R Zarathustra Jal Amrolia v The Commissioners for HM Revenue & Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Mann,Lord Justice Irwin,Lord Justice Henderson |
| Judgment Date | 03 April 2020 |
| Neutral Citation | [2020] EWCA Civ 488 |
| Date | 03 April 2020 |
| Docket Number | Case No: C1/2018/1737 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 488
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
MR JUSTICE LEWIS
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Irwin
Lord Justice Henderson
and
Mr Justice Mann
Case No: C1/2018/1737
Mr Thomas Chacko (instructed by Bird & Bird) for the Appellants
Mr Timothy Brennan QC and Mr Christopher Stone (instructed by the General Counsel and Solicitor to HMRC) for the Respondents
Hearing date: 4 February 2020
Approved Judgment
Introduction and Background
The appellant taxpayers, Dr Zarathustra Amrolia and Dr Isidora Ranjit-Singh, were each members of a limited liability partnership (“the LLP”) in which they invested with the purpose of generating trading losses in the tax year 2004/05 which they could set against their other taxable income for that or previous years. Their investment was geared so that, for every £1,000 contributed by the taxpayer, a further £3,000 was added by way of a limited recourse bank loan funded by circular movements of money and repayable (if at all) only from future profits (if any) of the LLP's initially loss-making trade. The arrangements formed part of a marketed tax avoidance scheme, for which each taxpayer presumably paid a substantial fee.
The LLP was called Tower MCashback 3 LLP. It was incorporated on 30 March 2004, and carried on a trade of software licensing. Dr Amrolia joined the LLP in September 2004, contributing £400,000, of which £300, 000 (or 75%) was borrowed. Dr Ranjit-Singh had already joined the LLP in June 2004, contributing £232,000, of which £174,000 was borrowed.
As intended, the LLP purportedly made a substantial loss in the 2004/05 tax year. The shares of that loss allocated to the taxpayers amounted to just less than their total contributions: £399,953 in the case of Dr Amrolia, and £231,973 in the case of Dr Ranjit-Singh. In their personal tax returns for that year, they duly claimed to make use of the losses. Dr Amrolia claimed to carry back the whole of his loss and to set it against his general income from the previous year, pursuant to section 380(1)(b) of the Income and Corporation Taxes Act 1988 (“ ICTA 1988”). Dr Ranjit-Singh claimed to set £99,984 of her loss “sideways” against her income for the current year, pursuant to section 380(1)(a) of ICTA 1988, and to carry back the remaining £131,989 to 2001/02 and 2002/03 pursuant to the further relief for individuals for losses in the early years of a trade contained in section 381 of ICTA 1988.
In September 2006, the respondent Commissioners for HM Revenue & Customs (“HMRC”) gave notice to the LLP that they were opening an enquiry into its partnership return for 2004/05, which had been submitted pursuant to section 12AA of the Taxes Management Act 1970 (“ TMA 1970”). The notice of enquiry was given under section 12AC(1) of TMA 1970. By virtue of section 12AC(6), the giving of notice of enquiry to the LLP was deemed to include the giving of notice of enquiry under section 9A(1) to each individual partner who had made a personal return under section 8 of the Act, including therefore Dr Amrolia and Dr Ranjit-Singh. I record at this point that, although an LLP is a corporate entity, it is relevantly treated for income tax purposes in the same way as an ordinary English partnership: see section 863 of the Income Tax (Trading and Other Income) Act 2005, and Revenue and Customs Commissioners v Vaines [2018] EWCA Civ 45, [2018] STC 297, at [14] to [18].
Before HMRC's enquiry into the LLP's 2004/05 return was concluded, effect was given by HMRC to the loss relief claims which the taxpayers had made in their personal returns for that year. On 27 February 2009, HMRC made a tax repayment to Dr Amrolia of £173,781.19, comprising credits to his self-assessment account of £159,981.20 in respect of tax and £13,799.99 repayment supplement. Dr Ranjit-Singh, for her part, had already received credits to her self-assessment account of £28,757.57 in respect of her sideways claim, and £45,050.84 in respect of her carry back claims, on 3 October 2005 and 10 November 2005 respectively.
