The restrictions on using losses generated by a trade not carried on ‘on a commercial basis’ are often regarded as primarily existing to block taxpayers from being given tax relief for ‘hobby’ activities. Accordingly, the restrictions, although significant, are rarely an area of focus for most corporate groups – the commerciality of whose operations seems obvious. Buried in the recent lengthy decision of the First-tier Tribunal (FTT) in Scheckter v HMRC [2026] UKFTT 1280 (TC), however, is the identification of a potential bear trap, which suggests that these rules may sometimes be more relevant than is thought.
In Scheckter the taxpayer operated what was essentially regarded as a single commercial undertaking, but with activities split across two legal entities (one primarily concerned with farming and the other primarily with meat processing and retail). Although the entities were making losses, the FTT had no hesitation in accepting both the commerciality of the business as a whole and the genuine desire for each entity to make profits. Nonetheless, it concluded that the losses of one these entities were effectively forfeited because its trade failed the requirement to be carried on ‘on a commercial basis’.
That somewhat counterintuitive result flowed from the FTT’s conclusion that this test needed to be applied at the level of the relevant entity. Whilst the business of the overall ‘group’ was clearly commercial, the FTT did not think that the interactions between the two entities were wholly commercial and, on the facts of the case, that was sufficient to mean that the entity level trade had not been carried on ‘on a commercial basis’.
The FTT’s reasoning on this point suggests that trading losses of companies, otherwise engaged in clearly commercial activities as part of a group, may be at risk if the companies cannot also be shown to be dealing commercially with other group entities. In Scheckter itself, moreover, the FTT in fact only identified one aspect of the dealings between the entities which it thought uncommercial (a failure to charge for the use of a valuable brand), but this was enough to taint the characterisation of the trade. That was despite the fact that the taxpayer had considered and appropriately priced all other dealings between the entities.
The facts in Scheckter were unusual, and the case should not be taken to imply that one uncommercial feature is always sufficient to taint the whole trade. Nonetheless, it does provide a stark illustration of the potential consequences of failing to ensure that all aspects of a trade are being carried on commercially.
It is also worth noting that the FTT did not go so far as to suggest that every commercial arrangement which allowed a counterparty to make use of a brand or similar intangible asset would necessarily involve a separately identified charge for this, or even that charges of this kind could always be made. The essential problem for the taxpayer was that the entity had acted in a way which appeared uncommercial and the taxpayer was unable to demonstrate that this was in reality the result of a commercial consideration of the entity (rather than group) position. A practical takeaway from the case is therefore the value of retaining evidence of the entity-level commerciality of intra-group dealings.
The issues raised by Scheckter have a clear overlap with those usually considered by most corporate groups in the context of transfer pricing. The potential interaction between these regimes was not something the FTT needed to address, but which will no doubt occupy the minds of those considering the broader ramifications of the case. The fundamental point here, however, is that these are structured as separate regimes. This means that the fact that, say, a wholly domestic group is entitled to an exemption from transfer pricing does not straightforwardly exempt that group from the need to consider the commerciality of any loss-making trades.
In most cases, of course, it is to be expected that transfer pricing will remain the primary area of focus when considering potentially uncommercial dealings between group entities. Moreover, a robust and well-documented transfer pricing analysis will often be a key defence when addressing concerns of the kind raised by Scheckter. Nonetheless, the case is an important reminder that, in some situations at least, transfer pricing may not be the end of the story.
