Samarkand Film Partnership No. 3 & Ors v Revenue And Customs

Whether an activity constitutes a trade requires a realistic, unblinkered evaluation of the whole picture, with particular regard to what the taxpayer actually did. The fact-finding tribunal’s conclusion may be challenged only for an error of principle or because it contradicts the only reasonable conclusion available.

A partnership’s business remains distinct from its partners’ personal borrowings and tax reliefs. Commerciality may depend partly on realistic profitability, including the time value of money.

Published tax guidance creates a substantive legitimate expectation only where the representation, read as a whole, is clear, unambiguous and devoid of relevant qualification. A qualification permitting departure where tax avoidance is suspected prevents reliance where reasonable grounds for that suspicion exist.

Two film partnerships acquired and leased back interests in qualifying British films through prearranged transactions. The arrangements produced fixed, secured rental streams and substantial first-year losses which individual partners sought to set against other taxable income.

The First-tier Tribunal held that the partnerships were not trading and rejected most subsidiary claims. The Upper Tribunal dismissed the partnerships’ tax appeals and their judicial review claims: [2015] UKUT 211 (TCC). It nevertheless reversed the First-tier Tribunal on whether Samarkand’s full contractual payment for rights in The Queen was acquisition expenditure.

The partnerships appealed on trading, commerciality, the relevant accounting period and public law grounds. HMRC cross-appealed on the acquisition-expenditure issue. The central questions were whether the transactions constituted trading, whether any trade was commercial, and whether HMRC’s published guidance or practice precluded application of the tax legislation.

1. The taxpayers’ appeals and HMRC’s cross-appeal were dismissed. Whether an activity constitutes a trade depends on a multi-factorial evaluation of all the facts. The tribunal must stand back, view the transaction realistically and examine what the taxpayer actually did. Purchase and leasing transactions are capable of constituting a trade, but their legal form does not determine their character. The First-tier Tribunal permissibly characterised each composite arrangement as payment of a lump sum for fixed payments over 15 years. Its conclusion could not be disturbed under the limited appellate principles reaffirmed in Eclipse Film Partners No. 35 LLP v Revenue and Customs Commissioners [2015] EWCA Civ 95.

2. The partnerships’ activities had to be distinguished from the partners’ personal affairs. Individual borrowings and anticipated sideways loss relief were neither partnership activities nor factors capable of transforming the partnership business into a trade. The activities preceding the investors’ adherence were preparatory and did not alter the character of the business at financial close. It was unnecessary to decide whether the founding participants had constituted partnerships under section 1(1) of the Partnership Act 1890.

3. Commerciality and an intention or reasonable expectation of profit are distinct but overlapping requirements. A serious interest in real commercial profit lies at the root of commerciality. A transaction intended to produce a net-present-value loss without a compensating business benefit may therefore be uncommercial. Personal loss relief could not supply that benefit because it fell outside the partnership business and reliance upon it would be circular.

4. For the apportionment required by section 138(6) of the Income Tax (Trading and Other Income) Act 2005, accounts covering a pre-trading business could not make that earlier period a period of account of the trade.

5. HMRC’s cross-appeal concerning The Queen failed. Samarkand contracted in good faith to pay the whole price for the acquired film rights. HMRC could not go behind that contractual allocation merely because the rights were virtually worthless. In a relief provision concerned with expenditure incurred on an acquisition, attention is directed to the fact and object of the expenditure, rather than whether the money was well spent.

6. The judicial review appeal failed. HMRC’s Business Income Manual was expressly qualified where HMRC considered that tax avoidance existed or might exist. The taxpayers therefore had no clear, unambiguous and unqualified assurance that the guidance would govern their schemes. HMRC had reasonable grounds for suspecting avoidance, no relevant settled practice was proved, and enforcing the legislation was not conspicuously unfair or irrational.

1. Court of Appeal (Civil Division): The taxpayers’ tax and judicial review appeals were dismissed. HMRC’s cross-appeal on acquisition expenditure was also dismissed: [2017] EWCA Civ 77.
2. Upper Tribunal (Tax and Chancery Chamber): The taxpayers’ tax appeals and judicial review applications were dismissed. By the presiding judge’s casting vote, the First-tier Tribunal’s decision concerning the expenditure on The Queen was reversed: [2015] UKUT 211 (TCC).
3. First-tier Tribunal: The partnerships were held not to be trading, and the claimed film-finance reliefs failed. It also held that no more than 1% of the payment for The Queen was incurred on acquiring the film rights: [2011] UKFTT 610 (TC).