This case examined whether, for group relief purposes, the trade of the loss-making company was being carried on in the relevant accounting periods with a view to the realisation of gain in the trade, or so as to afford a reasonable expectation of gain and thus was available for group relief. Sections 393A(3) and 393A(4) of ICTA 1988 (“ICTA”) were specifically in point.

Background

The taxpayer, Glapwell Football Club Limited (“GFC”) appealed against a discovery determination for the accounting period ending 29 February 2008 and against amendments to the company’s corporation tax returns for the accounting periods ended 30 September 2008 and 2009. All three appeals dealt with by the First Tier Tribunal (FTT) raised the same, single, issue: whether GFC’s losses in those periods were eligible to be surrendered by way of group relief under section 403 ICTA to GFC’s holding company.

The issue of whether GFC’s tax losses were eligible to be surrendered by way of group relief under section 403 ICTA depended on whether the losses were excluded by virtue of section 393A(3)(b) ICTA which provided that:

• “... a loss incurred in a trade in any accounting period shall not be relieved under [section 393A(1)] unless-
• (b) for that accounting period the trade was being carried on on a commercial basis and with a view to the realisation of gain in the trade ...”

Section 393A(4) ICTA applied to the interpretation of section 393A(3)(b) as follows:

“For the purposes of [section 393A(3)] above-

1. where at any time a trade is carried on so as to afford a reasonable expectation of gain, it shall be treated as being carried on at that time with a view to the realisation of gain.
2. where in an accounting period there is a change in the manner in which a trade is being carried on, it shall be treated as having throughout the accounting period been carried on in the way in which it was being carried on by the end of that period.”

The question for determination by the FTT was therefore whether the running of a football club was being carried on with a view to the realisation of gain in the trade.

Facts

The club had been run for some time by a well-known family, however, at a meeting held in early 2007 a new Chairman was appointed who had considerable experience in football management. At that same meeting, the incorporation of GFC was proposed and subscriptions were made for shares. Thereafter a due diligence report was prepared by the Commercial Manager which identified weaknesses and strengths of the club as it was then being run.

The strengths included potential for ground development and to ‘increase the 30 year lease’. Later, it transpired that the club did not have a 30 year lease but had an annual renewable licence from the local Parish council for a period of 30 years.

The Parish Council were not willing to offer anything other than the existing arrangement hence the existing annual licence remained unchanged but with the potential for a formal longer term lease application still possible in future.

As a result of the incorporation of GFC projections were prepared and a profit and loss forecast showed an anticipated rise in bar takings from the 2007/08 season to the 2009/10 season and rising takings from other income sources. Against this there were anticipated rises in expenses, in particular in players’ costs and property costs and maintenance. The net result was a forecasted deficit in both 2007/08 and 2008/09 and a forecasted surplus in 2009/10. These forecasts were accompanied by a cash flow forecast, showing that GFC would remain in funds despite the projected deficits.

During the September 2008 accounting period, GFC cited that a two-phase strategy was being developed. ‘Phase 1’ involved achieving the promotion of the first team to the next level and the acquisition of a lease to provide the security necessary in the immediate future for the first teams pitch which could eventually to be left to the junior groups when the first team transferred to a new stadium. ‘Phase 2’ would be the acquisition and development of a new stadium which would be needed once the first team secured promotion, this phase was not implemented in any practical sense at all before late 2008. Therefore by the end of the September 2008 accounting period, overall there had not been any material change in respect of implementing Phase 1, and Phase 2 had not commenced.

In early 2009 heads of terms for a 5 year lease was offered to GFC by the local Parish Council, but under strict terms. However, a 5 year term was not sufficient for GFC’S purposes because the Football Foundation required a minimum lease term of 10 years before it would consider making grants. In addition, the terms offered were deemed unsatisfactory because they did not give GFC’s first team priority for fixtures.

Later that year relations diminished when the Parish Council wrote outlining their concerns in the ongoing delay in finalising the 5 year lease and at that time advised that it had decided to offer the lease to the local junior club.

Therefore at the end of GFC’s 2009 accounting period, there was no prospect of completing the implementation of ‘Phase 1’ as originally envisaged because the required lease had not been settled. Though GFC did have a contingency plan for adapting its strategy via the prospect of a ground share agreement with another club, this arrangement later collapsed.

Nor was it clear that there was any progress on ‘Phase 2’ as there was no enforceable agreement for the acquisition of land for a new stadium, despite discussions and negotiations having taken place in relation to a site and land deemed suitable.

It was also noted that in the Directors’ Report for the financial statements for all accounting periods concerned, despite the deficits incurred, under the heading of going concern it was stated that ‘The directors and shareholders have indicated their intention to continue to support the Football Club’.

Taxpayer’s Argument

GFC contended that its trade was at all relevant times being carried on with a view to the realisation of gain in the trade, and so as to afford a reasonable expectation of gain. As with most businesses, it was argued that the venture required upfront capital and income expenditure and involved risk.

