R Alasdair James Dougall Locke v Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lewis,THE HONOURABLE |
| Judgment Date | 27 July 2018 |
| Neutral Citation | [2018] EWHC 1967 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/5432/2017 |
| Date | 27 July 2018 |
[2018] EWHC 1967 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
THE HONOURABLE Mr Justice Lewis
Case No: CO/5432/2017
David Ewart QC (instructed by Ernst & Young LLP) for the Claimant
Richard Vallat QC and David Yates (instructed by HMRC) for the Defendant
Hearing date 2 July 2018:
Judgment Approved
This is a claim challenging 10 notices, known as follower notices, and accelerated payment notices (“APN”) issued by the defendants, Her Majesty's Commissioners for Revenue and Customs, pursuant to Part 4 of the Finance Act 2014 (“the 2014 Act”). A follower notice requires a taxpayer to take corrective action to relinquish a particular tax advantage arising out of that taxpayer's tax arrangements. A taxpayer who fails to take corrective action to relinquish the particular tax advantage is liable to a penalty. An APN provides, in effect, that any disputed tax must be paid immediately and payment cannot be postponed.
In summary, the claimant, Mr Locke, claimed relief on interest paid on loans used to provide money to a partnership, Eclipse 10, involved in the acquisition and exploitation of film rights. Mr Locke contended that he used the loan to purchase an interest in the partnership. He contended that he was entitled to set off the interest payable on the loans against income by reason of sections 353 and 362(1) of the Income and Corporation Tax 1988 (“ ICTA”) (those sections now being replaced by sections 383 and 398(2)(a) of the Income Tax Act 2007).
The defendants contended that, in their view, the arrangements entered into by the claimant were similar to those described by the Court of Appeal in Eclipse Film Partners No. 35 LLP v Revenue and Customs Commissioners [2015] EWCA Civ 95, [2015] STC 1420 which proceeded on the basis that the arrangements involved the contribution of capital to (rather than the purchase of a share in) the partnership. The defendants therefore gave the claimant follower notices saying that there was a relevant judicial ruling, the ruling in Eclipse 35, which would, if applied to the claimant's arrangements, deny him the benefit of the tax advantage he asserted. They also gave APNs.
The claimant in effect contended that the conditions for serving a follower notice were not met as the judicial ruling in Eclipse 35 did not deal with the question of whether or not the monies borrowed had been used to purchase a share in a partnership. Rather, the court in that case assumed that the monies were paid by way of capital contribution and considered, on the basis of that assumption, whether the conditions that needed to be satisfied to claim relief on that basis were met. The application of the reasoning in the ruling would not of itself deny the claimant the asserted tax advantage; it would only do so if there were first a decision as to whether the monies borrowed were used to contribute capital to the partnership not purchase an interest in it.
THE FACTS
The claimant has over time been engaged in a variety of business activities and investments. In about 2006, he decided to extend his involvement with partnerships connected with the acquisition, distribution and marketing of film rights. One such partnership was Eclipse 10.
The Eclipse Film Partnership LLPs had produced a subscription pack describing certain proposals for what was described in their literature as the opportunity to participate in that partnership. The material in the subscription pack explained that each partnership was a separate vehicle. The subscription pack contemplated that, to put it neutrally, payments would be made by a person wishing to participate in a partnership. Persons wishing to become a partner (who were described as “subscribers”) would be required to make a partnership application, sign a deed of adherence (indicating which particular film partnership they wished to be allocated to and what amount of money they wished to invest), and provide the amount of money which they wished to pay into the partnership. On acceptance by the partnership of the application made by an individual, that individual would become a member of the partnership. The individual would be obliged to provide the full amount of the payment included in their application. The payment to be made by the individual was referred to in the proposal as “a capital contribution”. Other documentation referred to applicants as “subscribers” or “investors”.
