The Vaccine Research Limited Partnership & Anor v The Commissioners for HMRC

Introduction

1. These appeals (the “Appeals”) were heard originally by the First Tier Tribunal (“FTT”) between 8-10 October 2019. On 1 March 2022 the FTT advised the parties that there was no realistic prospect of a decision being produced following that hearing and proposed that the Appeals be re-heard by a new Panel. This is that re-hearing.

2. The Appeals relate to the tax years 2006/07, 2013/14 and 2014/15. They concern the tax treatment of a stream of guaranteed licence fees (the “Licence Fees”) payable as part of a complex transaction to which the Vaccine Research Limited Partnership (the “Partnership”) and Mr Vaughan, in his capacity as a partner, were parties.

3. The tax treatment of the transaction for the tax year 2006/07 was the subject of a FTT decision issued on 27 December 2012 and a subsequent Upper Tribunal (“UT”) decision issued on 2 September 2014 (the “Earlier Decisions”). An application for permission to appeal the UT decision was refused by the Court of Appeal in a decision issued on 15 October 2015. A case management decision in respect of these Appeals was issued on 10 October 2018 (the “Case Management Decision”) and a set of directions (the “Directions”) was issued following that decision. Summary of the transaction and key facts

4. Details of the transaction are set out in the FTT Decision (at [FTT 5 -20] and [FTT 41-45]). The FTT referred to the transaction as the “Scheme” – and we adopt the same terminology in this Decision.

5. We also include, in full, as an Appendix to this Decision, a summary of the Scheme as set out in the UT Decision. We found this description helpful as it includes reference to some of the key factual findings of the FTT in their context.

6. In short, and subject to the fuller description in the Appendix, the Scheme was a complex arrangement under which the Partnership was designed to secure for the individual partners (of whom Mr Vaughan was one) a loss for income tax purposes. Specifically, the Partnership intended to generate a trading loss as a consequence of (i) paying certain fees and (ii) incurring expenditure, as part of its purported trade, on research and development activities relating to particular vaccines in respect of which it claimed an entitlement to capital allowances. The individual partners’ share of the Partnership loss was expected to be set off “sideways” against their other income.

7. The central issue addressed in the earlier appeals was the entitlement of the individual partners to loss relief. In deciding that issue, the Earlier Decisions considered, inter alia : (i) whether the Partnership was trading at all, and (ii) the quantum of the “qualifying expenditure” incurred by it.

8. The outcome of the Earlier Decisions was that the claim for capital allowances was allowed, but only to the extent of the amount of qualifying expenditure found to have actually been incurred by the Partnership.

9. Those Decisions found, broadly, that the majority of the Partnership’s activities did not amount to a trade and that only a small fraction of the expenditure claimed to have been incurred by it on research and development expenditure as part of its trade had been so incurred.

10. The amount of qualifying expenditure was found to be approximately £14 million out of a total claimed of approximately £193 million. This was primarily a result of the FTT’s finding that a large part of the Scheme was in effect a circular, “self-contained financing arrangement”, whereby most of the funds borrowed and contributed to the Partnership as capital by the individual partners were used to pay for the Licence Fees which were then used to repay the full capital and interest payments incurred by each partner on their borrowings.

11. In the Case Management Decision, Judge Jonathan Richards held that the question of whether the Licence Fees received by the Partnership in 2006/07 were taxable had not been raised before the FTT or UT. He concluded that the FTT, while having the power to consider the extent to which the Licence Fees were taxable, did not express a concluded view on the issue and that the UT similarly expressed no concluded view (see [26] of the Case Management Decision).

12. It was agreed that the Appellants were therefore entitled to argue that the Licence Fees received were not taxable income for 2006/07 (and to raise the same arguments for 2013/14 and 2014/15). It was also agreed that the four appeals referred to above would be consolidated into the two appeals now before us.

13. The Directions further provided that: (i) evidence adduced in the earlier appeals is deemed to have been adduced in the later appeals also, and any witness statements filed and served in the earlier appeals shall stand as evidence in chief in the later appeals (Direction (3)): and (ii) any findings of fact made by the FTT and the UT in their respective decisions on the earlier appeals are established for the purposes of the later appeals without the need for further proof. Preliminary issues The Appellants

14. We have an appeal in the name of the Partnership and an appeal in the name of Mr Vaughan, an individual limited partner (a Class B Limited Partner).

