Investec Asset Finance Plc v The Commissioners of HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Rose,Sir Timothy Lloyd,Lord Justice Peter Jackson |
| Judgment Date | 30 April 2020 |
| Neutral Citation | [2020] EWCA Civ 579 |
| Date | 30 April 2020 |
| Docket Number | Case nos. A3/2019/0836 & 0837 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 579
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
(Arnold J and Judge Hellier)
[2018] UKUT 0069 (TCC) & [2018] UKUT 0413 (TCC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Peter Jackson
Lady Justice Rose DBE
and
Sir Timothy Lloyd
Case nos. A3/2019/0836 & 0837
Case no. A3/2019/0864
Jonathan Peacock QC and Michael Ripley (instructed by Allen & Overy LLP) for Investec Asset Finance plc and Investec Bank plc
John Tallon QC and James Rivett QC (instructed by HMRC Solicitors Office) for HMRC
Hearing dates: 4 and 5 March 2020
Approved Judgment
CONTENTS
| 1. BACKGROUND | 6 |
| (a) The Leasing Partnerships and the IAF and IBP interests in them | 6 |
| (b) The closure notices and the covering letter | 14 |
| (c) The issues before the FTT and the UT | 21 |
| 2. THE DEDUCTIBILITY OF THE CAPITAL CONTRIBUTIONS | 30 |
| (a) Capital Contributions: the facts | 31 |
| (b) Capital Contributions: the law | 35 |
| (c) Capital Contributions: the decisions below | 40 |
| (d) Capital Contributions: discussion | 42 |
| 3. THE SCOPE OF THE CLOSURE NOTICE APPEAL | 49 |
| (a) Scope of Closure Notice Appeal: The law | 50 |
| (b) Scope of Closure Notice Appeal: the decisions below | 67 |
| (c) Scope of Closure Notice Appeal: discussion | 70 |
| 4. THE APPLICATION OF THE NO DOUBLE TAXATION PRINCIPLE IN THIS CASE | 74 |
| (a) The no double taxation principle: the decisions below | 74 |
| (b) The no double taxation principle: developments before this Court | 87 |
| (c) The no double taxation principle: discussion | 96 |
| (i) Should HMRC be permitted to argue the repayment/distribution distinction point now in relation to Garrard? | 97 |
| (ii) If it is open to HMRC to argue the repayment/distribution distinction, what is the answer? | 104 |
| (iii) Is it open to HMRC to argue that the treatment of LAGP and HKP in the statutory accounts of IAF and IBP means that the no double taxation principle does not apply? | 109 |
| 5. CONCLUSION | 118 |
These appeals from the Upper Tribunal (Tax and Chancery Chamber) (Arnold J and Judge Charles Hellier) raise a number of important substantive and procedural issues arising out of a series of closure notices issued by HMRC to Investec Asset Finance plc (‘IAF’) and Investec Bank plc (‘IBP’) in respect of their liability for corporation tax in the accounting periods between 1 April 2006 and 31 March 2010. The substantive issues concern the relationship between the statutory provisions concerning the taxation of profits made by partnerships and the taxation of a company's business where that business includes owning interests in partnerships. Generally speaking, where a partnership is carried on by persons at least one of which is a company, it is not treated as a separate entity for tax purposes. According to sections 111 and 114 of the Income and Corporation Tax Act 1988 (‘ ICTA’), the profits of the partnership are first calculated for the purposes of corporation tax as if the partnership were a company but then those profits are taxed in the hands of the corporate partners according to their proportionate interests in the partnership. Where those partners are companies rather than individuals, those companies are also liable for corporation tax on their own business profits under section 42 of the Finance Act 1998.
The main substantive issue in this case is what happens when some of the income of the corporate partners' own business comprises profits of partnerships in which the companies own an interest. Should the profits made by the partnership that have already been taxed in the hands of the partners pursuant to section 114 be left out of account when calculating the profits of the partners' own businesses so as to ensure compliance with the principle that the same profits should not be taxed as income twice? If so, how does that principle apply in the instant cases?
