In HMRC v Investec Asset Finance [2018] UKUT 0069 the Upper Tribunal agreed that the costs of capital contributions in relation to the acquisition of partnerships were revenue not capital but found they were still not allowable: the expenditure was not solely for the purposes of Investec’s own trade.
In order to be deductible for tax purposes expenditure:
- Must not be capital in nature. This is not defined in the legislation and is the subject of a raft of case law.
- Must be incurred “Wholly and exclusively” for the purposes of the taxpayers trade and this is a question of fact.
- Where there is duality of purpose the wholly and exclusively test may not be met.
- Where expenditure does not meet the wholly and exclusively test it must be disallowed.
Where expenditure is capital in nature:
- Instead a deduction may be claimed under s38 TCGA 1992 as Allowable Expenditure for capital gains tax when the capital asset is disposed of.
Investec Asset Finance (Investec) acquired interests and became partners in seven leasing partnerships:
- Investec made payments to acquire interests in several different partnerships which were entitled to lease receivables with the intention of the partnerships realising the receivables and making a distribution to Investec.
- Following these acquisitions further substantial payments were made into the partnerships as capital contributions which were used to repay debt and acquire further assets for leasing from both third parties and connected companies.
- HMRC issued closure notices to Investec disallowing both the acquisition costs and capital contribution expenditure claimed by Investec on the grounds that it was all capital and not revenue expenditure, or alternatively that, even if it was revenue expenditure, it was not incurred wholly and exclusively for the purposes of Investec’s trade (as opposed to the trades carried on by the Leasing Partnerships).
- The First Tier tribunal (FTT), though deciding several issues as preliminary issues did not make a final decision as it anticipated that both parties would appeal its conclusions. However it did decide that:
- The expenditure was revenue in nature.
- It was incurred wholly and exclusively for the purposes of Investec’s trades and should not be disallowed.
- The Leasing Partnership’s taxed profits, or the distributions of the Leasing Partnerships which represented taxed profits, did not need to be brought into account when computing the tax in Investec.
- HMRC appealed these specific points to the Upper Tribunal (UT)
- Investec appealed in respect of a minor procedural point (which the UT did not allow).
The UT, citing many long-established cases, found that:
- Although the transactions involved the acquisition of partnership interests and making capital contributions, they were short-term, recurrent transactions which had the character of Trading Transactions and were therefore revenue in nature.
- The payments made to acquire partnership interests did meet the wholly and exclusively test; there was never any intention for the partnerships to continue as separate trades, rather the intention was to obtain the lease receivables in the manner of an “asset stripper” and thereby increase the size of Investec’s own trade.
- The capital contributions made to the partnerships did not meet the test; they were not part of the purchase price of the partnership interests and were made at least partly for the purposes of the partnerships’ trades and not Investec’s trade. They were therefore disallowable.
- Profits which had been taxed in the hands of the Leasing Partnerships did not fall to be taxed again in the hands of Investec as this would be a clear case of double taxation.
Comment
The structure of the various transactions make this a factually complex case which is perhaps why the FTT were reluctant to give a final decision, expecting appeals from both sides. The UT decision provides a good summary of the case law in respect of capital v revenue and wholly and exclusively. With significant amounts of tax at stake here an appeal to the Supreme Court may follow.
Links:
Badges of trade: are you trading or not?
External Links:
HMRC v Investec Asset Finance [2018] UKUT 0069
Investec Asset FInance v HMRC [2016] TC05311 (FTT decision)
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