15. For income tax purposes a partnership is transparent, as per s 848 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) which provides that: “Unless otherwise indicated (whether expressly or by implication), a firm is not to be regarded for income tax purposes as an entity separate from and distinct from the partners.”

16. It is necessary, therefore, to look through the Partnership to Mr Vaughan in his capacity as a partner with regard to the income tax aspects of these Appeals, save where the contrary is indicated, and this Decision should be read accordingly. The interest relief issue

17. The Case Management Decision also provided for Mr Vaughan to appeal in respect of the quantum of interest relief available in respect of the borrowing he incurred to finance his Partnership capital contribution. We were informed, however, that this issue had been resolved prior to the hearing and so it was not considered further.

18. Accordingly, the only issue before the Tribunal is the taxability of the Licence Fees. The hearing

19. The hearing took place over four days. We were provided with a hearing bundle of 1,931 pages together with an authorities bundle and skeleton arguments from each party. No witnesses were called. Terminology

20. In this Decision we have, unless otherwise indicated or defined, used the abbreviations and terminology used in the Earlier Decisions. The legislation

21. The references below are, unless otherwise stated, to the legislation in force at the times relevant for the Appeals. S 683 ITTOIA - Annual payments

22. Section 683 ITTOIA provides, so far as relevant, as follows: Charge to tax on annual payments not otherwise charged (1) Income tax is charged under this Chapter on annual payments that are not charged to income tax under or as a result of any other provision of this Act or any other Act. (2) Subsection (1) does not apply to annual payments that would be charged to income tax under or as a result of another provision but for an exemption. (3) The frequency with which payments are made is ignored in determining whether they are annual payments for the purposes of this Chapter.

23. S 684(1) ITTOIA provides that: Tax is charged under the Chapter on the full amount of the annual payments arising in the tax year.

24. S 685 ITTOIA provides that: The person liable for any tax charged under this Chapter is the person receiving or entitled to the annual payments. S 687 ITTOIA - Income not otherwise charged

25. S 687 ITTOIA provides so far as relevant: Charge to tax on income not otherwise charged (1) Income tax is charged under this Chapter on income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act. (2) Subsection (1) does not apply to annual payments …. (3) Subsection (1) does not apply to income that would be charged to income tax under or as a result of another provision or but for an exemption. (4) The definition of “income” in section 878(1) does not apply for the purposes of this section.

26. With effect from the tax year 2008/09, s 688(1) ITTOIA provides that tax is charged on the amount of the income arising in the tax year.

27. S 689 ITTOIA provides that: … the person liable for any tax charged under this Chapter is the person receiving or entitled to the income. The issue for determination

28. The single issue for determination in this appeal is whether the Licence Payments are, as HMRC contend, taxable pursuant to s 683 ITTOIA as “annual payments”, or, in the alternative, pursuant to s 687 ITTOIA as “income not otherwise charged to tax”.

29. The Appellants and HMRC put forward detailed submissions covering both provisions. Although there is inevitably some overlap between them, the Appellants’ grounds of appeal can be grouped as follows: (1) On a private law analysis of the contractual documentation the funds borrowed by the Partnership were not used to acquire the Licence Fees - they were instead returned to BOS via RBS under a circular arrangement and consequently there are no Licence Fees arising to the Partnership or the Partners to tax under either s 683 or s 687 ITTOIA (“Ground 1”). (2) Application of the principle of statutory interpretation established in WT Ramsay Ltd v IRC [1982] AC 300 (“ Ramsay ”) requires the Scheme to be seen as a single composite transaction consisting of a self-contained circular scheme. On this analysis the circular flow of funds does not give rise to “income” for the Partnership/the Partners and so neither s 683 nor s 687 ITTOIA are engaged (“Ground 2”). (3) The Partnership/the Partners are not in “receipt” of, nor do they have any “entitlement” to, the Licence Fees as they are the subject of an absolute assignment by the Partnership. On this basis neither s 683 nor s 687 ITTOIA can apply (“Ground 3”). (4) The Licence Fees do not constitute income for tax purposes as they represent capital receipts for the Partnership/the Partners and so neither s 683 nor s 687 ITTOIA can apply as those provisions apply only to income (“Ground 4”). (5) The Licence Fees are not annual payments as they are not “pure income profit” for the Partnership/the Partners and so s 683 ITTOIA cannot apply (“Ground 5”). (6) The Licence Fees are not taxable under s 687 ITTOIA as they have no suitable taxable source as required to fall within the charging provisions (“Ground 6”). (7) The imposition of a tax charge in the circumstances would contravene Article 1 of the First Protocol of the European Convention on Human Rights (“Ground 7”).

