Clavis Liberty 1 LP (acting through Cowen)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 18 April 2016 |
| Neutral Citation | [2016] UKFTT 253 (TC) |
| Date | 18 April 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Walters QC, Elizabeth Bridge
Andrew Thornhill QC and Jonathan Bremner, appeared for the Appellant
David Goy QC and Imran Afzal, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax – Tax avoidance scheme – Partnership purchasing rights to dividends and receiving dividends – Whether dividends are excluded from the computation of income of the partnership for tax purposes giving rise to a loss – Income and Corporation Taxes Act 1988 ICTA 1988, s. 730 – Held no – Whether partnership trading in short-dated securities – Held yes – Whether the purchase of dividend rights and receipt of dividends were transactions in the course of that trade – Held no – Whether certain fees in respect of tax advice were a deductible trading expense – Held no – Appeal dismissed.
The First-tier Tribunal found that a tax avoidance scheme designed to fall within ICTA 1988, s. 730 and thereby protect the recipient of a dividend from a tax charge did not succeed.
The appellant was a limited partnership (acting through one of the former members of the partnership) registered in Jersey established for the purpose of making a profit other than by means of investment principally through the acquisition of short dated fixed income receivables, dividends and the rights to receive dividends … An information memorandum issued to intending subscribers explained that the partnership expected to incur trading or tax losses in the first year of operation that would be allocated to the individual partners, enabling them to write off up to 100% of their initial expenditure. The following steps then took place:
Over 100 individuals were admitted to the partnership (total capital subscription in excess of £62m), each making an initial contribution in cash with the majority of their investment left outstanding as a loan.
SG Hambros (Channel Islands) Ltd (SCHCI) made available to the partners a loan facility of £61m for up to 60 days.
In the first accounting period (14 March 2006 to 5 April 2006), four acquisitions were made. The first three trades were in US Treasury bills and commercial paper, all resulting in small profits. The fourth was an acquisition (for £59,958,000) from Dickens Ventures Ltd (Dickens), a company incorporated in the British Virgin Islands, of dividend rights in Helios Ltd (Helios), a company incorporated in the Cayman Islands and controlled by its sole director, SG Hambros Trust Company Ltd. The dividend of £60m was received on 5 April. Helios was able to make the dividend payment as a result of a capital contribution from Dickens that was treated as share premium available for distribution. Dickens funded the capital contribution by a loan that was repaid using the proceeds of the sale of rights.
In the next period (6 April 2006 to 18 May 2005) 14 further acquisitions were made of short-dated commercial paper.
On 19 May 2006 all the limited partners sold their interests in the partnership to Pirouet Investments Ltd (Pirouet), that also had an address in the British Virgin Islands, for consideration equal to the outstanding loan due by the partners to SGHCI.
In the subsequent periods up to 30 April 2007 a lower level of trade took place.
The partners claimed their share of the trading loss for the period from 14 March 2006 to 5 April 2006 that they contended arose because the dividend from Helios was treated as accruing to Dickens (under former ICTA 1988, s. 730) and not to the partnership.
The First-tier Tribunal (FTT) considered the following arguments on behalf of HMRC.
They did not agree with the contention that the partnership was not trading in the period to 6 April 2006, considering that on the facts the transactions could be interpreted as either trading or investment, but the partnership's declared intention of making a profit other than by means of investment led them to the conclusion that it was trading.
They accepted the argument that the purchase of the dividend rights in Helios was not a trading transaction because, applying Ramsay, it was a single composite transaction designed to obtain a tax advantage and on the authority of Lupton (HMIT) v FA & AB Ltd TAX(1971) 47 TC 580 was therefore not a trading transaction.
They also agreed with the argument that, as the primary purpose of ICTA 1988, s. 730 was tax avoidance, the fact that it deemed income to arise to a person other than the recipient could not be taken to imply that the actual recipient of the income was protected from a tax charge. Moreover, applying the Ramsay principle, they did not consider that there had been any real sale of rights to the dividends by Dickens that could fall within s. 730(1).
Finally, as the transaction involving the purchase of the dividend rights in Helios was not a trading transaction, it followed that the fees for tax advice relating to that transaction were not deductible as a trading expense.
