Clavis Liberty Fund 1 LP (acting through Cowen) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 October 2017 |
| Neutral Citation | [2017] UKUT 418 (TCC) |
| Date | 19 October 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 418 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Mann
Andrew Thornhill QC and Jonathan Bremner, instructed by M&S Solicitors Ltd appeared for the appellant
Michael Gibbon QC and Imran S Afzal, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondent
Income tax – Tax avoidance scheme – Partnership purchasing rights to dividends and receiving dividends – 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 Upper Tribunal (UT) dismissed the taxpayer's appeal against a First-tier Tribunal (FTT) decision that a tax avoidance scheme designed to fall within ICTA 1988, s. 730 and generate an income tax loss did not succeed.
The claimed loss arose out of transactions undertaken by Clavis Liberty Fund LP (Clavis), a Jersey Limited Partnership. Clavis purchased the right to the bulk of dividends declared by a company known as Helios for £59,958,000. The amount of dividends to which Clavis was entitled was £60,000,000, generating a profit of £42,000. However, Clavis contended that ICTA 1988, s. 730 had the effect of deeming the dividends still to be the income of the seller and not Clavis. Therefore, Clavis claimed the cost of buying the dividends as an expense, but did not record the dividend as taxable income and this mismatch was claimed to give rise to a loss available to the partners.
Clavis had over 100 partners that subscribed over £62m to its capital. £3.5m of this came from their own funds and the balance was funded by borrowing from Hambros bank.
Helios Ltd was a Cayman Islands company incorporated by Dickens Venture Ltd (a company incorporated in the BVI). The director of Helios was an appointee of Hambros.
Schroders (another bank) lent £61m to Dickens Ventures Ltd to fund Helios so that Helios could pay the dividend. This was share premium and available for declaration as a dividend by Helios under Cayman law.
The limited partners' interests were sold to Pirouet Investments Ltd, a BVI company, around six weeks after the dividend had been received by Clavis. Pirouet was connected with the transaction as it was owned by a family trust whose ultimate beneficial owner was the managing director of Mercury Tax Strategies Ltd, the tax advisers to the scheme.
Schroders was repaid by Dickens out of the sum paid for the sale of the dividend rights in Helios together with actual dividends received from Helios and fees for facilitating the transaction. Hambros was repaid out of the sale of the partnership interests. Both banks had security over various interests throughout the transactions.
Clavis also undertook other transactions in line with its purpose of, “Making a profit other than by means of investment, principally through the acquisition of short-dated fixed income receivables, dividends and the right to receive dividends”. The FTT found that Clavis was carrying on a trade in the relevant accounting period and this point was not cross appealed by HMRC.
The following issues were the subject of the appeal to the UT:
- Was the acquisition of the Helios dividend rights a trading transaction?
- If it was a trading transaction, did ICTA 1988, s. 730 operate to prevent the dividend from being treated as income of the partnership?
- Were fees of around £761,000 paid to Mercury Tax Strategies Ltd in relation to the planning and implementation of the scheme deductible in the accounts of the partnership?
It was agreed that if the taxpayer lost the appeal on the first issue, the second issue did not arise. It was also common ground that the third issue would be determined by the outcome of the first issue.
The FTT had decided that the acquisition of the Helios dividend rights was not a trading transaction because applying WT Ramsay Ltd v IR Commrs (1981) 54 TC 101, it was a single composite transaction designed to obtain a tax advantage. Further, it considered that the principle in Lupton (HMIT) v FA & AB Ltd (1971) 47 TC 580 applied such that the transaction was so affected or inspired by fiscal considerations that it was no longer that of a trading transaction.
The UT could not criticise the approach taken by the FTT and dismissed the appeal on the first issue. It did not consider the second issue, but concluded that the appeal relating to the fees (the third issue) also failed.
The creation and acquisition of the Helios dividend rights was clearly motivated by the anticipated tax losses and even Counsel for the taxpayer had admitted that it had artificial elements. While HMRC had chosen not to contest the finding of the FTT that Clavis was carrying on a trade, the UT agreed with the FTT that Helios transaction could be distinguished as having a different nature and not being a trading transaction. The UT stated that, “The FTT so concluded on the basis of unimpeachable analysis and reasoning.”
