Another case in the string of tax avoidance cases that used partnerships for the generation of losses to enable participants to reduce their tax exposer.  This time the trade of software licencing was used.

The partners had used a similar scheme involving limited-recourse loans to increase the value of the losses generated and HMRC duly opened an enquiry into the partnership return.  While the enquiries into the partnership return were open the Supreme Court decided a case where 75% of the losses generated were held to be artificially generated by the limited recourse loans and therefore 75% of the losses could be disregarded for tax purposes.  HMRC then issued a closure notice to the partnership stating the 75% of the losses generated were artificial and that the partnership return was be amended.  Initially the partnership closure notice was appealed but this appeal was later withdrawn making the partnership closure notice final.  After the appeal was withdrawn, HMRC sent notices to the partners stating they self-assessment tax returns had been changed due to the change in the partnership return.

A couple of taxpayers to the notices of self-assessment tax return change challenged the notices by way of judicial review, there being no statutory recourse to the tribunal systems for notices given to partners of partnerships whose returns have been amended by HMRC and the case ended up in the Court of Appeal (CoA).  The taxpayers challenged the validity of the notices saying that principles that applicable to closure notices should also be applicable to notices of changes to self-assessment tax returns due to changes in partnership returns and therefore the notices were invalid.

The CoA held that the notices issued were not closures notices but that the notices had met the statutory requirements to enable the change to taxpayer’s self-assessment tax returns.  Therefore, HMRC had provided the necessary information in a suitable form to effect the change to the taxpayers.  As the notices were not closure notices the enquires into the partners’ returns remained open and that closure notices could be subsequently issued when any other issue relating to each of the taxpayers had been resolved.

Importantly, as the notices were not closure notices then they didn’t create a debt to HMRC and HMRC couldn’t use the notices as means for debt enforcement.  A closure notice to the partner’s self -assessment tax return is necessary to enable debt enforcement procedures.

The decision can be found at: Amrolia, R (On the Application Of) v Revenue & Customs – Find case law (nationalarchives.gov.uk)

This case has clarified the care that HMRC need to take when amending partners’ tax returns and the step-by-step procedures when enforcing debt collection.

Please let us know if you have any questions on tax schemes involving partnerships, many have proven to be ineffective.  We are experienced with these issues and can help with compliance or planning.