HMRC argued that the Fund created an artificial tax loss amounting to £18m in lost revenue and will affect a number of outstanding cases where partners used similar arrangements to manage tax liability.
In the decision in Clavis Liberty 1LP (acting through Mr D J Cowen) v The Commissioners for Her Majesty's Revenue & Customs TC/2013/03364, the FTT ruled that the Clavis Liberty Fund 1 LP scheme, created an artificial tax loss. The judgment covers 99 partners involved in the partnership.
The appeal by Mr D J Cowen, a former member of the limited partnership known as Clavis Liberty Fund 1 LP (the partnership), relates to a closure notice, dated 1 February 2013, issued to Cowen as ‘successor’ to the partnership. That closure notice amended to nil, from £60,942,061, the amount of the trading loss claimed to have been sustained by the partnership in respect of its accounting period running from 14 March to 5 April 2006.
The dispute between the partnership and HMRC relates principally to the tax treatment of a dividend of £60m paid to the partnership by Helios Limited on 5 April 2006.
At stake was the question of whether dividends are excluded from the computation of income of the partnership for tax purposes giving rise to a loss under section 730 of Income Tax Act 1988 (ICTA), and whether the purchase of dividend rights and receipt of dividends were transactions in the course of that trade.
The scheme involved a limited partnership, registered in Jersey and claiming to carry out UK trade. Each of the 99 users of the scheme contributed a sum, which was used, together with a bank loan, to acquire rights to dividends declared by a Cayman-registered company.
The partnership claimed a deduction for the cost of the dividend rights but sought to exclude the dividend payments paid from its trading profits, giving rise to a loss.
This is a significant win for HMRC as the tax authority says that up to £347m in tax liability is potentially collectable as a result of a number of outstanding similar cases.
The judgment is significant for HMRC as it is the first time that this particular anti-avoidance legislation has been tested in court.
Jennie Granger, director general of enforcement and compliance at HMRC, said: ‘This is an important success for HMRC both in terms of the money that it will bring in, and the powerful signal it sends to anyone who might be tempted to use any form of offshore arrangement to avoid paying the tax that is due.’
Clavis Liberty 1LP has the right to appeal the decision within the 56-day deadline under Rule 39 of the Tribunal Procedure.
The FTT decision in Clavis Liberty 1LP (acting through Mr D J Cowen) v The Commissioners for Her Majesty's Revenue & Customs TC/2013/03364 is available here