The Queen (on the application of Alasdair Locke) v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Rose,Simler LJ,Underhill LJ |
| Judgment Date | 07 November 2019 |
| Neutral Citation | [2019] EWCA Civ 1909 |
| Docket Number | Case No: C1/2018/1975 |
| Court | Court of Appeal (Civil Division) |
| Date | 07 November 2019 |
[2019] EWCA Civ 1909
Lord Justice Underhill
(Vice-President of the Court of Appeal (Civil Division))
Lady Justice Rose
and
Lady Justice Simler
Case No: C1/2018/1975
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (ADMINISTRATIVE COURT)
MR JUSTICE LEWIS
Royal Courts of Justice
Strand, London, WC2A 2LL
David Ewart QC (instructed by Ernst & Young LLP) for the Appellant
Richard Vallat QC and David Yates QC (instructed by Solicitor's Office, HMRC) for the Respondents
Hearing date: 15 October 2019
Approved Judgment
Background
This appeal arises out of Mr Locke's involvement with a limited liability partnership called Eclipse Film Partners No 10 LLP (‘Eclipse 10’). Eclipse 10's business was the exploitation of film rights. In March 2006 Mr Locke joined the Eclipse 10 partnership, making a contribution of £29,700,000. He financed that contribution by taking out two bank loans. When he came to complete his self-assessment tax return for the 2005/2006 year of assessment, Mr Locke responded to the question on the form asking whether he wanted to claim any of a list of reliefs by entering a figure in the box signifying that he claimed relief for interest on qualifying loans and arrangements. Mr Locke also completed the tax return supplementary page designed for members of a partnership. He described the Eclipse 10 partnership as for the “exploitation of film rights” and gave the date when he started being a partner as 4 April 2006. He stated that his share of the profits of the partnership for the year was nil. In an annex to his tax return he listed one of the loans he had taken out for Eclipse 10, being the one on which he had paid interest in that year, and described the purpose of the loan as “Purchase an interest in a film partnership”. Mr Locke made similar claims for relief for the interest paid on the loans in subsequent years of assessment up to and including 2014/2015.
HMRC have opened enquiries into Mr Locke's tax returns for the years of assessment 2005/2006 to 2014/2015. When the follower notices I describe below were issued, those enquiries had not yet been completed and no closure notices had been served pursuant to section 28A of the Taxes Management Act 1970. HMRC argue that Mr Locke is not entitled to relief from income tax for those interest payments because the loan is not a qualifying loan. There has been correspondence between HMRC and Ernst & Young who act for Mr Locke. Both sides have set out their evolving arguments as to whether or not the interest payments qualify for relief.
On 8 March 2017 HMRC issued a series of 10 follower notices to Mr Locke under Part 4 of Chapter 2 of the Finance Act 2014, one for each year of assessment in which he had claimed interest relief. Follower notices are part of the regime designed, broadly, to discourage a taxpayer from persisting with a claim to be entitled to a tax advantage when a court has already ruled in an earlier case that that advantage does not arise for a taxpayer in his circumstances. HMRC stated in the follower notices that the conditions for the issue of the notices were met because on 17 February 2015, the Court of Appeal had handed down a ruling in Eclipse Film Partners No 35 LLP v Revenue and Customs Commissioners [2015] EWCA Civ 95, [2015] STC 1429 (‘ Eclipse 35’). HMRC consider that that case shows that Mr Locke is not entitled to relief on the interest payments. There is no statutory right of appeal against the issue of a follower notice so Mr Locke brought a judicial review challenge contending that the conditions for the issue of the follower notices were not met. That challenge was dismissed by Lewis J in the judgment under appeal, reported at [2018] EWHC 1967 (Admin), [2018] STC 1938.
The statutory provisions
I set out first the statutory provisions relating to claims for interest relief. The provisions set out here are those found in the Income and Corporation Taxes Act 1988 (‘ ICTA 1988’) which applied in the tax year 2005/2006. For subsequent tax years, sections 383 and 398 in Part 8 of the Income Tax Act 2007 applied but there is no material difference between those provisions and the provisions set out here.
