HM Revenue & Customs v Tower MCashback LLP 1 & Anor

An appeal against a conclusion or amendment in a closure notice is confined to the subject matter of the enquiry and the conclusions closing it. It is not confined to deciding whether the Revenue’s stated reason was correct. The tax tribunal may entertain any factual evidence or legal argument relevant to that subject matter, subject to fair case management.

When deciding whether capital expenditure was genuinely incurred, the court may examine the terms of any borrowing and whether the taxpayer bore the economic burden. Borrowing, including non-recourse borrowing, does not itself prevent expenditure from qualifying. The reality of the expenditure may be established where the taxpayer owns the borrowed funds, discharges the purchase price and acquires the full economic benefit of the asset.

Two limited liability partnerships claimed first-year capital allowances under section 45 of the Capital Allowances Act 2001 for expenditure on software licences. The Revenue’s closure notices rejected the claims on the basis of section 45(4). During the hearing before the Special Commissioner, the Revenue abandoned that ground and argued instead that circular, non-recourse financing meant that only 25% of the stated expenditure had been incurred.

The Special Commissioner held that he could consider the new ground and limited the allowance accordingly. Henderson J, in [2008] EWHC 2387 (Ch), held that the appeal was confined to section 45(4), although he also concluded that the second partnership had incurred the full expenditure.

The issues were whether the closure notice confined the tribunal to the Revenue’s original reason and, if not, whether the second partnership had incurred the whole purchase price for capital-allowance purposes.

1. By a majority, the Revenue’s appeal on the closure-notice issue was allowed. Moses LJ, with whom Scott Baker LJ agreed, held that an appeal under section 31(1)(b) of the Taxes Management Act 1970 is confined to the subject matter of the enquiry and the conclusions stated in the closure notice. It is not confined to determining whether the Inspector’s reason for reaching the conclusion was correct. The fact-finding tribunal must identify the relevant subject matter while balancing the taxpayer’s statutory protection against prolonged enquiries with the public interest in collecting the correct tax.

2. The tribunal may receive any evidence and entertain any legal or factual argument relevant to that subject matter, provided its case-management powers protect the parties from unfairness or ambush. Here, the closure notice stated that the claim for relief under section 45 of the Capital Allowances Act 2001 was excessive. Its subject matter was therefore entitlement to the first-year allowance, rather than the narrower section 45(4) reason previously advanced. The Special Commissioner was entitled to consider whether the claimed expenditure had actually been incurred.

3. The Revenue’s appeal concerning the second partnership’s expenditure was dismissed. The capital-allowance provisions required real capital expenditure on plant for the purposes of the trade. The terms of borrowing were not invariably irrelevant: viewed with all the facts, they could show whether the taxpayer bore the economic burden of the purchase. A non-recourse loan nevertheless remains capable of funding qualifying expenditure where repayment depends on proceeds held by the borrower.

4. The borrowed funds belonged to the second partnership and were spent in discharging the software’s purchase price. Repayment depended on the commercial success of exploiting the software; the loan was not one which could never be repaid. Most importantly, the partnership acquired the full economic benefit and ownership of the software rights. Those features established the reality of the full expenditure and distinguished Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655.

5. Arden LJ dissented on the closure-notice issue. She considered that the notice could state only conclusions actually reached by the officer and that the sole conclusion reached here concerned section 45(4). She would therefore have dismissed that part of the appeal. Had the expenditure issue arisen, she agreed with Moses LJ.

1. Court of Appeal (Civil Division): By a majority, allowed the Revenue’s appeal from Henderson J on the permissible scope of the tax appeal. Unanimously upheld his conclusion that LLP 2 had incurred the full expenditure. Decision: [2010] EWCA Civ 32.

2. High Court, Chancery Division: Henderson J held that the appeal was confined to the section 45(4) issue stated through the closure notice and related correspondence. He also held that LLP 2 had incurred the full purchase price. Decision: [2008] EWHC 2387 (Ch).

3. Special Commissioner: Held that grounds other than the Inspector’s original section 45(4) ground could be considered and limited LLP 2’s first-year allowance to 25% of its claimed qualifying expenditure. Decision reported at [2008] STC (SCD) 1.