Tower MCashback LLP v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | LORD WALKER,LORD HOPE,LORD RODGER,LORD COLLINS,LORD KERR,LORD CLARKE,LORD DYSON |
| Judgment Date | 11 May 2011 |
| Neutral Citation | [2011] UKSC 19 |
| Court | Supreme Court |
| Date | 11 May 2011 |
and another
[2011] UKSC 19
Lord Hope, Deputy President
Lord Rodger
Lord Walker
Lord Collins
Lord Kerr
Lord Clarke
Lord Dyson
Appellant
Kevin Prosser QC
Rebecca Murray
(Instructed by Solicitor for Her Majesty's Revenue and Customs)
Respondent
Giles Goodfellow QC
Richard Vallat
Thomas Chacko
(Instructed by Ashton Rowe Solicitors)
Introduction
This appeal is concerned with claims for first year allowances ("FYAs") under the Capital Allowances Act 2001 (" CAA 2001") in respect of expenditure on software rights. The claims were made by two limited liability partnerships, the respondents Tower MCashback 1 LLP ("LLP1") and Tower MCashback 2 LLP ("LLP2"). The two claims were not identical, because there was an issue as to whether LLP 1 had started trading during the 2003-4 tax year for which it claimed FYAs (LLP2's claim was for the 2004-5 tax year). This point of distinction led to different outcomes in the Court of Appeal, as explained below.
Throughout the litigation there have been two main issues, one procedural and one substantive, each of which is of some general importance. There were also other issues below which have now disappeared. The procedural issue concerns the effect of two closure notices dated 20 June 2006 signed by Mr Peter Frost, an officer in the Anti-Avoidance Group (Investigation) of the appellants, the Commissioners for Her Majesty's Revenue and Customs ("HMRC"). The respondents contend that the terms of each closure notice restricted HMRC, on the taxpayer's appeal against it, to a single issue (which HMRC have now abandoned). HMRC contend that the notice did not have that restrictive effect. The substantive issue (referred to below as "the expenditure issue" to distinguish it from "the trading issue" and "the conditional contract issue", neither of which is live in this Court) goes to the efficacy of the tax-saving scheme embarked on by LLP1 and LLP2. In this judgment I shall try to use "LLPs" as referring to limited liability partnerships generally, and "the LLPs" to refer to LLP1 and LLP2 (with or without LLP3 and LLP4, which are of peripheral interest).
The litigation has followed a tortuous course. The Special Commissioner (Mr Howard Nowlan) decided the procedural point in favour of HMRC and disallowed 75% of LLP2's claim for FYAs. He disallowed the whole of LLP1's claim on the separate ground that it had not been trading during the 2003-4 tax year: [2008] STC 3366, 3369-3411. On appeal ( [2008] EWHC 2387 (Ch), [2008] STC 3366, 3411) Henderson J allowed the LLPs' appeals on the procedural issue. That made the expenditure issue academic, but Henderson J considered it fully and set out the reasons why he would have allowed the LLPs' appeals on that ground also (but for the trading issue affecting LLP1, on which he dismissed LLP1's appeal). He also dismissed HMRC's cross-appeal on the conditional contract issue.
By then it was common ground that if LLP2 was ultimately successful in its claim for FYAs for the 2004-5 tax year, then LLP1 would also be entitled to FYAs for that year. So on further appeal to the Court of Appeal ( [2010] EWCA Civ 32, [2010] STC 809), on LLP1 abandoning its appeal on the trading issue, HMRC was for all practical purposes the appellant on both remaining issues. The majority (Scott Baker and Moses LJJ) reversed Henderson J on the procedural issue but agreed with him on the expenditure issue. Arden LJ agreed with the judge on both issues.
Because of its abandonment of the trading issue, LLP1's appeal was formally dismissed by the Court of Appeal. But before this Court the argument has in substance been an appeal by HMRC on the expenditure issue and a cross-appeal by the LLPs on the procedural issue. Counsel sensibly agreed that both issues should be opened by Mr Kevin Prosser QC (who appeared with Miss Rebecca Murray for HMRC) and responded to by Mr Giles Goodfellow QC (who appeared with Mr Richard Vallat and Mr Thomas Chacko for the LLPs).
