Naghshineh v HMRC: Court of Appeal provides much-needed clarity on sideways loss relief and farming losses
Marika Lemos and Hitesh Dhorajiwala were recently successful in the Court of Appeal in what is now the leading authority on the “reasonable expectation of profit” test in section 68 of the Income Tax Act 2007 (ITA).
Where the test is satisfied, it relaxes the bar to the availability of sideways loss relief applied by section 67(2) of the Income Tax Act 2007 to ‘hobby’ farmers, after 5 consecutive tax years of loss.
The appeal turned on the meaning of the second limb of the “reasonable expectation of profit” test in section 68(3)(b) ITA. After a recent cluster of apparently conflicting decisions, the Court of Appeal (adopting the approach of the Upper Tribunal in Scambler v HMRC  UKUT 0001 (TCC)) has provided much need clarity on the purpose and on the proper interpretation of the provision: the reference to “the activities” in section 68(3)(b) ITA is a reference back to the same activities that are referred to in the first limb of the test (section 68(3)(a) ITA).
Though the construction preferred by the Court reveals the limited nature of the test, it is now also clear that it is not only the nature of the activities that may lead to a longer expected period to profitability: the way in which the activities are carried on is also relevant. The relaxation may therefore apply more widely than had previously been understood to be the case.Back to News
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