Investec Asset Finance Plc & Anor v Revenue And Customs

Expenditure is deductible as incurred wholly and exclusively for a trade only if its object serves that trade alone. An intended ultimate benefit to that trade does not suffice where the expenditure also serves a distinct partnership trade and that purpose is central rather than incidental.

On an appeal against a corporation tax closure notice, the First-tier Tribunal determines the matter in question from the amendment, read in context. HMRC may advance arguments producing greater tax, provided they concern that same matter and comply with fairness and case management.

The no double taxation principle excludes from a corporate partner’s own-trade computation partnership profit already taxed under section 114(2) of the Income and Corporation Taxes Act 1988. It may apply although the subsequent payment is a separate transaction or described as a repayment of capital.

Corporate taxpayers acquired interests in leasing partnerships, made acquisition payments and, in two partnerships, substantial capital contributions. Partnership profits were taxed in their hands under section 114(2) of the Income and Corporation Taxes Act 1988, while their separate financial trades were taxable under section 42 of the Finance Act 1998.

The First-tier Tribunal decided the material expenditure was revenue expenditure incurred wholly and exclusively for the taxpayers’ own financial trades. It also held that partnership profit already taxed under section 114(2) must be excluded from the computations for those trades. The Upper Tribunal, in [2018] UKUT 0069 (TCC) and [2018] UKUT 0413 (TCC), held that the capital contributions were not exclusively incurred for the taxpayers’ own trades. It upheld HMRC’s ability to advance its alternative case, but remitted an accounting issue concerning the Hong Kong partnerships.

The appeals concerned deductibility, the permissible scope of a closure-notice appeal, the operation of the no double taxation principle, and whether HMRC could introduce a substantially reformulated accounting case at the appellate stage.

1. Disposition. The taxpayers’ appeals were dismissed on deductibility and the scope of the closure-notice appeal. HMRC’s appeal concerning Garrard and LAGP was dismissed. The taxpayers’ appeal against remittal of the HKP issue was allowed, so no partnership was remitted to the First-tier Tribunal. Rose LJ gave the judgment, with which Sir Timothy Lloyd and Peter Jackson LJ agreed.

2. The capital contributions to Garrard and LAGP were not deductible from the income of the taxpayers’ separate financial trades. Under section 74(1)(a) of the Income and Corporation Taxes Act 1988, expenditure must be incurred wholly and exclusively for the trade whose profits are computed. The taxpayers’ ultimate objective was to profit from their own trades, but the contributions enabled the partnerships to acquire leasing assets or businesses and discharge debts. Serving those partnership businesses was central to the transactions, not an incidental consequence. The Upper Tribunal could reach that conclusion without disturbing the First-tier Tribunal’s primary findings of fact.

3. A closure-notice appeal is confined by the amendment to the return and the matter to which that amendment relates. That is a jurisdictional limit, not merely a requirement of procedural fairness. Nevertheless, the matter is not construed narrowly. The specialist First-tier Tribunal determines its scope from the notice, its context and the surrounding circumstances. HMRC may advance arguments yielding a different or larger tax liability where they concern the same identified matter, subject to fairness and proper case management. The alternative case identified in the covering letter fell within that scope.

4. The public interest in collecting the correct tax did not permit HMRC to abandon concessions or recast its case at will. Its new accounting analysis reversed its earlier position on deductibility and introduced contentious factual and methodological questions without adequate notice or evidence. It was too late to advance that case or obtain a remittal for evidence that could have been presented below.

5. The no double taxation principle required partnership profit already charged under section 114(2) to be excluded from income in the section 42 computations for the taxpayers’ separate trades. HMRC could not avoid that result by characterising a payment as a repayment of capital or as a transaction distinct from the partnership’s receipt of income. The acquisition costs remained deductible, but the capital contributions to Garrard and LAGP were not deductible from other income of the separate trades.

1. Court of Appeal (Civil Division): In [2020] EWCA Civ 579, dismissed the taxpayers’ appeals on the capital-contribution and closure-notice issues, dismissed HMRC’s appeal, and allowed the taxpayers’ appeal against remittal of the HKP issue.
2. Upper Tribunal (Tax and Chancery Chamber): In [2018] UKUT 0413 (TCC), resolved further double-taxation issues and remitted the HKP accounting issue to the First-tier Tribunal.
3. Upper Tribunal (Tax and Chancery Chamber): In [2018] UKUT 0069 (TCC), held that the acquisition costs were deductible but the capital contributions were not incurred wholly and exclusively for the taxpayers’ separate financial trades. It upheld the First-tier Tribunal’s jurisdiction to consider HMRC’s alternative case.
4. First-tier Tribunal (Tax Chamber): In [2016] UKFTT 356 (TC), held that the disputed expenditure was revenue expenditure incurred wholly and exclusively for the taxpayers’ separate financial trades, and that the no double taxation principle applied.