Sword Services Ltd and Others v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Mr Justice Cranston |
| Judgment Date | 23 June 2016 |
| Neutral Citation | [2016] EWHC 1473 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/2835/2015 |
| Date | 23 June 2016 |
[2016] EWHC 1473 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon. Mr Justice Cranston
Case No: CO/2835/2015
Mr James Rivett (instructed by GRM Law) for the Claimant
Mr Sam Grodzinski QC and Mr David Yates (instructed by HMRC Solicitor's Office) for the Defendant
Hearing dates: 8 and 9 June 2016
Approved Judgment
Introduction
These proceedings challenge the issue of Partner Payment Notices under Schedule 32 of the Finance Act 2014. Partner Payment Notices are a tax anti-avoidance measure. The effect of each Partner Payment Notice is to require the recipient to pay the sum identified in them to HM Revenue and Customs ("HMRC") within 90 days of the notice. There is no statutory mechanism by which to appeal to the First Tier Tribunal against the issue of a Partner Payment Notice and so a challenge must proceed by way of judicial review.
The claimants are each members of partnerships set up by Future Capital Partners Limited ("FCP"). Each partnership was either a general partnership ("GP") or a limited liability partnership ("LLP"). As a result of the permission decision of Picken J, explained later, this judgment affects only a limited number of the members of GPs, GPs 6–7, but all members of LLPs. There are witness statements from a number of claimants which refer to the Partner Payment Notice causing permanent financial consequences for them, in some instances also having devastating effects for their employees.
There are two challenges to the Partnership Payment Notices in these proceedings. First, the claimants contend that while the Partnership Payment Notice provisions of Schedule 32 apply to the GPs, as a matter of statutory construction they do not apply to the LLPs. The second challenge is that the particular Partnership Payment Notices sent for GPs 6–7 and LLPs 4–7 were invalid. If that is the case it is too late now under the legislation for HMRC to send valid notices. This second ground concerns whether, under the relevant provisions of the Taxes Management Act 1970, HMRC had issued notices of enquiry in relation to the partnership tax returns for GPs 6–7 and LLPs 4–7. That is one of the preconditions set out in Schedule 32 to the issue of Partnership Payment Notices.
The tax avoidance scheme
In his first witness statement, Mr Timothy Levy explains that he is the chief executive officer, and one of the founders, of FCP, and is a director of various other companies within the FCP group. These include Future Films (Management Services) Limited ("FFMS") and Future Films (Partnership Services) Limited ("FFPS") and Future Capital Partners (Partnership Services) Limited ("FCPPS"). From 2008 FCP established and promoted various GPs and LLPs as part of what was described in promotion material as "a plan to be involved in a diverse range of film activities", the FCP group having "arranged in excess of £5 billion of structured media financing transactions without successful challenge from HMRC". Since then the GPs and LLPs have been managed or operated by a company connected with FCP.
Under the arrangements each GP or LLP provides film production services, and in return receives the right to share in the income received from films, contingent on their performance. In turn each claimant shares in the profits and losses of the relevant GP or LLP of which it is a member. The contractual arrangements entered into by each GP or LLP purport during their first period of account to have the effect that they are obliged under Generally Accepted Accounting Principles ("GAAP") to recognise the expenditure to which they are committed as having been expended in that first period. The claimants' position is that the losses arising to each GP or LLP during that initial period can then be set against a member's income for the purposes of computing their individual tax liability.
In February 2008 FCP as promoter made a disclosure to HMRC about these arrangements under section 308 of the Finance Act 2004 (the disclosure of tax-avoidance schemes provision). The disclosure was updated in September 2008. Dean Street Productions was the name given to the scheme and ultimately it included GPs 6–7 and the LLPs, which are involved in the present litigation. HMRC describes the scheme as a "UK GAAP sideways loss scheme."
The partnership documents
Under the scheme there were partnership deeds for each of GPs 6–7 and LLPs 4–By way of example the Amended and Restated Partnership Deed for LLP 4 is dated 21 December 2010. Future Capital Partners (FS) Limited ("FCPFS") is identified as the promoter of the scheme. The founding members of the partnership are named as FFMS and FFPS, which are also defined as the designated members for the time being. FCP is defined as the consultant to the partnership for the time being, further to the Partnership Consultancy Agreement. The Future Corporate Member of the partnership is named as Future Screen Ventures (30) Ltd ("FSV30"). Under the Partnership Deed the registered office of the partnership is 10 Old Burlington Street, London.
