Ingenious Games v Revenue & Customs Commissioners (2019)


The First-tier Tribunal had erred in concluding that limited liability partnerships involved in the production of films and computer games had carried on a trade for the purpose of being able to claim trading losses in their partnership returns, and had wrongly applied a partly objective test when considering whether the trade had been carried on with a view to a profit.


The appellant limited liability partnerships (LLPs) appealed against a decision of the First-tier Tribunal concerning the recoverability of trading losses. HMRC cross-appealed against a decision that the first and second appellants carried on a trade with a view to a profit.

The LLPs were involved in the production of films and video or computer games. They had been promoted as investment opportunities enabling their members to offset their respective shares of any losses against other income. The arrangements through which the LLPs became involved in the production of films followed a complex structure with a suite of agreements which were all entered into at the same time in relation to each film. The LLPs appealed against closure notices issued by HMRC which amended their partnership tax returns to deny their claims for trading losses. The FTT found that the first and second appellants were carrying on a trade with a view to profit and therefore incurred trading losses in the tax years in question, but to a much smaller extent than claimed. It found that the third appellant, which produced computer games, was not carrying on a trade.


Effect of errors of fact by FTT - If the Upper Tribunal found that criticisms of the FTT's findings of fact were made out, it could still consider whether the remainder, taken together with unchallenged matters relied on by the FTT, nonetheless constituted a sufficient basis for the decision, Georgiou (t/a Marios Chippery) v Customs and Excise Commissioners [1996] S.T.C. 463 considered. The fact that the UT might decide that a finding disclosed an error of law did not necessarily mean that it should allow the appeal and set aside the decision. The discretion to set aside the decision should not be exercised if it was satisfied, notwithstanding errors of law, that there was a sufficient basis in the FTT's findings, that were fully reasoned and not subject to challenge, to justify its conclusion on the relevant issue, Megtian Ltd (In Administration) v Revenue and Customs Commissioners [2010] EWHC 18 (Ch) applied (see paras 66-67 of judgment).

Contractual construction - The FTT had erred in construing the series of contractual documents together as a single composite agreement. However, in determining the rights and obligations acquired by the LLPs pursuant to the contractual arrangements, it was entitled and correct to look at the entirety of each set of transaction documents which it found had been entered into at the same time and as a single package. The Ramsay principle, namely whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction viewed realistically, could be applied at both stages of contractual construction: first, when determining what rights and obligations arose, and second, when characterising those rights and obligations (paras 106, 110-111).

Whether the LLPs were trading - The FTT had made errors of law in concluding that the first and second appellants were trading. It had erred in concluding that their activity in relation to the making of independent, rather than studio, films was such as to transform what was fundamentally investment into a trading activity, and had erred in assessing commercial purpose and in focusing on organisation and repetition as indicators of trade. Those errors were so material that the decision should be set aside and remade. The LLPs had not been trading, Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 A.C. 655 considered. Ensign was not authority for the proposition that any level of involvement or investment in film production in return for a share of receipts gave rise to a trade. The LLPs' activities were the acquisition and holding of rights in a potential income stream from a film. There was no need to consider fiscal motivation if an activity was clearly an investment and not a trading transaction. The tax motivation of the LLP members was part of the wider factual context and explained why the transactions were structured as they were (paras 241-242, 247, 251, 256, 265, 267-268, 273).

Whether business carried on "with a view to profit" - The test was subjective. There was no need for profit to be the predominant aim, but where it was a subsidiary aim it was necessary to identify whether there was a "real" intention rather than something that was not, in fact or reality, aimed for. The question whether a trade was carried on "with a view to profit" also could not be answered in isolation, divorced from the context of the business. An indifference to whether a profit was realised was not sufficient to meet the test. Ordinarily, the sub-conscious would not be relevant. The test was a qualitative rather than a quantitative one and it would be wrong to prescribe a minimum percentage of probability of profit. The question was whether there was a real and serious intention to make a profit. The burden of proof was on the LLPs to displace the findings on which the closure notices were based. The FTT had fallen into error in finding that there was some objective element in the test. It's finding about the basis on which the business had been conducted was based on an error of law that was material and the decision was set aside. The LLPs had not conducted a trade or business with a view to profit (paras 333, 336, 340, 346, 348, 354-355, 369, 431).

Whether expenditure "incurred" wholly and exclusively for the purposes of the trade - If it had been necessary to decide, the FTT had correctly formulated the statutory question as being whether realistically the LLPs bore the economic burden of the liability in question. The source of the funds could be a non-recourse loan. The existence of a legal commitment to incur the expenditure was important, but was not determinative (paras 447, 457).

Appeal dismissed, cross-appeal allowed