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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Naghshineh v Commissioners for HM Revenue and Customs [2022] EWCA Civ 19 (13 January 2022) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2022/19.html Cite as: [2022] 1 WLR 3909, [2022] WLR 3909, [2022] EWCA Civ 19, [2022] STC 177, [2022] BTC 2 |
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ON APPEAL FROM
THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
TROWER J AND JUDGE THOMAS SCOTT
[2020] UKUT 0030 (TCC)
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE BIRSS
and
LADY JUSTICE WHIPPLE
____________________
ARDESHIR NAGHSHINEH |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS |
Respondent |
____________________
Marika Lemos and Hitesh Dhorajiwala (instructed by The Solicitor for HM Revenue and Customs) for the Respondent
Hearing dates: 15 and 16 December 2021
____________________
Crown Copyright ©
Lady Justice Whipple:
Introduction
Facts
Legislation
"(1) Trade loss relief against general income for a loss made in a trade in a tax year is not available unless the trade is commercial.
(2) The trade is commercial if it is carried on throughout the basis period for the tax year–
(a) on a commercial basis, and
(b) with a view to the realisation of profits of the trade.
(3) If at any time a trade is carried on so as to afford a reasonable expectation of profit, it is treated as carried on at that time with a view to the realisation of profits.
(4) If the trade forms part of a larger undertaking, references to profits of the trade are to be read as references to profits of the undertaking as a whole.
(5) If there is a change in the basis period in the way in which the trade is carried on, the trade is treated as carried on throughout the basis period in the way in which it is carried on by the end of the basis period.
[…]"
"The distinction is between the serious trader who, whatever his shortcomings in skill, experience or capital, is seriously interested in profit, and the amateur or dilettante" (at p 461c-d).
"35. … That requirement is looking at the aim or purpose of the relevant person, which is (primarily at least) a subjective question, rather than whether profits could reasonably be expected, which is an objective question"
"(1) This section applies if a loss is made in a trade of farming or market gardening in a tax year ("the current tax year").
(2) Trade loss relief against general income is not available for the loss if a loss, calculated without regard to capital allowances, was made in the trade in each of the previous 5 tax years (see section 70)
(3) This section does not prevent relief for the loss from being given if–
(a) the carrying on of the trade forms part of, and is ancillary to, a larger trading undertaking,
(b) the farming or market gardening activities meet the reasonable expectation of profit test (see section 68), or
(c) the trade was started, or treated as started, at any time within the 5 tax years before the current tax year (see section 69 below, as well as section 17 of ITTOIA 2005)."
"(1) This section explains how the farming or market gardening activities ("the activities") meet the reasonable expectation of profit test for the purposes of section 67.
(2) The test is decided by reference to the expectations of a competent farmer or market gardener (a "competent person") carrying on the activities.
(3) The test is met if–
(a) a competent person carrying on the activities in the current tax year would reasonably expect future profits (see subsection (4)), but
(b) a competent person carrying on the activities at the beginning of the prior period of loss (see subsection (5)) could not reasonably have expected the activities to become profitable until after the end of the current tax year.
(4) In determining whether a competent person carrying on the activities in the current tax year would reasonably expect future profits regard must be had to–
(a) the nature of the whole of the activities, and
(b) the way in which the whole of the activities were carried on in the current tax year.
(5) "The prior period of loss" means–
(a) the 5 tax years before the current tax year, or
(b) if losses in the trade, calculated without regard to capital allowances, were also made in successive tax years before those 5 tax years (see section 70), the period comprising both the successive tax years and the 5 tax years."
The Issue
First-tier Tribunal
"18. Importantly, the expression 'the prior period of loss' is defined in s68(5) and requires us to consider the reasonable expectations of the competent farmer as they would have been at the beginning of the period when the losses commenced."
"… Having established the business in 1995 the farm area increased with land purchase in 1998 and in 2000 when the business was fully established with 153 hectares being farmed. The conversion to organic production delayed the establishment of a stable business until December 2002 resulting in the first [saleable organic] harvest being 2003 and [the first] income accruing [from that harvest] in the year ending 2004.
In my opinion a competent operation running a simple system of production, with sales to stable wholesale markets, and economies of scale being employed, could reasonably expect to be making a profit from conventional crop production and livestock rearing within 3-5 years.
