Those (like me!) who appreciate the significance of the above headline will be thinking ‘Tax is Fun’ and ‘This is Fascinating’.  For the rest I challenge you to struggle on to the end.

The case (Brain Disorders Research Limited Partnership – TC4510) is interesting because the complex, highly cogent, judgement goes through the arrangements as a whole.  Then the Court decides that overall they do not make commercial sense (on the grounds that 6 ≠ 99).  As a result, the Court strikes down the whole structure as a “sham”, and hence ineffective from a tax perspective.  This is oversimplification, of course, but in this case the First Tier Tribunal have struck to the heart of a manufactured tax avoidance scheme by destroying it as having crucial aspects which meant the whole scheme effectively amounted to a sham.

Where does the case leave us?

Analysis of the detailed judgement is interesting in itself, as will be the question of whether the case is appealed to a higher court.

For the moment though, in looking at the commercial picture and looking at steps obviously inserted for tax purposes the First Tier tribunal could be said to be adopting an approach on the lines of ‘Ramsay Robust’.  Those of you familiar with the classic anti-avoidance case of CIR v Ramsay will know that it analysed tax planning schemes and then surgically excised steps inserted just for tax planning purposes and then re-analysed the result.

It seems to me the Brain Disorders judgement follows similar principles, but, in simile, perhaps by using a large axe rather than a scalpel!  It does though leave interesting (and relevant) thoughts, especially as in terms of the claim, the underlying scientific research seemed to be accepted by the Courts to be genuine and cutting edge.  The issue was whether the price had been artificially inflated.  Effectively, therefore it leaves open the question for future commercial planners of what makes the tax axe fall?  All of us need to use the tax system.  You can’t opt out!  How do we know we are not ‘abusing’ it?

In the case, the fact that (blatantly) 6 ≠ 99 was a key determinant, and understandable in may people’s eyes as an inherent misrepresentation.  Where though is the cut off?  Where 6 moves and then tends to approach 99?  Does ‘abuse’ stop at 12 or 50 or where?  Surely there cannot be a ‘fixed’ level?  As is clear from my insurance quotes, in a free market, there seems to be little that approaches a fixed price.  It depends upon the precise terms of the contract, plus the expertise and reputation of the provider.  There must therefore be a range of values which would be acceptable and thus ‘non-abusive’?  Crucially though, how is this ‘non-abusive’ range to be determined in advance by advisors?

The Court’s technical analysis and indeed the scheme details are highly complex, but essentially (to use the round numbers adopted in the case) the higher rate taxpayers investing in the scheme sought to claim 99 or 96 of interest/scientific research allowances, for true research expenditure that was actually being sub-contracted out for 6.

HMRC convinced the Court that it was never remotely considered (or even possible) for the investors to undertake the research themselves, in the Partnership Structure established.  This was believed, to be because of the bank borrowings and lack of relevant resources for the Partnership Structure meant that it would be problematic in raising the finance to undertake the research itself.  As a result, the Courts held it was thus inevitable that the research would be subcontracted to the true scientific experts at the agreed price of 6.  Thus it was ‘false wording’ in the documentation to suggest that 99 (or indeed any amount other than 6) was to be paid to procure the research.

The Court judged;

“Most of the money movements related entirely to the borrowing arrangements and had nothing to do with genuine royalties derived from scientific research”.

It went on;

“Everything in relation to the refund of capital expenditure should the research project be abandoned was uncommercial”.

The FTT held that the scheme was a sham.  It was based on the premise that the recipient of the borrowed/invested funds may undertake the relevant scientific research.

A previous case, Tower M Cashback, showed that the price paid had to represent fair value for allowances to be available.  A valuation exercise was undertaken by the designers of the Scheme to show that a number of “traditional” researchers in institutions or universities would have charged 99 or 100 for the work.  However, the Courts criticised this exercise as being effectively a self-fulfilling prophecy, undertaken in a hurry by a party associated with those involved through past work, and not actually comparing like with like.  The Courts also pointed out that a genuine commercial arrangement would have made the most of the quote of 6 from Australian leaders in the relevant brain research.  Any true commercial investors would have been unlikely to do anything other than go for that price, rather than committing to 99 or 100 created via the inflated borrowing.