Section 353 ICTA 1988 provides so far as relevant as follows:
“ 353 General Provision
“(1) Where a person pays interest in any year of assessment, that person, if he makes a claim to the relief, shall for that year of assessment be entitled (subject to sections 359 to 368 of this Act ….) to relief in accordance with this section in respect of so much (if any) of the amount of that interest as is eligible for relief under this section by virtue of sections 359 to 365.”
The various kinds of loans for which interest relief can be claimed are set out in the sections following section 353. For example, section 359 deals with a loan used to buy machinery or plant, section 360 with a loan to buy an interest in a close company and section 364 with a loan to pay inheritance tax. The relevant kind of loan in this case is that described in section 362 of ICTA 1988:
“ 362 Loan to buy into partnership
Subject to section 363 to 365, interest is eligible for relief under section 353 if it is interest on a loan to an individual to defray money applied –
(a) in purchasing a share in a partnership; or
(b) in contributing money to a partnership by way of capital or premium or in advancing money to a partnership, where the money contributed or advanced is used wholly for the purposes of the trade, profession or vocation carried on by the partnership; or
(c) in paying off another loan interest on which would have been eligible for relief under that section had the loan not been paid off (on the assumption, if the loan was free of interest, that it carried interest);
and the conditions stated in subsection (2) below are satisfied.”
It is accepted here that Mr Locke satisfied the conditions in section 362(2).
Section 353(1B) provides that where a person is entitled to interest relief by virtue of section 362, that relief shall consist in a deduction or set off of that amount from or against that person's income for that year.
The other set of relevant statutory provisions in this appeal are those establishing the follower notice regime. Section 199 of the Finance Act 2014 (‘ FA 2014’) provides an overview of Part 4 of the Act dealing with follower notices and accelerated payments. In that overview section 199 describes Chapter 2 of Part 4 as making provision for follower notices and for penalties “if account is not taken of judicial rulings which lay down principles or give reasoning relevant to tax cases”. Section 204 in Chapter 2, provides:
“ 204 Circumstances in which a follower notice may be given
(1) HMRC may give a notice (a “follower notice”) to a person (“P”) if Conditions A to D are met.
“(2) Condition A is that—
(a) a tax enquiry is in progress into a return or claim made by P in relation to a relevant tax, or
(b) P has made a tax appeal (by notifying HMRC or otherwise) in relation to a relevant tax, but that appeal has not yet been—
(i) determined by the tribunal or court to which it is addressed, or
(ii) abandoned or otherwise disposed of.
(3) Condition B is that the return or claim or, as the case may be, appeal is made on the basis that a particular tax advantage (“the asserted advantage”) results from particular tax arrangements (“the chosen arrangements”).
(4) Condition C is that HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements.
(5) Condition D is that no previous follower notice has been given to the same person (and not withdrawn) by reference to the same tax advantage, tax arrangements, judicial ruling and tax period.
(6) A follower notice may not be given after the end of the period of 12 months beginning with the later of—
(a) the day on which the judicial ruling mentioned in Condition C is made, and
(b) the day the return or claim to which subsection (2)(a) refers was received by HMRC or (as the case may be) the day the tax appeal to which subsection (2)(b) refers was made.”
“Relevant tax” for this purpose includes income tax: see section 200(a) and a “tax advantage” includes relief or increased relief from tax: see section 201(2)(a). Arrangements are “tax arrangements” “if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements”: see section 201(3). It is common ground before us that Conditions A, B and D were satisfied although there is a dispute as to the meaning of the term “the asserted advantage” used in Condition B. The principal issue between Mr Locke and HMRC concerns whether Condition C is met in his case, in effect whether HMRC are entitled to serve a follower notice on the basis of their opinion that there is a judicial ruling that is relevant to Mr Locke's chosen arrangements and which denies him the tax advantage he asserts.
The use of the word “relevant” in Condition C at first sight suggests that only a fairly loose connection between the judicial ruling and the taxpayer's chosen arrangements is needed for Condition C to be satisfied. However, relevance is defined in section 205 as follows:
“ 205 “Judicial ruling” and circumstances in which a ruling is “relevant”
(1) This section applies for the purposes of this Chapter.
(2) “Judicial ruling” means a ruling of a court or tribunal on one or more issues.
(3) A judicial ruling is “relevant” to the chosen arrangements if—
(a) it relates to tax arrangements,
(b) the principles laid down, or reasoning given, in the ruling...
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