A more complex farming system such as organic farming with the establishment of a diverse portfolio of enterprises, combined with the development of short supply chains direct to end consumers and limited opportunities for economies of scale, where diversification and continual expansion are combined with retailing, a competent farmer could reasonably expect to be making a profit in 10 years.
Where markets become unstable through forces beyond the control of the business, which necessitate production realignment and enterprise simplification and re-organization, a competent farmer could reasonably expect to be making a profit within 3 years from enterprises after restructuring."
"35. He had said that starting in 1998, when the additional 220 acres were acquired, it would take two years to achieve the conversion to organic status and a further two years to obtain full organic certification. The first fully organic harvest from this land would then be in 2003, with the profit from that harvest accruing in 2004. It would then take until the end of 2012 before he would expect a profit to accrue from the farming activities as a whole. He also clarified that his use of the words "within 10 years" in his report should be taken to read that he would not expect profits until after the end of that period."
"39. We must therefore consider the thinking of the competent farmer as at 31 March 1995. We are required by the legislation to work on the basis that the competent farmer was planning to carry on the same activities as were carried on by Mr Naghshineh in the years under consideration. In summary these plans must therefore have included:
(1) The acquisition of more land in order to achieve the scale necessary for profitability,
(2) The conversion of all the land to organic status,
(3) Producing a wide range of farming produce, and
(4) Selling farm produce directly to the consumer.
40. Applying Mr Waterfield's timescales to these activities we consider it reasonable to assume that the competent farmer's timescales would have included:
(1) Finding and acquiring the necessary land; three to five years,
(2) Conversion of the land to organic status; four years,
(3) Producing a wide range of farming produce; four to ten years,
(4) Selling farm produce directly to the consumer; four to ten years, and
(5) Achieving profitability; ten years after the land had been converted to organic status.
41. This would mean that profits would not have been expected until after the end of 2012.
42. We therefore find that Mr Naghshineh did indeed fulfil the second test in all years up to and including 2012."
Upper Tribunal
"32. The parties suggested that paragraph [40] should be read as a finding that as at the beginning of the prior period of loss the competent farmer would not have forecast profits for at least 17 years. That figure results if one assumes that:
(1) The total minimum forecast period is three years for acquiring land, plus four years for conversion to organic status, plus ten further years for achieving profitability.
(2) Items (3) and (4) run concurrently with item (2).
(3) Where a range is specified, one takes the lower figure.
33. We agree that that is the most plausible interpretation of paragraph [40], and one which supports the conclusion reached by the FTT. We have therefore assumed in our decision that this is indeed how the FTT's decision should be interpreted. It is, however, unfortunate that both the parties and this Tribunal should have to unpick and deduce the essential reasoning in this way."
"39. In our opinion, the test operates as follows. First, the activities actually carried on in each year of loss—in this appeal each of the five tax years from 2007/08 to 2011/12 inclusive—must be determined. Second, one must then assume that those activities were being carried on at the beginning of the loss period (discussed below but found by the FTT to be 31 March 1995). Having made that assumption, one must ask how long a competent farmer at 31 March 1995 would have expected it would take for those activities to become profitable. In answering that question, the competent farmer must "have regard to" the factors mentioned in section 68(4). Only if the competent farmer can say "it would have taken until after the end of the relevant loss year", and only if he could not reasonably have reached a contrary view, is the test in section 68(3)(b) satisfied. While applying the test of expectation as at 1995 may seem harsh, we note that section 68(3) refers specifically not to a competent person at that time but to "a competent person carrying on the activities at the beginning of the prior period of loss" (our emphasis).
