Icebreaker 1 LLP v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 January 2011 |
| Neutral Citation | [2010] UKUT 477 (TCC) |
| Date | 26 January 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2010] UKUT 477 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Vos J.
Jonathan Peacock QC and James Rivett (instructed by Deloitte LLP) for Icebreaker 1 LLP.
Peter Blair QC and Jonathan Davey (instructed by the Solicitor for HM Revenue and Customs) for the commissioners.
The following cases were referred to in the judgment:
Astall v R & C CommrsUNKTAX [2009] EWCA Civ 1010; [2009] BTC 631
Barclays Mercantile Business Finance Ltd v MawsonTAXELR [2004] BTC 414; [2005] 1 AC 684
Bookey v RowlandsTAX [1982] BTC 21
Edwards v BairstowELRTAX [1956] AC 14; 36 TC 207
Ensign Tankers (Leasing) Ltd v StokesTAXELR [1992] BTC 110; [1992] 1 AC 655
Investors Compensation Scheme v West Bromwich Building SocietyWLR [1998] 1 WLR 896
MacNiven v Westmoreland Investments LtdTAXELR [2001] BTC 44; [2003] 1 AC 311
Micro Fusion 2004-1 LLP v R & C CommrsSCD (2008) Sp C 695
Morgan v Tate & Lyle LtdELRTAX [1955] AC 21; 35 TC 367
Tower MCashback LLP1 v R & C CommrsTAXTAX [2010] BTC 154 (CA); [2008] BTC 805
WT Ramsay Ltd v IR CommrsELRTAX [1982] AC 300; 54 TC 101
Income tax - Limited liability partnership - Trading expenses - Trade of film distribution - Whether expenditure constituted allowable deductions - Whether payments incurred wholly and exclusively for purposes of taxpayer's trade - Interpretation of licence, distribution, administration and advisory agreements - Circular payments - Capital contributed funded by bank loans - Whether payments deductible as trading expenses - Whether part or all of payments capital payments - Whether payments deductible in taxpayer's first period of account - Whether payments included pre-payments - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 74 subsec-or-para 1ss. 74(1)(a), (f).
This was an appeal by the taxpayer against a decision of the First-tier Tribunal ([2010] UKFTT 6 (TC); [2010] TC 00325) that certain items of expenditure incurred by the taxpayer did not constitute allowable deductions under s. 74 of the Income and Corporation Taxes Act 1988.
The taxpayer was a limited liability partnership. It had been formed, initially with two corporate members, in February 2004 with a view to conducting a trade of film distribution. On 5 April 2004 six individuals joined the taxpayer, contributing capital of £1,520,000 between them, 70 per cent of which (£1,064,000) had been funded by way of non-recourse loans advanced by the bank. Also on 5 April the taxpayer entered into four agreements: a licence agreement to licence rights relating to eight film or television projects for a payment of £46,950; a head distribution agreement (HDA) whereby the taxpayer appointed a head distributor (C) in relation to the exploitation of the film or television projects it had licensed; an administration agreement and an advisory agreement with a company (IML) to provide administrative services and advice to the taxpayer. On the same day, the taxpayer paid £120,000 and £50,000 to IML under the administration and advisory agreements respectively. Under the HDA C was to distribute and exploit the rights and the taxpayer undertook to pay the amount of £1,273,866 in respect of exploitation costs to C immediately on signature of the HDA. The taxpayer paid the £1,273,866 to C pursuant to the HDA. C paid £1,064,000 into a blocked deposit account at the bank, and the balance of £209,866 to another account. Under the HDA C agreed to pay to the taxpayer the "Annual Advances" and "Final Minimum Sum"; the final minimum sum was £1,064,000 payable at the end of year ten and guaranteed by the bank; and there were ten annual advances of amounts equal to interest at the bank's base rate on £1,064,000, the first four being guaranteed by the bank.
The taxpayer subsequently claimed that the expenditure incurred on its first day of trading in film production and distribution gave rise to allowable losses which its members were entitled to set off by way of sideways loss relief against other income arising outside the trade. HMRC opened an enquiry into the return and subsequently issued a closure notice containing the conclusion that the taxpayer's claimed loss was to be reduced from £1,491,816 to £11,900. The taxpayer appealed.
