In BCM Cayman LP and various Bluecrest entities v HMRC, taxpayers were only partially successful in forcing HMRC to issue closure notices into long running and complex tax enquiries concerning the tax arrangements of hedgefunds.
BCM Cayman LP, Bluecrest Capital Management Cayman Limited, Bluecrest Capital Management LP, LLP, (UK) LLP v HMRC TC05714 concerned an application for HMRC to issue closure notices.
- Bluecrest are hedge funds set up with UK partnership structures and a Cayman partnership and companies.
- HMRC had opened tax enquires on different aspects of the business between 2007/08 and 2013/14.
- In relation to the Cayman businesses the key issues were transfer pricing: thin capitalisation, restriction for tax relief for interest on unallowable purpose loans and they also considered IHT issues and the Sale of Occupational income provisions.
- In addition there was a partnership incentive plan (PIP) which HMRC considered produced an income tax liability for the 175 UK partners.
- Approximately £250 million of tax was at stake.
- There were some 106,000 documents and 2,700 had been withheld on legal professional privilege grounds and HMRC had concerns that there were more documents that it should have seen and that further work was needed on the PIP issues.
The taxpayers considered that HMRC had exhausted its enquires and applied to the FTT to HMRC to issue Closure Notices within a specified timeframe.
The onus was on HMRC to show that there were reasonable grounds for the tribunal to refuse to issue a notice. It argued that the thin capitalisation aspects were complex and it need more time in order to decide which of its preferred arguments to put forward for disallowing a deduction for interest. The PIP element required more work.
The FTT considered at length various case authorities on proportionality and the burden on the taxpayer versus the need for HMRC to have time to make an informed judgment to conclude its enquiries and then make an assessment.
It concluded that if HMRC wanted to disallow interest and it could do this and it could also cite its different conclusions on this point within the closure notice. That part of the enquiry had gone on long enough. It would then be up to the Cayman businesses to appeal, and the burden would fall back to the taxpayer.
In relation to the PIP, as HMRC’s assessment affected so many partners it was given 3 months to work out its assessments and issue closure notices.
Comment
A complex case stretching HMRC’s resources, the LP, LLP and offshore company in low tax jurisdiction structure being a typical fund structure. Since 2015 the government has put in anti-avoidance provisions ahead of the OECDs BEPs project. The rules on closure notices are also amended in Finance (No 2) Bill 2016/17 allowing HMRC to issue partial closure notices and so assess some tax earlier than otherwise. This may greatly assist both sides where there are disputes covering such complex issues, although it could on the otherhand also create administrative nightmares.
If HMRC is forced into the issue of a closure notice it must then raise an assessment as noted above, this is not always in the taxpayer's interest although it is a very useful tactic if an enquiry is stuck in deadlock or if HMRC appeals to be trawling for information without any obvious plan of action.
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