On 11 May 2011, the Supreme Court delivered judgment in relation to similar schemes carried on through two predecessor LLPs, Tower MCashback LLP 1 and Tower MCashback LLP 2: see Tower MCashback LLP 1 and Another v Revenue and Customs Commissioners [2011] UKSC 19, [2011] 2 AC 457. For present purposes, it is enough to say that the Supreme Court upheld only 25% of the first-year allowances claimed by the predecessor LLPs, because the borrowed money did not in any meaningful sense involve an incurring of expenditure in the acquisition of software rights: see, in particular, the judgment of Lord Walker of Gestingthorpe JSC at [75]. It was soon realised that this reasoning would be equally fatal to 75% of the first-year allowances claimed in the third iteration of the scheme, and on 28 June 2011 HMRC served a closure notice pursuant to section 28B(1) of TMA 1970 disallowing 75% of the losses claimed by the LLP for 2004/05. Although the LLP initially appealed against the closure notice, the appeal was withdrawn in January 2012 and a later application to reinstate it was rejected by the First-tier Tribunal (“the FTT”) on 5 December 2014: Tower MCashback 3 LLP v HMRC [2014] UKFTT 1081 (TC).
We have not seen the closure notice which was served on the LLP, but it is important to note that its effect is now final and it cannot be challenged by the LLP itself, or by the individual partners whose shares of the LLP's first-year losses were correspondingly reduced by 75%. The issues which arise on this appeal stem from the steps which were then taken by HMRC to amend the taxpayers' individual returns so as to give effect to the unchallenged amendments made to the LLP's partnership return.
Section 28B of TMA 1970 relevantly provided as follows:
“ Completion of enquiry into partnership return
(1) An enquiry under section 12AC(1) of this Act is completed when an officer of the Board by notice (a “closure notice”) informs the taxpayer that he has completed his enquiries and states his conclusions. In this section “the taxpayer” means the person to whom notice of enquiry was given or his successor.
(2) A closure notice must either –
(a) state that in the officer's opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A closure notice takes effect when it is issued.
(4) Where a partnership return is amended under subsection (2) above, the officer shall by notice to each of the partners amend–
(a) the partner's return under section 8 or 8A of this Act, or
(b)…
so as to give effect to the amendments of the partnership return.”
In fulfilment of the duty under section 28B(4), notice was given by an officer of HMRC to each of the taxpayers amending his or her personal return under section 8. Since the terms of the two notices are of central importance, I must set them out in full.
The notice to Dr Amrolia was dated 4 February 2016 and contained in a letter sent by Mr P Bolton, a member of the Individual Compliance Team at Charities, Savings & International 3 in Bootle. It reads as follows:
“Dear Dr Amrolia
Tower MCashback 3 — Amendment to your personal Self Assessment Tax return – year ending 5 April 2005 (Section 28B(4) Taxes Management Act 1970)
On 27 September 2006 an enquiry was opened into the Tower MCashback 3 partnership's Self Assessment tax return for the period ended 5 April 2005.
Those enquiries were completed on 28 June 2011 and the conclusion was that the claim to Capital Allowances was excessive. An appeal was made against the closure notice on 28 July 2011 but this was subsequently withdrawn in October 2015. As a consequence the appeal process has been exhausted and the amendments agreed.
I have today amended your Self Assessment account for the year ended 5 April 2005 to take account of the reduction in losses allocated to you by the partnership. The share of the loss has been changed from £399,953.00 to £127,516.00. You originally claimed tax relief to be calculated by reference to earlier years and credits of £159,981.20 tax and £13,799.99 repayment supplement were applied to your Self Assessment account and a repayment of £173,781.19 was paid on 27 February 2009.
The result of this amendment is that your tax refund has decreased by £108,974.80 to £51,006.40. This credit due on 31 January 2006 attracts a repayment supplement of £4,396.87 to 27 February 2009. I have therefore applied a credit of £55,403.27 to your Self Assessment account today.
I enclose a statement of your Self Assessment account.”
The notice given to Dr Ranjit-Singh was contained in a letter dated 15 March 2016 from Bob Newman, an Avoidance Caseworker at HM Revenue & Customs Counter-Avoidance in Newcastle. It reads as follows:
“Dear Miss Ranjit-Singh
Tower MCashback 3 — Amendment to your personal Self Assessment Tax return – year ending 5 April 2005 (Section 28B(4) Taxes Management Act 1970)
On 27 September 2006 an enquiry was opened into the Tower MCashback 3 partnership's Self Assessment tax return for the period ended 5 April 2005. Those enquiries were completed on 28 June 2011 and the conclusion was that the claim...
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