The Brain Disorders Research Ltd Partnership v Revenue And Customs

For capital allowances on expenditure forming part of a composite tax transaction, the court must identify the expenditure legally incurred by the taxpayer and apply the same analysis when deciding whether it is qualifying expenditure. A Ramsay analysis may disregard circular or tax-driven financial components in identifying the transaction’s legal and economic effect, but it does not give the taxpayer contractual rights it did not acquire or collapse separate parties. Whether expenditure was incurred in carrying on a trade requires assessment of the actual contractual arrangements and their wider context. Tax motivation alone is not decisive, but non-commercial terms, lack of control or active involvement, absence of further trading costs, and returns financially independent of the research may show that no trade existed.

The Partnership was established under a tax scheme involving a research agreement with Numology Limited. It paid approximately £122m to Numology, which subcontracted the research to BRC Operations Pty Limited for approximately £7.67m. HMRC refused the claimed capital allowances. The First-tier Tribunal found that the Partnership was not trading, and the Upper Tribunal upheld that conclusion in [2017] UKUT 176 (TCC).

On appeal, the Partnership accepted that only £7.67m could be relevant expenditure under the composite-transaction analysis, but argued that this expenditure was incurred in carrying on a trade. It also challenged a finding that part of the research agreement was a sham. The central issue was whether the Partnership was carrying on a trade relating to the research for the purposes of Capital Allowances Act 2001.

Appeal dismissed. The Court of Appeal unanimously upheld the conclusion that the Partnership was not carrying on a trade relating to the research expenditure. The Partnership was ordered to pay HMRC’s costs of £21,915 within 30 days.

1. Composite transaction. Under Part 6 of the Capital Allowances Act 2001, the relevant expenditure must be identified by analysing the legal effect of the composite arrangements. The same analysis applies when deciding whether the expenditure is qualifying expenditure. The Ramsay approach, stated in W T Ramsay Ltd v Inland Revenue Commissioners [1981] STC 174, permits consideration of commercial realities and the disregard of circular or tax-driven financial components when identifying what expenditure engages the legislation. It does not permit the court to impose a contract which the taxpayer did not have or to collapse separate contractual parties.
2. Trading analysis. Whether expenditure was incurred while carrying on a trade required assessment of the actual arrangements and their wider context. The reasoning in Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655 did not require a different result. In Ensign, the partnership had directly expended money on producing and exploiting a film. Here, Numology paid BRC as principal. The Partnership had no direct contractual relationship with BRC, no legal control over the research, and no principal-and-agent or joint-venture relationship.
3. Application. The Partnership incurred no further costs of a trading venture and had no active involvement which could generate trading losses. The possible 10% royalty return was highly speculative. The substantial fixed royalties were financially independent of BRC’s research and were designed to secure repayment of borrowings and facilitate the tax scheme. The FtT was therefore entitled to conclude that the arrangements did not include an adventure in the nature of trade.
4. Sham issue. The challenge to the finding that part of clause 3.1 was a sham was academic after the quantum concession and the independent conclusion that there was no trade. The court declined to express a view on it.

1. Court of Appeal (Civil Division): Appeal dismissed. Patten LJ’s judgment was agreed by Kitchin and Floyd LJJ.
2. Upper Tribunal (Tax and Chancery Chamber): In [2017] UKUT 176 (TCC), the tribunal found no error in the First-tier Tribunal’s approach or conclusion that the Partnership was not trading.
3. First-tier Tribunal: Found that the Partnership was not trading at all in relation to the research and development and rejected the capital-allowance claim.