In Acornwood and others v HMRC (TC03545– 9 May 2014), the scheme implemented by the Icebreaker partnerships failed. The partnerships were set up as music industry investment schemes.
All the appellants were members of the partnerships, which had implemented arrangements giving rise to an accounting loss in each of the partnerships’ first accounting period. The loss was derived from the acquisition of intellectual property rights for a modest sum and the payment of a substantial exploitation fee to an exploitation company. The injection of capital by each member was partly financed by borrowings which were to be serviced by a guaranteed return on investment for the members.
The appellants claimed that they were entitled to sideways loss relief against their income and capital gains tax liabilities (ICTA 1988 ss 380 and 381, TCGA 1992 s 261B and ITA 2007 ss 64, 71 and 72).
The FTT considered that the payments to the exploitation company, which represented the purchase price of a guaranteed income stream, were of a capital nature. The profit and loss accounts of the partnerships which included those payments were therefore not GAAP compliant and must be redrawn. The FTT concluded that the losses made by the partnerships must be lower than claimed by the appellants but higher than suggested by HMRC. Therefore, the appeals against the closure notices must be partially allowed (to a very modest extent).
HMRC also contended that the arrangements were structured so that the members were guaranteed at the end of the sequence to be put back in the position from which they started. According to HMRC, the arrangements must therefore be recharacterised, applying the Ramsay doctrine.
The FTT disagreed, on the basis that the transactions were ineffective in any event. Once the partnerships’ accounts were redrawn to comply with GAAP, only those payments which were of a revenue nature and made in respect of expenses incurred for the purpose of the trade in the relevant year would be brought into the profit and loss account for that year.
The FTT did however accept that Ramsay could, in theory, apply to the transactions. It concluded that, as in Tower MCashback [2011] AC 457, the borrowings served no useful purpose but the inflation of the supposed loss. The artificial steps could therefore be disregarded.
The FTT also made the following points:
The partnerships did not show any sign of becoming profitable, to the extent that it might be realistically expected that the capital injected in them might be recoverable within a reasonable timescale. Therefore, the trades were not carried out on a commercial basis with a view to profit. Consequently, sideways loss relief would not have been available in any event (ICTA 1988 s 384).
The members were not active partners and their activities were not carried out for the purpose of the trade. For instance, they were supplied with music recordings only for the purpose of satisfying the statutory requirements. They therefore failed the test of ITA 2007 s 103B(1).
The arrangements were however not a sham and the liability to repay the loans remained with the members. The arrangements therefore did not fall foul of the conditions of the Partnerships (Restrictions on Contributions to a Trade) Regulations, SI 2005/2017.
Why it matters: The total amount of tax at stake was in excess of £134.5m and so the losses for investors may be in excess of £70m. The decision is also likely to affect other similar partnership arrangements in which the partners are not active.
In Acornwood and others v HMRC (TC03545– 9 May 2014), the scheme implemented by the Icebreaker partnerships failed. The partnerships were set up as music industry investment schemes.
All the appellants were members of the partnerships, which had implemented arrangements giving rise to an accounting loss in each of the partnerships’ first accounting period. The loss was derived from the acquisition of intellectual property rights for a modest sum and the payment of a substantial exploitation fee to an exploitation company. The injection of capital by each member was partly financed by borrowings which were to be serviced by a guaranteed return on investment for the members.
The appellants claimed that they were entitled to sideways loss relief against their income and capital gains tax liabilities (ICTA 1988 ss 380 and 381, TCGA 1992 s 261B and ITA 2007 ss 64, 71 and 72).
The FTT considered that the payments to the exploitation company, which represented the purchase price of a guaranteed income stream, were of a capital nature. The profit and loss accounts of the partnerships which included those payments were therefore not GAAP compliant and must be redrawn. The FTT concluded that the losses made by the partnerships must be lower than claimed by the appellants but higher than suggested by HMRC. Therefore, the appeals against the closure notices must be partially allowed (to a very modest extent).
HMRC also contended that the arrangements were structured so that the members were guaranteed at the end of the sequence to be put back in the position from which they started. According to HMRC, the arrangements must therefore be recharacterised, applying the Ramsay doctrine.
The FTT disagreed, on the basis that the transactions were ineffective in any event. Once the partnerships’ accounts were redrawn to comply with GAAP, only those payments which were of a revenue nature and made in respect of expenses incurred for the purpose of the trade in the relevant year would be brought into the profit and loss account for that year.
The FTT did however accept that Ramsay could, in theory, apply to the transactions. It concluded that, as in Tower MCashback [2011] AC 457, the borrowings served no useful purpose but the inflation of the supposed loss. The artificial steps could therefore be disregarded.
The FTT also made the following points:
The partnerships did not show any sign of becoming profitable, to the extent that it might be realistically expected that the capital injected in them might be recoverable within a reasonable timescale. Therefore, the trades were not carried out on a commercial basis with a view to profit. Consequently, sideways loss relief would not have been available in any event (ICTA 1988 s 384).
The members were not active partners and their activities were not carried out for the purpose of the trade. For instance, they were supplied with music recordings only for the purpose of satisfying the statutory requirements. They therefore failed the test of ITA 2007 s 103B(1).
The arrangements were however not a sham and the liability to repay the loans remained with the members. The arrangements therefore did not fall foul of the conditions of the Partnerships (Restrictions on Contributions to a Trade) Regulations, SI 2005/2017.
Why it matters: The total amount of tax at stake was in excess of £134.5m and so the losses for investors may be in excess of £70m. The decision is also likely to affect other similar partnership arrangements in which the partners are not active.
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