In HMRC v Inverclyde Property Renovation LLP and another [2020] UKUT 161 (TCC) (27 May 2020), the Upper Tribunal (UT), reversing the decision of the First-tier Tax Tribunal (FTT), found that the tax administration provisions in TMA 1970 were capable of applying to limited liability partnerships (LLPs), so that HMRC’s enquiries and closure notices issued to two LLPs under s 28B of that Act had been valid.
HMRC had opened enquiries into two LLPs’ partnership tax returns and subsequently issued closure notices concluding that the LLPs were not carrying on a business with a view to profit and not, therefore, entitled to claim for business property renovation allowance. The enquiries had been opened and closure notices had been issued under the income tax administration provisions of the TMA 1970. The LLPs argued that the enquiries should have been made under the corporation tax self-assessment provisions in FA 1998 Sch 18 instead, with the result that no valid closure notices had been issued.
Although tax returns and enquiries into returns of partnerships are governed by TMA 1970, the FTT held that the provisions of ITTOIA 2005 s 863, which deem references to a partnership to include an LLP carrying on a trade, profession or business with a view to profit for income tax purposes, did not go so far as to apply to the administrative provisions contained in, or treated as being contained in, TMA 1970. As a result, if the statutory ‘partnership’ deeming applied, although income tax and corporation tax were payable as if the LLP was a partnership, the tax administration provisions of TMA 1970 remained applicable on the basis that the LLP was a company. Accordingly, the FTT agreed with the LLPs that the closure notices issued by HMRC pursuant to the provisions of TMA 1970 were invalid.
The UT found that the FTT had erred in law in coming to that conclusion. The issue rested on the correct interpretation of the expression ‘For all purposes... in the Income Tax Acts’ in ITTOIA 2005 s 863(2). In coming to its decision the FTT had followed the conclusion of Lady Smith in R (on the application of Spring Salmon and Seafood Ltd) v IR Commrs [2004] STC 444 (and also two other judgments to the same effect: one a decision of the UT in Bartram v HMRC [2012] STC 2144 (UT), and the other a decision of the FTT in MDL Property Consultants LLP v HMRC [2017] UKFTT 894 (TC)). That conclusion was that the expression ‘the Tax Acts’ did not include TMA 1970, with the result that the provisions in s 863 referring to the Income Tax Acts and deeming references to a partnership to include an LLP where it carried on a business with a view to profit, likewise did not.
The UT found instead that the expression ‘the Income Tax Acts’ was indeed capable of including provisions of TMA 1970 that were concerned with income tax. Pursuant to the Interpretation Act 1978 (IA 1978), Sch 1, para 1, ‘the Income Tax Acts’ meant ‘all enactments relating to income tax, including any provisions of the Corporation Tax Acts which relate to income tax’ and importantly, the UT noted, section 1 of that Act stated that every section of an Act took effect as a substantive enactment without introductory words. Referencing for support Briggs LJ’s observation in John Lyon’s Charity [2017] EWCA Civ 846 (para 39) and the case of Wakefield and District Light Railways Co v Wakefield Corporation [1906] 2 KB 140, at para 145, the words ‘all enactments relating to income tax’ ought therefore, in the UT’s view, to be read as referring not only to whole Acts relating to income tax but also to any section of an Act, including the TMA 1970, relating to income tax. In the UT’s view, no doubt was cast on that analysis by the distinct references in TMA 1970 s 118(1) to both ‘this Act’ on the one hand and ‘the Tax Acts’ (consisting of the Income Tax Acts and the Corporation Tax Acts, pursuant to IA 1978 Sch 1 para 1) on the other. The UT therefore disagreed with the view taken by Lady Smith in Spring Salmon (and in Bartram and MDL) and found no compelling reason to treat the two expressions as mutually exclusive. The UT also noted, as HMRC had pointed out, that there were a significant number of court decisions that had proceeded upon an assumption that the return and enquiry regime applicable to LLPs was the one contained in TMA 1970.
Accordingly, HMRC’s notices of enquiry and closure notices were, in each case, validly issued, even though one of the conclusions in the closure notices was that the LLPs were not carrying on business with a view to profit and ought not to have filed partnership tax returns.
