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HMRC defeats Icebreaker scheme again

18th Aug 2016
Freelance journalist
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The upper tier tribunal has upheld a 2014 decision by the first tier tribunal that the Icebreaker investment scheme was known and understood by all concerned to be a tax avoidance scheme.

HMRC defeated the investment scheme which was used by more than 1,000 investors and purported to find finance for creative projects within the music industry.

It involved limited liability partnerships which, according to the Revenue, had tried to create artificial losses from intellectual property rights.

HMRC said that it was the second time it had defeated Icebreaker after winning a first tier tribunal in 2014. Up to £134m of tax was at stake in the case, HMRC said.

The upper tribunal’s decision [UKUT 0361] has bound a further 46 LLPs, HMRC added.

The main matter in the tribunal was whether spending claimed by five LLPs (Acornwood, Bastionspark, Edgedale, Starbrooke and Hawksbridge) met the requirement of section 34 of the Income Tax (Trading and Other Income) Act 2005. It stipulates that trading losses are only allowed if they come from expenses incurred wholly and exclusively for the purposes of the trade.

How the avoidance scheme worked

The tribunal heard an explanation of the scheme using a figure of 100 to represent the sums contributed to an LLP by its individual members of it.

  • Of that 100, the members contributed 20 from their own resources. The other 80 is borrowed by the members from a bank
  • The LLP took the 100 and paid five to a management company, Icebreaker Management. That five is partly an advisory fee and partly an administration fee
  • The key matter in the tribunal was the remainder of the fee paid to the management company by way of advisory fee. In 2014, the first tier tribunal allowed part of it (relating to Acornwood) but not for the other LLPs
  • The LLP paid the remaining 95 to a company called Shamrock Solutions, which was the “principal exploitation”. Acornwood used a different company, called Centipede Ventures
  • Shamrock agreed to pay a large part of the 95 (say 90) to a production company which would be responsible for producing the end product, whether it was a music CD, a book, or another product
  • The production company simultaneously agreed to acquire a share of the revenues from exploitation of the product from Shamrock, the price for doing so being, say 80
  • The net effect of those two agreements was that Shamrock paid 10 to the production company, leaving it with 85 of the 95 paid to it. Shamrock put 80 of this (or in one case 80 of its own money) on deposit as collateral for the issue of a letter of credit
  • The interest paid on the deposit of 80 is used by Shamrock to pay an income stream by quarterly payments to the LLP and that matches the quarterly interest payments which the members of the LLP are 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 also used to pay the LLP what is described as the “final minimum sum” due from Shamrock to the LLP

The upper tribunal dismissed the LLP’s appeal.

HMRC said that the upper tribunal’s decision was another example of taxpayers “claiming their case is different to those the courts have already decided don’t work, but failing to win that argument when their case gets to tribunal.”

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