The Brain Disorders Research Ltd Partnership v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Floyd,Lord Justice Patten,Lord Kitchin |
| Judgment Date | 31 October 2018 |
| Neutral Citation | [2018] EWCA Civ 2348 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2017/1871 |
| Date | 31 October 2018 |
[2018] EWCA Civ 2348
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE BIRSS AND JUDGE COLIN BISHOPP
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lord Kitchin
and
Lord Justice Floyd
Case No: A3/2017/1871
David Southern QC (instructed by Greenwoods GRM LLP) for the Appellant
Kevin Prosser QC and David Yates (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 26 July 2018
Judgment Approved
See ORDER at bottom of this judgment.
Introduction
The Appellant, the Brain Disorders Research Limited Partnership (“the Partnership”), was established in March 2007 as part of a scheme promoted by Matrix Securities Limited (“Matrix”) that was designed with the twin objectives of allowing substantial capital allowances to be claimed for expenditure on medical research and of obtaining tax relief for the members of the Partnership in respect of some £68.6m of pre-payments of interest included as part of the financing structure of the scheme. At least in its origin the scheme was based on the one considered by the Upper Tribunal (Tax and Chancery Chamber) in Vaccine Research Limited Partnership [2014] UKUT 389 (TCC).
In order to maximise the claim for capital allowances whilst still enabling the pre-payments of interest to be made, the Partnership capital of £122m (largely made up of bank borrowings) was paid to a captive SPV (Numology Limited) (“Numology”) under a Research Agreement which required the SPV to undertake a specified programme of medical research in return for the sum of £122m but permitted the SPV to conduct the medical research through a specified sub-contractor (BRC Operations Pty Limited (“BRC”)) at a cost of only £7.67m. I have used the figure of £122m because different figures appear in different places to describe the amount of the Partnership capital and what was paid to Numology. The balance of the £122m paid to the SPV was used to make the pre-payments of interest, to repay the principal of the bank loans and to pay fees. But the Partnership claimed capital allowances of some £120m on the basis that it had incurred this amount of capital expenditure on research when carrying on a trade.
The Appellant is the general partner of the Partnership and its limited partner members are all high net worth individuals who joined the scheme in order to obtain up-front tax relief which could be set against their other sources of income. The transactional arrangements necessary to implement the scheme took effect on 2 April 2007 when both the Research Agreement and the Research Sub-Contract were signed. HMRC refused to allow the Partnership's claim for capital allowances and the claims of the individual partners to interest relief on a number of grounds including that parts of the contractual arrangements in the form of the Research Agreement entered into between the Partnership and Numology were a sham and therefore of no legal effect; as an alternative to the sham argument that a claim for capital allowances could not extend beyond the £7.67m paid to the sub-contractor and used for medical research because the wider contractual arrangements (including the bank loans and the Research Agreement with Numology) fall to be treated as a single composite transaction under which the only expenditure incurred on medical research was the £7.67m; but that even this sum was not allowable because the Partnership was not at the time carrying on a trade to which the research and development related so that the expenditure was not qualifying expenditure as defined in s.439 Capital Allowances Act 2001 (“ CAA 2001”).
We are concerned on this appeal only with the question of capital allowances and in order to understand the issues which arise it is necessary to outline in slightly more detail the contractual arrangements between the Partnership and Numology and the financing arrangements put in place between the individual partners and the banks involved, Schroders and Bank of Scotland. From March 2007 the law was changed in Schedule 4 to the Finance Act 2007 so as to limit to £25,000 the amount of capital allowances which could be set against the partners' other income in any one year. It was this legislative change which led to an alteration in the form of the scheme so as to introduce the loan arrangements necessary to fund the pre-payments of interest and to include a claim for interest relief as one of the fiscal objectives of the scheme. The original tax planning together with these changes are described in the decision of the First-tier Tribunal (“FtT”) in this case (Judge HowardNowlan and Ms Helen Myerscough ACA) released on 2 July 2015. For convenience, I will adopt the same course as the Upper Tribunal (Birss J and Judge Colin Bishopp [2017] UKUT 0176 (TCC)) and set out the summary of the scheme contained in the FtT decision. For ease of exposition, the transactions are summarised using simple numbers beginning with the capital contributed to the Partnership which is treated as 100 and the payment of £7.67m to BRC which is 6. In fact, as already mentioned, the individual partners contributed capital of £122m to the Partnership of which £106.7m was provided by Schroders and Bank of Scotland by way of loan. The balance was provided by the partners out of their own resources. The FtT analysed these arrangements as follows:
“6. The original objective of the tax planning was to identify an area of scientific research where the cost of a conventional research programme would be approximately 100, but where the technology, expertise, systems and data bank held by one particular company, would enable the relevant research to be undertaken and accomplished by that unique company for a vastly lesser sum, albeit that the company in question would retain 90% of any net royalties derived from the work programme to reflect the value of its special expertise, data bank etc held prior to the commencement of the research.