30. Appeal Grounds 1 and 2 are threshold issues in that if the Appellants’ appeal on either Ground is upheld, the charging provisions in s 683 and s 685 ITTOIA cannot be engaged and so their appeal must succeed.

31. We deal with each of the Grounds in turn. Ground 1 – the private law analysis The Parties’ Submissions

32. The Appellants submit that it is necessary as a first step, that is before carrying out any tax analysis, to interpret and determine as a matter of private law the legal effect of the Scheme documents.

33. They submit that as a matter of private law, on a proper analysis, any and all contractual entitlements ostensibly granted to the Partnership in respect of the Licence Fees were immediately removed by subsequent contractual provisions which took effect as part of one overall package of transactions. On that basis they contend that there are no Licence Fees to tax.

34. Mr Bremner developed this argument by stating that the fundamental assertion underpinning HMRC’s case was that the Partnership used its funds to acquire (i) potential rewards from its investment of £14m in vaccine research and (ii) the Licence Fees from Numology as supported by a letter of credit from RBS, and that this assertion was incorrect.

35. This was because the funds loaned by BOS to the Partners were not used for this purpose but in reality were instead returned to BOS via RBS under the circular structure put in place by the Scheme participants.

36. He made it clear that this analysis was independent of the Ramsay principle which was being relied upon as a separate ground of appeal – although he noted that it was possible for the contractual interpretation exercise to take place alongside a consideration of Ramsay (see the UT decision in Ingenious Games LLP and others v HMRC [2019] UKUT 226 (TCC) at [111]).

37. HMRC submit that private law contractual analysis of the documents does not result in there being no Licence Fees to tax. They say that neither the circularity of the arrangements nor their economic effect can have the effect of extinguishing the rights and obligations created under the documents.

38. They contend that what they see as the clear legal rights and obligations under each document ought to be respected, noting that to do otherwise would be contrary to the findings of fact made by the FTT and affirmed by the UT. They also point out that the FTT had specifically found that the documents were not a “sham”.

39. The Appellants’ focus was on the circular nature of the arrangements involving the Licence Fee and the BOS loans. In this regard they cited the following specific findings of the FTT and the UT: (1) “We find that the Scheme consisted of a series of interlocking deeds, agreements and arrangements mostly made between 15 August and 17 August 2006.” [FTT 20] (2) “… a fundamental part of the Scheme was the arrangement with BOS and RBS for the provision of loans representing around 80% of the total investment by each Class B Limited Partner in a self-contained financing arrangement whereby the capital paid over from The Partnership was used to pay for the guaranteed licence fee which itself was used to pay the full capital and interest payments incurred by each partner in taking out those loans.” [FTT 66] (3) “The sums paid for the guaranteed licence fees are clearly identified in the accounts and agreements identified above. They were obligations, we find on the balance of probabilities, agreed as part of the Scheme but separate from payment of £14 million made to PepTcell Ltd by Numology Ltd to secure research and development of the intended kind. The only source of funds for the payment deposited with RBS to obtain the letter of credit to guarantee the licence fees on the evidence before us was the flow of funds from the capital contributions of the Class B Limited Partners.” [FTT 67]

40. Mr Bremner also pointed out that the FTT saw the “self-contained financing element” of the Scheme as separate from those elements of the arrangements which it regarded as amounting (just) to a trade. He noted that consistent with that view, the FTT had effectively disregarded the Licence Fee arrangements when assessing whether the arrangement as a whole amounted to a trade, holding (at [FTT 76]) that: “We do not accept that the arrangement of the guaranteed licence fee was a trading activity. and further that the Licence Fees could not: “… properly be regarded as part of trading income” The legal principle

41. The Appellants’ submission is based on what they contend is a key principle of private law, which is that linked documents effecting a single transaction may be read together.

