Judgment summary
This decision concerns claims by the Appellant, Jody Scheckter, to set off his share of losses arising in Laverstoke Park Produce LLP (the LLP) against his other income and capital gains for the tax years ending 5 April 2008, 2009 and 2010, known as sideways loss relief (paragraph 1).
The Appellant, a South African businessman and former motor racing driver, founded Laverstoke Park after relocating to England in 1996. The LLP was incorporated in 2001 and a related company, later renamed Laverstoke Park Farms Limited (the Company), was incorporated in 2005 to carry on meat processing activities (paragraphs 2 to 5).
HMRC issued closure notices denying sideways loss relief on the basis that the restrictions in Sections 66(2)(a), 66(2)(b) and 67(2) of the Income Tax Act 2007 applied (paragraphs 17 to 21, 33). The Tribunal heard extensive documentary and witness evidence, including from Mrs Luci McCallum, Ms Julie Butler and the Appellant himself (paragraphs 57 to 64).
The Tribunal found that the LLP carried on a single trade, that this trade was properly characterised as 'farming' within Section 996, and that, while this farming trade formed part of a larger trading undertaking comprising the LLP and the Company, it was not ancillary to that undertaking, so the exclusion in Section 67(3)(a) did not apply. The Tribunal also found that the LLP's trade was not carried on on a commercial basis, chiefly because the LLP had not charged the Company for use of its valuable brand. The appeal was accordingly dismissed (paragraphs 290 to 291).
Background
The Appellant relocated to England in 1996 and acquired Laverstoke Park and surrounding land. The LLP, incorporated on 21 September 2001, converted the land to organic food production and, between 2001 and 2009, planned, designed and paid for various food processing facilities, including a multi-species abattoir, boning hall, dairy processing unit, mozzarella facility and composting facility (paragraphs 3, 4, 8 to 28).
The Company was incorporated in 2005 to carry on meat processing, in order to insulate the LLP from the significant liabilities associated with operating an abattoir (paragraphs 5, 62(14)(b), 63(9), 64(2)(a)).
The LLP submitted partnership tax returns describing its trade as 'farming' for the tax years ending 5 April 2008 and 2009, and as 'organic food wholesalers' for the year ending 5 April 2010. The Appellant claimed sideways loss relief in respect of substantial losses incurred by the LLP in each of the relevant tax years (paragraphs 9 to 12).
HMRC opened enquiries into the Appellant's and the LLP's returns between 2010 and 2012, and issued closure notices in January 2019 (in respect of the Appellant) and January 2019 and September 2023 (in respect of the LLP), denying the sideways loss relief claims (paragraphs 14 to 21).
Core dispute
The dispute concerned whether the Appellant could rely on sideways loss relief under Section 64 of the Income Tax Act 2007 for his share of the LLP's losses in the relevant tax years, given the restrictions in Sections 66 and 67 of that Act (paragraphs 32 to 35).
The key questions were: whether the LLP's single trade was one of 'farming' within Section 996; if so, whether that farming trade formed part of, and was ancillary to, a 'larger trading undertaking' comprising the LLP and the Company for the purposes of the exclusion in Section 67(3)(a); whether the phrase 'larger trading undertaking' could encompass more than one legal entity; whether the LLP's trade was carried on on a commercial basis under Section 66(2)(a); and whether it was carried on with a view to the realisation of profits under Section 66(2)(b), whether tested by reference to the LLP alone or the larger undertaking comprising the LLP and the Company (paragraphs 97 to 119).
Court findings
The Tribunal found that the LLP carried on a single trade combining 'farming' activities (such as rearing livestock, cultivating crops and milking animals on the LLP Land) and 'non-farming' trading activities (such as composting, laboratory services and hospitality events), and that these activities were sufficiently interlaced to constitute one trade (paragraphs 94 to 96).
On the meaning of 'occupation', the Tribunal held that the LLP did not occupy land subject to livery arrangements with third-party farmers, so rearing of animals under those arrangements was not 'farming' by the LLP (paragraphs 127 to 143). On the meaning of 'husbandry', the Tribunal held that dairy processing of milk from animals reared on the LLP Land was 'husbandry', but processing of milk from animals reared on third-party land was not, regardless of the scale or sophistication of the processing (paragraphs 144 to 159).
