Daarasp LLP; Betex LLP v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 April 2021 |
| Neutral Citation | [2021] UKUT 87 (TCC) |
| Date | 13 April 2021 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 87 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Honourable Mr Justice Marcus Smith, Judge Guy Brannan
Andrew Thornhill, QC and Ben Elliott instructed by Charterhouse (Accountants) Limited appeared for the appellants
Aparna Nathan, QC and Harry Sheehan, instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs appeared for the respondent
Capital allowances – LLPs – Expenditure on software licences – Ambit of closure notices – Appeal dismissed.
The Upper Tribunal (UT) found that the First-tier Tribunal (FTT), taking into account the terms of the closure notices, was correct to consider points raised by HMRC as under appeal.
Daarasp LLP and Betex LLP (the appellants) appealed against the decision of the FTT (Daarasp LLP; Betex LLP [2018] TC 06718) that it had jurisdiction to consider the so-called “knock-out” points.
The appellants had incurred losses relating to capital allowances in respect of expenditure incurred on acquiring software licences. During an investigation, HMRC had raised a number of points, some of which were considered to be “knock-out” points in that, had HMRC been successful with regard to a particular point, the appellants would have been precluded from claiming capital allowances at all. In the closure notices, HMRC reduced the losses to £nil and stated that “of the losses claimed, only a currently unquantifiable part may be allowable”. Before the FTT, the appellants argued that the “knock-out” points were beyond the jurisdiction of the FTT as, given the terms of the closure notices, HMRC had accepted that some losses were allowable.
The UT agreed with the appellants that the FTT had erred in law in its approach to construing the closure notices: the question was what conclusions were stated in the closure notices, when correctly construed, and not whether there was any reason to accept a restricted approach, or whether a wide approach would be unfair to the taxpayer. Turning to the true construction of the closure notices, the UT rejected the argument put forward by the appellants: had HMRC accepted that the allowable loss figures lay somewhere in the range above £nil and the amounts claimed, it would have expressed the adjustment in a more nuanced way. Further, the UT found that the conclusion reached by HMRC was not inconsistent with an allowable loss figure of £nil.
In summary, the UT reached the same conclusion as the FTT, albeit by a different route, and the appeal was dismissed.
The appellants had appealed to the UT on a second ground, referred to as the “expenditure issue”. As the appellants needed to succeed on both issues for the appeal to succeed, the UT did not go on to consider the expenditure issue.
This case concerns the correct interpretation of closure notices that the UT described as “unspecific” and “uninformative”. Although HMRC won the day, clearly there are lessons to be learnt.
[1] According to the Respondent in this appeal, the Commissioners for Her Majesty's Revenue and Customs (HMRC), the Appellants – to whom we shall refer, respectively, as Daarasp and Betex and, collectively, as the Appellants – are LLPs formed in order to take part in a marketed tax avoidance scheme aimed at securing capital allowances in respect of the acquisition of information or communications technology assets (the software licence(s)) for its members. The scheme was disclosed to HMRC under the Disclosure of Tax Avoidance Schemes regime and given scheme reference number 46091087.
[2] The Appellants, for their part, say that the scheme is not a tax avoidance scheme and that it was disclosed to HMRC out of an abundance of caution.
[3] In very broad brush terms, the scheme involved:
- The establishment of an LLP (here: Daarasp or Betex), the designated members of which were involved in setting up and implementing the scheme. Individual scheme users would become members of the LLP and would fund their contributions out of a mixture of personal resources (approximately 20%) and borrowed funds (approximately 80%).
- The funds borrowed were, in each case, advanced by a bank (Hambros), various branches or associate companies of which were involved in each scheme in multiple different ways. For present purposes, the precise transactional details of Hambros' involvement do not matter.