42. In support of that submission Mr Bremner cited the following guidance from Sir Kim Lewison in the section headed “Documents Forming Part of the Same Transaction” in “The Interpretation of Contracts” (8 th Edition): “Many transactions take place by the entry into a series of contracts […]. In such cases, where the transaction is in truth one transaction, all the contracts may be read together for the purpose of determining their legal effect. This principle is a more specific example of the general principle that background is admissible in interpreting a written contract. It applies to other documents executed as part of the same transaction, whether they happen to be executed before, at the same time as, or after the document requiring to be interpreted.” [3.06] “The principle just described is only a principle of interpretation. It does not mean that linked documents are to be treated as a single document for the purposes of a substantive rules of law, where that rule requires a single document.” [3.12]

43. Mr Bremner also cited extracts from the UT judgment in Ingenious Games LLP v HMRC [2019] UKUT 226 (TCC) ( Ingenious UT ) as support for this approach under private law.

44. We were also taken carefully through the Scheme documents to explain how they interacted. He explained how, as a consequence of what was in effect the “hard-wiring” of the arrangements, the Partners had divested themselves of any control over the Licence Fees and, for practical purposes, of any risk of being called to repay to BOS the amounts due under their individual loans. Although the BOS Loans were stated to be recourse loans there was no expectation that the Partners would be called upon to repay them once the Transaction had been implemented – as the transaction cashflows together with the security arrangements would effectively ensure that repayment and the Partnership had assumed the overall risk by covenanting to pay the principal and interest on the loans.

45. In summary, the principal chain of events and primary cash flows (leaving aside fees and option arrangements and, for convenience, rounding the figures) was as follows: (1) Under the terms of the Limited Partnership Agreement the Class B Limited Partners (the individual partners) were obliged to contribute capital of £114 million to the Partnership and the Class A Partner (Numology) was obliged to contribute capital of £86 million. (2) Of their contribution of £114 million, the Class B Limited Partners borrowed £86 million via individual loans from BOS (the “Partner Loans”). These loans amortised over a 15 year term. (3) Under the terms of the Research Agreement, the Partnership was obliged to pay Numology [£193 million] for ( inter alia ) carrying out research and development in respect of specified vaccines. (4) Under the terms of the Research Sub-Contract Agreement, Numology sub-contracted that research to PepTCell and was obliged to pay PepTCell £14 million for research and development work. (5) Under the terms of the Licence Agreement, Numology was obliged to pay the Partnership, in instalments over a 15 year term, the Licence Fees, in return for being able to exploit the intellectual property arising from the research. The Licence Fees amounted in total to £124 million. It was also required to provide an irrevocable letter of credit (the “RBS Letter of Credit”) from RBS in respect of those fees.

46. Given the multiple payment flows between the Partnership, the Class B Limited Partners and Numology (in its capacity both as partner and contractual counterparty), the off-setting and sequencing of payments at closing of the Scheme resulted in the £86 million contributed by the Class B Limited Partners being paid into an RBS deposit account in Numology’s name. Those funds were then used to secure the RBS Letter of Credit required to be provided by Numology.

47. The RBS Letter of Credit enabled the Partnership to draw down, each year, from RBS an amount equal to the Licence Fee instalments. These amounts were then paid into the Partnership’s account with BOS (the Partnership Account).

48. The Partnership under a Charge Over Assets in favour of BOS, (a) covenanted with BOS to pay all of the principal and interest on the Partner Loans, (b) charged to BOS all funds standing to the credit of the Partnership Account, (c) assigned to BOS its interest in the Licence Fees, and (d) relinquished its rights to any amounts standing to the credit of the Partnership Account until the Partnership Loans had been discharged.

49. In addition to the operative Scheme documents, various confirmatory letters and instructions were sent between the parties, including (a) notification by MRD (as general partner) to Numology that the Partnership had assigned its rights to the Licence Fees to BOS, and (b) instructions by MRD (as general partner) to RBS to pay all sums owing under the Letter of Credit into the Partnership Account.