Notwithstanding these 'non-farming' elements, the Tribunal concluded that the LLP's single trade was, overall, a trade of 'farming' (Issue One), given the predominance of farming activities and their close and facilitative relationship with the non-farming activities (paragraphs 163 to 186).
The Tribunal held that the phrase 'larger trading undertaking' in Section 67(3)(a) is capable of encompassing more than one legal entity (Issue Two), and that, on the facts, the LLP's farming trade did in fact form part of a larger trading undertaking comprising the LLP and the Company (Issue Three), given the high degree of operational integration between them (paragraphs 195 to 225).
However, the Tribunal found that the farming trade was not ancillary to that larger trading undertaking (Issue Four), because the LLP's brand, which was central to the whole Business, was inextricably linked to the farm and the farming activities, rather than being subordinate to the Company's food-processing operations (paragraphs 226 to 239).
On Section 66, the Tribunal found that, viewed in isolation, the LLP's trade was not carried on on a commercial basis (Issue Five), principally because the LLP allowed the Company to use its valuable brand without charge, which was inconsistent with commercial conduct, notwithstanding that the Business as a whole was run commercially (paragraphs 241 to 277).
The Tribunal found that the farming trade was carried on with a view to the realisation of profits, both of the larger undertaking comprising the LLP and the Company (Issue Six) and, had it been necessary to decide, of the LLP's trade alone (Issue Seven), rejecting HMRC's submissions on this point (paragraphs 278 to 289).
Outcome
The Tribunal dismissed the appeal. Although the exclusion in Section 67(3)(a) was found to be capable of applying to a larger trading undertaking comprising more than one legal entity, and the LLP's farming trade was found to form part of such an undertaking with the Company, that farming trade was not ancillary to the undertaking, so the restriction in Section 67(2) applied. Separately, the LLP's trade was found not to have been carried on on a commercial basis for the purposes of Section 66(2)(a), which was itself sufficient to defeat the claim for sideways loss relief. The appeal accordingly failed (paragraphs 290 to 291).
Tp method highlighted
The Tribunal considered the pricing of transactions between the LLP and the Company, finding that, save in relation to the use of the LLP's brand, transactions such as sales of animals and dairy produce and re-charges of expenses were conducted on arm's length terms, tested by the parties' accountants against market comparables (paragraphs 62(7), 62(9), 63(10), 87(6)). A beef costing spreadsheet showed the LLP paid the same price as unrelated third parties for dressed whole carcasses, though a nil margin (as opposed to a 20% margin for third parties) appeared on primal carcasses, which the Tribunal treated as immaterial since the LLP never in fact purchased primal carcasses from the Company (paragraph 58(36), 87(6)). Critically, no payment was made by the Company to the LLP for use of the LLP's trademark/brand, which the Tribunal found was the LLP's most valuable asset; this absence of arm's length remuneration for the brand was a key factor in the Tribunal's conclusion that the LLP's trade was not carried on on a commercial basis (paragraphs 87(1), 269 to 277).
Major issues / areas of contention
- Whether the single trade carried on by the LLP was properly characterised as 'farming' within the meaning of Section 996, given both farming and non-farming trading activities (Issue One).
- Whether the phrase 'larger trading undertaking' in Section 67(3)(a) of the Income Tax Act 2007 can encompass more than one legal entity (Issue Two).
- Whether the LLP's farming trade in fact formed part of a 'larger trading undertaking' comprising the LLP and the Company (Issue Three).
- Whether the LLP's farming trade was ancillary to that larger trading undertaking (Issue Four).
- Whether the LLP's trade was carried on throughout the Relevant Period on a commercial basis for the purposes of Section 66(2)(a) (Issue Five).
- Whether the LLP's trade was carried on with a view to the realisation of profits of the larger undertaking comprising the LLP and the Company for the purposes of Section 66(2)(b) and 66(4) (Issue Six).
- Whether livery arrangements with third-party farmers meant the LLP 'occupied' land for the purposes of the definition of 'farming', and whether dairy processing activities amounted to 'husbandry'.
- Whether the absence of any charge by the LLP to the Company for use of the LLP's trademark and brand was consistent with the LLP's trade being carried on on a commercial basis.