Eclipse Film Partners No 35 LLP v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 17 February 2009 |
| Date | 17 February 2009 |
| Court | Special Commissioners |
special commissioners decision
Edward Sadler
Jolyon Maugham, counsel, instructed by DLA Piper UK LLP, for the Applicant
Victoria Wakefield, counsel, instructed by the General Counsel and Solicitor to Her Majesty's Revenue and Customs, for the Respondents
Closure notice - application for direction to close enquiry into tax return - limited liability partnership - Taxes Management Act 1970 section 28Bs. 28B Taxes Management Act 1970 - direction for closure within three months
A special commissioner directed that a closure notice be issued within three months in respect of an inquiry into the taxpayer's return where, on the evidence, he was not satisfied that there were reasonable grounds for not issuing a closure notice as required by TMA 1970, Taxes Management Act 1970 section 28Bs. 28B.
The taxpayer was a limited liability partnership with approximately 240 members which had entered into certain transactions in relation to the licensing and distribution of film rights, and was subject to an enquiry by HMRC into its tax return for the tax year ended 5 April 2007. The taxpayer applied to the special commissioners under TMA 1970, s. 28B for a direction that HMRC should issue a closure notice in relation to that enquiry within a specified period. The taxpayer considered that HMRC had sufficient information to enable them to issue such a closure notice. HMRC took the view that they required more time to gather and then to consider further information before they were in a position to complete their enquiries and to inform the taxpayer of the conclusions they had reached, with any amendments they proposed to make to the taxpayer's tax return. Taxes Management Act 1970 section 28BSection 28B required a direction to be given unless the tribunal was satisfied that there were reasonable grounds for not issuing a closure notice within a specified period.
Shortly before 5 April 2007 the taxpayer had entered into a complex series of transactions whereby it obtained a licence from a US corporation for a period of 20 years of the rights to distribute two films, and sub-licensed the distribution rights in those films to another US entity. The taxpayer paid approximately £500m as consideration for the licence to distribute the films, and under the sub-licence the taxpayer was entitled to receive annual fixed royalties and further royalties contingent upon the earnings from the films. The production costs of the two films were, in aggregate, approximately £79m. The taxpayer was financed by its members, who contributed capital to the partnership.
Prior to 5 April 2007, the taxpayer made a payment (expressed to be by way of loan on account of anticipated profits) to the members of an aggregate amount of approximately £292m. On 11 September 2007, the taxpayer filed its tax return for the tax year ended 5 April 2007. That return showed no profit and no loss. HMRC gave notice under TMA 1970, Taxes Management Act 1970 section 12ACs. 12AC of their intention to enquire into the taxpayer's partnership tax return for the year ended 5 April 2007. By reason of TMA 1970, Taxes Management Act 1970 section 12AC subsec-or-para 6s. 12AC(6) such notice of enquiry was also treated as the giving of notice of enquiry to each member in relation to his tax return for that year.
The taxpayer applied to the special commissioners on 6 August 2008 for a direction requiring HMRC to issue a closure notice. HMRC indicated that they wished to oppose the application as third party requests were outstanding; further information requests might be required; requests from a foreign fiscal authority were outstanding; and HMRC would need to appoint counsel to advise further.
Whether in all the circumstances it was appropriate to issue a closure notice.
The special commissioner (Edward Sadler) (granting the application) said that the provisions of TMA 1970, Taxes Management Act 1970 section 28Bs. 28B were constructed so as to produce a reasonable balance, given the different interests of HMRC and the taxpayer. It was implicit in the powers given to the general or special commissioners to give a direction requiring the issue of a closure notice, and was part of that reasonable balance, that a closure notice could be required notwithstanding that the officer had not pursued to the end every line of enquiry or investigation - what was required was that he should have conducted his enquiry to a point where it was reasonable for him to make an informed judgment as to the matter in question, so that, exercising such judgment, he could state his conclusions and make any related amendments to the taxpayer's return.
