Kieran Looney & Associates (Partnership) and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 16 October 2018 |
| Neutral Citation | [2018] UKFTT 619 (TC) |
| Date | 16 October 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0619 (TC)
Judge Rupert Jones, Noel Barrett
Nimal Fonseka and R Singh, Senstone Ltd, appeared for the appellant
Gary Cruddas, Presenting Officer of HM Revenue and Customs, appeared for the respondents
Partnership – Appeal against Amendment to Partnership Return for 2009–10 – Discovery – attribution of income and turnover to partnership or company – Termination payment trading and revenue receipt or non-taxable capital receipt – Appeal against amendment to self-assessment return for 2011–12 – Capital gains chargeability – Acquisition and disposition of shares – Chargeable gain or gift – Calculation of gain – Joint interest held by appellant and wife – Entrepreneurs' relief – Appeal against closure notice and amendment to self-assessment return for 2009–10 – Appeal allowed in part.
The First-tier Tribunal (FTT) found that income was attributable to the partnership and therefore assessable to income tax on the partner and that there had been a disposal of shares giving rise to a capital gain.
The three primary questions to be determined by the FTT were:
- Was £3m in income from a contract in 2009 turnover attributable to Mr Looney's partnership (Kieran Looney & Associates) or to his limited company (Kieran Looney and Co. Ltd)?
- Was the £1m termination payment under that contract paid:in respect of the trade, thus a revenue receipt liable to income tax; orcompensation paid to acquire a secret process or intellectual property rights in Mr Looney's training methods, thus a capital receipt or some other form of non-taxable compensation payment?
- Was a payment of US $5m paid to Mr Looney in January 2012, a gift from a friend or did it represent the proceeds from the sale of Mr Looney's interest in shares in a company holding land in the Caribbean, thus creating a chargeable gain?
Three appeals were heard together. The partnership, Kieran Looney & Associates, was the appellant in the first appeal. Keiran Looney was the appellant in relation to the capital gains tax appeal and the closure notice appeal.
On 14 January 2009, Keiran Looney & Associates (KLA) entered into a contract to provide management training for a period of 36 months to an oil and commodities trading company. An annual fee of £3m was payable under the contract. The contract provided for early termination (exercisable before 1 November 2009) subject to payment of an early termination fee of £1m.
The first annual fee was paid as follows:
- £2.4m on 4 February 2009; and
- £600,000 on 5 August 2009.
The payments were made to the swiss bank account of Nower Inc, a company incorporated in Panama on 14 January 2009. Mr Looney was the director and shareholder of Nower Inc.
Following a breakdown in relationships between the parties to the contract, an early termination fee of £1m was paid on 22 October 2009 to a bank account of KLA.
The termination of the contract was the subject of a claim by Mr Looney heard by the Chancery Division (Looney v Trafigura Beheer BV [2011] EWHC 125 (Ch)) with judgment handed down on 1 February 2011. The High Court dismissed Mr Looney's claim for damages for breach of contract and held that the termination clause had been lawfully invoked.
The partners in KLA were Keiran Looney and Reality Coaching Ltd. The directors of Reality Coaching Ltd were Mr Looney and his wife. Mr Looney ceased as a partner on 22 September 2009. KLA and Reality Coaching Ltd were dissolved on 22 December 2009.
Keiran Looney and Co Limited (KLCL) was incorporated on 9 April 2009 and Mr Looney was a director and shareholder.
The £3m income was declared in KLCL.
HMRC argued that the turnover for KLA for the accounting period ended 31 December 2009 should be £4m (the annual fee plus the termination payment) and HMRC had revised the KLA partnership return for 2009–10 to include this sum as turnover.
The burden of proof was on the partnership to demonstrate that the turnover was attributable to KLCL.
The contract could only be varied in writing agreed by both parties. There was no evidence of a written agreement for novation of the contract from KLA to either Nower Inc. or KLCL. Mr Looney sued in his personal name for breach of contract.
The Tribunal was satisfied that that HMRC's decision to revise the partnership accounts to include income under the contract was lawful and therefore the income was subject to income tax.
The Tribunal was satisfied that the purpose of the termination payment was to compensate KLA for the ability to profit from the remaining two years of the contract and was therefore trading income. The Tribunal noted that this was consistent with the findings of the High Court.
