Farmer denied £1.5m of loss relief
An organic farm that made losses for 17 years was judged not to have a reasonable expectation of profit by the upper tribunal (UT), which overturned a first tier decision to allow sideways loss relief.
In 2018, the first tier tribunal (FTT) allowed Ardeshir Naghshineh [TC06631] to claim sideways loss relief which arose from his farming business for the five tax years 2007/8 to 2011/12 (inclusive). The losses for those years amounted to almost £1.5m in total.
The FTT granted HMRC permission to appeal to the Upper Tribunal (UT) [UT/2018/0129].
Facts of the case
In January 1995 Naghshineh purchased Salle Moor Hall in Norfolk (the farm) with around 75 acres of surrounding agricultural land. At the time of purchase the estate was managed as a conventional working farm.
During the years with which the appeal was concerned, the owner extended the farm to 438 acres.
In 2007, a general manager was hired to oversee the farm’s operation, but by 2010 costs had run out of control under his direction and he was made redundant.
Early on, Naghshineh decided to convert the farm to organic production and the farm operated on that basis until 2009/10, when it reverted to non-organic production.
The farm generated losses in all years since it was acquired by Naghshineh, until 2012/13, when it became profitable. The farm has been profitable every year since then.
Sideways loss relief
Sideways loss relief allows trading losses to be relieved against the taxpayer’s general income in the loss-making year, the previous tax year, or both tax years (ITA 2007 s 64).
However, sideways loss relief is not available unless the trade is commercial (ie carried on a commercial basis and with a view to the realisation of profits) (ITA 2007, s 66). Naghshineh satisfied this test.
Further restrictions on sideways loss relief are in place in respect of farming or market gardening (ITA 2007 s67). Broadly, section 67 denies relief where a loss was made by the farm in each of the previous five tax years, unless the activities undertaken meet certain exemptions. One such exception is there would have been a reasonable expectation of profit if a competent person carried on the activities, as set out in ITA 2007 s68, and in particular in subsection 3.
Operation of s68(3)(b)
As the upper tribunal decision outlined, the test in ITA 2007, s68(3)(b) depends on two elements:
- What activities were actually carried on in each year of loss (in this case the years from 2007/8 to 2011/12 inclusive). Those activities must be assumed to be carried on at the beginning of the loss period (found by the FTT to be 31 March 1995, although the UT concluded that, strictly speaking, the beginning of the prior period of loss was 6 April 1994, as it must be a tax year).
- How long a competent farmer at that time (ie in 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 nature of the whole of the activities and the way in which they were carried on in the current tax year.
Reviewing FTT decision
The UT concluded the FTT’s reasoning and decision on those principles contained material errors of law.
Drawing from expert evidence in the original case, the UT found that by 2007/8 the activities actually carried on were mixed-use organic farming. If a competent farmer had been carrying on mixed-use organic farming activities in 1995, they would reasonably have expected them to become profitable by the early 2000s, according to the expert testimony.
Even if the competent farmer could not have reasonably expected to be profitable until 10 years after 1995, that would still have been before the first period of loss under appeal. This was sufficient to deny the taxpayer’s appeal.
Consequently, the UT overturned the FTT and found in favour of HMRC, refusing Naghshineh’s appeal for all years.
It is worth noting that the “reasonable expectation of profit” test at ITA 2007 s 68 is an objective test. It considers the reasonable expectation of a hypothetical competent farmer, and not the actual farmer. Therefore, there was no requirement for the FTT or UT to judge whether the actual farmer was competent, and this was not the issue in point before the FTT or UT.