[1] This is an appeal from a decision of the First-tier Tribunal (“FTT”) [2016] TC 05028) delivered on 18th April 2016 by the members Judge John Walters QC and Elizabeth Bridge. In it they dismissed an appeal which was technically by Mr D J Cowen, a former member of the limited partnership known as Clavis Liberty Fund LLP (“Clavis”) against a closure notice dated 1st February 2013. In that closure notice HMRC (“the Revenue”) reduced a claim to trading loss of £60,942,061 to nil.
[2] The claimed loss arose out of an artificial scheme (even Mr Thornhill QC, who appeared for the taxpayer Clavis, admitted that it had artificial elements) intended to generate a tax loss for members of Clavis (a Jersey limited Partnership) which they could then deploy in their tax affairs elsewhere. The loss was said to have been generated by the application of section 730 of the Income and Corporation Taxes Act 1988 (“ICTA”). I shall deal with the scheme below, but in essence it worked as follows. The plan of the Partnership was to buy the right to the bulk of dividends to be declared by a company known (for short) as Helios for a purchase price of £59,958,000. The amount of the dividends to which it would become entitled, when declared, would be £60,000,000, generating a profit of £42,000. The provisions of section 730 had the effect, according to the Partnership, of deeming the dividends still to be the income of the seller and not of the Partnership. If that is how the provisions work then the Partnership would bring in the cost of buying the dividend as an expense but would not bring in the actual fruit of the dividend as income. That is what is said to have given rise to the loss available to the members of the Partnership.
[3] The questions arising on this appeal are in outline as follows:
- Was the transaction in question, as outlined above, a trading transaction? HMRC contended it was not, so none of the expenditure relating to the transaction falls to be taken into account for tax purposes, thus eliminating the loss. On this appeal this was described as Issue 1 (it was Issue 2 in the FTT).
- If the answer to Issue 1 is that it was indeed a trading transaction, then an issue arose as to the operation of section 730, and in particular whether it prevented the dividend, when received, from being treated as the income of the Partnership. If it allowed the income to be so treated then the loss would not arise. This was Issue 2.
- A question arose as to whether a sum of £761,000 odd, paid by way of tax advisory fees to a concern known as Mercury, were deductible in the tax accounts of the Partnership. They were incurred in relation to the planning and implementation of the scheme which gave rise to the transaction in question. In this appeal this was known as Issue 3.
[4] Before the FTT there was a further issue (taken as Issue 1 there), namely whether any of the activities of the Partnership were trading (as opposed to investment) activities. The FTT held that the other activities were trading, and there has been no cross-appeal by HMRC on that. It therefore falls out of the picture for the purposes of this appeal. So far as this appeal is concerned it was accepted that if the taxpayer lost on Issue 1 then Issue 2 did not arise; it only arose if it were determined that the transaction in question in this case was properly viewed as a trading transaction. It was also common ground that Issue 3 was in effect automatically determined by the fate of Issue 1. If the transaction was a trading transaction then the fees were deductible as an expense. If it was not then the fees were not deductible.
[5] At the end of argument on Issue 1 I was not persuaded that the FTT was wrong in concluding that the transaction was not a proper trading transaction for tax purposes. In those circumstances Issue 2 did not arise and I decided not to hear argument on it at that point. For the reasons appearing above it was not necessary to hear separate argument on Issue 3 anyway.
[6] The details of the transaction and all the surrounding transactions appear in the FTT Decision at paragraph 11 and following. Since that detail is publicly available I will not set it all out again here. An outline will suffice for the purposes of this Decision.
[7] The transaction originated as a scheme devised by tax advisors known as Mercury. It is quite plain that the whole thing was designed to produce a substantial loss for tax purposes. A Credit Application form of S G Hambros Private Banking (created at some date before 20th December 2005) described its purpose, and the overall structure of the proposed scheme, thus:
to enable UK resident individuals to participate in the “Liberty Plan” which is a structure designed to mitigate income tax liabilities.
The funds will be immediately used to establish a...
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