In The Queen oao A Locke v HMRC [2019] EWCA Civ 1909 (7 November 2019), the Court of Appeal quashed follower notices on the ground that HMRC had been wrong in considering that a judicial ruling had been relevant to the arrangements.
Mr Locke had been a partner in an Eclipse Film partnership, Eclipse 10, and he had made a contribution of over £29m, financed by borrowing. HMRC had opened enquiries into his tax returns for the years 2005/06 and 2014/15 as it considered that no relief was due on the interest payments. It had subsequently issued 10 follower notices before the enquiries were completed. It contended that the conditions for the issue of such notices were met because Eclipse Film Partners No 35 LLP [2015] EWCA Civ 95 established that Mr Locke was not entitled to interest relief.
Mr Locke appealed against the High Court’s decision on the ground that the tax advantage he had claimed, relief on interest payments, was different from the tax advantage at issue in Eclipse 35. However, the Court of Appeal found that Parliament must have been referring to ‘broad classes of tax advantage’, as opposed to ‘a plethora of narrow kinds of tax advantage’. The relevant tax advantage was therefore relief for interest payments under ICTA 1988 s 353(1), and there was no need to distinguish between relief for interest payments on loans used to purchase an interest in a partnership (s 362(1)(a)) and relief for interest payments on loans used to contribute money to a partnership by way of capital or premium (s 362(1)(b)).
The second issue was whether the principles or reasoning in Eclipse 35 ‘as applied to Mr Locke’s arrangements would deny the asserted advantage’. The Court of Appeal found that the High Court had asked itself ‘the wrong question and so had come to the wrong answer’. The focus of the statutory provisions was not on whether the particular chosen arrangements were identical or similar to the arrangements with which the earlier judicial ruling was concerned. The question was rather ‘whether the principles laid down or reasoning given in that ruling would, if applied to the chosen arrangements, deny the asserted advantage or part of it’.
The court observed that Mr Locke’s claim for interest relief was based on s 362(1)(a) and the requirement that the partnership should carry on a trade, profession or vocation was only a requirement for s 362(1)(b). The only question was therefore whether the payment Mr Locke had made to Eclipse 10 was a payment to purchase a share in a partnership within the meaning of s 362(1)(a) or a contribution of money by way of capital or premium within the meaning of s 362(1)(b). Eclipse 35, which focused on the issue of trading, did not address this question at all.
Why it matters: The Court of Appeal accepted that if Mr Locke had claimed relief for his loans in respect of monies paid to Eclipse 10 on the basis of s 362(1)(b) (which required the partnership to trade), HMRC would have been entitled to issue a follower notice relying on Eclipse 35 as a judicial ruling ‘which established the principle that partnerships whose business is the same as the business of Eclipse 35 are not carrying on a trade for the purpose of that provision’. However, Mr Locke had claimed relief under s 362(1)(a). The Court of Appeal concluded that ‘caution … must be used to ensure that the serious consequences for the taxpayer of HMRC’s power to issue follower notices and accelerated payments notices mean that that power must be kept within narrow bounds’.
Also reported this week:
D Higgins v HMRC Principal residence relief and the period of ownership
In The Queen oao A Locke v HMRC [2019] EWCA Civ 1909 (7 November 2019), the Court of Appeal quashed follower notices on the ground that HMRC had been wrong in considering that a judicial ruling had been relevant to the arrangements.
Mr Locke had been a partner in an Eclipse Film partnership, Eclipse 10, and he had made a contribution of over £29m, financed by borrowing. HMRC had opened enquiries into his tax returns for the years 2005/06 and 2014/15 as it considered that no relief was due on the interest payments. It had subsequently issued 10 follower notices before the enquiries were completed. It contended that the conditions for the issue of such notices were met because Eclipse Film Partners No 35 LLP [2015] EWCA Civ 95 established that Mr Locke was not entitled to interest relief.
Mr Locke appealed against the High Court’s decision on the ground that the tax advantage he had claimed, relief on interest payments, was different from the tax advantage at issue in Eclipse 35. However, the Court of Appeal found that Parliament must have been referring to ‘broad classes of tax advantage’, as opposed to ‘a plethora of narrow kinds of tax advantage’. The relevant tax advantage was therefore relief for interest payments under ICTA 1988 s 353(1), and there was no need to distinguish between relief for interest payments on loans used to purchase an interest in a partnership (s 362(1)(a)) and relief for interest payments on loans used to contribute money to a partnership by way of capital or premium (s 362(1)(b)).
The second issue was whether the principles or reasoning in Eclipse 35 ‘as applied to Mr Locke’s arrangements would deny the asserted advantage’. The Court of Appeal found that the High Court had asked itself ‘the wrong question and so had come to the wrong answer’. The focus of the statutory provisions was not on whether the particular chosen arrangements were identical or similar to the arrangements with which the earlier judicial ruling was concerned. The question was rather ‘whether the principles laid down or reasoning given in that ruling would, if applied to the chosen arrangements, deny the asserted advantage or part of it’.
The court observed that Mr Locke’s claim for interest relief was based on s 362(1)(a) and the requirement that the partnership should carry on a trade, profession or vocation was only a requirement for s 362(1)(b). The only question was therefore whether the payment Mr Locke had made to Eclipse 10 was a payment to purchase a share in a partnership within the meaning of s 362(1)(a) or a contribution of money by way of capital or premium within the meaning of s 362(1)(b). Eclipse 35, which focused on the issue of trading, did not address this question at all.
Why it matters: The Court of Appeal accepted that if Mr Locke had claimed relief for his loans in respect of monies paid to Eclipse 10 on the basis of s 362(1)(b) (which required the partnership to trade), HMRC would have been entitled to issue a follower notice relying on Eclipse 35 as a judicial ruling ‘which established the principle that partnerships whose business is the same as the business of Eclipse 35 are not carrying on a trade for the purpose of that provision’. However, Mr Locke had claimed relief under s 362(1)(a). The Court of Appeal concluded that ‘caution … must be used to ensure that the serious consequences for the taxpayer of HMRC’s power to issue follower notices and accelerated payments notices mean that that power must be kept within narrow bounds’.
Also reported this week:
D Higgins v HMRC Principal residence relief and the period of ownership
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