Loss claims denied as closure notices were valid

In Daarasp LLP & Betex LLP v HMRC [2021] UKUT 0087, the Upper Tribunal (UT) dismissed a claim for losses resulting from capital allowances. The conclusions in the closure notices issued by HMRC were not inconsistent with the losses being reduced to nil.  

HMRC have to issue a Closure Notice in order to formally conclude an enquiry.

• The closure notice must state HMRC’s conclusions and make any amendments needed.
• A taxpayer has a right of appeal against the issue of a closure notice.

Daarasp LLP and Betex LLP (the LLPs) acquired 25-year licences for equities trading software, funded by bank loans.

• Only a small proportion of the purchase price was ever paid for the licences.
• The licences were acquired as part of a marketed tax scheme which included a warranty agreement under which the Limited Liability Partnerships (LLPs) were compensated if projected profits were not achieved. Their profits came from this, not from trading.
• They claimed first-year allowances on the licences which resulted in significant tax losses.
• HMRC opened enquiries and raised closure notices which stated “I conclude of the losses claimed only a currently unquantifiable part may be allowable.”
  • The tax return amendments made by the closure notices actually reduced the losses claimed to nil.

The First Tier Tribunal (FTT) agreed with HMRC that the capital allowance claims were not valid. The LLPs were not trading in the period in which claims were made. The capital allowance anti-avoidance rules applied to Daarasp and neither LLP was a small enterprise as was required for first-year allowances to be claimed. These were later called ‘the knock out points’ by the Upper Tribunal (UT).

The appeal to the UT centred around the closure notices issued by HMRC and the lower court’s construction of them (the closure notice issue). The UT could only go on to consider the eligibility of the licences for capital allowances if the LLPs won the closure notice issue as the LLPs did not have permission to appeal the FTT’s decision in respect of the knock out points.

The LLP’s contended that the wording of the closure notices either expressly or impliedly accepted that some of the losses were allowable and that the FTT was not entitled to use the prior history relating to the scope of the enquiry to widen an otherwise narrowly drawn closure notice. As a result, the FTT had erred in law in disallowing all of the losses claimed.

The Upper Tribunal dismissed the appeal.

• The FTT had erred in law in its approach to construing the closure notices. It should have considered exactly what conclusions the notices drew when properly construed and whether those conclusions were too narrow to support the amendments made to the tax returns, which would have rendered those amendments improperly made.
• The correct construction of the closure notices was to consider them as a whole. HMRC’s conclusions should not be viewed separately to the amendments to the tax return.
• If it was correct to conclude that the wording of the closure notices meant some of the losses would be allowable, the amendments to the tax returns would not have been so precise as to reduce the losses to nil. Instead, they would have set out how the unquantifiable allowable part was to be quantified. In addition, the HMRC officer would have used the word ‘will’, be allowable, not ‘may’.

Since the LLPs were unsuccessful on the closure notice issue the UT could not consider the knock out points and the FTT’s decision and reasoning for disallowing the losses stood.

Useful guides on this topic

Closure notices 
When does HMRC issue a closure notice? What is a partial closure notice? Can a taxpayer demand one? Are there appeal rights? 

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal, what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Appeals: Grounds for Appeal Toolkit
What grounds are there to appeal a tax penalty? How can you word a tax appeal? Can you appeal HMRC errors? What is a reasonable excuse?

External link

Daarasp LLP & Betex LLP v HMRC [2021] UKUT 0087