HM Revenue and Customs v Lansdowne Partners Ltd Partnership
| Jurisdiction | England & Wales |
| Judge | The Chancellor,Lord Justice Moses,Lord Justice Patten |
| Judgment Date | 20 December 2011 |
| Neutral Citation | [2011] EWCA Civ 1578 |
| Docket Number | Case No: A3/2010/2627/CHRVF |
| Court | Court of Appeal (Civil Division) |
| Date | 20 December 2011 |
[2011] EWCA Civ 1578
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM the High Court of Justice,
Chancery Division
Mr Justice Lewison
Rolls Building
Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
The Chancellor of the High Court
Lord Justice Moses
and
Lord Justice Patten
Case No: A3/2010/2627/CHRVF
Richard Coleman (instructed by HMRC) for the Appellant
John Gardiner QC and John Brinsmead-Stockham (instructed by Pricewaterhouse Coopers Legal LLP) for the Respondent
Hearing dates : 22 —23 November 2011
Introduction
In 1998:
(1) Lansdowne Partners International Ltd ("LPIL") was incorporated in the Cayman Islands to carry on the business of an investment fund manager.
(2) Lansdowne Partners Ltd ("LPL") was incorporated in England as a subsidiary of LPIL in order to carry on such a business in England.
(3) The respondent, Lansdowne Partners Limited Partnership ("LPLP") was constituted as a limited partnership under the Limited Partnerships Act 1907 by means of an agreement subject to English Law. Its general partner is LPL, its limited partners have changed from time to time but at the material time were individuals resident in England.
(4) Lansdowne European Equity Fund Ltd ("LEEF") was incorporated in the Cayman Islands as an open ended investment company. It was also registered with the Cayman Islands Monetary Authority under the Mutual Funds Law as a regulated mutual fund but was not and is not recognised in England as a collective investment scheme under the Financial Services and Markets Act 2000.
(5) By an agreement made between LEEF (1) and LPIL (2) ("the Management Agreement") the former appointed the latter to be its manager. The Management Agreement provided for LPIL to be paid a monthly management fee and an annual performance fee calculated, in each case, by reference to the value of the underlying investments of LEEF. LPIL was authorised to delegate responsibility for the management of the underlying investments (clause 4.1) and to waive or rebate all or any part of its fees to LEEF or to any third party (Clause 7.5).
(6) By an Agreement made between LEEF (1) LPIL (2) and LPLP (3) ("the Investment Management Agreement") LPLP was appointed by the other parties thereto to be the investment manager of LEEF to provide portfolio management services in relation to its underlying investments. LPLP was to be remunerated by LPIL by such fee as might be agreed between them from time to time (clause 16.1) and might waive or rebate any part of its fees to LEEF or to any third party (clause 16.9).
From time to time thereafter LEEF invited investment in various funds by means of the issue of redeemable shares. In relation to each such issue the membership of LPLP might have changed and the detailed terms of both the Management and the Investment Management Agreements were varied. The issue with which this appeal is concerned was made in 2004 on the basis of a prospectus issued by LEEF on 31st August 2004. LEEF invited subscription for 99,998,000 shares divided into two equal classes, A and B, half of each such class being denominated in Euros and US$. The investment objective for each class was to provide investors with good absolute returns. Shares of each class were redeemable on prior notice, subject in some cases to payment of a redemption fee. The prospectus stated that LPIL was entitled to a monthly management fee of 1/12th of 1.5% of the net asset value of each class of share and an annual performance fee equal to 20% of the increase in value of the underlying investments for that year. The prospectus declared that:
"[LPIL] and [LPLP] may from time to time and at their sole discretion and out of their own resources decide to rebate to some or all investors (or their agents including the Directors) or to intermediaries part or all of Management Fees and/or the Performance Fees. [LPLP] may at its discretion rebate its share of the Performance Fee attributable to the Shares issued to it or to its partners, employees and related entities. [LPIL] shares both the Management Fees and the Performance Fees with [LPLP]."
