R & C Commissioners v Inverclyde Property Renovation LLP and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 May 2020 |
| Neutral Citation | [2020] UKUT 161 (TCC) |
| Date | 27 May 2020 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2020] UKUT 161 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Lord Tyre, Judge Raghavan
Julian Ghosh QC and Michael Ripley, instructed by the Office of the Advocate General for Scotland, appeared for the appellants (HMRC)
Keith Gordon and Ximena Montes Manzano, instructed by Keystone Law, appeared for the respondents (Inverclyde Property Renovation LLP and Clackmannanshire Regeneration LLP)
Income tax – Limited liability partnerships – ITTOIA 2005, s. 863 – Whether HMRC had power to open enquiry under TMA 1970, s. 12AC – Whether any enquiry should have been made under FA 1998, Sch. 18, para. 24 – Whether closure notices issued under TMA 1970, s. 28B were valid – Yes – Appeal allowed.
The Upper Tribunal re-made the decision of the First-tier Tribunal (Inverclyde Property Renovation LLP [2019] TC 07223), finding that closure notices issued under TMA 1970, s. 28B to the LLPs had been validly issued.
Inverclyde Property Renovation LLP and Clackmannanshire Regeneration LLP (the LLPs) submitted partnership tax returns in response to notices under TMA 1970, s. 12AA. The returns included claims for business property renovation allowances. HMRC opened enquiries under TMA 1970, s. 12AC into the returns and concluded that the LLPs were not carrying on a trade with a view to a profit. Applying ITTOIA 2005, s. 863(1), it followed that the LLPs were chargeable to corporation tax and should not have completed partnership tax returns. HMRC issued closure notices under TMA 1970, s. 28B amending the partnerships' tax returns to remove all entries.
The LLPs appealed to the First-tier Tribunal (FTT) (Inverclyde Property Renovation LLP [2019] TC 07223) arguing that, in accordance with the decision in R (on the application of Spring Salmon and Seafood Ltd) v IR Commrs [2004] BTC 8108 (“Spring Salmon”), HMRC were incorrect to open an enquiry under TMA 1970, s. 12AC and therefore, that the closure notices issued under TMA 1970, s. 28B were invalid. In Spring Salmon, Lady Smith had found that TMA 1970 was separate from the “Tax Acts” referred to in former ICTA 1988, s. 832(1). The FTT allowed the LLPs' appeals.
The Upper Tribunal differed from the view taken by Lady Smith, finding that ITTOIA 2005, s. 832(2) should be read as referring not only to whole Acts relating to income tax but to any section of an Act, including TMA 1970, that relates to income tax. Therefore, HMRC were entitled to issue notices requiring the submission of a partnership tax return and it followed that the appropriate form of enquiry for HMRC to open was an enquiry under TMA 1970, s. 12AC. Having found that the FTT had erred in law, the Upper Tribunal re-made the decision by holding that the closure notices had been validly issued.
The Upper Tribunal remitted the appeals to the FTT to consider the remaining grounds of appeal.
The Upper Tribunal found that HMRC had been correct to open an enquiry under the rules applying in respect of partnerships into a partnership tax return submitted by an LLP despite HMRC having later found that a company tax return, and not a partnership tax return, should have been submitted.
Finance Bill 2020 introduces new TMA 1970, s. 12ABZAA to put this issue beyond doubt. Once enacted, the new rules will apply retrospectively except in relation to any return where, before 11 March 2020, a court or tribunal had determined that the return was not a return under TMA 1970, s. 12AA.
[1] The respondents in these two appeals (“the LLPs”) are two limited liability partnerships who made claims for business property renovation allowance. The appellants (“HMRC”) opened enquiries into the LLPs' tax returns and subsequently issued closure notices concluding that the LLPs were not carrying on a business with a view to profit and not therefore entitled to claim the allowance. The LLPs appealed to the First-tier Tribunal (“FTT”).
