Commissioners for Her Majesty’s Revenue and Customs v Tower MCashback LLP 1 and another

A closure notice defines the subject matter of a tax appeal through its stated conclusions and amendments. It does not confine the tribunal to the officer’s reasons. The tribunal may consider any relevant evidence or legal argument, subject to fairness and proper case management.

Capital allowances under the Capital Allowances Act 2001 require expenditure actually incurred on providing plant for a qualifying activity. The statute must be construed purposively and the facts viewed realistically. Circular payments do not alone defeat an allowance, but ownership and formal payment do not establish that the whole stated price was incurred for the statutory purpose. The destination of funds, loan terms, valuation and commercial context may therefore be relevant.

Two limited liability partnerships claimed 100% first-year capital allowances for expenditure said to have been incurred in acquiring software rights. Their investor members supplied 25% of the stated consideration. The remaining 75% came from interest-free, non-recourse loans and passed through a prearranged banking loop.

The Special Commissioner upheld HMRC’s procedural case and allowed only 25% of LLP2’s claim. Henderson J allowed the partnerships’ appeal on the procedural issue and would also have decided the expenditure issue in their favour: [2008] EWHC 2387 (Ch). The Court of Appeal rejected the partnerships’ procedural case but upheld their position on expenditure: [2010] EWCA Civ 32.

The Supreme Court considered whether the closure notices confined HMRC to its abandoned argument under section 45(4) of the Capital Allowances Act 2001, and whether the whole stated consideration was qualifying expenditure on the software rights.

1. Disposition. Lord Walker gave the leading judgment. Lord Hope agreed and added supplementary reasons. Lord Rodger, Lord Collins, Lord Kerr, Lord Clarke and Lord Dyson agreed with both judgments. The court unanimously allowed HMRC’s appeal on the expenditure issue and dismissed the partnerships’ cross-appeal on the procedural issue.

2. Closure notices. The subject matter of an appeal is defined by the conclusions stated in the closure notice and any amendments made to the return. It is not confined to the officer’s reasoning. Read in context, these notices refused the claims for relief under section 45 of the Capital Allowances Act 2001 generally; they were not limited to the abandoned section 45(4) argument. Section 50 of the Taxes Management Act 1970 permitted the tax tribunal to consider any evidence or legal argument relevant to that subject matter. Fairness and proper case management protected the taxpayer against ambush. Officers should nevertheless make closure notices as informative as possible and identify each point which produced an amendment.

3. Qualifying expenditure. Section 11(4) of the Capital Allowances Act 2001, purposively construed, required the whole amount claimed to have been actually incurred on acquiring the software rights. The inquiry was factual. A prearranged composite transaction had to be viewed realistically and as a whole. Transfer of rights demonstrated some expenditure, but did not establish that the whole stated price was expenditure for the statutory purpose. The source and destination of funds, the non-recourse loan terms, valuation evidence and the commercial substance of the arrangements were relevant.

4. Authorities and application. Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51 and Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655 remained good law. Circularity alone was insufficient; close statutory and factual analysis was required. In Barclays Mercantile, commercially borrowed funds were paid to the seller, which had the whole price at its disposal. Here, the borrowed 75% passed directly into a loop and did no economic work in acquiring the software rights. The arrangement was not a sham, but in no meaningful sense was that borrowed element expended on the acquisition. Market value was not determinative, although it was relevant to the realistic appraisal.

5. Order. The orders below were set aside. The conclusions and amendments in the closure notices were directed to be amended so as to allow 25% only of the first-year allowances claimed. The matter was not remitted.

1. United Kingdom Supreme Court: HMRC’s appeal on the expenditure issue was allowed and the partnerships’ cross-appeal on the procedural issue was dismissed: [2011] UKSC 19. The orders below were set aside and 25% only of the claimed allowances was permitted.

2. Court of Appeal: By a majority, the court reversed Henderson J on the procedural issue but agreed that the whole stated expenditure qualified. LLP1’s appeal was formally dismissed after it abandoned the separate trading issue: [2010] EWCA Civ 32; [2010] STC 809.

3. High Court, Chancery Division: Henderson J allowed the partnerships’ appeals on the procedural issue. Although the expenditure issue was then academic, he would also have decided it in their favour. LLP1’s appeal on the trading issue and HMRC’s cross-appeal on the conditional-contract issue were dismissed: [2008] EWHC 2387 (Ch); [2008] STC 3366.

4. Special Commissioner: The procedural issue was decided for HMRC. Seventy-five per cent of LLP2’s claim was disallowed. LLP1’s claim was wholly disallowed because it had not traded during the relevant year: [2008] STC 3366.