7. Without referring to the full detail of how the scheme might have proceeded, the original scheme envisaged that the partnership would pay 100 to a special purpose vehicle or SPV (in fact the Jersey company owned by a charitable trust, Numology Limited (“Numology”), that performed roughly this role in the Vaccine Research scheme). The 100 was said to be the reasonably verified amount that various third-party providers would have charged for undertaking the research work in the then conventional manner. Under the contract under which the Partnership paid the 100 to Numology, Numology contracted to undertake the work itself or through the identified sub-contractor, namely the company with the special expertise, systems and data bank referred to in the previous paragraph. That company was the Australian company, BRC Operations Pty Limited (“BRC”). In a research sub-contract, Numology then paid 6 to BRC to undertake the work programme that Numology had undertaken to perform or procure for the Partnership. The further terms of this arrangement were that BRC had licenced its existing intellectual property, its patents and knowhow, in relation to the relevant area of scientific research, namely treatments for certain brain disorders, to Numology, and indirectly to the partnership for £1, and that had then been licensed back by the Partnership, first to Numology in return for a combination of fixed royalties and fluctuating royalties, and then sub-licensed by Numology to BRC in return simply for fluctuating royalties equal to 10% of the net royalties eventually derived from the improved and enhanced intellectual property following the work programme undertaken by BRC. Under this sub-contract arrangement, the deal with BRC was simply that if the completed work programme delivered royalties or any other reward, BRC would retain 90% of the net revenues, whilst 10% would flow to Numology and on to the Partnership
8. Since Numology had received 100 from the Partnership and applied only 6 in procuring that the scientific research would be undertaken by BRC, the basic plan (ignoring now irrelevant detail) was to be that Numology would acquire various deposits or other financial instruments with its retained 94, less whatever amount had to be paid in fees, to secure its obligation to pay the fixed royalties for which it alone was liable, as mentioned in the previous paragraph.
9. The tax hope and expectation on the part of the Partnership was that, since the partnership had paid 100 to Numology for the scientific research, (that amount being claimed to be what it would ordinarily have cost to undertake the research, and implicitly therefore fair payment), the partnership would be able to claim capital allowances for 100 and the partners would be able to set their respective shares of the allowances against other income. The tax benefit of that early tax relief, coupled then with the secured receipt of the fixed royalties meant that the transaction was appealing to the partners even if the research was unsuccessful, and no 10% royalties were ever received. Hopefully such royalties would be received. The expectation, however, that capital allowances would be available for the full 100, coupled with the secured receipts of fixed royalties that eliminated the more risky expedient of simply investing the entire partnership capital directly in scientific research was the objective of the planning.
The law change in March 2007 and the revisions leading to the scheme as implemented
10. On 2 March 2007, it was announced that partners would only be able to offset £25,000 of losses or allowances in this situation against other...
To continue reading
Request your trial
-
Ingenious Games LLP and Others v Revenue and Customs Commissioners
...a trading purpose. [202] The final case is the Court of Appeal's judgment in Brain Disorders Research Ltd Partnership v R & C Commrs [2018] EWCA Civ 2348 (“Brain Disorders”). [203] The taxpayer limited partnership was established as part of a scheme designed with the twin objectives of allo......
-
BCM Cayman LP and Others
...approach is misconceived. In support, he cited the observation of Patten LJ in Brain Disorders Research Ltd Partnership v R & C Commrs [2018] EWCA Civ 2348 who said, at [32]: … Although the Ramsay approach to construction has undoubtedly involved the courts in looking at the commercial real......
-
Bluecrest v HMRC
...to the application of the Ramsay doctrine, citing the dictum of Patten LJ in Brain Disorders Research Limited Partnership v HMRC [2018] EWCA Civ 2348, [2018] STC 2382, at [32]: “Although the Ramsay approach to construction has undoubtedly involved the courts in looking at the commercial r......
-
(1)The Commissioners for HM Revenue and Customs v Bluecrest Capital Management LP and others and (2) Andrew Dodd and others v The Commissioners for HM Revenue and Customs [2022] UKUT 00200 (TCC)
...There are limits to the application of the Ramsay doctrine. As Patten LJ stated in Brain Disorders Research Limited Partnership v. HMRC [2018] STC 2382 at “Although the Ramsay approach to construction has undoubtedly involved the courts in looking at the commercial realities of the transact......