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February 23, 2015

Trades motivated by profit or passion? – Dipak Patel v HMRC

The case of Dipak Patel v HMRC examines whether or not two trades conducted by the appellant were carried out on a commercial basis with a view to the realisation of profits, or merely as a hobby.

In reaching its decision, the Tribunal looked into Mr Patel’s business plans, the economic viability of the trades and the steps taken by Mr Patel in the production and marketing of the products.

The Facts

-          Mr Patel works full time as a psychiatric social worker, and continued to perform these duties alongside his sole trade.

-          In 2004, he started “Silver Spice”, which supplied cooking ingredients and cookery workshops to local community groups and customers.

-          In 2007, he started a separate trade known as “Art Sutra” which sold art and photographic images of Indian culture.

-          Mr Patel set off losses in both trades against his employment income in accordance with Section 64 ITA 2007.

-          HMRC opened an enquiry into his self-assessment tax return so as to refuse loss relief, on the basis that the trades were neither carried on on a commercial basis, nor not carried on with a view to the realisation of profits.

The Case

“Silver Spoon”

Mr Patel argued that although he was passionate about cooking and using authentic and ethically sourced ingredients, he intended to make a profit from the Silver Spice business. This can be indicated by the time, effort and expense put into producing and marketing products.

He put forward the following arguments:

  • He underwent formal training on a food hygiene course and took a half-day business course run by HMRC in preparation of starting the business.
  • He purchased a commercial food blender and heavy duty sealing machine in order to professionally create and package the goods in a professional manner
  • His products were sold with healthy profit margins
  • He had contracts with 5 restaurants
  • He set up a website so that he could publish recipes showing customers how to use the products and to market his goods, which included a coriander marinade, spice mix, and metal spice containers
  • Mr Patel registered for VAT and applied to register a trade mark for a logo including the words “Silver Spice”

Mr Patel began running cookery workshops for schools and local community groups. This was extended and he agreed to provide workshops in customers’ homes for between 6 to 8 individuals for a charge.

Mr Patel submitted that although making and selling the products started as a hobby, this had developed into a business and had become about making a profit, as indicated by his plans to reduce his hours as a social worker.

Despite the effort that went into the trade, Silver Spoon made a loss. HMRC argued that although Mr Patel had a website marketing his goods, there was no payment facility, therefore in reality sales were only made to local people and Mr Patel collected payment on delivery. Furthermore, Mr Patel made a conscious decision to reduce production of his best-selling products so he could focus on the cookery workshops which is inconsistent with a profit seeking motive.

 “Art Sutra”

Mr Patel had an interest in photography, and set up a website where he would upload photographs he took on his trips to India and sell downloads for £4.99. He also identified an artist in India and obtained rights to produce digital images of his work in return for a royalty.

Mr Patel failed to sell the images and Art Sutra made a loss. The expenditure incurred by Mr Patel comprised his travelling expenses to India, website design and computer memory to store images. He submitted that if Art Sutra ever did make a profit, he would have donated them to the local people in India where the photographs were taken.

The Conclusion

Mr Patel argued that throughout this period, he was trying to supplement his income and there was no other explanation for the time, effort and expense that went into creating and building the businesses.

However, the Tribunal agreed with HMRC and found that Mr Patel had never had any realistic prospect of making a profit from either trade, and must have known that fact.

The Tribunal noted that Mr Patel did not appear to have any real idea as to the level of sales he was generating, indicating that he was not really concerned about the level of sales. The income was never going to be sufficient to cover the overheads being incurred. In regards to Silver Spice, his focussing on the cookery workshops instead of the popular products suggested that the real motivation was not profit but the enjoyment he got from working with people and sharing his passion for Indian culture.

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