HMRC had initially opened enquiries into Mr Looney's 2009–10 self-assessment return and the company tax return of KLCL on 26 May 2011. The burden of proof was on HMRC to demonstrate that they had made a discovery and were entitled to amend KLA's partnership return for 2009–10 under TMA 1970, s. 30B(1)(a). The amendment was made on 2 January 2014. As no partnership enquiry was opened under TMA 1970, s. 12AC an amendment can only be made under TMA 1970, s. 30B(1) if TMA 1970 s. 30B(4) is satisfied.
The Tribunal was satisfied that the conditions were met as:
- Mr Looney's actions were careless as he had failed to account for the income in the entity that was entitled to the payment; and
- at the time an officer of the Board ceased to be entitled to give notice of his intention to enquire into the representative partner's partnership return, the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation in TMA 1970, s. 30B(1)(b).
The partnership appeal was therefore dismissed.
This was an appeal against HMRC's closure notice and amendment of Mr Looney's self-assessment return for 2011–12.
When Mr Looney's return was originally submitted on 17 September 2012, no capital gain was declared. An amended return on 5 February 2013 included a gain of £1,127,551 said to be based on the purchase and sale of Mr Looney's interest in property or land in the Caribbean. A further amended return was submitted on 15 March 2013 showing half of the gain on the basis that the land or property was held jointly with his wife. HMRC opened an enquiry into the return on 2 July 2013.
A fourth return was submitted on 18 February 2014 showing a half share of the capital gain. A fifth return was submitted on 14 April 2014 showing no gain.
HMRC's closure notice issued on 16 July 2015 increased the capital gain from £547,875 to £1,127,551 and disallowed a claim for entrepreneurs' relief, resulting in a requirement for Mr Looney to pay £320,401.88 in tax.
The correspondence during the enquiry and HMRC review process highlighted various misunderstandings between the appellant, his agent and HMRC.
Mr and Mrs Looney had entered into an agreement to buy shares in Sandpiper Enterprises Ltd, which in turn owned the property in the Caribbean. The Looney's had intended to settle the shares on a trust, but this had uncovered that legal title in the shares had not passed to them. Mr Looney claimed that he had not sold the shares/property, but that his friend had made a gift of US $5m. The sales proceeds that had originally been declared exceeded this (£3.84m) which would be closer in value to a US $ 1m deposit and a balance of US $5m.
The Tribunal found that Mr Looney failed to discharge the burden to prove that the receipt of £3.84m was a gift and that is was more likely that the sum received in 2011–12 was in respect of the disposal of Mr and Mrs Looney's joint beneficial interest in shares in Sandpiper Enterprises Ltd.
The Tribunal was satisfied that even if the shares were never transferred into the names of Mr and Mrs Looney, the legal title holder was holding them on trust for Mr and Mrs Looney or as their nominee until the shares were sold. The Looney's had signed the share purchase agreement and had paid the sums due in compliance with the agreement.
The Tribunal concluded that Mr Looney was liable to capital gains tax on the disposal of his joint interest in the shares.
Mr Looney had originally claimed entrepreneurs' relief on the basis that the asset sold was a property acquired for development purposes. The Tribunal was satisfied that entrepreneurs' relief did not apply to the disposal of the shares in Sandpiper Enterprises Ltd as this was not Mr Looney's personal company nor a trading company or the holding company of a trading group nor was Mr Looney an officer or employee of the company.
The Tribunal found that the acquisition price of the shares was £2.14m and the disposal proceeds were £3.84m. As only half of the gain was attributed to Mr Looney and after deduction the annual exemption, his gain was £850,242.61. Applying a 28% rate of capital gains tax, the tax payable was £235,099.93. The appeal was allowed in part.
The closure notice appeal was an appeal against a closure notice and amendment to return issued to Mr Looney by HMRC on 15 September 2016 for the tax years 2008–09 and 2009–10. Only the amendment relating to 2009–10 was subject to appeal before the FTT.
The closure notice assessed income tax and National Insurance of £597,417.67 in relation to the £4m income (the subject of the partnership appeal) and £17,932.68 of capital gains tax on capital gains received by Nower Inc.
HMRC accepted that the closure notice should not have included details of KLA partnership income which is subject to the separate appeal and the FTT allowed the appeal to that extent. However, the FTT was satisfied that HMRC's amendment to Mr Looney's 2009–10 self-assessment return charging income tax on the £4m income should be confirmed.
The Tribunal was satisfied that HMRC properly treated gains arising from transactions by Nower Inc. under TCGA 1992, s. 13 that attributes gains to member...
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