The Vaccine Researcher Ltd Partnership & Anor v Revenue & Customs (PROCEDURE : Other) [2018] UKFTT 597 (TC)
FTT-Tax
The Vaccine Researcher Ltd Partnership & Anor v Revenue & Customs (PROCEDURE : Other)
[2018] UKFTT 597 (TC) · 2018-09-17
[16]Read literally, the closure notice is putting in issue the question of whether the Partnership is carrying on a trade at all, not the characterisation of income that it received or the quantification of its taxable income. However, as Lord Walker explained in Tower MCashback, in issuing a closure notice, HMRC are “performing an important public function in which fairness to the taxpayer must be matched with a proper regard for the public interest in the recovery of the full amount of tax payable.” Moreover, at [51] of his decision in Fidex Kitchin LJ concluded that “it is not appropriate to construe a closure notice as if it is a statute or as though its conclusions, grounds and amendments are necessarily contained in watertight compartments, labelled accordingly ”. Therefore, I do not consider that the construction of closure notices should be approached simply as exercises in literal construction particularly where there is a risk of unfairness to the taxpayer.17. Here, an exercise based on pure literal construction could produce unfairness. If the FTT had accepted HMRC’s argument that the Partnership was not carrying on a trade at all, the Partnership would suffer the adverse consequence that it was not entitled to capital allowances. However, if the Partnership was not carrying on a trade, it must follow that it was not in receipt of any trading income although its income might still be taxable (for example as “miscellaneous income” taxable under Part 5 of the Income Tax (Trading and Other Income) Act 2005 or as “annual payments”). Therefore, if the FTT concluded that the Partnership was not trading that would naturally and inevitably give rise to the question whether income that the Partnership had assumed was taxable trading income was taxable at all. A purely literal construction of the closure notice that rendered such a question “off limits” runs the risk of not being fair.18. A similar consideration arises if, as happened, the FTT concluded that some of the Partnership’s activities were “trading” and some were not. In such a case, the natural and inevitable question was as to the tax status of income that was not connected with “trading” activities and there would be a similar risk of unfairness if that question were “off limits”.19. Mr Yates urged me to conclude that, because the Partnership had included licence fee income within the computation of its trading profits in its 2006-7 partnership return, by permitting the Partnership to argue that this was not taxable income, the FTT would be permitting the Partnership effectively to appeal against its own self-assessment. I do not accept that submission. When the Partnership submitted its self-assessment return, it evidently thought that all of its activities were “trading” in nature. The FTT and the Upper Tribunal disagreed with the Partnership’s analysis and concluded that only part of its activities were trading. Therefore, circumstances changed between the submission of the partnership return and the release of the FTT’s and Upper Tribunal decisions. The Partnership is not seeking to appeal against its original partnership return: it is asking for full effect to be given to the decisions of the FTT and Upper Tribunal.20. Similarly, Mr Yates referred to the fact that, before both the FTT and Upper Tribunal, the Partnership relied on the receipt of the licence fees as demonstrating that it was carrying on a trade. However, in doing so, the Partnership was not conceding that if the FTT, contrary to its submissions, thought that the licence fees were not trading income, those licence fees remained taxable income of some other type (for example, annual payments or miscellaneous income) [2] .21. At [42] of the Court of Appeal’s decision in Tower MCashback v HMRC [2010] EWCA Civ 32 , Moses LJ said:[42]Provided a party can be protected from ambush, the only limitation on issues which might be entertained by the Special Commissioner is that those issues must arise out of the subject-matter of the enquiry and consequently its conclusion, and be subject to the case management powers to which I have referred.22. Applying that approach, I have concluded that the question whether licence fees are taxable income in 2006-07 did “arise out of the subject-matter” of HMRC’s enquiry as to whether the Partnership was trading. Moreover, HMRC had control over the drafting of the closure notice that they issued and I consider it would be unfair to give that closure notice a purely literal construction that might deprive the Partnership and Mr Vaughan of the ability to raise arguments favourable to them that arise out of that subject-matter. Therefore, construing the closure notice fairly it was open to the FTT in 2012 to entertain questions as to whether licence fees that the Partnership received in 2006-07 were taxable since such questions arose as a natural and inevitable consequence of the FTT’s determination of the conclusions set out in the closure notice. Aspects of the FTT and Upper Tribunal decisions on the licence fee issue23. At [82] and [83] of the FTT Decision, the FTT expressed the conclusion that the licence fees were not trading income in 2006-07. It did so because of its conclusion that the Partnership’s trade consisted of activities that it conducted with PepTcell Limited and the guaranteed licence fees were not part of those activities [3] . The Upper Tribunal endorsed the FTT’s approach at [82] and [83] [4] .24. However, having concluded that the guaranteed licence fees were not trading income, the FTT did not conclude positively on what those licence fees were (for example, whether they represented “miscellaneous income” that could be taxed under Part 5 of the Income Tax (Trading and Other Income) Act 2005). At [92] to [94] of the FTT Decision, the FTT concluded its decision as follows: 92 We allow the appeal on behalf of the Appellants in part but not in full. We find that the appeal is to be allowed to the limited extent that the Class B Limited Partners may claim research and development allowances in respect of their appropriate shares of the total sums incurred by them in funding PepTcell Ltd to the extent of £14 million to conduct relevant research and development for them. And they are entitled to deductions for interest under section 362 for their loans to the extent that these loans were used for trading income. 