First de Sales Ltd Partnership and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 February 2018 |
| Neutral Citation | [2018] UKFTT 106 (TC) |
| Date | 28 February 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0106 (TC)
Judge Jonathan Richards
David Ewart QC, Zizhen Yang and Ben Elliott instructed by Reynolds Porter Chamberlain LLP, appeared for the appellants
Aparna Nathan, instructed by the General Counsel and Solicitor to HM Revenue & Customs, appeared for the respondents
Procedure – Application to strike out – Whether appeals have a reasonable prospect of success – No – Appeals struck out – Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 8.
The First-tier Tribunal (FTT) struck out the appellants' appeals, holding that they had no reasonable prospect of success.
The appellants were partnerships or limited liability partnerships (LLPs) who had entered into arrangements disclosed under the disclosure of tax avoidance schemes (DOTAS) provisions in FA 2004, Pt. 7. Pursuant to those arrangements, the appellants all made significant payments which were contractual consideration for specific individuals granting restrictive undertakings and claimed to be entitled, in their partnership tax computations, to a tax deduction for those payments.
HMRC opened enquiries into all appellants' tax returns and, on conclusion of those enquiries, issued closure notices on the basis that the payments were not deductible.
It was common ground that the appellants' appeals could not succeed unless they established that the payments were, at least in part, deductible.
HMRC submitted that there was no reasonable prospect of the appellants establishing that the payments were deductible and therefore applied to strike out the appellants' appeals on the grounds that they had no reasonable prospect of success pursuant to the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 8(3).
The question for the FTT was essentially whether the appellants had a reasonable prospect of establishing that, by virtue of ITTOIA 2005, s. 69 or CTA 2009, s. 69, they were entitled to a deduction for all or part of the sums paid pursuant to the deeds of restrictive undertaking. Its task was to construe and apply ITEPA 2003, s. 225 and it therefore focused its attention on how that provision should be construed and then applied to the undisputed facts. The FTT's overall conclusion on the question of construction of s. 225 was that there was no reasonable prospect of the appellants establishing that the payments were “in respect of” restrictive undertakings unless they could establish that there was a “real-world” connection between the payments and the undertakings, which the FTT decided there was not.
The FTT's overall conclusion was that the appeals had no reasonable prospect of success and it decided to exercise its discretion to strike them out.
The FTT considered the relevant legislation and facts of the case, and decided that there was no reasonable prospect of the appellants establishing that they were entitled to a deduction for all or part of the sums paid pursuant to deeds of restrictive undertaking. As it was HMRC's disallowance of the these payments that was under appeal it decided to use its discretionary power to strike the appeals out.
[1] The appellants are partnerships or limited liability partnerships (“LLPs”) who have entered into arrangements disclosed under the provisions of Part 7 of Finance Act 2004 that relate to the disclosure of tax avoidance schemes (“DOTAS”). Pursuant to those arrangements, the appellants all made significant payments which were contractual consideration for specific individuals granting restrictive undertakings and claimed to be entitled, in their partnership tax computations, to a tax deduction for those payments.
[2] HMRC opened enquiries into all appellants' tax returns and, on conclusion of those enquiries, issued closure notices on the basis that the payments were not deductible. A number of matters are in dispute. However, it was common ground before me that the appellants' appeals cannot succeed unless they establish that the payments are, at least in part, deductible. HMRC submit that there is no reasonable prospect of the appellants establishing this and therefore have applied to strike out the appellants' appeals on the grounds that they have no reasonable prospect of success.
[3] In this section, I will not make detailed findings of fact not least since, during the hearing, I heard no live evidence and there was no opportunity for the appellants' witness evidence to be challenged. Therefore, the description below is highly abbreviated, is based on facts which I understand to be uncontroversial (at least for the purposes of the strike out application) and does not set out full details of the complicated arrangements to which all appellants were party. The focus is on the arrangements from which the disputed tax deductions are said to arise.
