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Inverclyde: a retrospective line in the sand

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As announced in the recent Budget, the Finance Bill 2020 (at clause 101) will amend the limited liability partnership (LLP) enquiry powers in TMA 1970. The legislation will come into effect on royal assent and will apply with retrospective effect. 

The legislation effectively treats the tax return of an LLP which is not carrying on business with a view to a profit in the same manner as that of an ‘ordinary’ partnership. This has a direct effect on HMRC’s ability to enquire into LLPs.

The legislative change was needed following HMRC’s loss before the First-tier Tribunal in Inverclyde Property Renovation LLP v HMRC [2019] UKFTT 408. Although the FTT’s decision is not a legally binding precedent, it potentially renders large numbers of existing enquiries into LLPs invalid on the basis that they were opened under incorrect statutory provisions. 

HMRC has, to date, largely proceeded on the basis that the rules which apply to ‘ordinary’ partnerships in respect of the filing of returns, and opening and closing of enquiries, apply equally to LLPs. Inverclyde effectively says this is not the case. This in turn calls into question whether HMRC has correctly opened and closed enquiries, issued partner payment notices (PPNs) or validly entered into settlements with users of tax avoidance schemes for which the investment vehicle was/is an LLP. Therefore, Inverclyde has potential ramifications for all LLPs, not just those which may have been used as the investment vehicle for an avoidance scheme, thereby presenting HMRC and the exchequer with a significant issue. The risk to the exchequer is understood to have run into several billion pounds.

Given the large stakes, was retrospective legislation proportionate on this occasion? HMRC states (at that the legislation ‘merely affirms the existing policy and practice that LLPs are treated for taxation purposes on the same basis as other partnerships’. There is some truth in this statement, as most practitioners had proceeded on the basis that enquiries into an LLP issued by HMRC under TMA 1970 s 12AC were indeed valid (assuming all other necessary conditions were met).

The FTT’s decision in Inverclyde suggests otherwise, but it is questionable whether it will survive on appeal. The partnership provisions in TMA 1970 (starting with ss 12AA–12AD) have been construed purposively to cover LLPs as well as ordinary partnerships. In Sword Services v HMRC [2016] EWHC 1473 (Admin), a case concerning partner payment notices (PPNs), the High Court said (at para 62): ‘There is no distinction between an ordinary partnership and an LLP in ss 12AA–12AC. Indeed there is high authority that those sections apply to both: Tower MCashback LLP v HMRC [2011] UKSC 19, per Lord Walker. Thus when Schedule 32 [regarding PPNs] refers to partnership and partners, it is referring to both ordinary and limited liability partnerships and their members.’ 

Inverclyde is to be heard by the Upper Tribunal on 27/28 April 2020. Rather than rely on HMRC winning its appeal, the introduction of retrospective legislation puts the issue beyond doubt, and all appeals submitted pending Inverclyde are effectively redundant.

The introduction of retrospective legislation also sends a more fundamental message to taxpayers: where the tax system is found to be materially flawed, HMRC is prepared to use all the measures at its disposal, however controversial, to protect its position. 

Issue: 1485
Categories: In brief , litigation , LLP