Nearly a year on from the First-tier Tribunal judgement in Charlotte Macdonald v the Commissioners for HMRC, how have diversified rural businesses been impacted?
On 1 May 2025, the FTT handed down their judgement on the ‘Macdonald case.’ The case focused on whether the taxpayer, who owned and operated a woodland shoot on her 1,500-acre estate, could offset losses from the shoot against her general income. The case focused on the restrictions held within legislation which only allows loss relief if the trade is both (a) carried on a commercial basis and (b) carried on with a view to the realisation of profits.
Charlotte Macdonald had inherited the estate in 2005 and ran the shoot as part of the estate’s activities – the other activities being the operation of a biomass boiler, letting of residential properties and the letting of agricultural land (arable land on a Farm Business Tenancy and grazing land on grazing licences).
The first part of the legislative test focuses on whether the shoot activities were carried out on a commercial basis. The Tribunal was happy this part of the test was met – proper planning and administration was evident, budgeting for the year ahead was shown and regular review meetings were being held.
However, the second part of the test proved to be Macdonald’s undoing. In the case, it was noted that between 2005 and 2021 the shoot had made one single year of profit in 2014, with all other years being losses. The FTT commented that despite the taxpayer’s efforts there was no realistic prospect that income would ever exceed expenditure. Business plans and forecasts produced did not include projections or detail how/when profits would be generated.
The FTT also considered whether the shoot was part of a ‘larger undertaking’ such that the shoot could not be carried out without relying on the success of another element, e.g. the biomass boiler operation in this case.
The FTT commented that the shoot was able to operate independently and it was therefore not part of a larger undertaking. Furthermore, the FTT upheld HMRC’s view that, as there was no genuine subjective intention to make a profit in the shoot, loss relief was not allowed.
What is clear from this judgement is that HMRC are taking the view that the cumulative profit position is relevant to the legislative test. An arbitrary example might be that a new shoot business commences with large upfront costs creating losses in years 1 and 2. The shoot then makes profits in years 3-12, followed by two years of losses due to issues with weather and the head gamekeeper. If the cumulative position at year 12 is still a loss, it would appear to suggest HMRC are of the view that the losses in years 13 and 14 would not be offsetable against the business owner’s other income.
It remains to be seen whether this approach will be taken with other diversified rural businesses, such as those with house opening businesses, for example. However, the key message to the rural businesses is to ensure financial forecasts and business plans are brought up-to-date and these plans demonstrate when a business will become profitable (if it is currently experiencing periods of losses).
*the views expressed are the author’s and not ICAEW’s