Artificial losses

Icebreaker 1 was a limited liability partnership formed in February 2004 with a view to conducting a trade of film distribution.

In April 2004 six individuals joined the partnership contributing capital of £1 520 000 between them 70% of which had been funded by non-recourse loans advanced by Bank of Scotland.

The partnership submitted accounts for a one-day accounting period and claimed virtually all of its expenditure as a trading loss for the period. This sum could then be used by the individual members of the partnership to set against other income.

HMRC opened an enquiry into the return and eventually issued a closure notice reducing Icebreaker 1’s losses from £1 491 816 to £11 900.

The partnership appealed.

The First-tier Tribunal concluded that most of the losses claimed were not allowable.

Mr Justice Nolan said the ‘reality of the proposal put to intending members...