The recent appeal in Acornwood LLP & Ors v HMRC has been dismissed by the Upper Tribunal (UT) which held that the First-tier Tribunal’s (FTT’s) findings were reasonable. The FTT judgment was released in 2014 and received a lot of press coverage at the time, most of it reported under the ‘Icebreaker’ name. The FTT ruled that the LLPs were ‘tax avoidance schemes’ which did not generate the purported trading losses which the partners sought to set off against their other income and so reduce their tax liabilities. We understand that the judgment affects 51 partnerships in total and the tax at stake is £336 million.
What the LLP did is best understood using indicative figures as follows:
- The members contributed £100 to the LLP - £20 from their own resources and £80 was borrowed from a bank;
- The LLP took that £100 and paid £5 as an ‘advisory’ fee to Icebreaker Management Ltd (IML);
- The LLP paid the remaining £95 to the principal exploitation company, normally Shamrock Solutions Ltd (Shamrock);
- Shamrock agreed to pay (say) £90 to a production company which would be responsible for producing the end product, be it a music CD, a book, or some other product;
- The production company simultaneously agreed to acquire from Shamrock for £80 a share of the future revenues arising from the product;
- The net effect of those two agreements was that Shamrock paid £10 to the production company, leaving Shamrock with £85 of the £95 paid to it;
- Shamrock then put £80 on deposit;
- The interest paid on the deposit of £80 was used by Shamrock to pay an income stream to the LLP;
- That income stream matched the quarterly interest payments which the partners of the LLP were obliged to pay to the lending bank for the initial borrowing of the £80 to fund their contribution to the LLP;
- The £80 on deposit was then after four years used by Shamrock to pay the LLP what is described as the ‘Final Minimum Sum’ due from Shamrock to the LLP; and
- That sum was then available to repay the principal amount borrowed by the members of the LLP.
The LLP claimed that the £95 it had paid to Shamrock was a revenue expense wholly and exclusively paid for the purposes of the LLP’s trade and as such, the LLP incurred a first year loss of £95. This loss would then be available to the partners to reduce their tax liability on other income and claim a tax refund.
The FTT however found that the monies paid to Shamrock were not wholly and exclusively for the trade due to the ‘circular’ financing employed. As such, the payment to exploit the IP which generated the partnership loss was held by the FTT not to be deductible for tax purposes and so no loss was available to offset.
While the decision of the FTT concerned appeals by both the LLPs on the wholly and exclusively point and by the partners as to whether, if the losses did exist for tax purposes, they could be used to offset their other income, the UT heard only the appeal from the LLPs. There were two main substantive appeal points as follows:
- The LLPs claimed that HMRC had made a concession that all transactions had occurred at market value but which the FTT had ignored in reaching its conclusion – if this was correct then it would point towards a conclusion that the expenditure was wholly and exclusively incurred. The UT reviewed the FTT transcripts and concluded that no such concession was made.
- The FTT judgment (and by extension the UT judgement in Icebreaker 1 upon which the FTT relied) was not consistent with the House of Lords judgement in Barclays Mercantile Business Finance Ltd (BMBF). Ultimately, the UT said that in BMBF a real pipeline was acquired, BMBF had both an existing and real trade in finance leasing and there was no question of whether the amount paid for the pipeline was not market value. As such, the case was easily distinguished from the current appeal.
We now wait to see if the LLPs will seek leave to appeal to the Court of Appeal
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