The internal un-commerciality of the finance arrangements was apparent by the fact that some of the quotes compared US $ prices to AUS $ prices without ‘noticing’ the 22% currency exchange difference existing at the time.

The First Tier Tribunal was scathing:-

“We agree that there was a sham in this case [None] of the parties or indeed the investing partners were intended to be deceived into thinking that the possible aim of sub-contracting was just one of two realistic possibilities. Of course it was known that it was the only conceivable way of proceeding.  [Hence] the alternative contractual provision, suggesting that [the Partnership Structure] might itself conduct the research was false. The significance of the false claim was that, had it been deleted in accordance with reality, it could not possibly have been suggested that [the Partnership Structure] was ever to pay more than 6, let alone 99 or 96, in order to procure the scientific research. The falsely worded clause was therefore the foundation of the Partnership’s claim for vastly excessive capital allowances, and this is why we decide to strike it down as being a sham.  The [HMRC] counsel was slightly more hesitant in describing the whole pricing of the scientific research in the Schedule to the top-level contract, sub-dividing the total expenditure and allocating elements of it to each step and stage in the research, as a sham. We are not so hesitant. By sub-dividing the alleged expenditure of 99 or 96 in this way, inserting all this elaborate nonsense into the Schedule, it becomes clear that the critical drafting of [the Partnership Structure] clause is not just some mistaken reference to one irrelevant possibility. The Schedule shines the light on the fact that the whole fiction is indeed intended, and that it is indeed the foundation of the Partnership’s claim. [My emphasis].

Comments please on whether you feel my idea of ‘Ramsay Robust’ makes sense and what needs to be done to aid commercial certainty.  Obviously everyone needs to act in accordance with tax law.  Similarly commercial enterprise needs to know tax consequences of their actions.

The Law is not an ass.  It is a quadruped, designed by a committee, who, over many years and many different committee members, cannot quite recall whether they were designing a camel, a horse or a spaceship.

  1. Hands up all those who believe the Rule of Law is important?
  1. Hands up (in Magna Carta year) all those who think the Law should be applied consistently?
  1. Hands up all those who believe that professional tax advice should be clear and based on proper interpretation of the Law?

Hopefully, I have everyone’s hands up for each question?  At least mentally?  Those too embarrassed to react or having a quiet lunch snooze should, I hope, still have made a genuine twitch towards acceptance.  If not, please say.  I genuinely would be interested to know why.

I now move on to the recent cases of Gemsupa and Trigg.  They would make a superb exam question in terms of ‘compare and contrast’.

In Gemsupa, the Courts agreed with the taxpayer that the CGT legislation was so clear that, even though various steps were taken for tax avoidance purposes, this did not meant that they were ineffective legally (the case was pre-GAAR so query whether those new rules may have an impact?)

And Compare:

Trigg(onometry) and Lawyers

The Trigg case heard in the First Tier Tribunal concerned the definition of Qualifying Corporate Bonds for tax purposes.  This may sound esoteric and technical, but in fact they raise some very interesting issues.  [Remember ‘Tax is Fun’].

Amongst the reasons the case is interesting is that it may have an impact on both future and historic Commercial, Corporate Sale and Purchase agreements where some of the consideration is deferred in the form of loan notes.  As will be generally known, (at least in esoteric tax and legal circles) the loan note form of deferred consideration makes a profound different on the way it is taxed.

In Trigg, HMRC lost, which seems to have widened the definition of QCBs.  This could have a profound impact on Sales and Purchase Agreements so Solicitors need to beware!

Having reviewed many Sales and Purchase agreements over the years, I fear that sometimes matters may be glossed over.  Perhaps so because of infrequent HMRC review of the detailed documentation?  This is understandable, from a commercial perspective.  A precedent has worked in the past, so just tweak it?

The ‘purposive’ approach in Trigg contrasts with the legalistic interpretation adopted by Gemsupa.  Which is correct?  Which ought to be correct?  Bearing in mind most of us just wish to get commercial deals done to help business people achieve their commercial objectives, how many professionals believe the objectives suggested in 1-3 above are being achieved?

As they used to say in exam questions – Discuss!