50. In broad terms it was apparent that disregarding the notional gross cashflows, the overall economic effect of the Scheme was that the funds borrowed from RBS under the Partner Loans were used to acquire the Licence Fees payable to the Partnership which in turn were used to discharge the interest and principal on those loans. This was a clear factual finding by the FTT, confirmed by the UT and not disputed by HMRC.

51. Ms Nathan took us to the findings of the FTT and UT. She drew our attention to the follow parts of the FTT’s judgment: (1) At [FTT 57] the FTT held that “ the reality of what happened ” with the Limited Partners loans was they were in fact contributed as capital to the Partnership and represented 80% of the Partnerships available capital. (2) At [FTT 62] the FTT held that adopting a “practical commercial approach” the Appellants would receive the Licence Fees “that completely met the £123.77 million obligations they had incurred in the loans from BOS which they had invested in the Scheme” (3) At [FTT 66/67] the FTT found that the sums which they considered to have been paid from the partners contributions which related to the Licence Fees constitute a “self contained financing arrangement”, in the sense that they were part of the financial arrangements but separate from the payment of £14 million to PepTCell by Numology to secure research and development. The FTT continued that “a fundamental part of the Scheme was the arrangement with BOS and RBS for the provision of loans representing around 80% of the total investment by each Class B Limited partner … whereby the capital paid over by the Partnership was used to pay for the guaranteed licence fee which itself was used to pay the full capital and interest payments incurred by each partner in taking out the loans.” (4) At [FTT 67] in responding to (and refusing to accept) an argument as to the indivisibility of the sums raised in the Scheme, the FTT stated as follows: “We do not accept that analysis as establishing that the whole of the sums raised, including the sums said to be raised from Numology Ltd, were indivisible. The sums paid for the guaranteed licence fees are clearly identified in the accounts and agreements identified above, They were obligations, we find on the balance of probabilities, agreed as part of the Scheme but separate from payment of £14 million made to PepTCell by Numology Ltd to secure research and development of the intended kind. The only source of funds for the payment deposited with RBS to obtain the letter of credit to guarantee the licence fees on the evidence before us was the flow of funds from the capital contributions of the Class B Limited Partners” Discussion

52. In Ingenious UT , the UT had to determine a range of tax issues relating to a tax driven film financing scheme. Its discussion and findings in relation to the private law construction of the contracts of that scheme are instructive.

53. As with the Scheme, the scheme in Ingenious relied on a complex series of inter-related and inter-dependent documents.

54. When considering a suite of agreements entered into by the taxpayers for the financing of a particular film under the Ingenious scheme, the FTT had construed that suite of documents together as a single composite agreement.

55. The UT had to consider whether the FTT had adopted an incorrect approach to the private law construction of relevant contracts in “ impermissibly collapsing the contractual documents together, rather than considering the terms and effect of each agreement individually without regard (at the stage) to the tax consequences … ” [42].

56. One of the issues was whether the LLP had erred in its exercise of contractual construction by seeking to apply the Ramsay principle of statutory construction which the appellants in that case submitted (i) should have been applied at a later stage as part of the process of statutory interpretation, and (ii) was irrelevant on the facts of the case [77].

57. In considering the approach taken by the FTT, the UT outlined at some length at [79] – [80] the basic private law principles to be applied to the construction of written contracts. We do not repeat those principles in this judgment save to note that the UT cited three Supreme Court judgments in which they had been set out – Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 , Arnold v Britton [2015] AC 1619 and Wood v Capita Insurance Services Limited [2017] AC 1173 .

58. The UT also differentiated between an exercise of private law contractual construction and the Ramsay approach, the latter being one of statutory interpretation dependent on the legislation in question.

59. Although it agreed that the suite of documents reviewed by the FTT: “reflected what was undeniably a single, albeit multi-party transaction as a commercial matter” it found that the starting point in construing the contracts as a matter of private law should have been to consider them individually in accordance with the basic principles it had identified.

60. It acknowledged that where a number of contracts are entered into together, the existence of the other contracts is (at the very least) part of the “factual matrix” when construing any of the individual contracts and that: “where the contracts specifically cross-refer or there are other indications that they are intended to operate only as a package, then that fact will be relevant” [108]. It cited the same Lewison paragraph as cited by the Appellants (although the 6 th rather than 8 th edition).

