Tower MCashback LLP v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE HENDERSON,Mr Justice Henderson: |
| Judgment Date | 13 October 2008 |
| Neutral Citation | [2008] EWHC 2387 (Ch) |
| Date | 13 October 2008 |
| Court | Chancery Division |
| Docket Number | Case No: CH/2007/APP/0596 & 0662 |
[2008] EWHC 2387 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONERS
The Honourable Mr Justice Henderson
Case No: CH/2007/APP/0596 & 0662
Mr Giles Goodfellow QC and Mr Richard Vallat (instructed by Ashton Rowe (Solicitors)) for the Appellants
Mr Bruce Carr (instructed by the Solicitor for HMRC) for the Respondents
Hearing dates: 30 June and 1, 2, and 3 July 2008
Approved Judgment
Introduction
These appeals from a decision of a single Special Commissioner, Mr Howard Nowlan, released on 19 July 2007 (“the Decision”) raise two main questions, one of substantive law and one of procedure. The question of substantive law, briefly stated, is whether the appellants, Tower MCashback 1 LLP (“LLP 1”) and Tower MCashback 2 LLP (“LLP 2”), are entitled to first-year allowances (“FYAs”) in respect of the full amount of first-year qualifying expenditure claimed to have been incurred by them on completion of Software Licence Agreements (“SLAs”) entered into between them and a company called MCashback Ltd (“MCashback”) on 31 March 2004. The procedural question, again briefly stated, is whether the Special Commissioner had jurisdiction to permit the respondents (“HMRC” or “the Revenue”) to raise and rely on certain additional grounds to support the closure notices which they had issued in June 2006, and (if so) whether he was correct to allow them to raise any or all of those grounds. I will refer to these two main questions as “the Expenditure Issue” and “the Closure Notice Issue” respectively.
In addition, there are two relatively minor questions which are still in contention on the appeals. The first of these (“the Trading Issue”) is whether LLP 1 had begun to trade on or before 5 April 2004. The second, raised by HMRC in a Respondent's Notice dated 18 October 2007, is whether the expenditure incurred by the LLPs was incurred pursuant to an unconditional contract requiring payment to be made within a period of four months of the date of the contract (“the Conditional Contract Issue”).
A further major issue, which was the focus of much of the evidence and argument before the Special Commissioner, was whether the two LLPs should be treated as having incurred 75% of the relevant expenditure on the provision of something other than plant and machinery, and in particular on the provision of finance on favourable terms (or “soft finance”, as it is often termed) to their individual members. The Special Commissioner decided this issue in favour of the LLPs. HMRC raised it by way of cross-appeal in their Respondent's Notice, but announced in their skeleton argument dated 18 April 2008 that they had abandoned it.
This was in fact the second occasion on which HMRC had decided to abandon a major argument upon which they had previously relied. The first, and even more striking, occasion was at the start of the third day of the eight day hearing before the Special Commissioner, when HMRC (represented then, as on the appeals to this court, by Mr Bruce Carr of counsel) formally abandoned the only contention on which they had expressly relied in support of the closure notices when they were originally issued on 20 June 2006, namely a contention that the relevant expenditure was disqualified from being first-year qualifying expenditure under section 45 of the Capital Allowances Act 2001 (“ CAA 2001”) by subsection (4) of that section, which provides that expenditure on an item of software within Class C (which the expenditure in question admittedly was, at least as to 25%) is disqualified “if the person incurring it does so with a view to granting to another person a right to use or otherwise deal with any of the software in question”. The abandonment of this contention brings out the importance in the present case of the Closure Notice Issue, because if the LLPs are right in their argument that the Special Commissioner had no jurisdiction to allow HMRC to rely on other grounds in support of the closure notices, the result must be that the self-assessments by the LLPs for the relevant tax years could no longer be challenged once the argument based on section 45(4) had fallen away.
The Special Commissioner decided the Closure Notice Issue in favour of HMRC: see paragraphs 19 to 22 of the Decision.
