J Beacon v HMRC illustrates the standard that must be met to claim trade loss relief
J Beacon v HMRC concerned the conversion of a dilapidated villa in the hillside village of Bennabio in Italy into a letting business to guests.
When Mr Beacon acquired Villa San Rocco (the ‘villa') at a public auction, it was in a dilapidated condition. He used his own private funds, a loan from an Italian bank and a further loan from HSBC (who had approved Mr Beacon’s business plan) to fund the restoration and refurbishment of the villa.
Mr Beacon made a claim for loss relief against his general income in his self-assessment tax returns for his recorded losses during the years 2010-11 and 2011-12.
As a sole trader, Mr Beacon was responsible for the business records of his letting business.
The income tax issue
Trade loss relief against general income for a loss is only available if the trade is conducted on a commercial basis and with a view to the realisation of profits.
The tribunal cited previous cases where taxpayers have been eligible for trade loss relief, including the following:
- A taxpayer being blown off course by adverse economic circumstances within the United Kingdom which few would have predicted objectively prior to the event (Walls v Livesey).
- A businessman being severely hampered by the length of time it took to obtain a lease but nevertheless conducting trade that was commercial (Kerr (Re Grantham House) v HMRC).
Mr Beacon submitted that it was clear on the evidence that a trade was being carried on at the villa on a commercial basis and with a view to the realisation of profits.
HMRC advanced a number of arguments to deny that the loss relief could be claimed, including the following:
- Mr Beacon only purchased the villa to return it to its former glory.
- The villa would also have a domestic use as a home for Mr Beacon or his son.
- There was no business plan or clear commercial strategy.
- There was a lack of business records.
HMRC's overarching argument was that Mr Beacon's business activities at the villa did not amount to commercial trade.
The tribunal dismissed the majority of these arguments due to a lack of evidence supporting them. Interestingly, they stated that even if the villa had been Mr Beacon’s or his son’s home, this would not in itself have precluded the trade. After all, bed and breakfast establishments are still classed as commercial trades.
The tribunal also rejected the claim that there was no business plan, citing the fact that the HMRC bank loan had been obtained as a direct result of Mr Beacon's detailed projections, analysis and research.
The tribunal held that all of the evidence pointed to the conclusion that Mr Beacon was carrying on a trade at the villa of a letting business to guests during the relevant years in accordance with ordinary prudent business principles.
The tribunal further noted that Mr Beacon's business had been hit by the adverse economic circumstances following the 2008 Great Recession, and that this did not prevent him from carrying on trade on a commercial basis and with a view to the realisation of profits.
This case highlights the importance of being able to prove that a business is run to such a standard that a commercial trade exists that can be eligible for trade loss relief.