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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> HM Revenue & Customs v Tower MCashback LLP 1 & Anor  EWCA Civ 32 (02 February 2010)
Cite as:  EWCA Civ 32,  STI 435,  STC 809,  BTC 154
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
The Honourable Mr Justice Henderson
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE SCOTT BAKER
LORD JUSTICE MOSES
| The Commissioners for Her Majesty's Revenue & Customs
|- and -
|Tower MCashback LLP 1 & Another
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
Mr Kevin Prosser QC (instructed by The Solicitor for HM Revenue and Customs) for the Appellant
Mr Giles Goodfellow QC and Mr Richard Vallat (instructed by Messrs Ashton Rowe) for the Respondent
Hearing dates : 21-22 October, 2009
Crown Copyright ©
Lord Justice Moses :
The Statutory Scheme
"S.28B Completion of Enquiry into Partnership Return
1. An enquiry under s.12AC(1) of this Act (i.e., an enquiry into a partnership return) is completed when an officer of the Board by notice (a 'closure notice') informs the taxpayer that he has completed his enquiries and states his conclusions
2. The Closure Notice must either –
a) state that in the officer's opinion no amendment to this return is required, or
b) make the amendments to the return required to give effect to his conclusions.
3. A Closure Notice takes effect when it is issued."
"any conclusion stated or amendment made by a Closure Notice under s.28A or s.28B…"
S.31A requires notice of appeal to be given in writing within thirty days after the date on which the Closure Notice is issued and that the notice of appeal must specify the grounds of appeal (s.31A(5)). At the time of this appeal s.31A(6) conferred power on the Commissioners to permit an appellant to put forward grounds not specified in his notice if satisfied that the omission was not wilful or unreasonable. That provision is no longer in force.
"(6) If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other …evidence, -
a) that…the appellant is overcharged by self- assessment;
b) that…any amounts contained in a partnership assessment are excessive; or
c) that the appellant is overcharged by an assessment other than a self-assessment,
the assessment or amounts shall be reduced accordingly, but otherwise the assessment or statement shall stand good.
7) If, on an appeal, it appears to the Commissioners –
a) that the appellant is undercharged to tax by self-assessment…,
b) that any amounts contained in a partnership statement…are insufficient; or
c) that the appellant is undercharged by an assessment other than a self-assessment,
the assessment or amounts shall be increased accordingly."
S.50(9) deals with notice to partners of consequential amendments following a decision either to reduce or increase the amount charged.
"(6) If, on an appeal, it appears to the majority of the Commissioners present at the hearing, by examination of the appellant on oath or affirmation, or by other…evidence, that the appellant is overcharged by any assessment, the assessment shall be reduced accordingly, but otherwise every such assessment shall stand good.
(7) If on any appeal it appears to the Commissioners that the person assessed ought to be charged in an amount exceeding the amount contained in the assessment, the assessment should be increased accordingly.
(7A) If, on appeal, it appears to the Commissioners that a claim or election [which was the subject of a decision contained in a closure notice under section 28A] of this Act should have been allowed or disallowed to an extent different from that specified in the notice, the claim or election shall be allowed or disallowed accordingly to the extent that appears to them appropriate, but otherwise the decision in the notice shall stand good.
(8) Where, on an appeal against an assessment which -
a) assesses an amount which is chargeable to tax, and
b) charges tax on the amount assessed,
it appears to the Commissioners as mentioned in sub-section (6) or (7) above, they may, unless the circumstances of the case otherwise require, reduce, or as the case may be, increase only the amount assessed; and where any appeal is so determined tax charged by the assessment should be taken to have been reduced or increased accordingly."
The Scope of an Appeal
"The new burdens were balanced by new protections for taxpayers who conscientiously complied with the system, in particular by new and tighter time limits on the power of the Revenue to make further tax assessments."
"The scope and subject-matter of the appeal will be defined by the conclusions stated in the Closure Notice and by the amendments (if any) made to the return." 
"Due to other pressures, as well as the materiality of the s.45(4) point, I have not had the opportunity to examine Mr Feetum's (representing the taxpayers) letters as thoroughly as your own."
