In Daarasp LLP And Betex LLP v HMRC [2018] TC06718 the First Tier tribunal refused £43million of capital allowance claims for software licences; the LLPs were not trading and even if they had been, the expenditure had not been incurred in the relevant accounting period.
A person who is engaged in Qualifying activities in the period that qualifying expenditure is incurred can claim capital allowances:
Qualifying activities include:
- A trade
- A property business or furnished holiday lettings business
- A profession or vocation
- An employment or office
In 2004 and 2005 Daarasp LLP and Betex LLP, newly formed LLPs, both acquired 25 year licences for equities trading software, funded by bank loans to the partners. The intention was that the LLPs would use the software to trade the stock market in Karachi.
- The LLPs took little part in the development or exploitation of the software licences, having no staff, no customers of their own and undertaking no activities to exploit the software.
- The licences came with a warranty that meant the partners would be compensated if the income streams initially projected were not forthcoming. Under this and a complex funding structure only a small proportion of the purchase price was actually paid to the vendor of the licences.
- The LLP’s claimed first year allowances totalling £43,674,185 for 2003/04 on the licences under s45 CAA 2001.
- Very few trades were made by the LLPs in 2003/04, with very small profits being made in this and subsequent years. Their profits came instead from warranty payments.
- HMRC opened enquiries into both LLPs and issued closure notices reducing their losses of £18,192,004 and £25,482,181 to nil. The LLP’s appealed.
The FTT agreed that the capital allowance claims were not valid and dismissed the appeals; the LLPs were not trading in the period in which claims were made (or subsequently) and even if they had been the amount of expenditure claimed had not been incurred.
The judge spent a long time examining the evidence, considering the Badges of trade, whether the licences were Long life assets and whether the anti-avoidance rules at s215 CAA 2001 (transactions to obtain a tax advantage) applied, especially given that this was a DOTAS declared promoted scheme.
After finding that no trade existed in either LLP the tribunal said:
- The definition of incurred for capital allowance purposes (from the case of Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] 1 AC 65) is:
- ‘to render oneself liable to’. Expenditure is incurred, whether or not there has been any actual disbursement, if the taxpayer has legally committed himself to that expenditure.”
- The only amounts which could properly be treated as real expenditure on the licences were initial sums paid to the developers, being £1.4 million by Daarasp and £1.641 million by Betex as the remaining amounts were conditional on the LLPs profitably exploiting the licences.
- The anti-avoidance rules did not apply despite the availability of capital allowances being a major factor in deciding to purchase the licences.
Links:
Plant and machinery (self-employed): allowances
What are qualifying activities for capital allowance purposes?
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