The procedural issues concern first, how far HMRC can defend a challenge brought by a taxpayer in the tribunal against a closure notice, by relying on arguments that the proper tax treatment of the company's affairs should be something different from the conclusions HMRC set out in that closure notice. Secondly, there are procedural issues about how far HMRC can rely on new arguments before this Court in particular on an argument that was presented before the First-tier Tribunal and the Upper Tribunal as relied on only as a secondary, fall-back argument, in circumstances where they have achieved a measure of success in their primary argument.
The appeal before the Upper Tribunal (‘UT’) was from the decision of the First-tier Tribunal (Tax Chamber) (Judge Howard Nowlan and Elizabeth Bridge) dated 24 May 2016 [2016] UKFTT 356 (TC) (‘the FTT Decision’). There are two judgments of the Upper Tribunal challenged before us. The first is the judgment of 4 April 2018 reported at [2018] UKUT 0069 (TCC) (‘the First Decision’). At the end of that decision, the UT invited further submissions on two points that it had raised for the consideration of the parties. Following a second hearing in November 2018, the UT issued a further judgment on 19 December 2018 [2018] UKUT 0413 (TCC) dealing with those points (‘the Second Decision’). The Second Decision resolved some points but remitted one issue back to the FTT for further fact-finding.
The UT granted permission to appeal to both parties. There are three appeals before us, two appellants' notices lodged in almost identical terms by IAF and IBP together, taking issue with aspects of the First and Second Decisions and an appellant's notice lodged by HMRC challenging one aspect of the Second Decision. HMRC also served Respondents' Notices in the two IAF and IBP appeals.
BACKGROUND
(a) The Leasing Partnerships and the IAF and IBP interests in them
The series of transactions which preceded the tax assessments in these appeals were very complicated. They are summarised in paras. 2 onwards of the First Decision and described in more detail in a Statement of Agreed Facts appended to that Decision (the ‘SOAF’). Fortunately, it is not necessary to go into much detail at least at this stage. There are seven partnerships at issue although it is agreed that five of them based in Hong Kong are all to be treated in the same way. We need therefore to focus only on three, the Forty-Sixth Hong Kong Leasing Partnership (‘HKP’) (which will determine the fate of four other transactions also involving Hong Kong leasing partnerships); the Garrard No 2 Leasing Partnership (‘Garrard’) and the Leasing Acquisitions General Partnership (‘LAGP’), together referred to as ‘the Leasing Partnerships’. Each of the Leasing Partnerships held assets which were leased out and which entitled them to receivables, for example in the form of annual rental payments or a final lump sum payment in respect of assets leased under a hire purchase agreement.
Through a series of transactions, IAF and IBP (to whom I will refer together as ‘the Appellants’) became partners in each of the Leasing Partnerships. They incurred costs referred to as the “Disputed Expenditure”, disputed because one of the main issues in these proceedings is whether all or some of these costs are deductible when computing the profits of IAF and IBP for corporation tax purposes. The Disputed Expenditure was of two kinds. The first kind was the price that the Appellants paid to acquire the interests they bought in the Leasing Partnerships (‘the Acquisition Costs’). Acquisition Costs were incurred by both IAF and IBP in respect of all seven of the Leasing Partnerships. The second kind of cost was Capital Contributions. This kind of cost was incurred by IAF and IBP only in respect of LAGP and Garrard. Both those partnerships received very substantial capital contributions from IAF and IBP once IAF and IBP had acquired their partnership interests. There was no capital contribution made to HKP; all the Disputed Expenditure in relation to HKP comprised Acquisition Costs. Shortly after the Appellants acquired their interests in the Leasing Partnerships, the Leasing Partnerships sold off their assets or otherwise terminated or disposed of the leases they held. As a result, the Leasing Partnerships all received large sums of money which generated profits in their hands. They paid over much of that money to the Appellants.
The Appellants, like most companies are subject to corporation tax on their profits pursuant to section 42 of the of FA 1998 which provides:
“ 42 Computation of profits of trade, profession or vocation
For the purposes of Case I or II of Schedule D, the profits of a trade, profession or vocation must be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in computing profits for those purposes.”
It is accepted that the no double taxation principle, if it applies, would be an adjustment required or authorised by law for the purposes of section 42.
The Appellants are also liable to tax because they are partners in a trade. Section 111 ICTA provides:
“ 111 Treatment of partnerships
(1) Where a trade or profession is carried on by persons in...
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