Why it matters
This decision is noteworthy, not only for the finding that the tax administration provisions in TMA 1970 were capable of applying to LLPs in itself, but also for the analysis of what is meant by ‘the Tax Acts’ and the difference between that expression and ‘the Taxes Acts’. The UT disagreed with previous decisions in this area, including Spring Salmon.
The UT conceded that both interpretations of the relevant provisions produced schemes for returns by and enquiries into the returns of LLPs that were not entirely without ‘awkwardness’ in their practical application. In the case of HMRC’s interpretation, the key difficulty arose where there was uncertainty regarding the ‘transparency’ status of an LLP and what happened if the ‘incorrect’ choice was made as to the appropriate form of return (TMA 1970 or FA 1998 Sch 18). However, in the UT’s view the approach advocated by the LLPs, namely that the management provisions in Schedule 18 applied to all LLPs regardless of whether or not they are carrying on a business with a view to profit, gave rise to more ‘intractable difficulties’ than the approach submitted by HMRC which did, in its view, provide a workable procedure. In this regard, the UT did note that clause 101 of Finance Bill 2020 currently before Parliament would, if enacted, insert a new s 12ABZAA into TMA 1970 dealing specifically with the case where an LLP has delivered an LLP partnership return on the basis of operating ‘with a view to profit’ but is subsequently found to be operating ‘without a view to profit’. The new section would ensure that HMRC can amend the LLP’s return (and the LLP members’ returns) to give effect to the conclusions reached when the relevant enquiry is completed. This amendment is stated as ‘putting beyond doubt that the legislation works as designed and intended’, and could be interpreted as suggesting some unease on the part of the government that TMA 1970 is, currently, not as clear as it could be in this regard. In any case, HMRC is likely to warmly welcome the UT’s decision in this case. The UT did not take any account of Finance Bill 2020 in reaching its decision and came to its conclusions on the basis of the legislation as it currently stands
In HMRC v Inverclyde Property Renovation LLP and another [2020] UKUT 161 (TCC) (27 May 2020), the Upper Tribunal (UT), reversing the decision of the First-tier Tax Tribunal (FTT), found that the tax administration provisions in TMA 1970 were capable of applying to limited liability partnerships (LLPs), so that HMRC’s enquiries and closure notices issued to two LLPs under s 28B of that Act had been valid.
HMRC had opened enquiries into two LLPs’ partnership tax returns and subsequently issued closure notices concluding that the LLPs were not carrying on a business with a view to profit and not, therefore, entitled to claim for business property renovation allowance. The enquiries had been opened and closure notices had been issued under the income tax administration provisions of the TMA 1970. The LLPs argued that the enquiries should have been made under the corporation tax self-assessment provisions in FA 1998 Sch 18 instead, with the result that no valid closure notices had been issued.
Although tax returns and enquiries into returns of partnerships are governed by TMA 1970, the FTT held that the provisions of ITTOIA 2005 s 863, which deem references to a partnership to include an LLP carrying on a trade, profession or business with a view to profit for income tax purposes, did not go so far as to apply to the administrative provisions contained in, or treated as being contained in, TMA 1970. As a result, if the statutory ‘partnership’ deeming applied, although income tax and corporation tax were payable as if the LLP was a partnership, the tax administration provisions of TMA 1970 remained applicable on the basis that the LLP was a company. Accordingly, the FTT agreed with the LLPs that the closure notices issued by HMRC pursuant to the provisions of TMA 1970 were invalid.
The UT found that the FTT had erred in law in coming to that conclusion. The issue rested on the correct interpretation of the expression ‘For all purposes... in the Income Tax Acts’ in ITTOIA 2005 s 863(2). In coming to its decision the FTT had followed the conclusion of Lady Smith in R (on the application of Spring Salmon and Seafood Ltd) v IR Commrs [2004] STC 444 (and also two other judgments to the same effect: one a decision of the UT in Bartram v HMRC [2012] STC 2144 (UT), and the other a decision of the FTT in MDL Property Consultants LLP v HMRC [2017] UKFTT 894 (TC)). That conclusion was that the expression ‘the Tax Acts’ did not include TMA 1970, with the result that the provisions in s 863 referring to the Income Tax Acts and deeming references to a partnership to include an LLP where it carried on a business with a view to profit, likewise did not.
