
enabled the Appellant to carry out its chartering business on a “commercial
basis”.
53.
The issue in 2009/10 is also whether the Appellant’s business was
carried out with “a reasonable expectation of profit”. The Appellant did not
make a profit in that year which was principally due to another fall in the
number of charters. The Appellant, however, reduced the scale of losses from
the previous year as a result of the costs reduction programme associated with
the relocation and running the business under the one umbrella.
54.
The Tribunal formed the view on the evidence that despite the Appellant
making a loss in 2009/10 that the Appellant had a reasonable expectation of
making a profit from his chartering business in that year. The costs reduction
programme brought down the break even point between income and expenditure. Had
the Appellant achieved the level of sales in 2007/08 he would have made a small
profit. The relocation to Plymouth should have resulted in more business. The
fact it did not may well have been due to factors outside the Appellant’s control.
The Tribunal notes that the Meteorological Office reported that July 2009 was
the wettest July on record in England and Wales. The Tribunal is, therefore,
satisfied that the Appellant’s business in 2009/10 was commercial within the meaning
of section 66 ITA 2007.
Decision
55.
The Tribunal finds that
(1)
In the years 2007/08 and 2008/09 the Appellant’s trade in chartering a yacht
was not “commercial” within the meaning of section 66(2) of ITA 2007.
(2)
In the year 2009/10 the Appellant’s trade in chartering a yacht was “commercial”
within the meaning of section 66(2) of ITA 2007.
(3)
In the years 2007/08 and 2008/09 the Appellant was not entitled to set
off his trade losses in chartering a yacht against his general income for those
years.
(4)
In the year 2009/10 the Appellant was entitled to off his trade loss in
chartering a yacht against his general income for that year.
56.
In view of its findings the Tribunal allows the appeal in part. The
amendment to the Appellant’s self assessment for 2007/08 resulting in tax due
of £4,647.89 and the assessment of tax for 2008/09 resulting in tax due of £6,556.96
are confirmed and stand good. The amendment to the Appellant’s self assessment
2009/10 producing a figure for tax due of £6,069.20 is cancelled.
57.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
MICHAEL
TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 20 March 2013
