Information technology - Capital allowances - Closure - Notices

Revenue and Customs Commissioners v Tower Mcashback LLP and Anor: SC (Justices of the Supreme Court: Lords Hope (deputy president), Rodger, Walker, Collins, Kerr, Clarke, Dyson): 11 May 2011

In a case raising two issues of tax law, the appellant commissioners appealed against a decision ([2010] EWCA Civ 32) that money paid by the respondent LLPs (L) under the terms of a software licence agreement was expenditure ‘incurred’ within the meaning of the Capital Allowances Act 2001 and L cross-appealed against a finding in the same decision that closure notices issued by the commissioners had not been confined to the specific subject matter of their enquiry.

L had claimed first-year allowances under section 45 of the Capital Allowances Act 2001 on the full purchase price of software licences.

They had bought the licences as part of a scheme to supply software packages enabling manufacturers to offer promotions to retail customers.

The financing of the scheme involved obtaining funding from investors who became investor members of L, and who contributed money from their own funds and from bank borrowing on uncommercial terms.

The commissioners issued a notice of enquiry and corresponded with L about the application of section 45(4).

They indicated that L was not entitled to claim the allowances because the expenditure fell within that subsection.

They eventually issued closure notices stating that ‘as previously indicated’, the claim for relief was excessive.

They amended the partnership return so as to reduce the first-year allowance relief to nil.

The issues were: (i) the extent to which surrounding circumstances, such as the source and destination of the funds expended and the commercial soundness of the transaction as a whole, could be taken into account in an assessment of the question of whether L was involved in expenditure that entitled it to the allowance claimed; and (ii) whether a ‘bald’ closure notice, devoid of reasons for its conclusion, was acceptable.

Held: (1) The orders of the Court of Appeal and the Chancery Division were set aside and the commissioners’ closure notices were amended to allow 25% of the first-year allowances claimed.

That was a fair outcome in a confusing case.

The special commissioner had found as a fact that L’s expenditure was not a sham, but that the market value of the software rights was very materially below the price ostensibly paid for them.

The Chancery Division had found that the market value of the software was ‘completely irrelevant’, which was putting it a good deal too high in the context of a complex, preordained transaction where the court was concerned to test the facts, realistically viewed, against the statutory text, purposively construed.

The Chancery Division had also been wrong to dismiss the special commissioner’s scepticism about the commercial soundness of the transactions.

It had treated the case as essentially similar to Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2004] UKHL 51, [2005] 1 AC 684 and had overlooked the continuing validity of Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 AC 655 HL, Barclays Mercantile and Ensign applied (see paragraphs 66-67, 72 of judgment).

The Court of Appeal had been right to derive assistance from Ensign as to the relevance of the terms of the borrowing, but had been wrong to concentrate on the terms as an indication of whether there had been ‘real expenditure’ (paragraph 76).

Commentators might argue that the instant decision abandoned the clarity of Barclays Mercantile in favour of the uncertainty of Ensign, but that was not the case.

Both cases were good law.

The composite nature of the transactions in the instant case did not meet the test laid down by the 2001 act, which required real expenditure for the purpose of acquiring plant for use in a trade.

Any uncertainty would arise purely from the unremitting ingenuity of tax consultants and investment bankers determined to test the limits of the capital allowances legislation (paragraphs 80).

(2) The Chancery Division had been correct to find that there was no basis for implying any obligation for a closure notice to contain reasons for its conclusion, but the Court of Appeal in overturning the lower decision had been correct to find that the scope of an appeal against a closure notice was not restricted to the conclusions actually stated in the notice.

Where a single specific point was in issue, it had to be identified in the closure notice, but where the facts were complicated and their analysis controversial, the public interest required that the closure notice be worded in more general terms.

That was not to be taken as encouragement to the commissioners to draft every closure notice widely.

Wherever possible the officer should set out his conclusions on each point of the enquiry that led to an amendment to the tax payer’s return (paragraphs 18, 83-85).

Appeal allowed, cross-appeal dismissed.

Kevin Prosser QC, Rebecca Murray (instructed by in-house solicitor) for the appellant; Giles Goodfellow QC, Richard Vallat, Thomas Chacko (instructed by Ashton Rowe) for the respondent.