Under clause 4.2 of the Partnership Deed, the consultant is responsible for ensuring that all partnership activities which amount to the operation of an unregulated collective investment scheme for the purposes of the Financial Services and Markets Act 2000 are carried out by an authorised person. The Partnership Deed states that FCPFS is appointed as the operator, pursuant to the Operator Agreement, although it enables the designated members to replace the operator. Under clause 4.4 the operator can delegate its functions to the consultant or any other suitable person. The remainder of clause 4 gives the designated members wide powers of management. Clause 7.1 imposes on the operator a duty to use reasonable endeavours to ensure that the consultant prepares the UK tax computation for the partnership and submits and agrees it with HMRC.
Under the Film Consultancy Agreement dated 2 August 2010, LLP 4 engages FCP to provide film consultancy services. By clauses 5.1.4–5.1.5 FCP undertakes in dealings with third parties to describe itself as the consultant to the partnership, not its agent, and not to hold itself out as agent or allow itself to be held out as such. Film consultancy services are defined as the services set out in the schedules. Schedule 2 contains a number of matters delegated by the operator, FCPFS, to the consultant, FCP. One of these is as follows:
"Administering the general taxation matters of the Partnership with the HMRC, and providing to Partners such information derived from the tax and financial affairs of the Partnership as they may reasonably require in relation to the computation of their own tax positions."
On 14 February 2011, LLP 4 appointed Taylorcocks, chartered accountants and chartered tax advisers, as its auditors. Under the letter of engagement Taylorcocks undertook to provide taxation services as follows:
"We shall prepare, in respect of each accounting period, a computation of profits adjusted in accordance with the Taxes Acts. Once they have been approved by you we shall complete the appropriate self assessment schedule.
We shall prepare on your behalf the necessary self assessment returns…
We shall forward your return (together with copies of all supporting material we propose to submit to HM Revenue & Customs with your return) to you for approval and signature. You are legally responsible for making a correct return in respect of your annual tax liability, and it is essential that we as your agent are supplied with all relevant information…"
The partnership documents for LLPs 5–7 and for GPs 6–7 followed essentially the same pattern as for LLP 4. With GPs 6–7 there was no designated partner but a managing partner; that was FCPPS. The accountant appointed for GPs 6–7 were Hillier Hopkins LLP.
There is an Operator Agreement dated 22 March 2010 for LLP 1. (I can assume that it is typical of such agreements given the absence of any objection from the claimants when HMRC produced it.) It is between LLP 1, FCP ("the consultant"), FCPFS ("the operator"), FFPS, and FFMS. The preamble records that the operator is authorised under the Financial Services and Markets Act 2000 and that the consultant has identified it as competent to provide services to the partnership as an unregulated collective investment scheme. Under the agreement the designated members of LLP 1 appoint the operator as the exclusive operator of the partnership. Among the services to be provided to the partnership by the operator listed in Schedule 1 is to "administer the general taxation matters of the Partnership with HM Revenue & Customs…" Under clause 2.6 of the agreement "[i]t is understood that the operator may delegate to the consultant the performance of various tasks (as set out in Schedule 2 …)…" and this includes "[a]dministering the general taxation matters of the Partnership with the Inland Revenue…" The operator Agreement is signed by Mr Levy as the designated member of LLP 1 and as director of each of FCP, FCPFS, FFPS, and FFMS.
The tax returns
Each of the partnerships in the scheme engaged with HMRC. The steps by LLP 4 can be taken as illustrative. On 1 February 2011 Mr Levy, for LLP 4, submitted a HMRC form 64–8, "Authorising your agent", naming FCP as the agent with whom HMRC could deal. A box was ticked "UTR [unique tax payer reference] not yet issued." The standard wording of form 64–8 states that the person who should sign the form is the partner responsible for the partnership's tax affairs.
On 17 February 2011 Mr Levy submitted to HMRC another form 64–8, "Authorising your agent". He...
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