BIM75705 - Trading losses: restriction of relief: uncommercial losses: not on a commercial basis

The object of ICTA88/S384 (1) 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 The Chancellor of the Exchequer, at the time ICTA88/S384 (1) was originally enacted, stated in the course of a Parliamentary debate: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 test in ICTA88/S384 (1) is two-legged:

• the trade must be carried on a commercial basis, and
• it must be carried on with a view to the realisation of profit.

Commercial basis

The first part of the test, that of commercial basis of carrying on the trade, was until quite recently considered satisfied if the activities that were carried on amounted to a trade. 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 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 a 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.’

Fact-finding is vital in exploring whether the activities are being carried on on a commercial basis.

One important question to be addressed is whether there are any other 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.

View to the realisation of profits

Consideration of other non-commercial reasons is also important when examining the second leg to the test in ICTA88/S384. See BIM75710 for guidance on the second leg to this test.