The “Take That” case (technically Acornwood LLP and others v HMRC [2014] UKFTT 416 (TC)) is a high profile case. Few clients will be unaware of it. Even fewer advisers will have had the time or inclination to plough through the 147 pages and 510 paragraphs which constitute the decision. Sadly, we felt obliged to and we offer this summary as a public service. It’s greatly simplified, of course: but it’s close.
There were multiple LLPs. Each of them purported to be trading on a commercial basis and with a view to the realisation of profit. Each member contributed some capital to the LLP, the great majority of which was borrowed. Because of the way the accounts were drawn up, the accounts showed a substantial trading loss. Members claimed tax relief for their share of the loss against other income. The tax relief more than covered the cash contributed. The total losses claimed topped £336m; HMRC smelt a rat and challenged the effectiveness of the scheme.
Although the Tribunal held that the LLPs were indeed carrying out the trade of exploiting intellectual property rights, as claimed, the scheme nonetheless failed. Why?
- The amounts borrowed by the members were not, as claimed, used to pay revenue expenses of the trade. They were used to purchase capital assets. The accounts drawn up showing them as expenses were not compliant with GAAP
- The losses claimed to have been made were therefore greatly overstated
There were nonetheless some real genuine trading losses. However, there then arose the separate question whether members could offset their share of that loss against other income. As regards that separate question:
- None of the trades was carried on on a commercial basis and with a view to profit (so no sideways relief was available)
- None of the members was an “active partner” (which would have restricted the relief otherwise available)
- The main purpose of entering into the arrangements was to secure sideways relief so as to avoid tax (so even if the scheme had otherwise succeeded it would have failed insofar as the arrangements were entered into after 21 October 2009)
So not, altogether, an unqualified success then. The possibility of appeal to the Upper Tribunal remains open; but given the decision in the closely-related “Icebreaker 1” case [2011] UKUT 477 (TCC) we suspect that this will go no further.
