Investec Asset Finance plc and another v HMRC

The Court of Appeal considered (i) whether certain sums paid by Investec Asset Finance plc and Investec Bank plc (the Appellants) to leasing partnerships were deductible as expenditure "wholly and exclusively" for the purposes of their solo financial trades (applying the Vodafone test); (ii) the scope of an appeal against a Schedule 18 closure notice and whether HMRC could rely on alternative adjustments identified only in a covering letter (applying Schedule 18 FA 1998, paras. 34 and relevant TMA provisions and the authorities in D'Arcy and Tower MCashback); and (iii) whether the no double taxation principle (as explained in IRC v F S Securities) required that profits already taxed in the hands of partnerships under section 114 ICTA be left out of account when computing the companies' section 42 FA 1998 trade profits.

The court upheld the UT's conclusion that substantial capital contributions made to Garrard and LAGP were not deductible because they were not incurred wholly and exclusively for the purposes of the companies' solo financial trades; acquisition costs remained deductible. The court held that the subject-matter of a closure‑notice appeal is to be identified by the First‑tier Tribunal in context and may include arguments beyond the precise wording of the notice where those arguments relate to the identified subject matter; accordingly the Appellants' challenge to the FTT/UT approach to scope was dismissed. The no double taxation principle applies to exclude from the section 42 computations the partnership profits already taxed under section 114, but factual uncertainty about the statutory accounts for HKP required remittal to the FTT for further findings.

This is an appeal from two Upper Tribunal decisions arising from closure notices served by HMRC on Investec Asset Finance plc and Investec Bank plc in respect of accounting periods 2006–2010. The transactions concerned involved the companies acquiring partnership interests in several leasing partnerships and incurring two kinds of disputed expenditure: (a) acquisition costs paid to buy partnership interests and (b) capital contributions paid into the partnerships (notably to Garrard and LAGP). The Appellants contended that all disputed expenditure was revenue in nature and deductible in computing their solo financial trade profits; HMRC maintained that some or all of the sums were capital in nature or not wholly and exclusively for the solo trades and advanced alternative adjustments in a covering letter to the closure notices.

Procedural path: appeal from FTT ([2016] UKFTT 356 (TC)) to the Upper Tribunal (First Decision [2018] UKUT 0069 (TCC) and Second Decision [2018] UKUT 0413 (TCC)), then to this Court.

Nature of the appeals/relief sought: the Appellants appealed the UT's rulings (in particular that certain capital contributions were not deductible and on the scope of the closure‑notice appeal); HMRC appealed one aspect of the UT's Second Decision (seeking remittal in relation to Garrard and LAGP).

Issues framed:

• Issue 1: whether the disputed items were capital or revenue (FTT and UT found revenue; uncontested on appeal).
• Issue 2: whether, assuming revenue, the capital contributions were nevertheless not deductible because not "wholly and exclusively" for the solo trades (Vodafone test).
• Issue 3: the permissible scope of a closure‑notice appeal—whether HMRC may rely on alternative amendments not set out in the closure notice itself but disclosed in the covering letter (Schedule 18 FA 1998; TMA ss.49/50).
• Issue 4: the application of the no double taxation principle—whether profits taxed under s.114 ICTA in the hands of the partnerships should be left out of account in the companies' s.42 computations (following IRC v F S Securities).

Court’s reasoning (concise): applying Vodafone, the court held that the UT was entitled to conclude that the capital contributions to Garrard and LAGP were made at least partly for the purposes of the partnerships rather than wholly and exclusively for the companies’ solo trades, so those contributions are not deductible (but acquisition costs are deductible). On closure‑notice scope, the court followed the line of authority (Tower MCashback, Fidex, D'Arcy) that the tribunal must identify the subject matter in context and may entertain alternative legal arguments related to that subject matter, and dismissed the Appellants' narrow construction. On the no double taxation principle, the court confirmed that FS Securities requires exclusion from the companies' section 42 computations of profits already taxed under s.114; the court rejected HMRC's late re‑cast of its case (and its attempt to abandon concessions already made) and refused to permit HMRC to pursue a substantially different accounting/structural theory for Garrard and LAGP at this late stage. Because of factual uncertainty about the statutory ("look through") accounting treatment for HKP, the UT’s remittal of HKP to the FTT for further findings was upheld.

Subsidiary findings: the FTT’s findings that the disputed items were revenue in nature were not appealed; the UT was correct to apply Edwards v Bairstow principles when reviewing factual findings; remittal was limited to HKP because HMRC had been partially successful on Issue 2 for Garrard and LAGP and had conceded some matters before the UT.

Appeal allowed in part. The Court of Appeal dismissed the Appellants’ appeals on the deductibility of the Capital Contributions (upholding the UT’s finding that the Garrard and LAGP contributions were not wholly and exclusively for the solo trades and therefore not deductible, while acquisition costs are deductible) and dismissed the Appellants’ challenge on the scope of closure‑notice appeals. The court also dismissed HMRC’s attempt to reopen and reframe their case in respect of Garrard and LAGP but remitted the question as to the accounting "look‑through" treatment of HKP back to the FTT for further factual findings. The decision rested on application of the Vodafone test for "wholly and exclusively", statutory scheme in Schedule 18 FA 1998 and TMA, and the no double taxation principle from IRC v F S Securities.

Appeal from First-tier Tribunal (Tax Chamber) decision [2016] UKFTT 356 (TC) to the Upper Tribunal (Tax and Chancery Chamber) (First Decision [2018] UKUT 0069 (TCC) and Second Decision [2018] UKUT 0413 (TCC)), then to the Court of Appeal ([2020] EWCA Civ 579).