It was further argued that although actual expenditure on ‘Phase 2’ was limited and was not incurred until after the end of the 2009 period, this had little significance. Major expenditure would not have been incurred until an application for planning permission was made or prepared.

The success of the club’s first team was crucial to the success of the sports development but the business plan was not built on the team achieving unrealistic promotions. It was built on the team achieving a promotion demonstrated by the evidence to be realistic (as the team was promoted after the 2007/8 season) and then sustaining that level before achieving further promotion.

The fact that GFC made losses and that the ticket sales and bar takings were unlikely to cover the costs it incurred did not show that GFC’s trade was not being carried on with a view to the realisation of gain in the trade, because that argument failed to take into account the complete change of business plan and operation of the club.

In support of its appeal, GFC also contended that during its February 2008 accounting period more than £120,000 had been invested in physical infrastructure to meet competition requirements in respect of facilities and ground grading regulations and to attract sponsors and local support. However the financial statements in question did not provide conclusive evidence of that investment and it would appear that much of this was funded by the directors themselves.

HMRC Argument

HMRC accepted that at all relevant times GFC’s trade was being carried on on a commercial basis and they also accepted that where a trade is being carried on with a view to the realisation of gain, that gain need not be realised (or be expected to be realised) within the relevant accounting period.

However, HMRC asserted that GFC’s trade was not (on the facts) being carried on with a view to the realisation of gain in the trade, and particularly, that it was not being carried on at any relevant time so as to afford a reasonable expectation of gain. Therefore the losses made could not be surrendered by way of group relief to its holding company because there was no reasonable expectation of gain in the trade during the relevant accounting periods.

HMRC contended that ‘Phase 2’ was merely a possible idea for the distant future and that there could not have been any reasonable expectation of gain from this before the end of the 2009 period. Furthermore this was not seriously pursued because no finance was raised, no planning permission was formally sought, no grants were applied for, no building work was tendered and no academy or hotel was publicised.

HMRC also referred to the small fan base of GFC’s first team as a factor pointing to the unreasonable nature of any expectation of profit from ‘Phase 2’ and submitted that it was not reasonable to expect a village football club with an annual turnover of £70,000 to develop a £2m hotel as a part of a larger complex. The hope that profits would be derived from sales of players from the academy was also unrealistic as it had not been established where the demand for such players lay and examples of clubs at GFC’s level selling players were scant.

FTT Position

The task of the FTT was to decide whether, GFC’s trade was being carried on with a view to the realisation of gain in the trade, or alternatively, whether GFC’s trade was at those times being carried on so as to afford a reasonable expectation of gain.

Decision

The FTT explored whether section 393A(4)(a) added a further test for the relief of losses to that provided by section 393A(3) and held that whilst there was a tenable interpretation, such an interpretation would result in providing two routes to the relief of losses, one objective and one subjective. That was probably not in accordance with the intention of Parliament when the legislation was enacted and hence that argument was disregarded.

The FTT therefore interpreted the legislation in the same manner as addressed by HMRC’s submissions being that Section 393A(4)(a) applies to clarify the test in section 393A(3)(b). So the test ‘carried on with a view to the realisation of gain in the trade’ means ‘carried on so as to afford a reasonable expectation of gain in the trade’. The evidence was therefore analysed on that basis i.e. whether at the relevant times GFC was carrying on its trade so as to afford a reasonable expectation of gain in that trade.

Another point which the FTT explored was the requirement that a gain of which there is a reasonable expectation must be a gain in the same trade as the trade in which the losses sought to be relieved have been incurred. On this point, the FTT held that the trade carried on in the accounting periods in question was undoubtedly a trade of running a football club i.e. fielding the club’s first team. There was no question of GFC’s trade at those times encompassing anything else.

Nor was it necessary to decide whether GFC’s trade changed before 1 October 2009, because, as at 30 September 2009, there was no enforceable agreement for the acquisition by GFC of a site to build a new stadium nor had any enforceable option over the specific site in question been acquired.

The FTT also held, in considering the expectation of gain in the trade after 30 September 2009, that it should not assume GFC’s trade then would or could evolve to include these new profit earning elements. Therefore in reaching its decision, the FTT disregarded any expectation of future gain from those elements.

The FTT also closely examined the accounting results for the accounting periods in question and the due diligence report outlining the strengths and weaknesses of GFC. Although GFC was cognisant of the need to improve trading performance in the trade as it then was, the basis for any sustainable improvement (i.e. sufficient security of tenure for the ground on which the first team would play home matches) simply did not exist.

The FTT concluded that the trade was not being carried on at any time in the relevant periods so as to afford a reasonable expectation of gain.

The appeal was dismissed in relation to all the accounting periods concerned.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j7415/TC02904.pdf