He noted that he had not yet received business plans. On 24 May 2006 KPMG responded to the Inspector's arguments relating to s.45(4) but it also enclosed additional information with their own comments. It recorded the concern of the partners as to the repayments they had claimed and concluded that if they did not receive confirmation that the amounts were agreed or detailed reasons for not doing so by 20 June 2006, the taxpayers would apply to the Commissioners for a directive under s.28A(4) TMA. The Inspector responded, on 2 June 2006, that he hoped to respond fully before 31 July. On 14 June 2006 KPMG reiterated its intention to apply for a direction if no response was received by 20 June 2006.
"I have now concluded my enquiries into the partnership tax return for the year ended 5 April 2005. As previously indicated, my conclusion is:-
The claim for relief under S.45 CAA 2001 is excessive.
The partnership return for the year ended 5 April 2005 is amended as follows:
Capital Allowances £ Nil
Capital Allowable Loss £ Nil…"
The letter went on to state that the Inspector's amendments resulted in a reduction of losses available to the individual partners for the year ended 5 April 2005 and notified the partnership of the right to appeal against this amendment or conclusion within 30 days of the notice.
"Because the appeal would then no longer be an appeal against the conclusion stated in the Closure Notice." 
"The object of granting the allowance is, as we have said, to provide a tax equivalent to the normal accounting deduction from profits for the depreciation of machinery and plant used for the purposes of a trade. Consistently with this purpose, section 24(1) requires that a trader should have incurred capital expenditure on the provision of machinery or plant for the purposes of his trade". 
"But these matters do not affect the reality of the expenditure by BMBF and its acquisition of the pipeline for the purposes of its finance leasing trade". 
"None of these transactions, whether circular or not, were necessary elements in creating the entitlement to capital allowances" .
"There is nothing in the section to suggest that it matters what is the source of the £91m, or alternatively what is to be done with the £91m by the recipient, once the obligation has been discharged."
"There is no non-recourse or other uncommercial loan nor any immediate payment back to the purported lender. Each step taken was properly commercial….there was real expenditure by BMBF… .
"There might be more room for argument as to whether there was 'expenditure', given the apparent circularity of the payments. However, once one accepts the transfer of ownership, it is difficult to question the reality of the expenditure by which the purchase price was discharged. " (my emphasis)
He commented that the loan from the parent bank was on standard terms.
"A creditor who receives a participation in profits in addition to repayment of his loan is of course a creditor. But a creditor who receives a participation in profits instead of repayment of his "loan" is not a creditor".(667D)"
L.P.I.'s money remained at all times under its control whilst it was electronically transferred between Hollywood and London, serving no useful purpose and leaving no trace except entries on computer prints (667G). Thus Lord Templeman concluded that 75% of the expenditure was never expenditure incurred by the partnership. VP neither borrowed nor spent that 75%, it was L.P.I. which incurred the expenditure of $10¾m (674D,676E).
"…if one takes certain individual features of the transaction, and considers them in isolation, it is possible to give some colour to VP's argument. For, example it is no doubt correct that the mere fact that the taxpayer borrows money in order to incur capital expenditure does not prevent him from qualifying for a capital allowance under the section; likewise the mere fact that such a loan is a non-recourse loan in the sense that the taxpayer is not personally liable for its repayment, the loan being repayable out of property or proceeds in the hands of the taxpayer, will not of itself of itself prevent the transaction from constituting what is in truth a loan, or the expenditure so financed qualifying for a capital allowance." (681E).
"The leverage obtained by use of a non-recourse loan meant that the investors did not sustain an economic loss after the tax deduction is taken into account. Their Lordships suspect that it is this feature of the scheme which has most exercised the Commissioner. But a moment's reflection shows that what Lord Templeman had in mind was expenditure or loss before any tax advantage is taken into account. Tax relief often makes the difference between profit and loss after tax is taken into account; and a transaction does not become tax avoidance merely because it does so. The fact that the investment was funded by a non-recourse loan did not alter the fact that the investors had suffered the economic burden of paying the full amount of $x + y. It was not and could not be suggested that either loan was on terms which meant that was unlikely ever to be repaid. The investors have repaid one of the loans in whole or in part albeit out of the film receipts; and they incurred a liability to repay the other if the film generated sufficient receipts, as it was hoped it would."
"However, once one accepts the transfer of ownership, it is difficult to question the reality of the expenditure by which the purchase price was discharged. "
Lord Justice Scott Baker:
Lady Justice Arden:
Closure notice issue
The expenditure issue