93 We therefore decide that the decisions against which the appeals are made cannot stand without modification. However, we have not heard from the parties about the precise amounts that Mr Vaughan and the other Class B Limited Partners may claim. Nor do we have appropriate figures readily to hand. 94 We therefore reach this decision as a decision in principle. If the parties are unable to reach agreement on the precise sums to be included in the decisions under appeal to make them consistent with this decision then they are at liberty to seek a further hearing of the tribunal to determine the matter fully.25. Paragraph [92] allows the appeal to a “limited extent” and does not mention the determination of taxable income. However, paragraph [94] includes a broader invitation to the parties to agree “precise sums” which does not expressly exclude the determination of the amount of the Partnership’s taxable income, in the light of the FTT’s findings on the limited extent of its trade. Therefore, while neither paragraph [92] or [94] expressly invite the parties to return to the FTT with arguments on the character of the licence fees, neither do those paragraphs expressly exclude the possibility.26. Overall, I have concluded that the FTT, while having the power to consider the extent to which licence fees were taxable income, did not express a concluded view on the issue. The Upper Tribunal similarly expressed no concluded view. The exercise of case management powers27. It follows from the above that the FTT expressed no concluded view on the extent to which licence fees were taxable income in 2006-07 despite having power to do so. The Upper Tribunal similarly expressed no concluded view in the Upper Tribunal Decision. In this section, I will consider how the Tribunal should exercise its case management powers to decide whether, and if so on what terms, to permit the appellants now to make arguments on the character of the licence fees in 2006-07. As noted above, it is important that the Tribunal makes case management directions that are fair and avoid either party being “ambushed”. Moreover, the Tribunal is entitled to expect that litigants will conduct litigation proportionately.28. Mr Yates’ skeleton argument (and his oral submissions at the hearing) focused on his point that neither the Partnership nor Mr Vaughan made any argument about the status of licence fees at any point up to or including the hearings before the FTT and Upper Tribunal. Indeed, they had both made a positive case that the licence fees were taxable (trading) income. He criticised the appellants for not doing so, but I consider there is little force in that criticism. Until the hearing before the FTT, the appellants were making a case that all of the Partnership’s activities were of a “trading nature”. They could not have known, until the FTT released its decision, that the FTT would conclude that only part of the activities were “trading” and therefore the appellants cannot have been expected to make a case before the FTT that some of the licence fees were not taxable income. The appeal to the Upper Tribunal was concerned largely with whether the FTT’s findings of fact were sustainable (with the appellants submitting that they were not). In those circumstances, it is difficult to see how the appellants could sensibly have raised an argument as to the character of the licence fees in the Upper Tribunal either.29. Mr Yates did not submit that HMRC had been prejudiced by any delay, following the release of the Upper Tribunal’s decision, in raising the character of the licence fees as an issue for 2006-07. In any event, there is no doubt that HMRC will have to meet the point in relation to the Partnership’s appeal against HMRC’s closure notices for 2013-14 and 2014-15. Mr Yates did not suggest that it would be materially more difficult for HMRC to meet the point in relation to the 2006-07 year than for the 2013-14 or 2014-15 tax years.30. I therefore see no case management reason why I should restrict the Partnership’s or Mr Vaughan’s ability to raise the question whether the licence fees are taxable income in 2006-07. Disposition31. My overall conclusion on the main point of contention between the parties is that the Partnership and Mr Vaughan are entitled to raise an argument before the FTT that, in the tax year 2006-07, guaranteed licence fees that the Partnership received were not taxable income. I will release separate case management directions to the parties to give effect to my decision and to enable the various appeals to proceed to hearing.32. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. JONATHAN RICHARDS TRIBUNAL JUDGE RELEASE DATE: 10 October 2018 [1] The extent to which the FTT was entitled to, or did, make findings on other issues was disputed and we address that issue below. [2] Below I will consider the separate, but related, question of whether, because of the positive case that the Partnership and Mr Vaughan were making in the earlier appeals, I should exercise a case management power to preclude them from now arguing that licence fees are not taxable income in 2006-07. [3] The FTT’s conclusions to this effect appear in a section of the FTT Decision dealing with the commercial basis issue. However, I do not read their conclusions as relating only to that issue. [4] The Upper Tribunal considered the point in connection with the quantum issue. In essence, in reliance on the FTT’s conclusion that the financing arrangement involving the guaranteed licence fees was not a trading activity, the Upper Tribunal concluded that the Partnership’s expenditure attributable to that financing arrangement was not “qualifying expenditure” as it was incurred in order to produce guaranteed licence fees (and not in connection with a trade). Nevertheless, the Upper Tribunal was clearly declining to interfere with the FTT’s conclusion that the activity of generating licence fees was no part of the Partnership’s trade.