Revenue and Customs Commissioners v Hamilton & Kinneil (Archerfield) Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 March 2015 |
| Neutral Citation | [2015] UKUT 130 (TCC) |
| Date | 20 March 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Warren CP
Graham Maciver appeared for the Appellants
Julian Ghosh QC and Thomas Chacko appeared for the Respondents
Income tax/corporation tax Losses Interpretation of Income and Corporation Taxes Act 1988 (ICTA 1988), s. 118ZC limit on loss relief for members of LLPs Whether appellant's third share in capital of LLP was contributed as capital (ICTA 1988, s. 118ZC(3)) on basis that this was the amount appellant had exposed to risk No Whether appellant's third share was included in amount the appellant was liable to contribute to the assets of the LLP in the event LLP was wound up (ICTA 1988, s. 118ZC(4)(a)) No Appeal from Tax Chamber allowed.
The Upper Tribunal (UT) allowed HMRC's appeal and overturned the decision of the First-tier Tribunal (FTT) in Hamilton & Kinneil (Archerfield) Ltd TAX[2014] TC 03485 finding that the amount that Hamilton & Kinneil (Archerfield) Ltd (HKAL) (as a corporate member) contributed as capital to the LLP's trade, under the Income and Corporation Taxes Act 1988, s. 118ZC, was zero and, accordingly, it was not entitled to any loss relief in respect of the LLP's trading losses.
HKAL was a member of The Renaissance Club at Archerfield LLP (RCA) and had claimed trading losses relating to RCA against its profits chargeable to corporation tax. HMRC had disallowed the trading losses claim.
The issue before the tribunals was the interpretation of the provisions in the former ICTA 1988, s. 118 and 118ZC, (now CTA 2010, s. 59 and 60) which limit the amount of loss relief that may be claimed to the members contribution to the trade of the LLP as capital. A member's contribution to a trade is defined by s. 118ZC(2) as the greater of: (a) the amount the member has subscribed (in turn defined by s. 118ZC(3)), or (b) the amount of the member's liability on a winding up (in turn defined by s. 118ZC(4)).
The FTT had found unanimously that the appellant's contribution to capital under s. 118ZC(3) was zero but was split in its opinion on the amount the appellant was liable to contribute upon a winding up under s. 118ZC(4), particularly, with regard to the US$8.1m cash that had been contributed to the LLP by its other member (a Delaware limited liability corporation called Invest Archerfield LLC (IALLC)) but which had been credited to both members' capital accounts according to the capital sharing ratio set out in the LLP agreement, which meant HKAL had been credited with a one-third share (i.e. $2.7m).
The dissenting view of Mr Law was that HKAL had contributed nothing by way of capital to the LPP within the context of s. 118ZC(3) because no money or other property had passed from its ownership into the ownership of the LLP. It, therefore, could not be regarded as satisfying either subsection (a) or (b) of s. 118ZC(2) to any extent and so it could not claim loss relief. The casting vote of Judge Raghavan, however, was that HKAL's one third share in the LLP's net capital was the amount HKAL was liable to contribute upon a winding up and the amount of the LLPs losses available to HKAL were to be limited by reference to that amount.
The UT considered that a subscription under s. 118ZC(3) amounted to the transfer of assets to the LLP in return for an interest in the LLP. In the present case, the $8m paid to RCA by IALLC was subscribed and it was subscribed by IALLC. The UT confirmed that HKAL did not make any contribution at the initial stage and could not claim one third of the $8m contributed by IALLC.
On the second issue as to how much HKAL was liable to contribute on a winding up under s. 118ZC(4), HKAL argued that what it was liable to contribute on a winding up was what had been put at risk and that was the $2.7m credited to its capital account. If the LLP were wound up solvently, HKAL would have been entitled to $2.7m plus a share of any surplus whereas on a winding up it would receive no return of the $2.7m.
The UT found that this amounted to an argument that an amount subscribed under s. 118ZC(3) would automatically feature as part of the member's liability on a winding up under s. 118ZC(4) in an ordinary case but considered if that was the case, it was unlikely that s. 118ZC(2) would have been drafted in the way that it was. The UT was further troubled by HKAL's description of the amount which a member was liable to contribute on its winding up as including an amount already committed to the LLP which would form part of the assets available to creditors if the LLP were would up, but which would otherwise be returned to the member on a winding up and further considered that as far as risk was concerned, in terms of capital contribution, the risk related to the $8m all of which was provided by IALLC.
