Tower MCashback LLP 1 & Anor v HM Revenue & Customs

For capital allowances, the relevant question is what the taxpayer acquired and whether the taxpayer incurred expenditure on that acquisition for the purposes of its qualifying activity. The source of the purchase money, circular financing arrangements, the vendor’s use of the consideration and the economic equivalence of another transaction are ordinarily immaterial. Market value does not limit the allowance unless the statutory anti-avoidance provisions apply.

A trade is not normally carried on merely because preparatory steps have been taken. The taxpayer must have begun operational activities directed towards generating taxable profits. An appeal against a closure notice is confined to the conclusions and amendments stated in that notice, although fresh legal arguments may be advanced within that defined subject matter.

Tower MCashback LLP 1 and Tower MCashback LLP 2 appealed from the decision of the Special Commissioners, reported at [2008] STC (SDC) 1. The Special Commissioner had restricted the first-year allowances claimed for software licences, held that LLP 1 had not begun trading by 5 April 2004, accepted that the contractual payment obligation was unconditional, and permitted HMRC to rely on grounds not identified in the closure notices.

The High Court had to determine the proper amount of qualifying expenditure, whether LLP 1 had begun to trade, whether the software licence agreements imposed an unconditional obligation to pay, and the permissible scope of the appeals against the closure notices.

1. Expenditure issue. The appeals were allowed on the basis that the full consideration payable for the software licences was expenditure on the provision of plant for the purposes of the LLPs’ trade. Under Capital Allowances Act 2001, the court had to examine what the LLPs did as purchasers. The circular movement of borrowed funds, the vendor’s security deposits, the limited-recourse loans and the use made of the consideration after payment did not alter that analysis.
2. The reasoning in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51 and MacNiven v Westmoreland Investments Ltd [2001] UKHL 6 showed that taxation must be based on the statutory requirements and the transactions actually carried out, not on an economically equivalent transaction. The market value of the software was irrelevant because none of the applicable anti-avoidance provisions was engaged and there was no finding of sham.
3. Trading issue. LLP 1 had not begun to carry on a trade by 5 April 2004. Its entry into the software licence agreement and preliminary promotional discussions were preparatory. Applying the useful concept of operational activities discussed in Mansell v HMRC [2006] STC (SCD) 605, the LLP had not yet established the decision-making, financial and management structure necessary to exploit the software and generate trading profits.
4. Conditional contract issue. The licence agreements imposed an unconditional obligation to pay. Sequential obligations undertaken by the parties in one contract did not make the payment obligation conditional. The approach in Eastham v Leigh London and Provincial Properties Ltd [1917] Ch 871 supported that conclusion. HMRC’s cross-appeal was dismissed.
5. Closure notice issue. Commissioners may in principle apply the law to the facts and entertain fresh legal arguments, provided fairness and proper case management are observed. However, the appeal remains confined to the subject matter of the conclusions and amendments stated in the closure notice. Read with the accompanying correspondence, HMRC’s notices challenged the claims solely under section 45(4) of the Capital Allowances Act 2001. The Special Commissioner therefore had no jurisdiction to determine the expenditure, trading or conditional-contract issues. The appeals were allowed on this issue.

• High Court (Chancery Division): appeals from the Special Commissioners’ decision, reported at [2008] STC (SDC) 1, allowed on the closure notice and expenditure issues. HMRC’s cross-appeal on the conditional contract issue dismissed.