In this case it was clear that the enquiry was concerned with the claim of the members of the taxpayer for tax relief for a payment (which they contended was by way of interest on borrowings) of approximately £292m, where the amount of tax relief claimed was £117m. The only issue touching upon the taxpayer and its tax return was whether, for the three days to 5 April 2007, it was carrying on a trade with a view to profit, for that was a requirement if interest paid on a loan applied in contributing money to a limited liability partnership by way of capital or advance was to be eligible for tax relief under the provisions of ICTA 1988, Income and Corporation Taxes Act 1988 section 353 section 362ss. 353 and 362.
The issue of whether or not the taxpayer was carrying on a trade with a view to profit for those three days was a matter of little significance or even indifference in relation to the tax year under review. Moreover, given the relationship between a partnership and its partners a pragmatic approach was required, recognising an alignment or correspondence, in a broad sense, of the interests of the partnership with those of its partners or members.
The burden was on HMRC to show that there were reasonable grounds for not issuing a closure notice within a specified period. The issue identified for enquiry was that of the tax relief claimed by the members on their borrowings made to invest partnership capital in the taxpayer. The taxpayer had given every assistance to HMRC in the enquiry, consistent with its desire to have matters resolved as speedily as possible, so that it was concluded, or could proceed to an appeal and to a final determination by that route. It had volunteered documents and information from the outset and had for the most part responded fully and promptly to subsequent requests. From the day the taxpayer filed its tax return HMRC had had most of the documents and ancillary papers relating to the transactions in which the taxpayer was involved. Those documents in themselves should have been sufficient for HMRC to come to a provisional view, by way of inference from the primary facts, as to whether or not the taxpayer was carrying on a trade with a view to a profit during the relevant three-day period.
In all the circumstances, HMRC had reached a stage in their enquiries where they had sufficient information to enable them to make an informed judgment as to the matter they had identified as relevant to the taxpayer's return. Nevertheless, a three-month period of grace was appropriate before such notice was issued. That allowed HMRC time to receive and consider replies to the enquiries made under TMA 1970, Taxes Management Act 1970 section 20 subsec-or-para 3s. 20(3) notices and the further enquiries to be made. It also allowed HMRC to draw the threads of their enquiry together with time to seek the advice of counsel if they wished to do so.
1. Eclipse Film Partners No 35 LLP ("the Applicant") is a limited liability partnership which has entered into certain transactions in relation to the licensing and distribution of film rights, and is subject to an enquiry by The Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") into its tax return for the tax year ended 5 April 2007. The Applicant has applied to the Special Commissioners under Taxes Management Act 1970 section 28Bsection 28BTaxes Management Act 1970 ("TMA 1970") for a direction that the Commissioners issue a closure notice in relation to that enquiry within a specified period. The Applicant considers that the Commissioners now have sufficient information to enable them to issue such closure notice. The Commissioners consider that they require more time to gather and then to consider further information before they are in a position to complete their enquiries and to inform the Applicant of the conclusions they have reached, with any amendments they propose to make to the Applicant's tax return.
2. Section 28B TMA 1970 requires that I should give the direction applied for unless I am satisfied that there are reasonable grounds for not issuing a closure notice within a specified period. Having heard the evidence and the arguments of the parties in a lengthy hearing, I am not satisfied that there are reasonable grounds for not issuing a closure notice, and it is my decision to direct that the relevant officer of the Commissioners issue a closure notice not later than three months from the date on which this decision is released.
3. I heard evidence from Mr Nicholas John Hagan, an officer of the Commissioners working in the office of the Specialist Investigations team and responsible for the enquiry which is the subject of this application. Mr Hagan's evidence was set out in his witness statement which had exhibited to it 35 documents, for the most part correspondence and notes of meetings between the Commissioners and the Applicant's agent; correspondence and documents relating to notices served on third parties in the UK by the Commissioners under Taxes Management Act 1970 section 20 subsec-or-para 3section 20(3) TMA 1970 in relation to the enquiry; and documents...
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