In a somewhat surprising decision, the First-tier Tribunal have held in the case of Akhtar Ali v HMRC  UKFTT 8 (6 January 2016) that the losses stemming from Mr Ali’s share-related activities were losses of a trade run commercially, such that they could be set against income from his pharmacy business.
Mr Ali has a successful business running a pharmacy and used the profits to buy and sell publically listed shares. Mr Ali described his initial share activities as “investing” in shares and the gains and losses were reported as capital gains disposals.
By 2005 he was buying large amounts of shares and writing call options against them and devoting more time to the share activity and he became a “day trader” where shares were often held for a few hours, for a day or two via an online share dealing account with NatWest Stockbrokers Ltd.
By 2009 Mr Ali was spending 35 to 40 hours a week day trading shares from an office above the pharmacy, with close on 2,000 transactions a year. He employed a locum to run his pharmacy during this time.
Mr Ali asserted in correspondence with HMRC that he had an unwritten business plan to undertake such activities over a 15 year period. He would concentrate on certain shares that he knew, for example pharmaceutical shares and fast moving shares, and conducted regular research into the stock market. He could sustain the losses made in anticipation of making profits later learning from his mistakes. Relief for the losses was claimed under ITA 2007, s 64(1) on the basis the losses were sustained in a trade carried on commercially under ITA 2007, s 66.
HMRC took the view that Mr Ali’s share activities were no more than speculative investment over a prolonged period, with a view to increasing the value of his investments. The case of Salt v Chamberlain  was authority to support the fact that speculative dealings in shares by individuals although looked like trading did not constitute a trade as they were in essence “gambling transactions”. In addition, given the sustained period of losses, HMRC called into question whether the activity was carried out commercially for the purposes of section 66.
The FTT acknowledged that Mr Ali’s activities bore classic hallmarks of trading. In essence, he bought assets (his stock) over a long period with a view to sell it at a profit. The activities reflected a number of the “badges of trade” in particular:
- The length of the period of ownership;
- The frequency of transactions by the same person;
- The circumstances that were responsible for the realisation, and;
- Profit motive.
These all pointed towards trading but the FTT were mindful of previous case law which showed that the courts were wary of awarding trading status to an individual speculating in shares which was viewed as gambling.
Mr Ali’s business plan, unsophisticated as it was, was the decisive fact and when considering the organised way in which Mr Ali conducted his share activities, this was enough to convince the FTT that he was not gambling but carrying on a trade in share dealing. The fact that he was self-taught and arguably over-confident and undertook considerable risk was no different than a risk-taking self-made entrepreneur who was seriously interested in profit. The fact that losses had been incurred did not, in their view, make the trade uncommercial as the aims were clearly to make profits.
Why this matters
Because of the ability to offset losses it has always been difficult to convince HMRC that share dealing activities carried out by individuals are nothing more than speculative gambling whereas it harder for HMRC to argue this when operated via a company. It appears that conducting such activities in a business like way with a business plan at the heart was enough to convince the FTT. Such a decision will be of interest to many day traders operating in a similar way and it will be interesting to see if HMRC appeal the decision.
For further information in relation to this case, please contact the TaxDesk on 0845 4900 509 and ask for Martin Mann.