Degorce v The Commissioners for HMRC

Whether activities constitute a trade for tax purposes requires a multi-factorial evaluation of the whole picture, with particular regard to what the taxpayer actually did. The tribunal must consider all relevant facts against the applicable legal principles. Its conclusion is an inference of fact and may be challenged for legal error or perversity.

The Upper Tribunal has a broad discretion under section 12 of the Tribunals, Courts and Enforcement Act 2007 after finding an error of law. Materiality will usually be decisive. A decision should normally be set aside where the error might have affected the outcome, but an immaterial error may properly be disregarded.

The taxpayer entered a pre-planned film-rights scheme intended to generate a trading loss exceeding £20 million for set-off against his other income. The First-tier Tribunal held that the composite transaction was the acquisition of a contingent income stream rather than an adventure in the nature of trade: [2013] UKFTT 178 (TC). It also decided four subsidiary issues against him.

The Upper Tribunal identified an error in the First-tier Tribunal's treatment of evidence about similar activities in other years, but held that the error did not undermine its overall conclusion. It dismissed the appeal: [2015] UKUT 0447 (TCC).

The principal issues before the Court of Appeal were whether the Upper Tribunal had applied the correct materiality test after identifying the error and whether the evidence concerning the taxpayer's wider film-related activities might have altered the conclusion that he was not trading.

1. Appeal dismissed. The First-tier Tribunal's conclusion that the taxpayer was not engaged in a trade when he entered the April 2007 transactions remained valid. The trade issue was determinative, so the subsidiary grounds and the application to add a further ground did not require decision.

2. Whether particular activities amount to a trade requires the tribunal to stand back and evaluate the whole picture, with particular regard to what the taxpayer actually did. It is a question of law whether an activity is capable of constituting a trade. Whether it did so on the facts is an inference from the primary facts. That inference is ordinarily open to challenge only for an error of principle or on Edwards v Bairstow grounds. The Court applied the principles restated in Eclipse Film Partners No 35 LLP v Revenue and Customs Commissioners [2015] EWCA Civ 95 and Samarkand Film Partnership No 3 v Revenue and Customs Commissioners [2017] EWCA Civ 77.

3. The First-tier Tribunal erred by treating unresolved HMRC enquiries and the absence of previous judicial findings as reasons to disregard similar activities in other years. Nevertheless, the error was immaterial. The tribunal was entitled to consider the detailed evidence insufficient for reliable findings about those activities. The earlier partnership activities were not a sole trade carried on by the taxpayer, while the later transactions were materially similar repetitions of the same pre-planned package.

4. The First-tier Tribunal also placed erroneous emphasis on the absence of an intention to sell the resulting income stream. Trading requires a counterparty, but identifying a person conventionally described as a customer is unhelpful in a complex transaction. That error was peripheral and immaterial to the evaluation as a whole.

5. Section 12 of the Tribunals, Courts and Enforcement Act 2007 gives the Upper Tribunal a broad discretion whether to set aside a First-tier Tribunal decision affected by an error of law. Materiality will usually be crucial and decisive. If the error might have affected the result, justice will normally require the decision to be set aside. If it was immaterial, the decision may stand.

6. The Upper Tribunal had correctly identified the core question and was entitled to conclude that the taxpayer merely acquired a potential income stream through contracts having a single predetermined outcome. Any technical misdirection concerning the burden of establishing materiality did not affect its reasoning or conclusion.

1. Court of Appeal (Civil Division): The appeal was dismissed unanimously. The Upper Tribunal had made no material error of law, and its dismissal of the appeal was upheld: [2017] EWCA Civ 1427.

2. Upper Tribunal (Tax and Chancery Chamber): The tribunal identified an error of approach in the First-tier Tribunal's treatment of evidence from other years but held it immaterial. It dismissed the appeal: [2015] UKUT 0447 (TCC), reported at [2016] STC 542.

3. First-tier Tribunal: The tribunal held that the transactions were not an adventure in the nature of trade. It also decided the subsidiary issues against the taxpayer: [2013] UKFTT 178 (TC), reported at [2013] SFTD 806.