BIM75710 - Trading losses: restriction of relief: uncommercial losses: not with a view to the realisation of profit

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 prospect of profit being earned at some future date, however distant. The fact that it is distant is not a ground for refusing relief.

If a trader is sustaining losses without a prospect of making a profit, he or she must have some other purpose. You may then be able to show that there is no possibility of profit ever being earned, so that the expectation of profit was unfounded. This might be done by closely examining any business plan or profit projections of the trader. Furthermore it may also be possible to show that there is some other motive for carrying on the trade apart from the intention of making profits. 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 BIM75705) or gives the trader personal enjoyment. It may also be the case that the trader is simply seeking to increase the value of a capital asset.

In the Special Commissioners’ case of Delian Enterprises v Ellis [1999] SpC186 the Inspector was unable to prove that the trader was carrying on a hobby and 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.

Where there is any doubt, having established the facts (including an interview), whether to challenge a claim; and in any case before listing a claim for contentious hearing before the Commissioners, a report should be made to CT&VAT (Technical).