TC03545: Acornwood LLP and related appeals
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 May 2014 |
| Neutral Citation | [2014] UKFTT 416 (TC) |
| Date | 07 May 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 416 (TC)
Judge Colin Bishopp, Mr Richard Law FCA
Mr Jonathan Peacock QC and Ms Hui Ling McCarthy, counsel, instructed by Deloitte LLP, appeared for the appellants
Mr Jolyon Maugham, counsel, instructed by Michael Simpkins LLP, appeared for the seven individual referrers
Mr Peter Blair QC, Mr Jonathan Davey and Mr Imran Afzal, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents and Joint referrers
Income tax - Loss relief - Arrangements for exploitation of intellectual property rights - Whether first-year losses incurred - Whether large part of money used for exploitation of rights or for purchase of guaranteed income stream - Guaranteed income stream - Whether remainder used within first accounting period and allowable loss in that year - Whether capital or income payments - Icebreaker 1 considered - Arrangements essentially a tax avoidance scheme - Appeals against closure notices substantially dismissed.Reference - Taxes Management Act 1970 ("TMA 1970"), section 28ZAs. 28ZA - Whether partnerships' trade commercial - No - Whether members non-active - Yes - Whether Restrictions Regulations apply - No, as none of conditions satisfied - Whether Income Tax Act 2007 ("ITA 2007"), Income Tax Act 2007 section 74ZAs. 74ZA applies to later iteration - Yes.
The First-tier Tribunal (FTT) has dismissed in part several partnerships' appeals concerning arrangements entered into for the acquisition and exploitation of intellectual property rights. The FTT found that although each of the partnerships was carrying on a trade of the exploitation of intellectual property rights, the scheme substantially failed in its purpose to secure sideways loss relief for the partnerships' members and to increase the amount of the relief by unnecessary borrowing, which was purported to be available for use in the exploitation of intellectual property rights, but was in reality used to service itself.
The FTT also concluded that in respect of a joint reference designed to ascertain whether, if the partnerships' appeals had been successful, the individual members of the partnerships would have satisfied the conditions necessary for sideways relief to have been available, it concluded that they would not.
This case looked at the tax position of five Limited Liability Partnerships ("the appellant partnerships") and their members and follows on from the Upper Tribunal decision inIcebreaker 1LLP v R & C CommrsTAX[2011] BTC 1579. The appellant partnerships' cases and a joint reference from seven individuals ("the individual referrers"), who were members of the appellant partnerships, or other, similar, partnerships, and HMRC, were heard together as all involved essentially the same facts and arrangements, with the five appeals being lead cases. There were a further 46 partnerships and approximately 1,000 members involved in related cases (with all 51 partnerships collectively referred to as "Icebreaker Partnerships"). The case considered arrangements in the tax years 2005-06 to 2009-10 during which each of the partnerships acquired for relatively modest sums certain intellectual property rights (often in the music or publishing industry), and for much larger payments agreed with an exploitation company that it would exploit the rights on its behalf. The revenue from the exploitation was to be shared between the partnership and the exploitation company, which was also required, as part of the arrangements, to pay certain guaranteed sums to the partnership. In addition each partnership entered into agreements with the promoter of the arrangements (Icebreaker Management Limited or IML) by which, in return for substantial payments, IML provided, or was to provide, various services to the partnership. One of the key features of the arrangements was the financing of the members' capital injections; these were in each case derived in part from their own resources (often 20-25 per cent) and in part from secured bank borrowings (often 75-80 per cent). In each case the expenditure mentioned above was incurred in the partnership's first accounting period and the members were guaranteed returns sufficient to enable them to service and repay their secured borrowings. The appellant partnerships claimed that the expenditure incurred in the first year of trading gave rise to allowable losses which their members were entitled to set off by way of sideways loss relief against income or capital gains arising outside the trade. Although HMRC accepted that the appellant partnerships were trading with a view to profit and that none of the arrangements were a sham, they argued that the true purpose was the creation of artificial losses, the aim being to generate tax relief as part of tax avoidance schemes and the earning of trading profit was incidental to this. HMRC issued closure notices disallowing almost all of the supposed losses, against which the appellant partnerships appealed.
HMRC argued that:
(2) the schemes did not work: the expenditure which gave rise to the supposed losses was not incurred wholly and exclusively for the purposes of the partnerships' trade; their accounts were not prepared in accordance with Generally Accepted Accounting Practice (GAAP); and the expenditure was in any event of a capital rather than revenue nature (all referred to by the FTT as "the ineffective argument"; and
(3) if the schemes did succeed in generating a tax advantage, the fiscal effect should be disregarded under the Ramsay principle.
The FTT looked at the following five key questions (the first four of which relate to the ineffective argument):
The FTT decided that the payments to the exploitation company were, to the extent they matched the amount borrowed, paid for the purchase of a guaranteed income stream with the remainder of the payment being for exploitation services. The advisory fees paid to IML on closure of the partnership represented, in one case (in which there was no provision for an annual fee), the consideration for three things: the purchase of a ready-made package of projects; advisory services rendered in the relevant year; and a pre-payment for future services. In another case (again in which there was no provision for an annual fee) they represented in part the consideration for the ready-made package of projects with the remainder being a pre-payment. In all the other cases the advisory fees were found not to be fees for advisory services, but instead represented a payment for the package of projects. Following the decision in Icebreaker 1 all of the administration fees paid on closure of the partnership represented, the consideration for services rendered in the relevant tax year.
The FTT found that the payments to the exploitation company which represented the purchase of a guaranteed income stream were of a capital nature while the remainder were of an income nature. The advisory fees paid immediately by all but one of the appellant partnership's were all of a capital nature, whereas the fee paid by the partnership which comprised the purchase of a ready-made package of projects; advisory services rendered in the relevant year; and a pre-payment for future service had to be apportioned: with the portion that represented the purchase price of the package being of a capital nature while the remainder was of a revenue nature. The entirety of the administration services fee paid on closure of the partnership was of a revenue nature.
The FTT found that the accounts were not GAAP-compliant. The taking to the profit and loss account of all of the amounts paid to IML and the exploitation company was not correct since it led to the introduction into the calculation of the profit or loss of what the FTT found to be capital payments and of sums properly to be treated as pre-payments. That approach did not satisfy the requirements of ITTOIA 2005, section 25 subsec-or-para 1s. 25(1) and section 26 subsec-or-para 126(1).
The FTT ruled that each partnership was entitled to treat as an allowable expense in the relevant year only so much of the payments it made as was of a revenue nature, and which did not represent a pre-payment. The FTT accepted that, so far as they were of a revenue nature and attributable to the relevant year, the payments were made for the purposes of the partnerships' trades and that they were not excluded from relief by virtue of being expenses not incurred wholly and exclusively for the purposes of the trade (ITTOIA 2005, section 34 subsec-or-para 1s. 34(1)). The remainder of the amount paid, however, could not be taken to the profit and loss account in the relevant year and, in the case of capital payments, ever. Therefore, the true loss for the relevant year was considerably less than the amount claimed, although not as little as HMRC submitted. The FTT did not have all the relevant information to enable it to calculate the true loss in each case so could not determine how the closure notices needed to be amended.
HMRC argued that there was a close parallel between Ramsayv IR CommrsTAX(1981) 54 TC 101 and this case. The arrangements were so structured, they say, that, save for the IML fees and some incidental expenditure, in respect of the money borrowed, the members were guaranteed at the end of the sequence to be put back in the position from which they started, in that not merely were their borrowings repaid but they did not themselves have to find the interest on the borrowings in the meantime. If any money was ever at risk it was no more...
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