The procedural issue: statutory provisions
Matters of procedure in charging income tax, capital gains tax and corporation tax are regulated largely by the Taxes Management Act 1970 (" TMA 1970") and regulations made under TMA 1970. Major amendments were made to TMA 1970 in order to provide for the introduction of self-assessment (described by HMRC, as Moses LJ noted, at para 1, as "the most fundamental reform of personal tax administration for 50 years"). The changes were introduced by the Finance Act 1994 (" FA 1994") and took effect, for income tax and capital gains tax purposes, in 1996-97. Further amendments were made by the Finance Act 2001 (" FA 2001") intended to simplify and clarify the process of self-assessment.
A limited liability partnership established under the Limited Liability Partnership Act 2000 has a legal personality separate from those of its members. But if it carries on a trade it is, under section 118ZA of the Income and Corporation Taxes Act 1988 (" ICTA 1988"), taxed as if it were an ordinary, non-incorporated partnership. Section 118ZA(1) (as substituted by FA 2001) provides:
"For the purposes of the Tax Acts, where a limited liability partnership carries on a trade, profession or other business with a view to profit –
(a) all the activities of the partnership are treated as carried on in partnership by its members (and not by the partnership as such),
(b) anything done by, to or in relation to the partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and
(c) the property of the partnership is treated as held by the members as partnership property."
The most important provisions of the self-assessment regime, as it applies to LLPs, are to be found in sections 12AA, 12AB, 12AC, 28B, 31 and 31A of TMA 1970 (the first two introduced by FA 1994, the last four substituted by FA 2001). The familiar provisions of section 50 of TMA 1970, relating to procedure before the Commissioners (now the First-tier Tribunal) were also amended by those Acts. Together the provisions require a partnership to submit a partnership return, which is to contain a partnership statement with the particulars required by section 12AB(1). That section, as further amended by the Finance Acts 1995, 1996 and FA 2001, (and in contrast to section 9 of TMA 1970, which applies to a personal return or a trustee's return) does not actually include the expression "self-assessment", but that is its effect. By section 12AC an officer of HMRC may give notice of enquiry into a partnership return. The time limit for a notice of enquiry is generally a year from the due date for submission of the return.
Section 28B provides as follows:
"(1) An enquiry under section 12AC(1) of this Act is completed when an officer of the Board by notice (a 'closure notice') informs the taxpayer that he has completed his enquiries and states his conclusions. In this section 'the taxpayer' means the person to whom notice of enquiry was given or his successor.
(2) A closure notice must either –
(a) state that in the officer's opinion no amendment of the return is required, or
(b) make the amendments of the return required to give effect to his conclusions.
(3) A closure notice takes effect when it is issued.
(4) Where a partnership return is amended under subsection (2) above, the officer shall by notice to each of the partners amend –
(a) the partner's return under section 8 or 8A of this Act, or
(b) the partner's company tax return, so as to give effect to the amendments of the partnership return.
(5) The taxpayer may apply to the Commissioners for a direction requiring an officer of the Board to issue a closure notice within a specified period.
(6) Any such application shall be heard and determined in the same way as an appeal.
(7) The Commissioners hearing the application shall give the direction applied for unless they are satisfied that there are reasonable grounds for not issuing a closure notice within a specified period."
Section 31(1)(b) gives the taxpayer a right of appeal against any conclusion stated or amendment made by a closure notice. By section 31A(5) and (6) the notice of appeal must specify the grounds of appeal, but the Commissioners (or now the First-tier Tribunal) may allow other grounds to be put forward. Section 50 (as amended) regulates the disposal of the appeal:
"(6) If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other … evidence –
(a) that … the appellant is overcharged by a self-assessment;
(b) that … any amounts contained in a partnership assessment are excessive; or
(c) that the appellant is overcharged by an assessment other than a self-assessment.
the assessment or amounts shall be reduced accordingly but otherwise the assessment or statement shall stand good.
(7) If, on an appeal, it appears to the Commissioners –
(a) that the appellant is undercharged to tax by a self-assessment…;
(b) that any amounts contained in a partnership statement … are insufficient; or
(c) that the appellant is undercharged by an assessment other than a self-assessment,
the assessment or amounts shall be increased accordingly.
…
(9) Where any amounts contained in a partnership statement are reduced under subsection (6) above or increased under subsection (7) above, an officer of the Board shall by notice to each of the relevant partners amend –
(a) the partner's return under section 8 or 8A of this Act, or
(b) the partner's company tax return,
so as to give effect to the reductions or increases of those amounts."
The procedural issue: the facts
This summary follows...
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