In The Brain Disorders Research Limited Partnership & Neil Hockin v HMRC [2017] UKUT 0176 the Upper Tribunal (UT) found that a tax avoidance scheme was a sham and the partnership involved was not trading.

The case concerned a convoluted tax avoidance scheme:

  • Taxpayers made contributions into a partnership, the majority of which were funded by loans specially taken out for the purpose.
  • The partnership paid these funds to a special purpose vehicle (‘SPV’), supposedly to fund research.
  • According to the agreement between the partnership and SPV, the SPV could have carried out the research itself, but actually subcontracted it to an Australian research company.
  • The amounts actually paid by the SPV to the Australian research company were only a tiny proportion of the amounts it received from the partnership.
  • The bulk of the funds paid to the SPV actually passed back through various routes to pay off the partners' borrowings.
  • The aim was that the partners could claim R&D allowances ('RDAs') on their full contributions to the partnership and relief for the interest on their borrowings.

The First-tier Tribunal (FTT) found that the agreement entered into by the partnership and SPV was a sham, and that the partnership was not trading.

The UT has now upheld that decision, finding that:

  • The provisions of the agreement which indicated that the SPV could carry out the work itself were a sham designed to do nothing other than lend the scheme credibility.
  • The SPV was never in the position to carry out the research itself, and it was always the intention that this would be subcontracted for a much lower cost.
  • The partnership’s actual expenditure on R&D for RDA purposes could not exceed the amount that was eventually paid to the Australian research company.
  • In any event the partnership was not trading: although some research was undertaken this was no more than a vehicle to generate tax losses. Any profits would have been the ‘icing on the cake’ and the partnership and its members were in reality indifferent to them.

The taxpayers’ appeal was therefore dismissed.

UPDATE: Leave was granted to allow the taxpayers to appeal to the Court of Appeal. The case was heard in July 2018 and was dismissed.


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Case reference: The Brain Disorders Research Limited Partnership & Neil Hockin v HMRC [2017] UKUT 0176

Court of appeal decision: The Brain Disorders Research Limited Partnership & Neil Hockin v HMRC [2018] EWCA Civ 2348