Tower MCashback LLP 1 & Anor v HM Revenue & Customs

The Court allowed the appellants' appeals on the procedural question that the closure notices issued by HMRC were limited in scope to the ground expressly stated (namely section 45(4) of the Capital Allowances Act 2001). The judge held that a closure notice need only state conclusions and need not give reasons, but where the notice conveys a clear and limited conclusion HMRC cannot afterwards rely at the hearing on different substantive grounds not indicated in the notice. The court therefore ruled that the Special Commissioner had no jurisdiction to allow HMRC to advance and rely on additional grounds beyond those stated in the closure notices.

On the main substantive capital allowances question the judge endorsed the principle from Barclays Mercantile Business Finance Ltd v Mawson (BMBF) that, absent sham or relevant anti-avoidance provisions, the correct enquiry under the capital allowances legislation is what the purchaser did and whether it incurred capital expenditure on plant or machinery; the post-payment movements of the purchase price are immaterial. Applying those principles, had the Closure Notice Issue gone the other way the judge would have held that the whole purchase price was expenditure incurred on acquisition of the software, but he did not need to determine that point because HMRC were precluded from raising it on appeal.

This was an appeal to the High Court (Chancery Division) from a decision of a single Special Commissioner (Mr Howard Nowlan) concerning claims by two limited liability partnerships, Tower MCashback LLP 1 and LLP 2, for first-year allowances under section 45 of the Capital Allowances Act 2001 in respect of licences to use software acquired from MCashback Ltd.

Parties and posture: The LLPs (appellants) appealed from the Special Commissioner’s Decision dated 19 July 2007. HM Revenue & Customs (respondent) had issued closure notices on 20 June 2006 and later relied before the Special Commissioner on a number of grounds; at the hearing HMRC abandoned the one ground expressly relied on in the closure notices (section 45(4)), and the Special Commissioner allowed HMRC to pursue other grounds. The appeals to the High Court raised (i) the Closure Notice Issue (whether the Special Commissioner had jurisdiction to permit HMRC to rely on additional grounds not stated in the closure notices), (ii) the Expenditure Issue (whether the LLPs incurred first-year qualifying expenditure equal to the full purchase price of the software), (iii) the Trading Issue (whether LLP 1 had begun trading by 5 April 2004), and (iv) the Conditional Contract Issue (whether the obligation to pay was unconditional within section 5 CAA 2001).

Issues framed by the court:

• The Closure Notice Issue: construction of the closure notices and the scope of appeals under TMA 1970 ss 28B, 31 and 50; whether HMRC could rely at appeal on grounds other than those stated in the closure notices.
• The Expenditure Issue: whether, applying principles from BMBF and Ramsay authorities, the circular financing meant that only part of the purported purchase price was "incurred" for capital allowance purposes.
• The Trading and Conditional Contract Issues: whether LLP1 had commenced trading by 5 April 2004; and whether obligations under the Software Licence Agreements were unconditional for timing under s 5 CAA 2001.

Court’s reasoning and conclusion: On procedure the judge held that a closure notice must state the officer's conclusions but need not give reasons; however read in context the notices in this case unmistakably limited HMRC's conclusion to the operation of section 45(4). Once HMRC had issued those closure notices they were bound by the stated conclusion and could not expand the factual or legal basis of the closure at the appeal hearing. The judge relied on the statutory scheme in TMA 1970 (notably ss 28B, 31, 31A and 50), and considered and distinguished prior Special Commissioners' decisions including D'Arcy. Because the Special Commissioner had allowed HMRC to advance other grounds beyond those in the closure notices, he was held to have acted without jurisdiction in so doing; accordingly the High Court allowed the appeals on the Closure Notice Issue and held that the Special Commissioner should not have determined the other issues.

The judge added that, if he were wrong on the Closure Notice Issue, he would have decided the Expenditure Issue in favour of the LLPs (applying BMBF and related authority) and found the SLAs unconditional under s 5 CAA 2001, but he would have dismissed LLP1's claim that it had begun trading by 5 April 2004.

Appeal allowed on the Closure Notice Issue. The closure notices issued by HMRC were properly read as limited to the single ground expressly indicated (section 45(4) CAA 2001) and, once issued, HMRC could not rely at the appeal on other grounds not stated in the notices; the Special Commissioner therefore lacked jurisdiction to permit HMRC to advance those additional grounds. For completeness, the judge stated that if he were wrong on that procedural point he would have allowed the LLPs on the Expenditure Issue (applying BMBF) and dismissed their trading date contention, and he would dismiss HMRC’s conditional contract argument (the contracts were unconditional).

Appeal from the decision of a single Special Commissioner (Mr Howard Nowlan) released 19 July 2007 (reported at [2008] STC (SDC) 1). Appeal heard in the High Court (Chancery Division) before Henderson J, judgment delivered 13 October 2008 ([2008] EWHC 2387 (Ch)).