TAXPAYERS WHO try to exploit broad-brush tax legislation will have greater trouble arguing their case in court following a Supreme Court ruling, lawyers have warned.
HM Revenue & Customs appealed against decisions by the upper tribunal and Court of Appeal that found in favour of Tower MCashback, a software development partnership. The case centred around the partnership artificially paying too much money for software rights, which was subsequently recycled back into the firm to pay back a bank loan.
Tower MCashback then claimed first year allowances on the software, which was treated as capital. This was offset against other income, leaving the partnership with a minimal tax bill.
The Court of Appeal said that this practice was in accordance with capital allowance legislation, which was broad brush in approach and allowed companies to offset the acquisition of rights for the basis of trade against their tax bill. As there was no doubt the software had been purchased, this was acceptable, the CofA said.
However, the Supreme Court said that it was required to consider what had been spent on the software in reality.
Jason Collins, a partner at McGrigors, said the courts used the “Ramsay” approach, which focuses on transactions that have only come about for tax avoidance purposes. “Ramsay allows a court to evaluate the true reality of a series of transactions rather than look at the particular transaction which the tax legislation seeks to tax or give relief for,” he said.
“HMRC tend to approach Ramsay as if it were a broad spectrum antibiotic which negates all forms of tax planning and will say Tower MCashback supports this.”
However, he added, this only comes into play if the particular legislation permits the courts to look into the reality, which only applies in broad-brush legislation.
“The status quo is that planning around prescriptive legislation or legislation which creates legal ‘fictions’ will tend to succeed and it is HMRC’s responsibility to make sure its legislation does not contain loopholes,” he said.
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