The Tribunal was considering what was clearly a tax avoidance scheme and, in addition to citing well-known cases such as Ramsay, they also cited with approval the comments of Lord Reed in UBS AG v R & C Commrs TAX[2016] BTC 11 (a case heard by the Supreme Court after this hearing) that, where a provision had been introduced for anti-avoidance purposes, it self-evidently makes it difficult to attribute to Parliament an intention that it should apply to schemes which were carefully crafted to fall within its scope, purely for the purposes of tax avoidance.
[1] This is an appeal by Mr D J Cowen, a former member of the limited partnership known as Clavis Liberty Fund 1 LP (the Partnership), against a closure notice, dated 1 February 2013, issued to Mr Cowen as successor to the Partnership. That closure notice amended to nil, from £60,942,061, the amount of the trading loss claimed to have been sustained by the Partnership in respect of its accounting period running from 14 March to 5 April 2006.
[2] The dispute between the Partnership and the Respondents (HMRC) relates principally to the tax treatment of a dividend of £60 million paid to the Partnership by Helios Limited (Helios) on 5 April 2006. Helios had been incorporated in the Cayman Islands on 6 January 2006 and resolved, on 19 January 2006, that it would be managed and controlled from the offices in the UK of its sole director, SG Hambros Trust Company Limited (SGHTC).
[3] The Partnership's case is that, by virtue of section 730 Income and Corporation Taxes Act 1988 (ICTA), that dividend of £60 million, although actually received by the Partnership, is deemed to be the income of Dickens Ventures Limited (Dickens), a company incorporated in 2004 in the British Virgin Islands, because the right to receive it was sold to Helios by Dickens without any sale of the shares, in respect of which the dividend was paid. Those shares were owned and retained by Dickens. HMRC submit that section 730 ICTA does not have the effect for which the Partnership contends.
[4] The Partnership has also claimed a trading deduction for a fee of £761,363.45 in respect of tax advice, rendered by Mercury Tax Strategies Limited (Mercury) in an invoice dated 15 March 2006. This deduction has also been disallowed in the closure notice amendment.
[5] The appeal was conducted on the basis that four issues arise for our determination. They are: (1) was the Partnership carrying on a trade in its accounting period ended 5 April 2006?; (2) if so, were the particular transactions claimed to produce the loss (namely the transactions by which the Partnership arranged to receive the dividend from Helios) trading transactions?; (3) does section 730 ICTA have the effect claimed by the Partnership?; and (4) if the Partnership was trading, were the fees in respect of tax advice paid to Mercury deductible in computing the profit/loss of the trade?
[6] We received a Witness Statement from Mr Christopher Derricott, Chief Executive of Curzon Capital Limited (Curzon), investment adviser to the Partnership. Mr Derricott gave oral evidence and was cross-examined by Mr Goy QC, for HMRC. We also received a witness statement from Mr Andrew Fitton, presented by the Partnership as an expert witness able to assist the Tribunal in determining whether the Partnership's business strategy could be considered to be a valid trading strategy. Mr Fitton also gave oral evidence and was cross-examined by Mr Goy.
[7] We also had a Witness Statement from Mr Terence Mowschenson QC (an expert witness instructed by the Partnership) dealing with certain matters of Cayman Islands law. Mr Mowschenson's evidence was accepted by Mr Goy and he was not called to speak to his statement.
[8] We should mention that the Partnership had attempted to obtain evidence from Mr Simon Young, Managing Director of Sanne Trust Company Limited (Sanne) and from Mr Peter Machon, a director of Sanne. (Sanne was appointed by the General Partner of the Partnership, Clavis Liberty 1 G.P. Limited (the General Partner), to be the administrator of the Partnership.) The Tribunal did issue witness summonses to these two individuals, neither of whom is resident in the UK, but subsequently set the summonses aside. This occasioned satellite litigation in this appeal, ultimately resulting in a decision of the Upper Tribunal (Warren J) given on 12 February 2015 (under reference [2015] BTC 506) whereby the Partnership's appeal was dismissed, Warren J holding that the Tribunal had no jurisdiction to summons Mr Young and Mr Machon.
[9] We also had before us extensive documentation to which we shall make reference as appropriate.
[10] From the evidence, we find facts as follows.
[11] The Partnership was registered in Jersey under the Limited Partnership (Jersey) Law 1994 on 9 March 2006. It was established by an agreement dated 14 March 2006 (the Limited Partnership Agreement) between the General Partner...
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