Overall, the UT rejected HKAL's case and concluded that the decision of Judge Raghaven was in error and that of Mr Law was to be preferred. HMRC's appeal was allowed.
Former ICTA 1988, s. 118 (now CTA 2010, s. 59) limited the amount of relief a corporate member could obtain for its share of an LLP's losses to the amount it had contributed to the trade of the LLP as capital. This was defined at former ICTA 1988, s. 118ZC (now CTA 2010, s. 60) as the greater of (i) the amount subscribed; and (ii) the amount of the member's liability on a winding up. The FTT was unanimous that the amount subscribed was zero but disagreed on the amount of HKAL's liability on a winding up. The dissenting view was that this was also zero because the company had no obligation to contribute anything on a winding up. However, the FTT Judge had the casting vote and found that the amount that had been credited to the HKAL's capital account was to be included as part of its liability on a winding up even though that amount had actually been paid in by the other member of the LLP. The UT has found that this judgment was incorrect and that the dissenting view was the one to be preferred.
[1] The appellants (HMRC) appeal from the decision of the Tax Chamber released on 10 April 2014 (the Decision) allowing the appeals by the respondents against amendments to their respective corporation tax returns. The appeal of the first respondent (HKAL) was for the period ending 28 February 2009 and the appeals of the second respondent (Estates) and the third respondent (Enterprises) were for the periods ending 31 October 2007, 31 October 2008 and 31 October 2009. The amendment to HKAL's return reflected the non-availability of the loss which it had claimed and the returns of Estates and Enterprises reflected the knock-on effect of part of the loss claimed being unavailable for surrender to them.
[2] The tribunal comprised Judge Raghavan and Mr Richard Law (together the Tribunal). The Tribunal were split on their ultimate decision although there was common ground on one issue. By the casting vote of Judge Raghavan, it was held that the loss claimed by HKAL was available and its appeal allowed. The surrender of part of the loss to Estates and Enterprises was therefore effective and their appeals were also allowed.
[3] I will refer to paragraphs of the Decision in this format: Decision [x]. The facts agreed are set out in Decision [5] to [24]. I do not need to repeat them. The material points are these:
a) HKAL was at all relevant times a member of the limited liability partnership called The Renaissance Club at Archerfield LLP (RCA). The other member was at all material times a Delaware limited liability corporation called Invest Archerfield LLC (IALLC).
b) IALLC represented the interests of a group of American investors. HKAL and IALLC were at all material times dealing at arm's length.
c) The purpose of RCA was to develop and run a golf course and associated hospitality business on the Archerfield Estate in East Lothian. RCA was governed by an agreement (the LLP Agreement) dated 1 April 2005.
d) RCA made substantial trading losses during the years in issue. For its accounting period ending 29 February 2008, HKAL claimed trading losses relating to RCA of 806,058 and for its accounting period ending 28 February 2009 it claimed trading losses of 835,351
e) The accounts and abbreviated accounts submitted with HKAL's corporation tax return for the periods ending 29 February 2008 and 28 February 2009 stated that they were prepared on the historical cost basis and recorded that HKAL was a member of and held a one-third share in the LLP and that there was no cost to the investment.
f) On 19 May 2010 HMRC opened an enquiry into HKAL's corporation tax return for the period ending 28 February 2009; and on 26 October 2011 HMRC issued notices amending HKAL's return for the period ending 28 February 2009 so as to disallow the claimed trading losses.
[4] The material terms of the LLP Agreement were as follows:
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a) Clause 1.1 contained definitions including these:
Capital
means the net capital of the LLP as shown in any balance sheet prepared in accordance with the provisions hereof as belonging to the Members and being the excess of the assets of the LLP over its liabilities;
Contribution
means any money or assets paid into the accounts of the LLP by a Member less any liabilities attaching thereto which shall be assumed by the LLP in substitution for it;
Members
means [HKAL] and IALLC;
Member's Share
means a Member's share and interest of and in [the net capital of the LLP];
Relevant Proportion
means:
(a) in respect of IALLC, 66.66%; and
(b) in respect of [HKAL], 33.34%.
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b) Clause 3.8 provided that on the Completion Date [in the event, 3 March 2006]
3.8.1 IALLC shall remit to the bank account of the LLP the sum of US$8 million by way of an initial cash Contribution to the LLP
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c) Clause 9.1 provided that:
Notwithstanding the amount or value of any Contributions made by each Member as at the Commencement Date or the Completion Date or any other...
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