Judgment summary
This is an appeal by HMRC against a decision of the First-tier Tribunal (Tax Chamber) released on 17 October 2024 ([2024] UKFTT 00922 (TC)). The case concerns a tax mitigation scheme involving the contribution of loan notes, received on the takeover of Tomkins plc by Pinafore Acquisitions Ltd, to GCH Active LLP, followed by the LLP's liquidation and the redemption of the loan notes (paras 1-4).
The FTT allowed the Respondents' appeals against closure notices issued to GCH Corporation Limited and the LLP, and against discovery assessments issued to three trusts, on the basis that the LLP was carrying on a business with a view to profit under section 59A(1) TCGA at the time the loan notes were transferred to it, so no chargeable gain arose (para 4, 41).
The FTT found that the LLP was not carrying on a trade, a finding the Respondents challenged by cross-appeal (para 5, 38). The FTT also (obiter, given its conclusion on the substantive ground) found that HMRC had made a valid 'discovery' for the purposes of section 29 TMA 1970, so the discovery assessments were not invalid on procedural grounds; the Trusts challenged this in their Respondents' Notice (para 5, 42, 44).
The Upper Tribunal (Mr Justice Edwin Johnson and Judge Ashley Greenbank) addressed three sets of issues: a procedural question of whether the Trusts required permission to appeal on the section 29 TMA point; HMRC's substantive grounds of appeal on the meaning and application of 'business' in section 59A(1) TCGA and on the 'view to profit' requirement; and the Respondents' cross-appeal on whether the LLP was trading.
Background
Mr Gregory Hutchings, an experienced businessman, established GCH Corporation Limited in March 2010. He was trustee of each of the three Trusts and a director and shareholder of the Company (paras 11-12).
As of June 2010, the Company and Trusts held substantial shareholdings in Tomkins plc. Following a takeover announcement by Pinafore Acquisitions Ltd on 27 July 2010, the LLP was incorporated on 26 August 2010, with Mr Hutchings and the Company as initial members. On the same day, the LLP purchased shareholdings in five listed companies, funded by a loan from Mr Hutchings (paras 13-18).
The Tomkins takeover completed on 24 September 2010. The Company and Trusts exchanged Tomkins shares for Floating Rate Cash Secured Notes (the 'Loan Notes') issued by Pinafore, which paid no interest because LIBOR remained below 0.8% throughout (paras 20-22).
On 18 May 2011, a partnership agreement was executed admitting Mr Hutchings (as nominee for the Children's Trust) as an additional LLP member, and the Company and Trusts sold their Loan Notes to the LLP at a 2% discount, with consideration left as an interest-free loan (para 23). The LLP entered members' voluntary liquidation on 10 June 2011, and the scheme was disclosed to HMRC under the DOTAS rules around that time (paras 26-27). On 13 June 2011, the LLP (in liquidation) redeemed the Loan Notes (para 28). At no point did the LLP have its own bank account; all transactions used Mr Hutchings's personal bank account (para 30).
The intended tax effect was that, because the LLP was carrying on a trade or business with a view to profit under section 59A(1) TCGA at the time of the contribution, no gain would accrue on the transfer of the Loan Notes to the LLP; the LLP would only become chargeable on the appointment of a liquidator, by which time the base cost would eliminate the prior gains (para 33).
The Trusts submitted voluntary tax returns for the year ending 5 April 2012 on 29 April 2013. Following an enquiry, HMRC issued closure notices on 11 May 2017, which were later found invalid because voluntary returns could not be enquired into (following Patel v HMRC). HMRC then issued Trust Discovery Assessments on 3 July 2020 under section 29 TMA (paras 72-79).
Core dispute
The core substantive dispute was whether, at the time the Loan Notes were transferred to the LLP, the LLP was carrying on a trade or business with a view to profit within section 59A(1) TCGA, such that it should be treated as a partnership for capital gains tax purposes and no chargeable gain would arise on the transfer (paras 3-4, 34-36).
