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Deloitte: HMRC victory in anti-avoidance case is the ‘right result’

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HMRC have welcomed a Supreme Court decision that money borrowed by the taxpayers in the Tower MCashback case was not used as expenditure in the acquisition of software rights but ‘went in a loop back to the lender’ to enable the taxpayers to ‘to enable the LLPs to indulge in a tax avoidance scheme’.

The decision should see an extra £30 million come in to the exchequer in respect of this scheme alone, an HMRC spokesman said.

Seven Supreme Court judges unanimously allowed HMRC’s appeal in HMRC v Tower MCashback LLP 1 and another [2011] UKSC 19, which concerned whether expenditure had been ‘incurred’ by four limited liability partnerships (LLPs) for the purpose of claims to first-year allowances under Capital Allowances Act 2001.

The LLPs were intended to raise money from individuals, who would benefit from tax losses arising from capital allowances on the purchase of the software, Bill Dodwell, Head of Tax Policy at Deloitte, explained in his review of the Court of Appeal decision ([2010] STC 809, see Tax Journal 15 February 2010).

‘Between them, the four were intended to pay £143 million for software. However, only 25% of this was funded by the LLPs themselves; 75% came in the form of unusual non-recourse loans,’ Dodwell explained. He observed at the time that ‘cases such as these do perhaps illustrate why we now have restrictions on loss relief; there are limits to the exchequer's generosity in financing unsuccessful businesses’.

The Guardian quoted Dodwell today as saying that the scheme ‘had pushed the bounds of credibility’. Pop stars were among ‘hundreds’ of wealthy investors potentially affected by the decision, it reported. Deloitte declared on Twitter that the Supreme Court decision was the ‘right result’.

‘Commercial soundness’

The Supreme Court judges heard HMRC’s appeal in February 2011 and published their decision yesterday. They considered that ‘it is not enough for HMRC, in attacking a scheme of this sort, simply to point to money going round in a circle’.

In the context of a complex pre-ordained transaction, however, the court’s task is ‘to test the facts, realistically viewed, against the statutory test, purposively construed,’ the court stated in a press summary of the judgment. ‘Entitlement to capital allowances requires there to have been real expenditure for the real purpose of acquiring plant or machinery for use in a trade.’

The court’s summary went to say that concerns about the valuation of what is being acquired and the commercial soundness of the transactions are relevant.

‘The fact that rights in the software had been transferred by MCashback to LLP2 demonstrated the reality of some expenditure on acquiring those rights, but did not conclusively show that the whole of consideration in the [software licence agreement] was expenditure for that purpose.

‘The Special Commissioner found that the market value of the software was “very materially below” [the stated consideration]. He had also held that there was little chance that the members’ loan would be repaid in full within ten years – as much as 60% might be unpaid, and waived, at the end of that period.

‘These findings justified the conclusion that the money which the investor members borrowed was not used, in any meaningful sense, as expenditure in the acquisition of software rights. Instead, it went in a loop back to the lender in order to enable the LLPs to indulge in a tax avoidance scheme.’

Jason Collins, Tax Partner at McGrigors, observed that ‘tax planning around prescriptive legislation or legislation which creates legal “fictions” will tend to succeed, and it is HMRC's responsibility to make sure its legislation does not contain loopholes’. However, where the legislation applies a broad-brush approach, ‘most artificial tax planning will fail’.