- The LLP would use the contributed funds to acquire a computer software licence. In each case, that acquisition was complex, but in general termsA licence was acquired from the software designer by an intermediary company. In the case of the Daarasp scheme, the software in question was equity trading computer software (the Daarasp Software), the software designer was Parjun Enterprises and the intermediary company was Damats. In the case of the Betex scheme, the software in question provided on-line gambling functions (the Betex Software), the software designer was Ecoholdings Media Group Limited (Ecoholdings) and the intermediary company was Piebet.In each case, there were close links between the LLP (Daarasp or Betex, respectively) and the intermediary (Damats or Piebet, respectively).In each case, Hambros advanced a significant sum to the LLP for the purchase of the software. Daarasp acquired the software from Damats for a total consideration of £18,188,244, yet Damats only paid Parjun Enterprises £1.4 million for the licence to its software. Similarly, Betex acquired the software from Piebet for an initial consideration of £58,427,394, but Piebet paid Ecoholdings only £1.6 million.The reason for the very different levels of payment down the chain from Daarasp to Damats and from Damats to Parjun Enterprises was that Damats provided to Daarasp various guarantees as to the operating income that Daarasp would receive, whereas Parjun Enterprises provided no such guarantees. These guarantees were, in turn, themselves guaranteed by Hambros, albeit that this was conditional upon most of the money advanced by Hambros to Daarasp and paid by Daarasp to Damats being held in an account with Hambros.Similarly in the case of Betex: although the transaction was considerably more complex than that involving Daarasp, there were similar warranties from Piebet (and not from Ecoholdings) that a minimum net operating income would be payable, and similar secured guarantees by Hambros of those obligations.
- Thus, the sums paid for the licence by Daarasp and Betex respectively were paid in part and indirectly to the ultimate owner of the software licence, but in part went to fund and/or guarantee the payment of operating income under the licence each obtained from the intermediary (respectively, Damats and Piebet).
- A large proportion of the sums paid, or allegedly paid, for the acquisition of the software was placed on deposit as security for the loans made to the partners and/or the LLP.
- The LLP would in each case sustain a first-year loss equivalent to the capital allowances claimed in respect of the expenditure on the software licence. The individual members would seek to claim income tax loss relief, under sections 380/381 of the Income and Corporation Taxes Act 1988, in respect of their respective shares of the LLP's first year loss.
[4] HMRC commenced an investigation into both schemes. The investigation was prolonged and wide-ranging. The investigation included consideration of:
- Whether either Daarasp or Betex carried out a trade at the time or during the accounting period when the qualifying expenditure was incurred and whether activities were carried on on a commercial basis.
- Whether the expenditure which Daarasp or Betex claimed to have incurred could properly be treated as incurred on software licences.
- Whether any expenditure was incurred by a small enterprise within the meaning of section 45(1) of the Capital Allowances Act 2001.
- Whether the expenditure was long-life asset expenditure within the meaning of section 44(2) of the Capital Allowances Act 2001.
- Whether the anti-avoidance rule at section 215 of the Capital Allowances Act 2001 was engaged.
[5] HMRC closed the investigation into Daarasp by way of a closure notice dated 26 January 2011 (the Daarasp Closure Notice), which stated:
I have now completed my check of the Partnership Tax Return for Daarasp LLP for year ended 5 April 2004. I am sending a copy of this letter to your adviser.
That following the detailed review of the relevant partnership documents and the lengthy discussions held with James Edmond of Charterhouse (the Promoter) and their legal representative Michael Sherry, I conclude of the losses claimed only a currently unquantifiable part may be allowable.
I have amended your partnership loss figure to reflect this. The figure for your partnership loss is as follows:
- The original Partnership loss figure was £18,192,004.00
- The Partnership loss figure is now £0.00
If you disagree with our decision, you or your adviser can appeal …
[6] The closure notice in the case of Betex (the Betex Closure Notice) was in very similar terms:
I have now completed my check of the Partnership Tax Return for Betex LLP for year ended 5 April 2006. I am sending a copy of this letter to your adviser.
That following the detailed review of the relevant partnership documents and the lengthy discussions held with James Edmond of Charterhouse (the Promoter), I conclude of the losses claimed only a currently unquantifiable part may be allowable.
I have amended your partnership loss figure to reflect this. The figure for your partnership loss is as follows:
- The original Partnership loss figure was...
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