Trading purpose and subjective intention govern first-year allowances where film partnership arrangements may mask a fiscal advantage.

To qualify for first-year allowances under section 41(1) of the Finance Act 1971, the taxpayer had to be carrying on a trade and the expenditure had to be incurred for a trading purpose. The Court of Appeal stated that whether a transaction is trading is a question of fact assessed by looking at the arrangement as a whole: commercial form alone is insufficient if the real purpose is to obtain a fiscal advantage. Where the objective features are equivocal, the subjective intention of the relevant taxpayer or partnership is admissible and may be decisive. The commissioners were entitled to treat the partnership's intentions, as inferred from its partners and controllers, as relevant to whether the partnership had a commercial purpose.

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Issues: Whether the partnership transactions for acquiring and exploiting the film were trading transactions entered into for a commercial purpose, and whether the subjective intentions of the partnership were relevant where the objective features of the arrangements were equivocal.

Analysis: To qualify for first-year allowances under section 41(1) of the Finance Act 1971, the relevant person had to be carrying on a trade and the expenditure had to be incurred for a trading purpose. The Court held that the question whether a transaction is trading is one of fact, to be decided by viewing the arrangement as a whole. Although outward commercial features are relevant, a transaction does not become trading merely because it is structured in commercial form if its real purpose is to secure a fiscal advantage. Where the objective appearance leaves the matter equivocal, the subjective intention of the relevant taxpayer or partnership is admissible and may be decisive. The Court further held that the commissioners were entitled to treat the intentions of the partnership, as inferred from the intentions of its partners and controllers, as relevant to the issue whether the partnership itself had a commercial purpose.

Conclusion: The commissioners were entitled to conclude that the transactions were not trading transactions on the facts found, and the appeal was therefore allowed with the matter remitted for reconsideration in the light of the correct legal approach.

Ratio Decidendi: A transaction that has commercial form will not constitute trading if, on a view of the arrangement as a whole, its real purpose is to secure a fiscal advantage; where the objective features are equivocal, the subjective intention of the relevant taxpayer or partnership is admissible and may determine the issue.

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