40. With this approach in mind, our conclusions in relation to the competing submissions of the parties are as follows. First, the question of whether it is right or wrong to take account of preparatory or planning steps in relation to the trade is the wrong question. The operative question is "what were the activities as actually carried on in a particular loss year?" If, for instance, by a particular loss year as a matter of fact insufficient land had been acquired to operate the activities in that year profitably, that would inform any assessment to be made under section 68(3)(b), and if as a matter of fact the contrary was the case, that would similarly inform any assessment. But that would be so not because of a principle that planning or preparatory steps are or are not relevant, but because of the activities in fact carried out in that year. Second, it is essential in applying the test not to adopt a general categorisation of the activity carried out over a period of several years, such as "organic farming", "stud farming" or "conventional farming", but to consider the activities actually carried out in each tax year of loss. Not only may the activities change radically in nature (as they did in this appeal when the farm was eventually converted from mixed-use organic to conventional farming), they may well change more gradually. If, for instance, one takes HMRC's practice of generally accepting that stud farming takes 11 years to become profitable from the start of trading, then the answer to the question posited by section 68(3)(b) is likely to differ if the loss year occurs 10 years after the trade begins rather than 1 year after. Put another way, the test is dynamic and not static in nature."
"41. … The legislative code in this area seeks to reconcile a number of objectives, including a 'longer period of grace' than 5 years for sideways loss relief in respect of farming activities which by their nature or structure can reasonably be expected to take longer than normal to come to profit".
"44. According to the expert evidence on which the FTT based its decision, the four-year process of converting the land to organic status by 2002 would have led to the first fully organic harvest in 2003, with profit from the harvest in 2004. It would then take at least 10 years following conversion to organic status for the venture to become profitable: [34], [35], [40] of the decision. On the basis of these facts, by 2007/08 the activities actually carried on in that year were (mixed-use) organic farming, the process of conversion having been completed some years previously. So, if the competent farmer had been assumed to be carrying on those activities in 1995, he would reasonably have expected them to become profitable (accepting for this purpose the expert evidence) by the early 2000s, being 10 years after a conversion to organic status which had occurred some years previously. Even if the competent farmer could reasonably have expected the profitability not to arise until 10 years after 1995, that would still have been before the first period of loss under appeal."
The Matters for Determination
i) What is the proper construction of the section 68(3)(b)? Within that overarching issue, there are a number of sub-issues:
a) Is the sub-heading to sections 66-70 which refers to "hobby" farmers relevant to construction?
b) How should section 68(3)(b) be construed, based on its language, context and statutory purpose?
c) What are the circumstances in which reference to the predecessor legislation may be made and do those circumstances exist here?
d) If reference is permitted to the predecessor legislation, what, if anything, does that reveal?
e) What does previous tribunal authority on the issue of construction of section 68(3)(b) show?
Construction of Section 68(3)(b)
The "hobby farmers" sub-heading
Language, Context and Purpose
Predecessor legislation
"96. … An important part of the objective of a consolidating statute or a project like the Tax Law Rewrite Project is to gather disparate provisions into a single, easily accessible code. That objective would be undermined if, in order to interpret the consolidating legislation, there was a constant need to refer back to the previous disparate provisions and construe them. … However, where, after undertaking such an exercise, a provision which falls to be applied is found to be ambiguous, a subordinate presumption comes into play, namely that it is presumed that there was no intention to change the meaning of the provision which has been repeated in the same language in the consolidated code. In such circumstances, it may be relevant to try to determine the meaning of the relevant provision by looking to see what it meant when it was previously enacted: see [Farrell v Alexander][1977] AC 59 at 73B (Lord Wilberforce), 84D-H (Lord Simon of Glaisdale) and 97B (Lord Edmund-Davies)."
"(3) [This section] shall not restrict relief for any loss or for any capital allowance, [in any case] —
(a) [where] the whole of the farming or market gardening activities in the year next following the prior five years are of such a nature, and carried on in such a way, as would have justified a reasonable expectation of the realisation of profits in the future if they had been undertaken by a competent farmer or market gardener, but
(b) [where], if that farmer or market gardener had undertaken those activities at the beginning of the prior period of loss, [that farmer or market gardener] could not reasonably have expected the activities to become profitable until after the end of the year next following the prior period of loss."
Previous Tribunal Cases
"Looking at the activities in [the current year], and taking account of the nature of the activities and the way they are carried on, I would reasonably have expected them to become profitable at some stage, but if you had asked me [at the beginning of the prior period of loss] to look at those [current year activities] in the same way, I could not reasonably have expected them to become profitable until after the end of [the current year]."
Conclusion on Statutory Construction
Disposal on the Facts
Conclusion
Lord Justice Birss:
Lord Justice Green: