Revenue and Customs Commissioners v Investec Asset Finance Plc; Investec Bank Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 April 2018 |
| Neutral Citation | [2018] UKUT 69 (TCC) |
| Date | 04 April 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0069 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
The Hon Mr Justice Arnold and Judge Charles Hellier
John Tallon QC and James Rivett, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Jonathan Peacock QC and Michael Ripley, instructed by Allen & Overy LLP, appeared for the respondents
Corporation tax – Purchase by traders of partnership interests and contributions to capital – Whether capital or revenue expenditure – Whether wholly and exclusively for purposes of trade.
The Upper Tribunal allowed HMRC's appeal in part: although transactions involving the acquisition of partnership interests and making of capital contributions were short-term, recurrent transactions which had the character of trading, nevertheless the capital contributions by the taxpayer companies were for the businesses of the partnerships, whose trades were separate trades to those of the taxpayers.
This was an appeal from a decision of the First-Tier Tribunal (FTT) (Investec Asset Finance plc [2016] TC 05111). The case concerned seven transactions involving the participation by Investec Asset Finance plc (“IAF”) and Investec Bank plc (“IBP”), collectively “Investec”, in leasing partnerships.
The parties had agreed the FTT only had to consider (taking these as representative transactions) three transactions involving:
- Leasing Acquisitions General Partnership (LAGP);
- Garrard No. 2 Leasing Partnership LP (Garrard); and
- The 46th Hong Kong Leasing Partnership (HKP).
The LAGP transactions had been summarised by the FTT:
Merrill Lynch companies held the partnership shares. The partnerships had acquired UK tax-based leases of LNG tankers. The leases were acquired utilising indirect funding by a company within the Merrill Lynch group.
Investec bought partnership shares from the Merrill Lynch companies (£8,854,001). Investec also contributed funds (£226,181,882) so the partnership could purchase assets (£4,250,000) and pursuant to the purchase terms enable debt to be settled i.e. the vast majority of funds were indirectly applied to repay Merill Lynch. Immediately following the purchase, the lessees exercised an option and the leases were terminated. Subsequently, the partnership received the guaranteed residual value payments owed to the partnership by the original suppliers of the vessels the subject of the leases. The receipts were distributed to the partners (i.e. Investec).
The Garrard transactions had been summarised by the FTT:
A Schroders leasing partnership was acquired by Investec. The partnership held a lease of a film that was leased to the BBC. Investec acquired a 95% partnership interest and acquired Schrovest, which held the remaining 5% interest. Subsequently 4% of the 5% partnership interest was acquired directly by IAF. IAF contributed to the partnership and that contribution was returned to Schrovest.
Investec contributed substantial further capital to the partnership on several occasions. The capital was applied by the partnership to:
- Purchase assets from unconnected third parties and to lease them to third parties;
- Acquire a portfolio of leased assets from Investec Asset Finance (No.1) Limited; and
- Purchase leased assets from Investec Asset Finance (Capital) Limited.
Most of future rental entitlement was to be sold to Lombard, and a return of capital was to be made to the partners out of the proceeds of that sale. The remaining interest in the partnership, was to be sold, by way of transfers of partnership interests, to several companies in the Sumitomo Mitsui Banking Corporation group.
The HKP transactions had been summarised by the FTT:
The transactions involved the termination of a Hong Kong lease of an Airbus 340 in which the lessee was Cathay Pacific. Ahead of the transaction, all or virtually all the capital allowances had been claimed and any future rentals or sales proceeds would be taxable in Hong Kong at 17.5%.
The lease made no provision for what was to happen at the end of the primary lease period. Investec procured that before they became partners there would be a payment of an accelerated rental equivalent to the sales proceeds of the aircraft. The payment would then be distributed to the partners (i.e. Investec). Following the changes, Investec purchased the partnership interests. The cost suffered by Investec consisted of the price paid for the partnership interests and there was no contribution.
The Upper Tribunal said the common theme in each of the transactions was that IAF and IBP each acquired an interest in a partnership entitled to lease receivables, and became a partner in that partnership, with a view to the partnership realising the receivables and making distributions to IAF and IBP.
The FTT had found that:
- It was unrealistic to say that Investec had acquired the receivables or that the acquisition of the partnership interests was irrelevant;
- On the contrary, the purchase of the partnership interests was crucial to the tax planning of Investec's counterparties;
- Investec nevertheless had no interest in carrying on the leasing trades;
- The aim was, rather, to effect pre-planned steps of terminating the leases to receive distributions, or to receive distributions following the sale to Lombard/SMBC.
By Closure Notices, HMRC disallowed the expenditure (“the Disputed Expenditure”) claimed by Investec on the grounds that it was capital and not revenue, or, if revenue, that it was not incurred wholly and exclusively for the purposes of IAF's and IBP's trades; further, even if wholly and exclusively for those trades, that the profits of those trades should be computed, for tax purposes, separately from the trades carried on by the Leasing Partnerships.
The Disputed Expenditure included the sums paid for the acquisition of interests in the partnerships, sums paid for the acquisition of shares in Schrovest (in the case of Garrard), and the additional substantial contributions of capital (in the case of LAGP and Garrard).
The FTT had also determined, as a preliminary issue, that Investec were undertaking two trades (rather than one), viz: (a) the solo financial trades carried on by each of IAF and IBP, and (b) the trades carried on by each of IAF and IBP in partnership with the other partners in the Leasing partnerships.
There were six issues before the FTT:
- Was the Disputed Expenditure capital or revenue in nature? The FTT decided it was revenue in nature.
- Should the Disputed Expenditure be disallowed as not incurred wholly and exclusively for the purposes of IAF's and IBP's respective trades? The FTT decided the expenditure was incurred wholly and exclusively, and should not be disallowed.
- Were HMRC precluded by the Closure Notices from raising issue 4? The FTT decided that HMRC were not so precluded.
- Did the leasing partnerships' taxed profits – or the distributions of the leasing partnerships that represented taxed profits – need to be brought into account when computing the tax on the solo financial trades? The FTT decided they did not.
- Were HMRC precluded by the Closure Notices from raising Issue 6? The FTT again decided that HMRC were not so precluded.
- Was there a limitation on the foreign tax credits available to IAF and IBP in relation to the Hong Kong transactions? The FTT decided there was no such limitation because the partnership trades were separate from the solo financial trades carried on by each of the partners.
HMRC appealed against the FTT's conclusions on issues 1, 2 and 4. Investec appealed against the FTT's conclusion on issue 3. Neither side appealed 5 and 6. Investec did not challenge the FTT's decision that there were two trades rather than one in each case.
The Upper Tribunal decided as follows:
Issue 1: With regard to whether the expenditure was capital or revenue in nature, it considered the FTT was right to conclude that, although the transactions involved the acquisition of partnership interests and making capital contributions, they were short-term, recurrent transactions which had the character of trading. The partnership interests were exploited by quickly extracting the lease receivables in distributions and sales proceeds, rather than carrying on the trades of the leasing partnerships. HMRC's appeal was therefore to be dismissed.
Issue 2: Although the FTT was entitled to make the finding that Investec's ultimate objective by making capital contributions was to enable IAF and IBP to profit from distributions and sale proceeds, it was nevertheless inescapable that these capital contributions were partly for the purposes of Garrard's and LAGP's businesses, which were separate trades from those carried on by IAF and IBP. HMRC's appeal was therefore to be dismissed in relation to the sums paid to acquire the partnership interests and the shares in Schrovest, but allowed in relation to the sums paid by way of capital contributions to Garrard and LAGP.
Issue 3: It was common ground that HMRC's case on issue 4 was not set out by HMRC in the Closure Notices, but was set out in the covering letter accompanying such Closure Notices. But the documents had to be read together, and accordingly the FTT had been right to hold that it had jurisdiction to entertain HMRC's case on Issue 4. Investec's appeal on this issue fell to be dismissed.
Issue 4: The Upper Tribunal said that, in writing its decision, it had identified a point which was not explored, although touched on within HMRC's skeleton argument. Regarding LAGP and Garrard, the distributions received by IAF and IBP were mainly part repayments of earlier capital contributions. It may be arguable that, to the extent that IAF's and IBP's receipts were returns of capital contributions rather than profits, they were not deductible when computing IAF's and IBP's taxable profits.
Furthermore, the Upper Tribunal said, this may relate to another point which had been...
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