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HMRC wins £29m R&D tax avoidance case

30th Jul 2015
Freelance journalist
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HMRC has defeated an "artificial" tax avoidance scheme that tried to claim inflated tax relief on scientific research.

In the first-tier tribunal case concerning The Brain Disorders Research Limited Partnership and Neil Hockin v HMRC [2015] UKFTT 0325 (TC), the judges ruled against an attempt to claim £29m in tax relief. The investors claimed to have spent £122m on research even though only £7m reached the genuine research company.

The aim of the scheme was to enable investors to make large claims to interest relief on their borrowings. Large capital allowances claims were also made.

The tribunal found that as the partnership was not trading, no tax relief was due.

How the avoidance scheme worked

The partners took out two 15-year loans of £53m each and invested these, together with £13m of their own money, into the Brain Disorders Research Limited Partnership.

The partnership paid £122m to a Jersey-registered company, Numology Limited, to fund research into depression and Attention Deficit Hyperactivity Disorder.

The partnership claimed capital allowances on this full amount.

Numology Limited then subcontracted the entire research project to an Australian biotechnology company for £7m. The other monies, apart from those used to pay promoter fees, were used to cover the loan and interest.

Research tax breaks

The UK has tax reliefs to support genuine research and development (R&D), which includes medical research. Since the R&D tax credit schemes were launched in 2000‐01, over 100,000 claims have been made and more than £9.5bn in tax relief has been claimed.

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By Satwaki Chanda
02nd Aug 2015 09:50

Putting in £20 and claiming back 40 - a money printing machine?

All these R&D/film cases are set up so that the investor gets out more than he puts in.

It is the level of gearing to inflate the value of the claim that is the real mischief here. Investors are never at risk for the amount of the loan - for the funds are never used in the business they are investing in, but locked in the bank's own account. 

In this case about 96-99 was "invested" but only 6 was actually spent on the R&D.

So even if the LLP were regarded as trading, the claim to allowances - and therefore sideways loss relief - would have been severely limited.

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By moneymanager
03rd Aug 2015 13:22

A bit too generalist IMHO

That an action by a taxpayer/investor is designed to enhance their position seems self evident and quite correct.. As to gearing and risk, all the film finance partnerships that I ever used were always on a full recourse basis otherwise no relief would have been granted, ever. It's not the gearing that is the real mischielf but the delierate obfuscation  as to the purpose of the arangement. Not even with gritted teeth I would say that this scheme was set to fail and does the tax planning adviser no favours.

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By Satwaki Chanda
03rd Aug 2015 13:42

Comments on gearing should be read with what I said afterwards

 

"Investors are never at risk for the amount of the loan - for the funds are never used in the business they are investing in, but locked in the bank's own account."

The fault is mine for not expressing this more clearly.

But it really is clear from reading the case that one asks "How did they every imagine that relief could be granted?

As moneymanager says - its "the delierate obfuscation  as to the purpose of the arangement. E.g.

Why spend time and effort getting quotes as to the cost of the R&D for approx 100 when you're going to use a process that costs a miniscule fraction of the amount?

What were the members doing, that could consitute a trading activity? 

I agree that if the loan is on a full recourse basis this should not be a problem. Though I had understood that all these LLPs were on the basis that the members would never be at risk for the amount. So it is interesting to find out that there have been cases where the full recourse method was followed.

Indeed, when I was working on an R&D Fund, my intention was that no loan would be offered. It would have been a straight investment of 100 in return for tax relief of 40 on the R&D allowance. Though it compares unfavorably to putting in 20 and getting out 40, it would have been a nice complement to the then EIS/VCT schemes for those people who've used up their annual VC scheme allowance and were looking for something ellse.

Unfortunately my idea never got off the ground. Partner too busy with other matters.

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