Words and Phrases - "with a view to profit"

Each appellant LLP (subject to some variation in the case of an LLP that focused on video games rather than films) had entered into agreements with an arm’s length film distributor (the “Commissioning Distributors,” or “CD”) under which the LLPs used money raised from their individual members (as to approximately 30%) and borrowed by the corporate member from the applicable CD on a limited recourse basis and supposedly contributed by it to the LLP (as to the balance of 70%), with the LLP paying its funds (net of the promoter’s fee) to a production services company (“PSC”), which produced the film supposedly as a subcontractor of the LLP. Upon completion of the film, the LLP assigned to the CD all its rights to the film and became entitled to receive a share of the receipts generated in accordance with a stipulated “waterfall.”

The First-tier Tribunal (“FTT”) had found that in legal substance, the LLP only incurred the 30% portion of the film budget that was contributed by its individual members, and was only entitled to receipts under the waterfall that were not applied to repay the limited recourse loan (the “30:30 basis”).

This quoted requirement arose under s. 863(1) of the Income Tax (Trading and Other Income) Act 2005 that a limited liability partnership is fiscally transparent if it “carries on a trade, profession or business with a view to profit," and was also relevant to s. 2(1)(a) of the Limited Liability Partnerships Act 2000, which required that the incorporation document for an LLP be subscribed by "two or more persons associated for carrying on a lawful business with a view to profit."

In making its “with a view to profit” determination, the Court noted that the following principles generally were common ground:

[S]haring profits … [is] not an essential characteristic of a partnership [citing Young v. Zahid] (para. 118).

[T]he words "with a view to profit" import a wholly subjective test. It must be the actual subjective intention or purpose of the putative partners to make profits from carrying on their trade, profession or business. (para. 119)

Other aspects of the test are uncontroversial. First, "profit" has an objective meaning. If putative partners only have a view to making what they wrongly believe to be profits, for example gross revenue, they will not have a view to profit. Second, there is no maximum period during which the partners must intend to make a profit, although no doubt the longer the period the more searching the inquiry into the real subjective purpose of the partners. Third, in broad terms, "profit" has the basic meaning of an excess of income over costs over a possibly indefinite period. It follows that the complex mosaic of generally accepted accounting practice … will generally have little part to play. Fourth … the view to profit need not be the predominant subjective purpose, but it must be part of the partners' subjective purpose. (para. 123)

The Court noted (at para. 125) that many of the above propositions were supported by Backman.

The Court further found that the UT had been unduly influenced by the fact that the LLPs' case before the FTT was founded exclusively on the basis that the LLPs had incurred 100% of the film costs and it was on that basis that tax benefits for the individual investors in the LLPs were projected - and indicated that this motivation did not detract from the FTT’s finding that “the controlling minds had a subjective view to profit in causing the LLPs to enter into the relevant transactions “ (para. 165).

Although the taxpayers succeeded on this issue, the bulk of the £1.6 billion in losses that had been claimed by the investors in these and similar LLPs nonetheless were disallowed because of an unreversed finding below that the bulk of the LLP expenditures were capital expenditures rather than being on income account.