Musical impresario Andrew Lloyd Webber has won a tax case against HMRC over a claim for a capital gains tax rebate over development of a luxury beachside mansion in Barbados which was never completed
At the time of the CGT dispute, the Lloyd Webbers were UK tax resident and domiciled in England. The losses claimed were £3,124,312 for Lord Lloyd Webber (ALW) and £3,124,311 for Lady Lloyd Webber (MLW) for a beachside development.
The Lloyd-Webbers appealed against the closure notices issued under section 28A of the Taxes Management Act 1970 (TMA 1970), by HMRC on 15 September 2017 and 5 October 2017.
The first closure notice disallowed their claims for losses for capital gains tax (CGT) purposes made in their 2011-12 self-assessment tax returns.
The second closure notice denied claims, made in their 2012-13 self-assessment tax returns, to carry forward the 2011-12 losses.
The 2007 Contracts stated that if the vendors failed to deliver the completed properties within a given time frame then the purchase price would be reduced by the sum of $200 per day for each day of delay. The 2007 Contracts do not, however, provide for what should happen if completion does not take place at all.
However, the building work was delayed and on 9 September 2011 the building work stopped completely.
Various attempts were made by the developers to try and secure financing and recommence work, but ultimately these proved insufficient to get the project back on track.
The partially built properties were never completed and development was never resumed. The partially built villas have been left to degrade and are currently derelict.
The 2011-12 tax returns of ALW and MLW, based on their own calculation, claimed capital losses equal to the sums paid under the 2007 Contracts, less the nil value of the new rights received in consideration under the 2011 Contracts. The losses claimed were £3,124,312 for ALW and £3,124,311 for MLW.
HMRC rejected the claims but no formal enquiry notices were raised. The first notices of enquiries under s9A TMA 1970 were issued on 17 December 2013 for the 2011-12 returns of both ALW and MLW.
After two years of dispute and extensive correspondence and discussions between HMRC and Deloitte as agents for ALW and MLW, HMRC issued closure notices in September 2017.
The parties also considered whether alternative dispute resolution should be pursued. This was considered by both sides not to be appropriate due to the binary nature of the dispute.
They appealed to the First Tier Tribunal (FTT) over the disputed CGT [Lady Lloyd Webber, Lord Lloyd Webber v Commissioners for HM Revenue and Customs  UKFTT 717 (TC)].
HMRC argued that ‘each limb of s38 requires a consideration of the subjective intention of the person acquiring or enhancing the value of asset in addition to the actual consequences of the expenditure’.
The defence said that there was ‘no reason why Parliament would have included an objective test in s38(1)(a) but a subjective test in s38(1)(b)’, adding that ‘in any event, the first part of s38(1)(b) “the amount of any expenditure wholly and exclusively incurred on”, clearly imports an objective test with the second part, “for the purpose of enhancing”, etc, being a matter that can and ought to be ascertained objectively. As once it has been concluded that expenditure is “on” an asset it will follow from the objective facts that such expenditure was for such purposes’.
The tribunal judge stressed that ‘if Parliament considered that a loss in circumstances such as in the present case should be excluded from relief, provision could have been made, as it was by s144(7) in the case of losses resulting from a forfeited deposit’.
In the ruling the judge stated: ‘Therefore, taking an objective approach and having regard to all the circumstances, I have come to the conclusion that although they entered into the 2007 Contracts with the intention of ultimately acquiring completed villas, the payments made by ALW and MLW under the 2007 Contracts were for the acquisition of contractual rights, the only asset they actually acquired.
‘Not only does this correspond with the “real world” approach of Lord Wilberforce in Aberdeen Construction and Ramsay (given it is accepted that ALW and MLW suffered a real loss) but it is also consistent with the wider scheme of the TCGA, in particular in relation s43 and s144.’
The tribunal ruled in favour of the Lloyd Webbers and confirm that they could apply for costs from HMRC.
An HMRC spokesperson told Accountancy Daily: ‘HMRC is disappointed in the tribunal decision and is studying the detail carefully to determine next steps.
‘This is not about a tax avoidance scheme, but a matter of legal interpretation’.
HMRC has the right to appeal.
First Tier Tribunal ruling, Lady Lloyd Webber, Lord Lloyd Webber v Commissioners for HM Revenue and Customs  UKFTT 717 (TC)