The win against Brain Disorders Research Limited Partnership protects taxes worth £29m, the tax authority said. [The Brain Disorders Research Limited Partnership, Neil Hockin and Her Majesty’s Commissioners for Revenue and Customs, [2017] UKUT 0176 (TCC)].

The scheme, promoted by Matrix-Securities Ltd, was set up to enable investors to make large claims for interest relief on their borrowings. The partners took out two 15-year loans of £53m and invested these, together with £13m of their own money, into the Brain Disorders Research Limited Partnership.

The partnership paid £122m to a Jersey-registered company, Numology Ltd, 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.

David Richardson, HMRC director general for customer compliance, said: ‘We’re relentless in pursing those who use contrived, artificial schemes to try to avoid tax. The message is clear – it just doesn’t pay to try to avoid tax.’

The Brain Disorders Research Limited Partnership, Neil Hockin and Her Majesty’s Commissioners for Revenue and Customs, [2017] UKUT 0176 (TCC) is here.