In this recent case HMRC was challenging the basis of a scheme which sought to claim £122m was spent on research into brain disorders, when only £7m of it reached a genuine research company.
HMRC has said that the win against Brain Disorders Research Limited Partnership protects taxes worth £29m.
Matrix-Securities Ltd was the promoter of the scheme which allowed investors to make large claims for interest relief on their borrowings. The Brain Disorders Research Limited Partnership was the beneficiary of two 15-year loans of £53m taken out by the partners who then invested these, together with £13m of their own money, into the Research Partnership.
Numology Ltd, a Jersey registered company was then paid £122m by the Partnership to fund research into depression and Attention Deficit Hyperactivity Disorder (ADHD). The Partnership then claimed capital allowances on this full amount.
Numology Ltd then subcontracted the entire research project to an Australian biotechnology company for £7m. The other money, apart from that used to pay promoter fees, was used to cover the loan and interest.
HMRC’s argument was that the scheme was designed to create an impression the money was being used for research when, in fact, it sought to claim reliefs that were not due.
The First Tier Tribunal (FTT) found in HMRC’s favour, but the Brain Disorders Research Limited Partnership and Neil Hockin, one of the partners, took the case to the Upper Tribunal.
The tribunal heard an appeal by the Partnership against HMRC’s decision to deny its claim for capital allowances, and an appeal by Hockin against HMRC’s decision to deny his claims for interest relief in the tax year 2006-07 on interest paid on borrowings made to fund his contribution to the partnership, and to set £25,000 of loss relief against his general income for tax purposes.
The judge said that the Upper Tribunal was faced with six substantive issues to be determined in the. They included whether parts of the research agreement were a sham, and if so to what extent; whether the FTT erred in law in holding that the partnership was not carrying on a trade when it incurred expenditure on research and development and whether partners were entitled to interest relief; and the question of costs.
The Upper Tribunal was in agreement with the FTT that part of the contract underpinning the scheme was a sham (although it pointed out that the scheme itself was not dishonest), and said the FTT ‘took the right approach to answering the question whether the partnership was trading, and reached a conclusion which was supported by the evidence.’
On this basis, the appeal was dismissed. The appellants have applied to the Court of Appeal for permission to appeal the Upper Tribunal’s decision. The full decision can be found of the .Gov website.
HMRC is clearly strengthening its efforts to challenge tax avoidance schemes through the Courts. You can read an earlier blog on the subject here.