The UT found instead that the expression ‘the Income Tax Acts’ was indeed capable of including provisions of TMA 1970 that were concerned with income tax. Pursuant to the Interpretation Act 1978 (IA 1978), Sch 1, para 1, ‘the Income Tax Acts’ meant ‘all enactments relating to income tax, including any provisions of the Corporation Tax Acts which relate to income tax’ and importantly, the UT noted, section 1 of that Act stated that every section of an Act took effect as a substantive enactment without introductory words. Referencing for support Briggs LJ’s observation in John Lyon’s Charity [2017] EWCA Civ 846 (para 39) and the case of Wakefield and District Light Railways Co v Wakefield Corporation [1906] 2 KB 140, at para 145, the words ‘all enactments relating to income tax’ ought therefore, in the UT’s view, to be read as referring not only to whole Acts relating to income tax but also to any section of an Act, including the TMA 1970, relating to income tax. In the UT’s view, no doubt was cast on that analysis by the distinct references in TMA 1970 s 118(1) to both ‘this Act’ on the one hand and ‘the Tax Acts’ (consisting of the Income Tax Acts and the Corporation Tax Acts, pursuant to IA 1978 Sch 1 para 1) on the other. The UT therefore disagreed with the view taken by Lady Smith in Spring Salmon (and in Bartram and MDL) and found no compelling reason to treat the two expressions as mutually exclusive. The UT also noted, as HMRC had pointed out, that there were a significant number of court decisions that had proceeded upon an assumption that the return and enquiry regime applicable to LLPs was the one contained in TMA 1970.
Accordingly, HMRC’s notices of enquiry and closure notices were, in each case, validly issued, even though one of the conclusions in the closure notices was that the LLPs were not carrying on business with a view to profit and ought not to have filed partnership tax returns.
Why it matters
This decision is noteworthy, not only for the finding that the tax administration provisions in TMA 1970 were capable of applying to LLPs in itself, but also for the analysis of what is meant by ‘the Tax Acts’ and the difference between that expression and ‘the Taxes Acts’. The UT disagreed with previous decisions in this area, including Spring Salmon.
The UT conceded that both interpretations of the relevant provisions produced schemes for returns by and enquiries into the returns of LLPs that were not entirely without ‘awkwardness’ in their practical application. In the case of HMRC’s interpretation, the key difficulty arose where there was uncertainty regarding the ‘transparency’ status of an LLP and what happened if the ‘incorrect’ choice was made as to the appropriate form of return (TMA 1970 or FA 1998 Sch 18). However, in the UT’s view the approach advocated by the LLPs, namely that the management provisions in Schedule 18 applied to all LLPs regardless of whether or not they are carrying on a business with a view to profit, gave rise to more ‘intractable difficulties’ than the approach submitted by HMRC which did, in its view, provide a workable procedure. In this regard, the UT did note that clause 101 of Finance Bill 2020 currently before Parliament would, if enacted, insert a new s 12ABZAA into TMA 1970 dealing specifically with the case where an LLP has delivered an LLP partnership return on the basis of operating ‘with a view to profit’ but is subsequently found to be operating ‘without a view to profit’. The new section would ensure that HMRC can amend the LLP’s return (and the LLP members’ returns) to give effect to the conclusions reached when the relevant enquiry is completed. This amendment is stated as ‘putting beyond doubt that the legislation works as designed and intended’, and could be interpreted as suggesting some unease on the part of the government that TMA 1970 is, currently, not as clear as it could be in this regard. In any case, HMRC is likely to warmly welcome the UT’s decision in this case. The UT did not take any account of Finance Bill 2020 in reaching its decision and came to its conclusions on the basis of the legislation as it currently stands
.tmb-editorspic.jpg?sfvrsn=df04ab27_1)