The First-tier Tribunal (FTT) dismissed the taxpayer's appeal, holding that the bulk of the expenditure had nothing to do with its trade but was basically inserted into the structure to ramp up the apparent spending on trading items in order to increase the initial tax relief available to the LLP and its members. The FTT concluded that the sum of £1,064,000, paid to C as part of the payment of £1,273,866, was not expended wholly and exclusively for the purposes of the taxpayer's trade within the meaning of ICTA 1988, s. 74(1)(a) but rather to obtain and secure the right to the future payments from C under the HDA; £174,866 of the payment of £1,273,866 was capital expenditure but was deemed to be revenue expenditure by F(No. 2)A 1992, s. 40A and allowable only in periods after 5 April 2004; £35,000 out of the balance of the payment of £1,273,866 to C was disallowable as a pre-payment for film distribution purposes and only deductible in periods after 5 April 2004; £51,000 out of the payment of £170,000 to IML was disallowable as having been paid for the acquisition of the taxpayer's structure; and £29,000 out of the payment of £170,000 to IML was disallowable as a pre-payment and only deductible in periods after 5 April 2004. Accordingly the FTT decided that the bulk of the claimed losses in the tax return should be disallowed ([2010] UKFTT 6 (TC); [2010] TC 00325). The taxpayer appealed.
The key questions on appeal were whether the items of expenditure were of an income rather than a capital nature within the provisions of s. 74(1)(f) of ICTA 1988, and, if they were revenue expenses, whether they were incurred wholly and exclusively for the purposes of the taxpayer's trade within the provisions of s. 74(1)(a) of ICTA 1988.
Held, allowing the appeal in part:
1. It was possible to adopt a purposive construction for s. 74 of ICTA 1988. Its simple object was to allow a deduction from taxable profits for revenue expenses incurred by the taxpayer for the purposes of its trade. The subsections of s. 74(1) were all directed to a consideration of what was expended in the taxpayer's trade, profession or vocation, even though those words were not always mentioned. There was no indication that the ultimate use of the moneys by the recipient was to be relevant to a determination of the purpose for which they were expended. The focus was all on the taxpayer's own business.
2. On the proper interpretation of the HDA the payment of the annual advances and the final minimum sum were paid in consideration of the rights and benefits obtained by C under the HDA and one the rights and benefits obtained by C was the payment of £1,273,866 to which it was entitled under the HDA. The transaction as a whole was correctly analysed by the FTT as demonstrating that the sum £1,064,000 that came from the bank to the members into the taxpayer and then on to C was paid for the purpose of securing the annual advances and the final minimum sum. That was not a matter of looking at what C did with the money, but of looking at what the taxpayer paid the money for. The taxpayer never expected or intended that the sum of £1,064,000 would be used for any film distribution trading purpose. Instead, it intended and expected that the sum would be used for the purpose of securing the annual advances and the final minimum sum. Analysing the transaction as a whole, and looking at the matter exclusively from the taxpayer's viewpoint, the payment of the £1,064,000, as part of the global payment of £1,273,866, was not made wholly and exclusively for the purposes of the taxpayer's trade. That part of the payment was not made for the film distribution trade at all. It was made so that the taxpayer could be assured that it, and therefore its members, would recover the loans that its members had borrowed from the bank, and which had been used to finance precisely that sum by way of investment into the taxpayer. The bank would not have regarded the transaction as such a low risk one (a fact much relied upon by the FTT) if that had not been the case. Moreover, the payment of £1,064,000 was never intended to be used for any film production or distribution purpose. The sum of £1,064,000 was expended and disbursed for the sole purpose of investment and security, and not for the taxpayer's film trade properly so regarded.
3. The FTT had not relied on s. 74(1)(f) as a ground for holding that the payment of £1,064,000 was not a deductible expense, and it was right not to have done so. The sum of £1,064,000 had been employed as capital not in the taxpayer's trade but in C's trade. Accordingly it fell outside s. 74(1)(f). (Morgan v Tate & Lyle Ltd [1955] AC 21; 35 TC 367 considered.)
4. In concluding that £174,866 out of the balance of the payment of £1,273,866 to C was capital expenditure expended on producing a film which was deemed to be revenue expenditure by F(No. 2)A 1992, s. 40A and allowable only in periods after 5 April 2004, the FTT had adopted the wrong approach. The question was what, on the true construction of the HDA or the transaction as a whole, the expense or disbursement was paid for from the taxpayer's point of view. It was not relevant to look at what C did with the money. Thus, the FTT was not justified in enquiring into where the £209,866 went. It was, on the face of the HDA a legitimate revenue expense, incurred wholly and exclusively for the purposes of the taxpayer's trade and the entire sum would be allowed.
5. Furthermore, the FTT was wrong in law to look behind the administration agreement and the advisory agreement and find, without evidence, that £51,000 was paid for the taxpayer structure and was disallowable as a capital expense. It...
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