In a significant decision, HMRC v Inverclyde Property Renovation LLP and Clackmannanshire Regeneration LLP  UKUT 0161 (TCC), the Upper Tribunal has upheld HMRC’s powers to issue a notice and commence an enquiry into returns submitted by a limited liability partnership (LLP). LLPs are bodies corporate and not partnerships under the LLPA 2000 but (if the LLPs undertake activities with a view to a profit) are treated as partnerships for tax purposes under ITTOIA 2005, section 863 and CTA 2009, section 1273, so that for tax computational purposes, profits and losses are fixed on the LLP members, not on the LLP itself. HMRC have consistently considered this treatment to extend to HMRC compliance and enforcement powers.
Reversing the decision of the First-tier Tribunal, the Upper Tribunal held that HMRC are correct to issue a notice to an LLP, under TMA 1970, section 12AA and enquire into the tax affairs of an LLP under section 12AC, on the basis that ITTOIA 2005, section 863 (and CTA 2009, section 1273 for LLPs with company members) deem an LLP to be a partnership, not only for the purposes of computing the tax liability of the LLP members but also for compliance and enforcement purposes.
Critically, this means the notice and enquiry into an LLP automatically extend to the LLP members who are subject to a tax charge (or, in the current appeal, are seeking tax relief). Furthermore, the Upper Tribunal held, importantly, that although an LLP is treated as a partnership for tax purposes only if it carries on activities with a view to a profit, the HMRC notice under TMA 1970 (and any enquiry) is valid if, subsequent to the issue of the notice and during the course of the enquiry, HMRC discover that the LLP was not in fact undertaking any activity with a view to profit (as is the case here, where HMRC contends that the two LLPs were not undertaking any activity with a view to profit but rather seeking merely to generate tax relief in the form of capital allowances, for the respective LLPs’ members).
Significantly, the Upper Tribunal rejected the proposition, which had found favour before the First-tier tribunal, that the compliance and enforcement provisions in TMA 1970 were excluded from the deeming, for tax purposes, that LLPs were partnerships.
The First-tier tribunal had held that the HMRC notices and enquiries were invalid, on the basis that an LLP was a body corporate, not a partnership for the purpose of tax compliance and enforcement provisions. Thus the notices and enquiries made by HMRC on the basis that the LLPs were partnerships were invalid (and there was no deemed notice or enquiry into the LLP members who are claiming tax relief). This represented a major setback to HMRC, not only invalidating long-standing practice (since 2000) but also rejecting the consistent assumption in case law, including that of the Supreme Court in HMRC v Tower MCashback, LLP 1  UKSC 19, the First-tier tribunal preferring to apply the analysis of the outer house of the court of session in R (Spring Salmon) v IRC  STC 444, which had decided the contrary. HMRC was also faced with the prospect of notices and enquiries made into LLPs who had undertaken aggressive tax avoidance schemes being rendered invalid (so that the LLP members who had claimed tax relief could not be assessed because HMRC were out of time to assess them on an individual basis).
Indeed, HMRC were sufficiently concerned that after the First tier tribunal decision, retrospective legislation was drafted (which did not apply to the LLPs in the current case) to reverse the First tier tribunal decision in some (but not all) cases. The Upper Tribunal, in its decision, restored the position to that which HMRC have consistently argued it to be and protected HMRCs’ notices and enquiries in relation to all LLPs and their members, particularly in relation to tax avoidance schemes.
A copy of the full decision can be found here.
Julian Ghosh QC appeared for HMRC before the Upper Tribunal.