61. The UT concluded (at [110]) as follows: “Therefore, where there is in truth one transaction, the tribunal is entitled to read the contracts together for the purpose of determining their legal effect. That is not the same as saying that where there is a series of contracts to implement a transaction there is a single composite agreement. As we have said the “composite agreement” approach is not correct as a matter of contractual construction.” “However what must not be done is to adopt blinkers in looking at each agreement. In determining the legal rights and obligations acquired by the LLPs pursuant to the contractual arrangements the FTT was entitled and correct to look at the entirety of each set of transactions, which it found at [91] were entered into at the same time and as a single package.”

62. It found that as a matter of contractual construction and in the absence of Ramsay, the FTT erred in adopting a “composite agreement” approach to the scheme documentation [107].

63. The judgment shows that a high threshold must be met in order for the rights and obligations ostensibly created under a document or a set of documents to be regarded, as a matter of private law, as other than stated. Critically, unlike the Ramsay principle, a private law analysis does not permit a departure from the legal rights and obligations created. What it requires is discovery of the “true nature of the legal rights and obligations created pursuant to the contractual arrangements” [110].

64. The UT’s analysis, based in part on an assessment of the judgments in Antoniades v Villiers [1990] 1 AC 417 , indicates that it is necessary to consider whether the contractual terms of the documents in question are: “unrealistic or a pretence [that was] never intended to be acted upon” [98] .

65. Although similar in some ways to the concept of “sham”, the UT distinguished “sham” on the basis that “sham” requires there to be a common intention between the parties to a document for that document to give the appearance of creating legal rights and obligations different from those intended to be created. In Villiers there was no such common intention – as only one party knew the true nature of the arrangements.

66. It is apparent from the UT’s judgment that the fact that a transaction is circular and/or constituted by a set of inter-linked and inter-dependent contracts does not mean per se that it can be treated contractually as a single transaction, nor does its economic effect on the parties necessarily have an impact. It is also clear that tax legislation can have no bearing on the contractual interpretation.

67. Taking into account the UT’s guidance, in carrying out a private law analysis of the Scheme documentation our task is to determine the actual legal relationships created by the relevant documents, examining them individually but recognising that they are part of a circular scheme, and to assess whether there is “in truth one transaction”. As part of this process we are not to be bound by the labels attached to the documents.

68. For the Appellants’ submission to be correct it is necessary therefore to have regard to the contractual terms of the Scheme documents. We must then evaluate, in the context of the intended circularity, whether the legal rights and obligations are as written or, as the Appellants submit, the correct legal analysis is that those funds were simply returned to BOS and RBS via the circular arrangements.

69. We have some difficulty with the private law analysis put forward by the Appellants. This is for two main reasons.

70. First, in accordance with the Directions, we must take into account the factual findings of the FTT and UT.

71. Having reviewed the Scheme documents the FTT came to certain conclusions as to the rights and obligations under those documents - as set out for us by Ms Nathan.

72. Although the FTT found that the arrangement was circular and amounted to a self contained financing agreement it seems to us implicit that it accepted the legal rights and obligations created under the documents.

73. Specifically (as set out at [51] above) it acknowledged that money was borrowed under the BOS loans, that those loans were used to fund capital contributions to the Partnership and that the Partnership then acquired the Licence Fees which were then used to repay the borrowings.

74. Second, we note Ms Nathan’s reference to the FTT’s conclusion at [FTT 52 and 53], that no part of the arrangements was a sham. Although, as Ingenious (UT) makes clear (at [100]), a finding of sham is not necessary in order to conclude that a contractual provision is unrealistic or a pretence never intended to be acted upon, there is a need for a finding close to the concept of sham. In other words there is a high hurdle to overcome in order to find that the legal rights and obligations are other than as drafted.

75. In the context of the Scheme, the FTT considered the “sham” argument carefully before reaching the following conclusion; “It is clear in this case, and we so find, that considerable effort was spent in setting up the Scheme, with trouble being taken to create and insert the relevant companies, agreements and deeds in the Scheme as planned. The companies were established, the deeds and agreements were concluded; the money was passed through accounts as stated.” [53]

76. This suggests to us that the threshold for a private law interpretation that diverges from the actual terms of the contracts in question has not been reached.

