A group of taxpayers that formed a limited partnership to enable capital allowances and trade related interest relief to be claimed have had their appeal dismissed at the Court of Appeal (CoA) after earlier dismissals at the Upper Tribunal and the First-tier Tribunal. The partnership scheme worked in a similar manner to other partnership schemes that have used film financing as a means to obtain up-front tax losses that have similarly been held not to be effective.
In the case dismissed the partnership claimed that it was trading and had made an investment in an offshore company to the tune of £122m by way of research funding agreement. This offshore company had then contracted with a third-party research company based in Australia and agreed to fund their research program, around brain disorders and their treatment, to the tune of £7.6m. The offshore company was then entitled to 10% of the net royalties that the Australian company earned in the future. Much of the £122m had been financed by banks loans at the partnership level and the interest of these loans was pre-paid in advance by the advance payment of royalties from the offshore company. The taxpayers claimed that the partners of the partnership were entitled to capital allowances on research and development expenditure along with interest deductions.
As there were many circular flows of money the CoA reviewed the transactions as a composite whole following principles laid down in the Ramsey case earlier decided in the House of Lords.
The CoA concluded that the partnership was not trading. It possibly could be viewed as investment activities but certainly wasn’t trading in any commercial sense as it had no control over the third-party research company. Since the partnership had no trade; capital allowances and trade related interest deductions were not available for the partners to use.
The decision can be found at: The Brain Disorders Research Ltd Partnership v Revenue And Customs – Find case law (nationalarchives.gov.uk)
This case highlights the difficulty with successful income tax planning. The scheme to enable upfront tax deductions failed in a similar manner to schemes like it that had been defeated in court. While the scheme had been changed from other schemes that had been shown to be not effective, this scheme ultimately failed as the partnership couldn’t demonstrate that it was in any actual trade, the research it (vastly over) funded was too remote from the partnership.
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