Ardeshir Naghshineh v The Commissioners for HMRC

The farming-specific exception to the five-year limit on sideways loss relief is tightly confined. Under section 68(3)(b) of Income Tax Act 2007, “the activities” are the same current-year farming or market-gardening activities examined under limb (a), considered as a whole. The court must hypothesise those activities being carried on at the beginning of the prior period of loss and ask how long a competent person could reasonably expect them to take to become profitable. Limb (b) imposes a long-stop, so relief is unavailable once that reasonable period has expired. The test concerns the activities, not the individual farmer’s competence. The “hobby” heading does not restrict the statutory provisions to hobby farmers.

HMRC denied Mr Naghshineh sideways relief for losses from his farming business for 2007/08 to 2011/12. The First-tier Tribunal allowed his appeal, finding that a competent farmer could reasonably have taken the relevant period to bring the evolving business into profit. The Upper Tribunal allowed HMRC’s appeal and held that section 68(3)(b) concerned the activities carried on in each current tax year, hypothetically begun at the start of the prior period of loss: [2020] UKUT 0030 (TCC). The Court of Appeal had to determine the proper construction of section 68(3)(b) and whether the evidence satisfied that statutory test.

The Court of Appeal unanimously dismissed the appeal. Lady Justice Whipple gave the judgment, with Lord Justice Birss and Lord Justice Green agreeing.

1. Statutory scheme. The commerciality requirement in section 66 of Income Tax Act 2007 and the farming-specific restrictions in sections 67 to 70 are cumulative. Section 67 imposes the five-year rule, subject to limited relaxations, including the reasonable expectation of profit test in section 68(3).
2. Construction of section 68(3)(b). “The activities” in limb (b) means the same activities considered under limb (a): the farming or market-gardening activities carried on in the current tax year, considered as a whole and by reference to their nature and the way they are carried on. Those activities are hypothetically treated as having been carried on at the beginning of the prior period of loss. The question is whether a competent person could not reasonably have expected them to become profitable until after the end of the current tax year.
3. Limb (b), introduced by “but”, qualifies limb (a) and imposes a long-stop on the relaxation of the five-year rule. The test is objective and concerns the reasonable time required for the relevant activities to become profitable, not the competence or intentions of the individual taxpayer. The Court approved the formulation adopted in Scambler v HMRC [2017] UKUT 0001 (TCC).
4. The “hobby” sub-heading is only a guide to the provisions. It does not confine them to hobby farmers. Headings may assist construction, but the statutory wording and structure govern. The Court applied a purposive approach based on the language and purpose found in the statute.
5. The First-tier Tribunal’s finding that the business had a 17-year route to profitability was a finding of mixed fact and law based on a misconstruction of section 68(3)(b). It was therefore not binding on the Upper Tribunal. The evidence did not answer the statutory question for the current-year activities, and Mr Naghshineh was not entitled to relief for any of the five years claimed.

1. Court of Appeal (Civil Division): dismissed Mr Naghshineh’s appeal and upheld the Upper Tribunal’s construction of section 68(3)(b).
2. Upper Tribunal (Tax and Chancery Chamber): allowed HMRC’s appeal from the First-tier Tribunal and denied sideways relief: [2020] UKUT 0030 (TCC).
3. First-tier Tribunal: allowed Mr Naghshineh’s appeal against HMRC’s denial of sideways relief.