R Christopher Mitchell v Commissioners for HM Revenue and Custom
| Jurisdiction | England & Wales |
| Judge | Sir Ross Cranston |
| Judgment Date | 17 December 2020 |
| Neutral Citation | [2020] EWHC 3489 (Admin) |
| Date | 17 December 2020 |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/281/2020 |
[2020] EWHC 3489 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Sir Ross Cranston
Sitting as a judge of the High Court
Case No: CO/281/2020
Keith M. Gordon and Ximena Montes Manzano (instructed by Jefferies, Solicitors) for the Claimant
Marika Lemos (instructed by HMRC) for the Defendant
Hearing dates: 10 December 2020
Introduction
This is an application for permission to apply for judicial review following an order by Andrews J (as she then was) dated 13 July 2020 that it be considered at an oral hearing.
By her order this claim is to be treated as the lead case of 89 other cases which raise materially the same arguments and have been case-managed along with it. For convenience I will call all these claimants the case managed claimants.
The claimant seeks permission to challenge the decision by HMRC to issue a notice under section 28B(4) of the Taxes Management Act 1970 (“the 1970 Act”) which amends his self-assessment return to deny claimed loss relief as a member of Twofold First Services LLP (“Twofold”). The decision to issue the notice is said to be ultra vires the statutory power of section 28B(4). The other case managed claimants similarly challenge notices issued in their cases.
In outline, the claimants having lost their challenge on the substance of their tax avoidance arrangements are now seeking to argue that HMRC should fail since it followed the wrong procedural track in its inquiries into them.
Background
Twofold is a limited liability partnership (“LLP”) incorporated on 1 July 2011 under the Limited Liability Partnerships Act 2000. Its tax avoidance measures were described in First De Sales Limited Partnership v HMRC [2018] UKFTT 106 (TC), when the tribunal struck out the taxpayers' appeals. In short, Twofold acquired an agricultural estate for about £250,000, which it leased for an annual rent of about £3000. (Later some additional land was let on an annual rent of £8,880). It issued an information memorandum designed to attract investors with its tax avoidance arrangements. An estate manager based in Jersey was employed at £40,000 pa.
As part of these tax avoidance arrangements, Twofold entered into a Deed of Restrictive Undertakings with the estate manager and 3P Limited in the Cayman Islands. Pursuant to that Deed, he gave an undertaking that restricted him from being involved in a business that competed with that of Twofold or from soliciting its clients. £200m was paid to 3P as consideration for the deed, and a further £300m in March 2012. The argument was that the payments for the restrictive deeds were tax deductible, and Twofold's consequent losses were to be treated as losses of its members.
The arrangements of Twofold, along with those of other LLPs, Trident First Services LLP and Trident Second Services LLP, and of First De Sales Ltd Partnership, were considered by the FTT, when the partnerships appealed against closure notices HMRC issued them on the basis that the payments under the deeds were not deductible. In the notices HMRC asserted that the LLPs were not carrying on a trade or business with a view to a profit. FTT Judge Richards concluded that the partnerships' appeals had no reasonable prospect of success and struck them out.
The Upper Tribunal (Tax and Chancery Chamber) (Carr J and Judge Sinfield) dismissed the taxpayers' appeal on 27 November 2018: First De Sales Limited Partnership v HMRC [2018] UKUT 0396 (TCC). In the course of doing so it said that the facts the judge had set out were uncontroversial and there was no challenge to them on the appeal: para [9]. The Court of Appeal refused permission to appeal.
The claimant was a member of Twofold. He had filed a self-assessment tax return for the two years ended April 2013 claiming losses passed through from the LLP. An enquiry was commenced by HMRC on his tax returns under section 12AC(6) of the 1970 Act. On 27 December 2019, HMRC issued the notice at issue in this case under section 28B(4) of the 1970 Act stating that his LLP losses were not allowable deductions.
The claimant contends that HMRC did not have the power to issue the notice under section 28B(4), because the conditions provided in that section for doing so were not met. Section 28B deals with the issue of notices in relation to an enquiry under section 12AC of the Act in the case of partnership returns. In simple terms the argument is that, as an LLP, Twofold is not a partnership falling under these sections and that the statutory code applying is contained in Schedule 18 of Finance Act 1998.
Finance Act 2020; section 12ABZAA of 1970 Act
Section 104 of the Finance Act 2020 was introduced to address what the government regarded as the illegitimate use of LLPs as tax avoidance vehicles. It inserted section 12ABZAA into the 1970 Act with general retrospective effect. It was announced in March this year and enacted on Royal Assent in July. It applies where a person delivers a purported partnership return [subsection (1)(a)] and the LLP does not carry on a business with a view to profit in the relevant period [subsection (1)(c)]. The section provides that for the purposes of the relevant enactments the relevant return is treated as a partnership return: subsection (2). Subsection (5) defines purported partnership return to mean anything that (a) purports to be a partnership return, and (b) is in a form, and is delivered in a way, that a partnership return could have been made and delivered in a corresponding partnership case. “Corresponding partnership case” is defined to mean a corresponding case in which the LLP in question carries on a business with a view to profit in the relevant period.
Upper Tribunal determination in Inverclyde
Earlier this year, on 27 May, the Upper Tribunal (Tax and Chancery Chamber) issued its decision in HMRC v Inverclyde Property Renovation LLP [2020] UKUT 161 (TCC). The tribunal was constituted by Lord Tyre, a commercial judge in the Court of Session, and Judge Raghavan, a member of the Tax and Chancery Chamber of the Upper Tribunal. The Tribunal examined arguments along the lines of those advanced for the claimants in this judicial review.
In that case two LLPs filed partnership tax returns and made claims for business premises renovation allowance. After inquiries HMRC issued closure notices concluding that the LLPs were not carrying on a business with a view to a profit and therefore not entitled to claim the allowance.
Central to the UT's decision was section 863 of the Income Tax (Trading and Other Income) Act 2005 (“the 2005 Act”). Generally speaking, that provides that for income tax purposes, if an LLP carries on a trade, profession or business with a view to profit, all its activities are treated as carried on in partnership by its members. In other words, the LLP is treated for income tax purposes in the same way as an ordinary partnership. It is thus regarded as tax transparent with its profits and losses allocated proportionately among its members. There are parallel provisions in section 1273 of the Corporation Tax Act 2009 as regards corporation tax.
On the taxpayers' appeal it was said that HMRC had no power to open an enquiry under the income tax self-assessment provisions in section 12AC of the 1970 Act, 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 provisions.
The FTT agreed: [2018] UKFTT 106 (TC). That was because section 863 of the 2005 Act provides in s.863(2) that for all purposes “in the Income Tax Acts” references to a partnership included an LLP. Earlier authority — Bartram v HMRC [2012] STC 2144 and Spring Salmon & Seafood Ltd, Re Petition for Judicial Review [2004] STC 444 — had established that the expression “the Tax Acts” did not include the 1970 Act. Accordingly, the FTT held, the words in s.863(2), “in the Income Tax Acts”, likewise did not encompass that Act. Thus HMRC had had no power to open an enquiry into the tax returns of the LLPs under the 1970 Act and thus no power to issue the closure notices.
The Upper Tribunal allowed the appeal. As regards the 1970 Act, it said that given its legislative history section 863(1) was concerned with the imposition of liability as between a LLP and its members, whereas section 863(2) was an interpretative provision, mapping LLPs into existing statutory provisions: para. [34]. Given the legislative history, both subsections should be read together as a coherent structure for regulating the income tax treatment of LLPs (with section 1273 providing a similar coherent structure for regulating their corporation tax treatment) and neither...
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