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Two America's Cup teams
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America’s Cup LLP has its sails trimmed

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22nd Jun 2017
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Julie Cameron reviews a case which examined whether an LLP set up to win the America’s Cup was trading, and if so, whether its losses could be off-set.

Profit motive

It was clear this First-Tier Tribunal case of Sir Keith Mills and Team Origin LLP (TC05844), was concerned with a genuine business undertaking; there was no suggestion that tax avoidance was a motive. 

Team Origin LLP was set up by Mills as an entity for assembling a sailing team, initially to compete in the 33rd America’s Cup (AC33). The LLP would earn income through sponsorship, merchandising, and hosting rights. Mills was an accomplished businessman and amateur yachtsman, a member of, major investor in and Principal, Chairman and CEO of Team Origin. As such, “his motives, aims and purposes in relation to Team Origin were also Team Origin’s”.

Long-term view

The Team Origin business plan, created during 2007, envisaged net profits of some £32.23m, over eight years, significant losses from 2007 to 2009 giving way to profits in 2010 to 2015. Crucial to this was winning the Cup twice in succession, thus gaining the hosting income from defending the Cup twice.

Only a properly established yacht club is permitted to challenge or defend the Cup, so Team Origin entered a flexible agreement with the Royal Thames Yacht Club involving setting up a joint venture company (JVCo) owned 75% by Team Origin, profits to be distributed as decided by the JVCo. 

Losses mount up

Ongoing America’s Cup litigation in the USA forced a decision in December 2007 to scale back activities, but Team Origin continued operating and claimed trading losses for the years 2007/08 to 2010/11 inclusive, totalling almost £32.25m.

The FTT heard appeals against HMRC closure notices for the years 2007/08 to 2009/10. The tribunal considered whether the LLP was carrying on a trade and, if so, whether the trade was carried on commercially and with a view to realisation of profit. If the trade was found to be commercial, a portion of the losses generated by the LLP would be available to off-set against Mills’ general income (ITA 2007, s 64).

Racing and sponsorship

On trading, the FTT considered whether obtaining sponsorship was a trading activity, on which they concluded: “obtaining sponsorship income for a sporting endeavour is…capable of being a trading activity”.

Secondly, the FTT considered whether racing was a separate activity, not part of the trade. The FTT found that it was not separate, as it was conducted with a view to increasing prospects of success in the Cup and making sponsorship attractive.

Finally, the FTT addressed HMRC’s contention that no profit could arise to Team Origin, as that profit would have ended up in the JVCo. The FTT found this was not so, as the relevant parties were amenable to amending the JV agreement.

Overall, Team Origin was carrying on a trade throughout the periods concerned (August 2007 to October 2010).

Commerciality

The FTT then turned to ITA 2007 s66(1) and (2), which denies loss relief where a trade is not carried out on a commercial basis, with a view to realising profits.

Here Team Origin fared less well: although rejecting many of HMRC’s arguments the tribunal noted a wider test emanating from Seven Individuals v HMRC [2017] UKUT where the Upper Tribunal found that the likelihood and level of profit are central to commerciality. The FTT rejected Team Origin’s argument that commerciality hinged around how the trade was carried out and not whether it should have been carried out in the first place.

On realisation of profits, the FTT considered whether there was a subjective profit motive and the likelihood of profits being made. A lack of focus on profit, low prospect of success and expectation of modest returns, as compared to the risk and level of capital invested, were deciding factors. The FTT accepted HMRC’s contention that Team Origin was focused on winning the Cup at acceptable cost and not that of realising a profit. Loss relief would therefore be restricted by the operation of ITA 2007, s 66.

Points to note

When considering the commerciality and profit motives, the FTT placed importance on such matters as the conspicuous absence of reference to profits in plans and documents and a failure to rework the business plan as changes and uncertainties arose. This should be borne in mind by anyone setting out on a business venture which is linked intrinsically to their non-business activities.

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