77. We also have no findings that any of the parties intended not to act upon the terms of the documents as written.

78. We would add that neither the economic consequences of the arrangements nor the restrictions imposed by the security arrangements give rise, in our view, to any such inference.

79. We agree, therefore, with Ms Nathan, that a disregard of the rights and obligations ostensibly provided for in the Scheme documents and a finding that the Partnership did not acquire the Licence Fees would be inconsistent with the facts found by the FTT (and acknowledged by the UT).

80. For that reason we do not agree with the Appellants that as a matter of private law it can be said that the funds were not used to acquire the Licence Payments.

81. Ground 1 is therefore dismissed.

82. The Appellants also submit that as a matter of private law the assignment of the Licence Fees by way of security divests them of any ownership of those payments and so they cannot be said to be “entitled” to them for the purpose of s 683 or s 687 ITTOIA. We have included that submission as appeal Ground 4. Ground 2 The “Ramsay issue” The Parties’ submissions

83. The Appellants submit that: (1) for the Licence Fees to be taxable under s 683 or s.687 ITTOIA they must constitute “income”; and (2) applying a “realistic view of the facts”, which they say we are required to following Ramsay , the Licence Fees represent a circular flow of funds from BOS to RBS which does not answer to the description of “income” for the purposes of the statutory provisions.

84. The Appellants’ submissions on the Ramsay issue follow naturally, to some extent, their submissions on the private law interpretation issue.

85. They referred again to the FTT findings set out at [40] above – each of which demonstrated the circularity of the Scheme and its predetermined nature. The description of the chain of events, the cashflows and offsetting and the net effect of the arrangements as set out at [46] to [51] above is also relevant. The key point again being that the Scheme was a composite transaction which included as a circular self-financing element the arrangements relating to the Licence Fees. HMRC’s submissions

86. HMRC submit that the Ramsay analysis put forward by the Appellants is not supported by the statutory provisions in question.

87. Ms Nathan cited in this regard the Court of Appeal decisions in Bostan Khan v HMRC [2021] EWCA Civ 624 (“ Khan ”) and Thomas William Good v HMRC [2023] EWCA Civ 114 (“ Good ”) as authority for the proposition that the statutory question posed by the relevant provisions is not concerned with the overall economic outcome of a series of interlinked transactions and focuses instead on the agreement giving rise to the payments in question.

88. Ms Nathan also made the point that accepting the Appellant’s submissions on Ramsay would be to disregard the findings of the FTT that the Loans and obligations were “real”. Discussion

89. As we acknowledge in our discussion on Ground 1 there is no dispute as to the circularity of the arrangements relating to the Licence Fees nor the expectations of the Scheme participants in relation to the cash-flow arrangements. Specifically, it was expected that the Licence Fees would be used to discharge the Partner loans and that the effect of the security arrangements and offsetting meant that purchase of the Licence Fees was in effect funded by the Partner loan proceeds. It is also clear, as pointed out by Mr Bremner that there was no real prospect of any of the individual partners being asked by BOS to make repayment of the Partner loans, As found by the FTT: “although the debt was in the form of a full recourse loan – the borrowers would be entitled to assume that in reality he or she would have no further concerns about meeting the liability once the initial paperwork was completed.” [FTT 15]. We approach the Ramsay issue with that in mind.

90. The Ramsay principle of statutory interpretation has been considered and explained several times by the courts.

91. Mr Bremner cited excerpts from the judgment of Lord Reed (with whom the other judges agreed) in UBS AG v HMRC [2016] UKSC 13 (“ UBS ”) which reviewed the development of the principle. Lord Reed’s first reference was to Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51 (“BMBF”): “as the House of Lords explained in [BMBF] in a single opinion of the Appellate Committee delivered by Lord Nicholls, the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in the way which best gives effect to that purpose”. [UBS - 61]

92. Mr Bremner then referred to Lord Reed’s reference (at [66]) to the succinct conclusion of Ribeiro PJ in Collector of Stamp Taxes v Arrowtown Assets Ltd [2003] HKCFA 46 (“ Arrowtown ”) that: “the ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically”.

