The upper tribunal has dismissed the latest “Icebreaker” partnerships appeal.
The appeal, ‘Seven individuals v HMRC’ [UT/2015/0041], was against a decision of the first tier tribunal (FTT) and is the most recent round of litigation between the partnerships and the tax department.
The proceedings heard by the FTT back in 2014 consisted in part of appeals by five of the Icebreaker partnerships (LLPs including Acornwood, Bastionspark, Edgedale, Starbrooke and Hawksbridge) against decisions of HMRC disallowing expenditure which they claimed to be deductible in calculating trading losses.
It was also in part a joint reference to the FTT of a number of questions by seven individuals, who were members of those or other Icebreaker LLPs, and HMRC. The joint reference was made under section 28ZA of the Taxes Management Act 1970, which permits questions arising in connection with the subject matter of an enquiry to be referred jointly to the FTT for determination.
On 7 May 2014 the FTT released its decision allowing the appeal of all five LLPs to a limited extent, but rejected the most significant of the claims made by them, and largely rejected the contentions of the individual referrers in the joint reference.
The tribunal found that the aim of Icebreaker, which made use of tax schemes for the creative industries, was to secure sideways relief for members of all the partnerships and to inflate the scale of relief by unnecessary borrowing. Included in the investors were Take That singers Gary Barlow, Howard Donald and Mark Owen.
On 4 August 2016 judge Nugee dismissed an appeal by the five LLPs against the FTT decision.
The tribunal concluded then: “The aim was to secure sideways relief for the members, and to inflate the scale of the relief by unnecessary borrowing, coupled with the illusion that the borrowed money was available for use in the exploitation of intellectual property rights by the device of the purported payment of a large production fee offset by the equally purported payment of a fee for a share of the resulting revenue. In our judgment the schemes substantially failed in their purpose.”
On 5 October 2016 a separate appeal by four of the LLPs (all except Acornwood) against the FTT’s decision on costs was also dismissed.
The most recent appeal is by the individual referrers against the decision around whether the individual members of the LLPs could obtain sideways loss relief - that is setting their individual share of their LLP’s trading losses against other income for income tax purposes.
Jolyon Maugham QC, who appeared for the individual referrers, explained that the “member level issues” remained live and were significant despite the fact that the FTT largely rejected the LLPs’ arguments on the partnership level issues.
The seven individuals in question were chosen, with the agreement of HMRC, as a representative cross-section of the individual members of the Icebreaker LLPs.
Maugham outlined three questions arising on the appeal:
- In respect of each individual referrer, whether his or her LLP’s trade was carried on on a commercial basis and with a view to profit
- In respect of each individual referrer, whether s/he was active
- In respect of Mr Hawksbridge, whether the arrangements to which he was party
On the commercial basis question the judge was not persuaded that HMRC’s acceptance that the LLPs were carrying on their trades with a view to profit within the meaning of s. 863 ITTOIA, even if that is now to be understood in the sense expounded by the FTT in Ingenious Games, carries with it an acceptance that the LLPs’ trades were being carried out on a commercial basis.
“By saying that they were not taking a point on the profits limb, HMRC were not conceding anything. They were choosing to rely on the commerciality limb to defeat the claim to relief, and they were choosing not to put forward any particular case on the profits limb.
“But that cannot it seems to me be equated with an acceptance or agreement or concession that the profits limb was in each case satisfied. It simply meant that they were not arguing the point, not that they agreed anything. For these reasons I do not accept Mr Maugham’s argument based on HMRC’s so-called concessions,” Judge Nugee said.
He later added: “In my judgment therefore the FTT are not shown to have made any error of law in their conclusion on the commerciality limb.”
On dismissing the appeal on the commercial basis question, Maugham accepted that that knocked out all claims to relief so the other two questions do not arise. However the judge deals with them in the full judgement, which can be viewed here.
About Robert Lovell
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