[2] One of the LLPs' grounds of appeal was that HMRC had had no power to open an enquiry under the income tax self-assessment provisions in section 12AC of the Taxes Management Act 1970 (“TMA”), and accordingly that there had been no valid closure notices under section 28B of that Act. The LLPs argued that any enquiry should have been made under the corporation tax self-assessment provisions in Schedule 18 to the Finance Act 1998. The FTT accepted the LLPs' argument and held that no valid closure notices had been issued. The appeals were struck out under rule 8(2)(a) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, on the ground that the FTT had no jurisdiction in relation to the proceedings.
[3] HMRC now appeal to the Upper Tribunal against the FTT's finding. The issue is one of statutory interpretation; there are no material facts in dispute. The matter is therefore at large for this Tribunal to determine.
[4] Limited liability partnerships were created as a new form of legal entity by the Limited Liability Partnerships Act 2000. In terms of section 1(2) of that Act, a limited liability partnership is a body corporate, with legal personality separate from that of its members, which is formed by being incorporated under the Act. Section 1(5) provides that, except as otherwise provided by the 2000 Act or any other enactment, the law relating to partnerships does not apply to a limited liability partnership.
[5] For a limited liability partnership to be incorporated, two or more persons associated for carrying on a lawful business with a view to profit must subscribe their names to an incorporation document and deliver it to the registrar of companies (the 2000 Act, section 2(1)). On incorporation, the subscribers become the members of the limited liability partnership (section 4(1)). Thereafter any other person may become a member with the agreement of the existing members (section 4(2)).
[6] Provisions governing the taxation of income of limited liability partnerships were inserted into the Income and Corporation Taxes Act 1988 by section 75(1) of the Finance Act 2001. These were consolidated as section 863 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”). Section 863 (as subsequently amended) is central to the present appeal. Subsections (1) and (2) provide as follows:
(1) For income tax purposes, if a limited liability partnership carries on a trade, profession or business with a view to profit–
- all the activities of the limited liability partnership are treated as carried on in partnership by its members (and not by the limited liability partnership as such),
- anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and
- the property of the limited liability partnership is treated as held by the members as partnership property.
References in this subsection to the activities of the limited liability partnership are to anything that it does, whether or not in the course of carrying on a trade, profession or business with a view to profit.
(2) For all purposes, except as otherwise provided, in the Income Tax Acts–
- references to a firm or partnership include a limited liability partnership in relation to which subsection (1) applies,
- references to members or partners of a firm or partnership include members of such a limited liability partnership,
- references to a company do not include such a limited liability partnership, and
- references to members of a company do not include members of such a limited liability partnership.
[7] Subsections (3) and (4) of section 863 provide that subsection (1) continues to apply to a limited liability partnership that is no longer carrying on a trade, profession or business with a view to profit if either (a) the cessation is only temporary, or (b) it is in the course of being wound up (otherwise than by a liquidator) following a permanent cessation, provided that the winding up is not for reasons connected with tax avoidance and the period of winding up is not unreasonably prolonged.
[8] Section 1273 of the Corporation Tax Act 2009 contains parallel provisions, mutatis mutandis, for corporation tax.
[9] The effect of these provisions is that a limited liability partnership that carries on a trade, profession or business with a view to profit is treated for income tax and corporation tax in the same way as an ordinary partnership: it is regarded as transparent, and its profits and losses are allocated proportionately among its members. The converse is that where in a given period a limited liability partnership does not carry on a trade, profession or business with a view to profit, neither of the subsections (1) or (2) of section 863 applies to it (except as provided by subsections (3) and (4)). As a body corporate, it is chargeable to corporation tax and is not treated as transparent.
[10] The tax returns, and enquiries into the returns, of partnerships are governed by TMA sections 12AA to 12AD. Section 12AA(2) empowers an officer of HMRC to give notice to the partners requiring a person identified in the notice (usually the nominated partner) to submit a partnership return. The return must, in terms of section 12AB, include a partnership statement showing the amount of income that has accrued to the partnership, and each partner's share of that income. Each partner must then, under section 8(1B), include that share in his personal tax return.
[11] The partnership return having been submitted, TMA section 12AC empowers an officer to enquire into it if, within the time allowed (normally 12 months), he gives notice of enquiry to the partner who delivered the return. Any such enquiry is completed, according to section 28B, when an officer, by a closure notice...
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