HMRC have lost their case on follower and accelerated payment notices despite trying to tackle another taxpayer that has used one of the film industry tax avoidance schemes.
It was common ground that the taxpayer was a member of an LLP structured in a similar manner to another LLP created by the same scheme advisers and marketers. The earlier scheme had been held to be not trading and therefore the earlier scheme users couldn’t deduct interest charges from their taxable income. In a similar manner the taxpayer had borrowed significant sums to buy an interest in the new partnership and wished to deduct interest on the loan from his own taxable income.
HMRC opened enquiries into his returns and eventually issued follower and accelerated payment notices. The follower notices informed the taxpayer that HMRC considered that the scheme he was using had been proved to be ineffective by the earlier case and that in his circumstances that meant he would not be able to claim the interest as a deduction against taxable income. After receipt of a follower notice if a taxpayer appeals a case and loses they may be subject to a substantial fine, up to 50% of the asserted tax advantage.
The prior case that HMRC quoted in the follower notices concerned a very similar partnership but the case was held at the partnership level as opposed to the level of the individual partners. The case found that the partnership wasn’t trading and therefore all the partners couldn’t deduct interest as they had ‘contributed money to a partnership’. In the relevant tax legislation, where an individual uses a loan to ‘contribute’ money then the express provision is that the partnership is trading.
The taxpayer argued that he had ‘purchased a share in a partnership’ and within the legislation there is no express requirement for the partnership to be trading and therefore his grounds for appealing the underlying tax case were different to the case already heard. The CoA agreed, while many of the facts were similar the taxpayer was arguing a different point of law that had been agued previously.
The decision can be found at: Locke, R. (On the Application of) v Revenue And Customs – Find case law (nationalarchives.gov.uk)
This is a very interesting case as it shows that HMRC’s powers under the follower and accelerated payment notice regime are extremely strong but that there must be certainty that the tax avoidance scheme being countered is absolutely applicable to the taxpayer in question. We anticipate that the taxpayer’s argument on ‘purchasing a share in a partnership’ will ultimately fail as the section following details that investment LLPs do not qualify for interest deduction and if the LLP isn’t trading, as one would expect, then it would likely be classified as an investment LLP, watch this space.
Please contact us if you have received follower notices or accelerated payment notices or any other form of correspondence from HMRC and are uncertain how to deal with. We are experienced with these matters.