In relation to the Expenditure Issue, the Special Commissioner adopted an analysis for which neither side had contended and which he himself had propounded during the course of the hearing. His analysis sought to reflect the fact that the investors in the LLPs provided only 25% of the finance for the purchase of the software from their own resources. The remaining 75% was borrowed by the investors under arrangements which involved two offshore banks, and which required the vendor of the software, MCashback, to deposit an equivalent amount with the second of the banks as a security deposit. The effect of the arrangements, most easily seen with the assistance of a diagram, is that 75% of the purchase price went round in a circle which started and ended with the first bank, although at each stage on its journey the money had, at least ostensibly, a separate function to perform. The arrangements envisaged that this financing structure would be unwound over a period of approximately ten years, as and when fees for the licensed software were paid to the LLPs. The Special Commissioner regarded the arrangements as being equivalent in economic terms to a sale for a purchase price payable by instalments, and he held that on a realistic analysis of the transactions the only expenditure initially incurred by the LLPs was the 25% provided by the members. He also held, however, that further expenditure would be incurred as, when and to the extent that the borrowings by the members were paid off out of the designated fee income. The upshot was that the LLPs could in principle obtain FYAs for only 25% of the purchase price of the software in the tax years under appeal, because it was only to that extent that expenditure had been truly incurred by them at that stage.
On the Trading Issue, the Special Commissioner decided that LLP 1 had not begun to carry on any trade by 5 April 2004, with the consequence that none of the capital expenditure which it had incurred could qualify for FYAs in the tax year 2003/04. Since this was the year for which LLP 1 had claimed the FYAs, it followed that LLP 1's appeal in relation to that year had to be dismissed.
The Trading Issue did not arise in relation to LLP 2, because LLP 2 only claimed FYAs for the next tax year, 2004/05, when it was accepted by HMRC that it had started trading. It is common ground, as I understand it, that LLP 1 also started trading in 2004/05, if the true position is that it had not started trading in the previous year. HMRC therefore accept that LLP 1 will be entitled to the benefit of FYAs in the latter year, on the same basis as LLP 2, if LLP 1's appeal for 2003/04 is dismissed.
I should explain at this point that the reason why LLP 2 did not seek to claim FYAs for 2003/04 has nothing to do with any differences in the basic arrangements and transactions which it entered into with MCashback – in all essentials they appear to have been identical – but rather reflects the fact that no investor members of LLP 2 had been signed up before 6 April 2004, so FYAs for the previous tax year, even if available, would have been of no use to them: see paragraph 17 of the Decision.
On the Conditional Contract Issue, the Special Commissioner decided in favour of the LLPs that the obligation to pay the purchase price under the SLAs was unconditional: see paragraphs 162 to 166 of the Decision. (He also decided – see paragraph 167 – that there had been no subsequent variation of the SLAs so as to provide for completion at a date more than four months after the date of the contract. There is no cross-appeal by HMRC in relation to that conclusion).
The Decision is reported at [2008] STC (SDC) 1. It is a long one, running to 176 paragraphs and some 42 pages in the report. I will refer to those parts of the Decision which are relevant to my discussion of the live issues, but I will not attempt to summarise it in any detail or to describe the factual background to the appeals. The present judgment therefore needs to be read in conjunction with the Decision.
The representation on both sides was the same before me as it had been below. Mr Giles Goodfellow QC and Mr Richard Vallat appeared for the taxpayers, and (as I have already said) Mr Bruce Carr appeared for HMRC. I am grateful to counsel on both sides for their clear and helpful submissions.
I remind myself, before going any further, that an appeal to the High Court from a decision of the Special Commissioners lies only on questions of law: see section 56A(1) and (4) of the Taxes Management Act 1970 (“ TMA 1970”). It follows that I may only interfere with findings of fact made by the Special Commissioner on the limited grounds explained by the House of Lords in Edwards v Bairstow [1956] AC 14.
Legislation
The legislative background to the present appeals is a little complex, but fortunately most of it is not in dispute. Much of what follows is based on the helpful analysis in the schedule to the skeleton argument of Mr Goodfellow and Mr Vallat.
(A) Capital Allowances
Section 5 of CAA 2001 contains general timing provisions which say when capital...
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