HMRC's appeal (Grounds 1 to 3) challenged the FTT's interpretation of 'business' in section 59A(1), its application of that meaning to the facts, and its reasoning on the 'view to profit' requirement (para 43).
The Respondents' cross-appeal, by Respondents' Notice, challenged the FTT's finding that the LLP was not carrying on a trade, and its (obiter) rejection of the Trusts' argument that the discovery assessments were invalid under section 29 TMA (para 44).
A preliminary procedural question arose as to whether the Trusts required permission to appeal to raise the section 29 TMA argument in the Respondents' Notice, given that the FTT's overall decision (that no tax was due) was in the Trusts' favour (paras 45-66).
Court findings
On the procedural issue, the Upper Tribunal held that the Trusts did not require permission to appeal to raise the section 29 TMA argument in the Respondents' Notice, because the FTT's 'decision' for the purposes of section 11 TCEA was that there was no tax to assess, and success on the procedural issue would not lead to a different decision (paras 63-66).
On the substance of the procedural issue, the Tribunal rejected the Trusts' argument that the FTT's finding that HMRC officer Ms Marks had made a valid 'discovery' under section 29 TMA was irrational on the Edwards v Bairstow principles. The Tribunal found there was ample evidence to support the FTT's finding, and that a discovery relating to the earlier closure notices being invalid was capable of constituting a 'discovery' within section 29(1) (paras 93-105).
On Ground 1 (interpretation of 'business' in section 59A(1)), the Tribunal held that the FTT correctly applied the Ramsay principle of purposive construction, properly took into account the statutory context (including the Limited Liability Partnerships Act 2000 and the Partnership Act 1890), and was correct to conclude that 'business' in section 59A(1) should be given its ordinary commercial meaning, not excluding investment business, and was broader than 'trade' (paras 114-147).
On Ground 2 (application of 'business' to the facts), the Tribunal held that the FTT's evaluative conclusion that the LLP was carrying on a business was not irrational or wrong in law, and the FTT gave adequate reasons, referring to its findings that the LLP was established to deal in shares, undertook consistent transactions, and that Mr Hutchings undertook a degree of activity (paras 152-168).
On Ground 3 (the 'view to profit' issue), the Tribunal found the FTT gave adequate, if concise, reasons for concluding the LLP had a genuine profit-seeking purpose and made an unchallenged profit, satisfying the subjective 'view to profit' test derived from Ingenious Games (paras 169-179).
On the trading issue (Respondents' cross-appeal), the Tribunal held that the FTT correctly identified the relevant legal principles (including the 'badges of trade' from Marson v Morton and the multifactorial approach from Ingenious Games) and there was no basis to conclude it failed to apply them faithfully in finding the LLP was not carrying on a trade (paras 185-192).
Outcome
The Upper Tribunal dismissed HMRC's appeal on the business issue on all grounds (Grounds 1, 2 and 3). It dismissed the Trusts' appeal on the procedural issue. It also dismissed the Respondents' cross-appeal on the trading issue (para 194).
Major issues / areas of contention
- Whether GCH Active LLP was carrying on a business with a view to profit under section 59A(1) TCGA 1992 at the time the Loan Notes were transferred to it, so that no capital gains tax charge arose on the transfer.
- Whether the FTT correctly interpreted the meaning of 'business' in section 59A(1) TCGA, including whether it should extend to investment business and whether it is narrower where associated with the term 'trade'.
- Whether the FTT correctly applied the concept of 'business' to the facts, including the level of activity undertaken by the LLP and its members.
- Whether the FTT gave adequate reasons for concluding that the LLP's business was carried on 'with a view to profit'.
- Whether the FTT erred in concluding that the LLP was not carrying on a trade at the relevant time.
- Whether the Trusts required permission to appeal to raise, in a Respondents' Notice, an argument on which they had been unsuccessful before the FTT (the section 29 TMA discovery issue).
- Whether HMRC had validly made a 'discovery' within section 29 Taxes Management Act 1970 to support the Trust Discovery Assessments issued on 3 July 2020.