If you say it in a deep enough voice, "litigation on an epic scale" sounds like it may be the trailer for the latest summer blockbuster which is fitting because it is actually the Court of Appeal's (CoA) verdict on what was unleashed by the dispute between HMRC and Ingenious Films. And whilst the latest instalment may not now be playing in all major theatres, nor released straight to your favourite streaming platform for £19.99, it is available here for your home viewing pleasure, for free.
In so many ways, this is an incredible case. The numbers are enormous. Whether it is the number of barristers needed to argue the case (9 in total, 4 for Ingenious, 5 for HMRC) or the amounts at stake (over £1.6 billion in claimed losses once you include follower cases). But, on the face of it, the only two issues which made it to the Court of Appeal look oh so simple. Were three partnerships carrying on a trade and, if so, were they doing so with a view to profit?
The First-tier Tribunal (FTT) said two were and one was not in a 343 page judgment. The Upper Tribunal (UT) said the FTT had made no less than 6 errors (as counted by the CoA) in reaching the conclusion that two were trading and in fact none of them were carrying on a trade, let alone with a view to profit. The CoA went through the errors, decided none had any substance, noted that the FTT had not misunderstood or misdirected itself as to the underlying legal principles and therefore the UT was wrong to interfere with the FTT's decision that two of the partnerships were trading with a view to profit.
I'm not about to run through the merits of the case. I don't think it is possible to do it justice in a blog. But there is space to list three key takeaways:
(1) Applying longstanding tax concepts to a particular fact pattern can be really difficult and there can be different views. "Trade" was first written into the Law of Income Tax in 1799. It is a familiar and fundamental concept in so many ways - whether a non-resident company's activities in the UK amount to "trade" can determine whether or not they are subject to UK tax, for example. It was even noted, at paragraph 49 of the CoA's judgment, that: "There appears to be no substantial disagreement between the LLPs and HMRC about the basic tests which have to be satisfied if an activity is properly to be characterised as a trade." And yet still the parties, and experienced tax judges, could disagree on the answer the basic tests produced. A good reminder, if you are in the position of having to do that, to take your time and work it through carefully. And not to assume that the question is always as easy as it looks or to be embarrassed about finding it difficult. Often you are finding it difficult because it is difficult.
(2) It is really important to win questions of fact before the FTT. Following on from the above, if the FTT gets the law right, higher courts cannot interfere because they would have taken a different view on applying the law to the facts at hand unless the FTT's conclusion cannot reasonably be supported by the evidence. This is why the CoA found the UT were wrong to overturn the FTT in respect of the two partnerships the FTT found were trading. It is also why Ingenious' appeal in respect of the third partnership failed. That could be crucial in any "unallowable purpose" litigation, for example. If the FTT decides that a taxpayer is, or is not, party to a loan relationship for a main purpose of obtaining a tax advantage then unless the FTT has got the law wrong, or its conclusions could not be reasonably supported by the evidence, that finding should not be interfered with by a higher court, irrespective of whether the higher court would have reached the opposite conclusion if it were to answer the question itself.
(3) Purpose and motive are different. There is often a tendency to conflate purpose, what you are trying to achieve, with motive, why you are trying to achieve it. Again this can be particularly important in any "main purpose" type dispute. Having noted that it was agreed that the words "with a view to profit" imported a wholly subjective test, the CoA went on to note that: "It must be the actual subjective intention or purpose of the putative partners to make profits from carrying on their trade, profession or business. This is not a question of motive. People may have many reasons why they aim to make profits, including, for example, to support themselves and their families, to make charitable gifts or to create tax losses. For these purposes, they are beside the point. It is the genuine subjective purpose of the partners to make profits from their trade, profession or business which is the defining feature of a partnership." The question here was whether the partnerships were trying to make a profit (purpose) not why they were trying to do so (motive).