The deed of adherence provided that the applicant applied to become a member of a particular Eclipse Film Partnership (in the claimant's case Eclipse 10). It provided that acceptance of the deed of adherence by existing partners would constitute the applicant a member of the partnership. It confirmed that the applicant agreed to pay all of his “contribution”. It recorded that, by completing and delivering the deed of adherence, the applicant agreed to join the relevant Eclipse Partnership and “to hold the interest in the partnership” subject to and in accordance with the deed. The schedule to the deed referred to the applicant's “investment” in the partnership and recorded that the applicant was “subscribing capital” to the partnership. Arrangements were in place to enable applicants to finance their payment by means of a loan.
The partnership deed for Eclipse 10 is dated 9 January 2006. The introduction to the document noted that “Capital contributions are being sought from investors who will, upon execution of or adherence to this Agreement, become Members”. Clause 2 of the partnership agreement provides, under the heading members, that:
“2 Contributions
2.1 Members
2.1.1 Additional persons may be admitted as Subscribers at any time and from time to time provided that each such person executes and delivers to the Operator (having consulted with the Designated Members), a Deed of Adherence upon acceptance of which by the Operator, they shall be admitted to the Partnership.
2.1.2 Each Additional Member herby appoints each of the Designated Members (either acting alone or together with each other) as its true and lawful attorney with full power and authority on their behalf to sign a form LLP288a pursuant to which they consent to be a Member of the Partnership and any such other terms and documents that such additional Member is required to complete pursuant to the Act.
2.2 Capital Contribution and Interest
2.2.1 Each Subscriber hereby agrees that it shall contribute the initial amount of their respective Contribution referred to as such in their Deed of Adherence on its admission as a Member. The balance of the Contribution shall be advanced in such tranches and on such dates (in cleared funds) as shall be determined by the Designated Members and as specified in a Drawdown Notice given by the Designated Members to the Subscriber not less than five (5) Business Days prior to the date specified.
2.2.2 No interest shall shall be paid or payable by the partnership upon any Outstanding Contribution or upon any amount whether that amount be of a Net Income or Capital Gain nature, where that allocated to any Member but not yet distributed to that Member.
2.3 Failure to Contribute
Notwithstanding any provision of this Agreement to the contrary, if any Member fails to provide to the Partnership the full amount of its Contribution on or before the date of its admission to the Partnership, then;
2.3.1 the Operator may, at any time thereafter, give notice to such Member requiring such Member to remedy such default and to pay interest to the Partnership on the amount outstanding for the period from the date of admission up to the date of payment thereof at the rate of 5% over LIBOR from time to time, on or before the expiry of twenty (20) Business Days from the date of receipt of such notice by the Member, from the Partnership. If the Member has not remedied that default and paid all interest at the expiry of the said 20 days from the date of such notice, the Operator shall cause such Member to cease to be a Member and to forfeit its paid up Contribution (if any). The Partnership shall pay, or apply on behalf of the forfeited Contribution monies to other Subscribers, pro rata to their respective Contributors;
and
2.3.2 the Partnership may at the election of a Designated Member take such legal advice and pursue any necessary legal action to recover any sums due by Members pursuant to clauses 2.3.1 and may meet the cost of such legal advice or action, including expenses relating thereto, from the capital of the Partnership.”
Subscribers were defined as persons who executed a deed of adherence and any substitute member. “Capital contribution” was defined in clause 1 of the partnership agreement as:
“Capital Contribution
In relation to a Member, the amount committed by such Member to the capital of the Partnership being, in the case of Members other than the Designated Members, the amount specified in their Deed of Adherence.”
On 24 March 2006, the claimant completed and delivered the documentation necessary to enable him to become a member of Eclipse Also on 24 March 2006, he borrowed money from HSBC to finance the payment he made to Eclipse 10 in connection with his application to become a member of the partnership. The purpose of the loan was said to be “to assist with an equity contribution into the Future Film arranged Eclipse structure”.
A document dated 13 April 2006 entitled “certificate of partnership interest” certified that the claimant had “invested £29,700,000” in Eclipse 10 of which £28,920,692 had been financed by a loan.
The claimant completed a tax return for the 2005/2006 year of assessment. In that tax...
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