In J Anderson v HMRC[2018] UKUT 159 (17 May 2018), the UT found that the taxpayer’s activity, although relating to his other business activities, did not amount to a trade.
Mr Anderson had claimed losses of £3,002,772 in his return. He had invested the amounts claimed in a South African soccer academy, Bafana, having borrowed the amount from a Jersey based entity, Maddox. HMRC considered that these losses, arising from activities undertaken to develop and bring young South African footballing talent to the European football market, were not allowable (ITA 2007 s 66 and s 74). HMRC had issued a discovery assessment.
There were two issues: whether HMRC’s discovery assessment was valid; and whether Mr Anderson had been carrying on a trade on a commercial basis with a view to profit.
The UT noted that an HMRC officer who makes a discovery assessment ‘must have formed a certain state of mind’. The issue was therefore ‘what must the officer think or believe?’ This was the subjective test. Having referred to Sanderson [2014] STC 915 and Lansdowne Partners [2012] STC 544 (inter alia), the UT observed that: ‘The officer must believe that the information available to him points in the direction of there being an insufficiency of tax.’ The UT clarified its own formulation by adding: ‘The discovery must be something more than suspicion of an insufficiency of tax and it need not go so far as a conclusion that an insufficiency of tax is more probable than not.’ The UT added that there was an objective test as well, which is that the belief of the officer must be reasonable.
The UT accepted the FTT’s finding that the officer had the appropriate belief, noting that her belief went beyond a ‘mere suspicion’ and that this belief was reasonable, given all the information available to her. It concluded that the discovery assessment was valid.
As to Mr Anderson’s claim for sideway loss relief (ITA 2007 s 64), the UT noted that HMRC’s discovery assessment had been made on the basis that the taxpayer had not carried on a trade. The UT observed that the FTT had found, as a matter of fact, that Mr Anderson’s activities were more akin to those of an investor in a market comprising young African footballers, but with no substantial active day-to-day involvement in the activity. The UT agreed with this overall finding, observing in particular that the amount and quality of the time spent by Mr Anderson on Bafana projects did not suggest the existence of a trade. The UT noted, however, that Mr Anderson’s interest in the Bafana operation was related to his other football business activities.
Finally, agreeing with the FTT, the UT found that the fact that Mr Anderson was not an amateur or dilettante was not sufficient to establish his serious interest in profit. It accepted the FTT’s finding that Mr Anderson had not taken sufficient steps to indicate that his purpose met the statutory requirements.
Why it matters: The UT observed that it was not appropriate to seek to identify a description of the putative trade and then to ascertain if the taxpayer’s activities correspond to such a trade. The issue was whether the activities of Mr Anderson as a whole, in relation to Bafana, amounted to a trade, irrespective of how those activities might have been described. In addition, the UT’s formulation of the knowledge test for discovery may have brought some clarification in an area which remains a minefield.
In J Anderson v HMRC[2018] UKUT 159 (17 May 2018), the UT found that the taxpayer’s activity, although relating to his other business activities, did not amount to a trade.
Mr Anderson had claimed losses of £3,002,772 in his return. He had invested the amounts claimed in a South African soccer academy, Bafana, having borrowed the amount from a Jersey based entity, Maddox. HMRC considered that these losses, arising from activities undertaken to develop and bring young South African footballing talent to the European football market, were not allowable (ITA 2007 s 66 and s 74). HMRC had issued a discovery assessment.
There were two issues: whether HMRC’s discovery assessment was valid; and whether Mr Anderson had been carrying on a trade on a commercial basis with a view to profit.
The UT noted that an HMRC officer who makes a discovery assessment ‘must have formed a certain state of mind’. The issue was therefore ‘what must the officer think or believe?’ This was the subjective test. Having referred to Sanderson [2014] STC 915 and Lansdowne Partners [2012] STC 544 (inter alia), the UT observed that: ‘The officer must believe that the information available to him points in the direction of there being an insufficiency of tax.’ The UT clarified its own formulation by adding: ‘The discovery must be something more than suspicion of an insufficiency of tax and it need not go so far as a conclusion that an insufficiency of tax is more probable than not.’ The UT added that there was an objective test as well, which is that the belief of the officer must be reasonable.
The UT accepted the FTT’s finding that the officer had the appropriate belief, noting that her belief went beyond a ‘mere suspicion’ and that this belief was reasonable, given all the information available to her. It concluded that the discovery assessment was valid.
As to Mr Anderson’s claim for sideway loss relief (ITA 2007 s 64), the UT noted that HMRC’s discovery assessment had been made on the basis that the taxpayer had not carried on a trade. The UT observed that the FTT had found, as a matter of fact, that Mr Anderson’s activities were more akin to those of an investor in a market comprising young African footballers, but with no substantial active day-to-day involvement in the activity. The UT agreed with this overall finding, observing in particular that the amount and quality of the time spent by Mr Anderson on Bafana projects did not suggest the existence of a trade. The UT noted, however, that Mr Anderson’s interest in the Bafana operation was related to his other football business activities.
Finally, agreeing with the FTT, the UT found that the fact that Mr Anderson was not an amateur or dilettante was not sufficient to establish his serious interest in profit. It accepted the FTT’s finding that Mr Anderson had not taken sufficient steps to indicate that his purpose met the statutory requirements.
Why it matters: The UT observed that it was not appropriate to seek to identify a description of the putative trade and then to ascertain if the taxpayer’s activities correspond to such a trade. The issue was whether the activities of Mr Anderson as a whole, in relation to Bafana, amounted to a trade, irrespective of how those activities might have been described. In addition, the UT’s formulation of the knowledge test for discovery may have brought some clarification in an area which remains a minefield.