[4] First de Sales Limited Partnership (“FDS”) is a limited partnership formed under the law of the Cayman Islands. Its limited partners include UK resident individuals liable to income tax.
[5] In September 2009, FDS entered into an agreement with Inspire Editorial Services Ltd (“Inspire”), a company resident in the Cayman Islands, under which Inspire agreed to provide certain editorial services to FDS. For the purposes of the strike-out application, the parties proceeded on the basis that, at relevant times, FDS carried on a profession of creative writing. FDS's creative writing profession was small in scale. HMRC's Statement of Case stated that it was agreed that the income from the profession was £468 in 2010–11, £671 in 2011–12, £761 in 2012–13 and £293 in 2013–14. I have proceeded on the basis that, small though it was, the activity was nevertheless a profession for income tax purpose.
[6] On 23 September 2009, FDS and Victoria Murray, a resident of Jersey, entered into an employment contract under which Ms Murray agreed to act as an administrations manager for FDS for an annual salary of £60,000. Her duties under the employment contract were essentially administrative and she was not required to produce original literary content.
[7] FDS published an Information Memorandum soliciting UK resident individuals to subscribe for partnership interests in FDS. The Information Memorandum referred extensively to tax advantages that an investor in FDS could hope to obtain. The first sentence of the “Opportunity” section of the executive summary of the Information Memorandum stated:
The First De Sales Limited Partnership has been structured to provide an expected tax advantage to UK resident and/or ordinarily resident individuals (regardless of their domicile) who join the Partnership as Limited Partners.
The Information Memorandum also described FDS's creative writing business and gave information on the UK book industry.
[8] UK resident individuals subscribed for partnership interests in FDS. FDS also obtained funding by way of loan.
[9] On 1 October 2009, a Deed of Restrictive Undertakings was entered into between FDS, Victoria Murray and Inspire. Pursuant to that deed, Victoria Murray gave undertakings to FDS that broadly restricted her from being involved in a business that competed with FDS, or from soliciting clients or suppliers of FDS, for a period of six months after her employment with FDS ceased. FDS agreed to pay £170,362,076 to Inspire as consideration for Victoria Murray giving the restrictive undertaking.
[10] For the purposes of considering the application, I will proceed on the basis that payments were indeed made pursuant to the Deed of Restrictive Undertaking.
[11] Section 225 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) deals with the income tax treatment of payments for restrictive undertakings from the perspective of the recipient of such payments. It provides, relevantly, as follows:
(1) This section applies where–
- an individual gives a restrictive undertaking in connection with the individual's current, future or past employment, and
- a payment is made in respect of–the giving of the undertaking, orthe total or partial fulfilment of the undertaking.
(2) It does not matter to whom the payment is made.
(3) The payment is to be treated as earnings from the employment for the tax year in which it is made.
…
(8) In this section “restrictive undertaking” means an undertaking which restricts the individual's conduct or activities.
For this purpose it does not matter whether or not the undertaking is legally enforceable or is qualified.
[12] Both Ms Murray (the employee) and Inspire (the recipient of the payment) are resident outside the UK. Therefore, for the purposes of the strike out application, it was common ground that s225 of ITEPA could not impose a UK tax liability on either Ms Murray or Inspire. However, FDS argues that the requirements of s225 are nevertheless met and that therefore, s69 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), which deals with the position of a person paying for restrictive undertakings, is engaged. Section 69 provides relevantly as follows:
(1) In calculating the profits of a trade, a deduction is allowed for a payment–
- which is treated as earnings of an employee by virtue of section 225 of ITEPA (payments for restrictive undertakings), and
- which is made, or treated as made for the purposes of section 226 of that Act (valuable consideration given for restrictive undertakings), by the person carrying on the trade.
(2) The deduction is allowed for the period of account in which the payment–
- is made, or
- is treated as made for the purposes of section 226 of ITEPA
[13] FDS considers that, at the time it made the payment, it was carrying on the profession of creative writing. Section 56...
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