Carlton & Ors, R (On the Application Of) v Revenue And Customs

For partner payment notices, Condition B imports only the mechanics of the partnership-return test. The question is whether an increase or reduction in partnership-statement amounts resulted from particular arrangements and produced a tax advantage for partners. It does not require proof of the taxpayers’ purpose.

Under the DOTAS loss-scheme test, the court applies an objective informed-observer assessment. The relevant questions are whether the expected main benefit was the provision of losses and whether participants were expected to use those losses to reduce income tax or capital gains tax. Commercial benefits, statutory tax relief and returned capital do not prevent arrangements being notifiable. A payment notice may relate to only part of the asserted tax advantage.

The claimants invested in partnerships established to acquire and renovate commercial property using business premises renovation allowances. They claimed losses in their personal tax returns. HMRC opened enquiries into partnership returns and issued partner payment notices under the accelerated-payment regime in Finance Act 2014.

The claim challenged the notices on two permitted grounds: that the arrangements were commercial and their treatment as tax-avoidance arrangements was unreasonable or an abuse of power; and that the statutory conditions for issuing the notices were not met. Issues common to R (Rowe and Others) v HMRC [2015] EWHC 2293 (Admin) remained stayed.

1. Condition B. Paragraph 3(4) of Schedule 32 to Finance Act 2014 imports the mechanical elements of paragraph 3(3) of Schedule 31. It does not import the wider follower-notice regime or the statutory purpose test in section 201(3). The relevant questions were whether the partnership statements had been reduced by the arrangements and whether that reduction produced a tax advantage for the partners. Both questions were answered yes.
2. Condition C. The arrangements were “DOTAS arrangements”. Regulation 12 of the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 requires an objective assessment from the viewpoint of an informed observer. It asks whether the expected main benefit was the provision of losses and whether participants were expected to use those losses to reduce income tax or capital gains tax. The court held that both factors were satisfied. The test concerns benefit, not subjective purpose, and is not confined to arrangements involving tax avoidance.
3. The expected tax advantage was properly compared with the non-tax commercial return. Capital invested and ultimately returned to investors did not form part of that comparison. The arrangements were therefore loss schemes under regulation 12 and satisfied the relevant provisions of section 306 of Finance Act 2004.
4. The late “designated officer” challenge was not pleaded and could not be raised within the permission granted. Issues concerning the capital account and alleged circular financing were matters for the First-tier Tribunal and could not properly be determined in this judicial review on the evidence available.
5. Commercial features, HMRC’s reduction of the proposed percentage from 55% to 30%, and HMRC’s acceptance of part of the claimed expenditure did not establish error of precedent fact, irrationality, unreasonableness or abuse of power. Paragraph 4(2) of Schedule 32 permitted notices relating to only part of the tax advantage.

The claim was dismissed on the two grounds for which permission had been granted. The remaining grounds stayed pending the further procedural directions ordered after the decision in R (Rowe and Others) v HMRC.

First-instance judicial review. The judgment records that R (Rowe and Others) v HMRC [2015] EWHC 2293 (Admin) had been refused by Simler J and was under appeal, while the remaining grounds in the present claim were stayed.