HMRC claims Upper Tribunal victory in Clavis Liberty 1P case

The Upper Tribunal has dismissed an appeal by the Clavis Liberty Fund 1 Partnership scheme, in a ruling HMRC expects to protect £325m in tax

HMRC argued that the fund created an artificial tax loss amounting to £18m in lost revenue and will affect a number of outstanding cases where partners used similar arrangements to manage tax liability.

In the decision in Clavis Liberty 1LP (acting through Mr D J Cowen) v The Commissioners for Her Majesty's Revenue & Customs UT/2016/0126, the FTT ruled that the Clavis Liberty Fund 1 LP scheme, created an artificial tax loss. The judgment covers 99 partners involved in the partnership.

The appeal by Mr D J Cowen, a former member of the limited partnership known as Clavis Liberty Fund 1 LP (the partnership), relates to a closure notice, dated 1 February 2013, issued to Cowen as ‘successor’ to the partnership. That closure notice amended to nil, from £60,942,061, the amount of the trading loss claimed to have been sustained by the partnership in respect of its accounting period running from 14 March to 5 April 2006.

The dispute between the partnership and HMRC relates principally to the tax treatment of a dividend of £60m paid to the partnership by Helios Limited on 5 April 2006.

At stake was the question of whether dividends are excluded from the computation of income of the partnership for tax purposes giving rise to a loss under section 730 of Income Tax Act 1988 (ICTA), and whether the purchase of dividend rights and receipt of dividends were transactions in the course of that trade.

The scheme involved a limited partnership, registered in Jersey and claiming to carry out UK trade. Each of the 99 users of the scheme contributed a sum, which was used, together with a bank loan, to acquire rights to dividends declared by a Cayman-registered company.

The partnership claimed a deduction for the cost of the dividend rights but sought to exclude the dividend payments paid from its trading profits, giving rise to a loss.

The Upper Tribunal upheld the First Tier Tribunal’s (FTT) ruling. Mr Justice Mann said: ‘There was ample, if not overwhelming, material for saying that this transaction was not a trade but had a different nature.

‘The FTT so concluded on the basis of unimpeachable analysis and reasoning. There is no basis for criticising its approach. Furthermore, if I had to reach a conclusion on the point on this appeal I would have arrived at the same conclusion as the FTT.’

The Upper Tribunal's ruling is here.

Report by Calum Fuller

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