In the course of its accounting year to 31st March 2005 LPLP received from LPIL £92,232,571 in management and performance fees. It 'rebated' to third parties the sum of £4,696,133 of which a sum in excess of £2m was 'rebated' to its limited partners, their families and trusts. The latter sum was equal to the aggregate of the performance and management fees attributable to the investments in the funds under management representing the money invested by them in the shares in LEEF and in other funds. In the partnership tax return of LPLP for the year ended 5th April 2005 the taxable income or profit of LPLP was stated to be £67,123,805. That amount did not include £2m+ repaid to the limited partners and their associates.
The partnership tax return of LPLP was sent to and received by HMRC in the third week of August 2005. There was a meeting between representatives of LPL and HMRC on 22nd February 2006 followed by correspondence between them in March 2006. No amended return was put in by LPLP under s.12ABA Taxes Management Act 1970 (" TMA") nor did an officer of HMRC give notice under s.12AC of his intention to enquire into the partnership tax return of LPLP within the time allowed by that section. That time expired on 31st January 2007. It is common ground that on 1st May 2008 HMRC first concluded that the declared profits of LPLP were insufficient because the rebates paid by LPLP to its limited partners, their families and associates had been deducted from the income of LPLP returned for tax purposes. On 27th August 2008 HMRC purported to amend the tax return of LPLP for the year ended 5th April 2005 by increasing the income or profit by £2,194,693 being HMRC's estimate at the time of the aggregate of the 'rebates' to the limited partners, their families and associates. In their covering letter of that date HMRC contended, on the authority of Mackinlay v Arthur Young McLelland Moores [1990] 2 AC 239 ( Arthur Young), that the deduction of that sum had been precluded by the terms of s.74(1)(a) Income and Corporation Taxes Act 1988 as not being wholly and exclusively laid out or expended for the purposes of the trade or business of LPLP.
LPLP appealed against the amendment so made pursuant to s.31(1)(c) TMA. They contended that the amendment should not have been made on three grounds:
(1) the sum of £2,194,693 was not part of the income or profits of LPLP liable to tax; alternatively if it was;
(2) such sum was deductible when computing the income or profits of LPLP for tax purposes; alternatively if it was not;
(3) HMRC had not been entitled to make the amendment to the partnership tax return of LPLP because it did not satisfy the condition specified in s.30B(6) TMA in that the relevant officer of HMRC could have been reasonably expected, on the basis of the information described in s.29(6) TMA, to have been aware on or before 31st January 2007 that such sum ought to have been included in the partnership statement as profits or income for the year ended 5th April 2005.
For the reasons explained by the General Commissioners in their case stated made on 4th March 2010 they considered that the sums so 'rebated' were part of the income or profits for tax purposes of LPLP but were deductible for those purposes because they did comply with the conditions imposed by s.74(1)(a) ICTA. In addition they concluded that HMRC had not been entitled to amend the tax return of LPLP because the relevant officer did have the information from which he could have been reasonably be expected to appreciate that the profits of LPLP were understated by the amount of the 'rebates' to limited partners, their families and associates. HMRC appealed. The appeal came before Lewison J on 7th and 8th October 2010. For the reasons given by him in his judgment handed down on 18th October 2010 he agreed with the General Commissioners on the first and third point. He considered that they had asked themselves the wrong question in relation to the second point and, if necessary, would have remitted the matter to the General Commissioners for them to consider the facts in relation to the correct question. In view of his conclusion on the third point a remission to the General Commissioners on the second point was unnecessary.
HMRC now appeal to this court on the third point with the permission of Rimer and Etherton LJJ. They agree with the General Commissioners and Lewison J on the first point and with Lewison J on the second point, save to the extent that they submit that there is no need for any remission to the General Commissioners. They invite this court to allow their appeal and declare that LPLP's taxable profits for the year ended 5th April 2005 were £69,142,423. LPLP cross appeal on the first and second points with the permission of Rimer LJ. With the agreement of the parties we heard argument first from LPLP and HMRC on grounds 1 and 2 and then from HMRC and LPLP on ground 3. I will, in due course, deal with them in that order. First, I should refer to the case stated in more detail.
The Case Stated
The appeal was heard together with an appeal by one of the limited partners, Steven Heinz. Lewison J was not concerned with any further appeal of Mr Heinz nor are we. In paragraph 6 the General Commissioners referred to the facts I have already summarised. They had witness statements from two witnesses on behalf of LPLP,...
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