The First-tier Tribunal decision in Glapwell Football Club Limited (TC02904) was published on 16 October 2013. It looked at the availability of trading losses for group relief purposes.
Glapwell Football Club (GFC) played in the Northern Counties East Football League Premier Division on land at Hall Corner provided under licence by Glapwell Parish Council. The company that operated the club was a wholly owned subsidiary of Denticheck Limited, which operated a dental practice. Denticheck was owned by Dr Hancock, who was a dentist but also had significant experience in football management, having been a player and director and chairman of Aldershot FC.
GFC made losses each year, and was dependent on the support of its directors and shareholders. The directors had drawn up plans to develop the clubs activities in two phases. Phase 1 involved the promotion of the first team to the next division and acquiring a lease on the Hall Corner land to ensure that the club has security of tenure over the first team’s pitch. Phase 2 involved the acquisition and development of a new stadium which would be used by the first team, leaving the Hall Corner pitch for the junior groups. There were also plans to develop a coaching centre, a hotel, and a football academy.
However, the financial statements for the year to 30 September 2008 showed that neither Phase 1 nor Phase 2 had started. The accounts were signed off in May 2009 showing an operating loss of £99,673 and a debt due to the holding company of £241,413. The going concern note stated that the shareholders had indicated their intention to continue to support the club.
At the time, under the then relevant legislation, a claim for group relief was only possible for an accounting period where
the trade was being carried on on a commercial basis and with a view to the realisation of gain in the trade (ICTA 1988, s 393A(3).
This is requirement was then amplified in s 393A(4)(a):
where at any time a trade is carried on so as to afford a reasonable expectation of gain, it shall be treated as being carried on at that time with a view to the realisation of gain…
The tribunal regarded these sections as two separate tests, the first being a subjective test – whether the trade was being carried on with a view to the realisation of gain; the second being an objective test – whether the trade was being carried on so as to afford a reasonable expectation of gain.
Their view was that treating these as separate tests could lead to perverse results, as loss relief could be available where the subjective test was
satisfied but the objective test failed. They therefore preferred the approach taken by HMRC, that s 393(4)(a) applied to clarify the test in s 393A(3)(b), so that the test “carried on with a view to the realisation of gain in the trade” means “carried on so as to afford a reasonable expectation of gain in the trade”.
The correct test, therefore, according to the tribunal and HMRC, was whether GFC was carrying on its trade so as to afford a reasonable expectation of gain in that trade.
Having established the nature of the test to be applied in deciding whether group relief was available, the tribunal then raised the question whether there was a reasonable expectation of gain in the trade that was currently carried on by the company, which was the running of a small local football club.
It was evident that the level of activity in the club was not sufficient to generate profits, and that in the period for which the losses arose GFC’s operations did not include running a hotel or a football academy. The tribunal recognised that it is often difficult to determine whether a trade can be regarded as evolving over time, or whether the change is such that the old trade ceases and a new trade commences. However, as there was at the relevant time no realistic expectation of the football academy or hotel projects being realised the tribunal considered that it was correct for them to disregard these elements in reaching their decision as to whether GFC’s trade was being carried on so as to afford a reasonable expectation of gain.
The tribunal decided that group relief was not available.
What this decision means
The legislation on which this decision was based has been rewritten in CTA 2010, s 44, which now reads:
Relief under section 37 is not available for a loss made in a trade unless for the loss-making period (see section 37(3)(a)) the trade is carried on—
(a) on a commercial basis, and
(b) with a view to the making of a profit in the trade or so as to afford a reasonable expectation of making such a profit.
As sub-section 3(b) is an either/or test the tribunal’s analysis of the subjective and objective tests appears to have introduced an additional hurdle when submitting loss relief claims. It will be interesting to see whether this is upheld by decisions under the new rules.
However, the substance of the decision highlights some important principles to be considered when making claims for group relief and sideways loss relief for companies.
Loss relief is not available where the trade has not been carried on on a commercial basis and with a view to, or so as to afford a reasonable expectation of making a profit.
The profit making potential of the trade actually being carried on has to be considered. Where the company proposes substantial changes to its operations HMRC are likely to take the view that a new trade has commenced. Loss relief would not become available for the old trade.
The tribunal placed importance on the going concern note in the accounts. The fact that the company was reliant on the continued support of the shareholders and directors was seen as further evidence that the trade was not being carried on with a reasonable expectation of profit. This is something to consider carefully when preparing company accounts.