93. He went on to cite the following two extracts from the judgment of Lord Wilberforce in Ramsay : “A subject is only to be taxed upon clear words, not upon ‘intendment’ or upon the ‘equity’ of an Act. … What are ‘clear words’ is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded”. [323-324] and “For the commissioners considering a particular case it is wrong, and an unnecessary self-limitation, to regard themselves as precluded by their own finding that documents or transactions are not “shams”, from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is. They are not, under the Westminster doctrine or any other authority, bound to consider individually each separate step in a composite transaction intended to be carried through as a whole.”

94. The Ramsay doctrine was restated relatively recently by the Supreme Court in Hurstwood Properties (A) Ltd v Rossendale BC (2021] UKSC 16 (“ Rossendale ”).

95. Rossendale concerned two schemes which had been entered into by the registered owners of various unoccupied properties to seek to avoid liability for business rates. Each scheme involved leases being granted to special purpose companies (SPCs). The speech of Lord Briggs and Lord Leggatt (with whom Lord Reed, Lord Hodge and Lord Kitching agreed) stated at [5] that it was common ground that: (a) the schemes had no business or other “real world” purpose, their sole purpose being to avoid liability to pay business rates, and (b) the leases granted were not shams so that, as a matter of the law of real property they conferred an entitlement to possession upon the SPCs.

96. Lord Briggs and Lord Leggatt emphasised that the Ramsay principle is one of statutory interpretation and at [15] described it in the following manner as a two-step process: “In the task of ascertaining whether a particular statutory provision imposes a charge or grants an exemption from a charge, the Ramsay approach is generally described … as involving two components or stages. The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they “answer to the statutory description” (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required.

97. They went on to add at [16]: “Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained, The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material. and finally at [17]: “Likewise, the facts must be also be looked at in the round. In Inland Revenue Comrs v McGuckian [1997] 1 WLR 991 , 999, Lord Steyn explained that it was the formalistic insistence on examining steps in a composite scheme separately that allowed tax avoidance schemes to flourish. Sometimes looking at a composite scheme as a whole allows particular steps which have no commercial purpose to be ignored. But the requirement to look at the facts in the round is not limited to such cases. Thus, in Scottish Provident where the taxing statute granted an allowance which depended upon the taxpayer having an entitlement to a specified type of property (gilts), a view of the facts in the round enabled the House of Lords to conclude that a legal entitlement to gilts generated by one element in a larger scheme failed to qualify because the entitlement was intended and expected to be cancelled out by an equal and opposite transaction.”

98. We note also the statement of the judges at [12] that: “Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole” Where does that leave us?

99. We agree with Mr Bremner that we are obliged to apply the Ramsay principle as outlined in the cases cited.

100. We therefore adopt the two-step process outlined by Lord Briggs and Lord Leggatt in Rossendale .

101. The first step is to ascertain the class of facts intended to be affected by the statutory provisions, which requires us to interpret the provisions in the light of their purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they “answer to the statutory description”

102. We note though, as per the court’s observation in Rossendale, that there is no rigid demarcation between the two processes. Step One – consideration of the statutory provisions

103. The Appellants contend that for either provision to be engaged there must be an amount of “income” to tax. Must there be income?

104. We consider each provision separately. S 683 Annual payments

105. In HMRC v Hargreaves Lansdown Asset Management Limited [2019] UKUT 246 (TCC) (“ Hargreaves Lansdown ”) the UT had to consider whether “loyalty bonuses” paid by an investment platform provider to its clients were “annual payments”. The loyalty bonuses in question represented a proportion of rebates received by the platform from fund managers of the annual management charged to the funds that the investors were invested in.

106. The UT confirmed at [39] that: “ … the authorities establish that an annual payment is a payment which has four characteristics, as follows: (1) It must be payable under a legal obligation. (2) It must recur or be capable of recurrence, although the obligation to pay may be contingent. (3) It must constitute income and not capital in the hands of the recipient. (4) It must represent ‘pure income profit’ to the recipient”.

107. Two of the four characteristics identified by the UT refer to “income”.

108. Requirement (3) is a relatively straightforward requirement for the payment to be income rather than capital in nature for the recipient. We take this to mean “income” on first principles as there is no indication of the term being given a particular meaning in the context of annual payments.

109. Requirement (4) is more complex – as “pure income profit” has a particular meaning which requires a determination as to whether: “in the light of the relevant facts … the payment is a taxable receipt in the hands of the recipient without any deduction for expenses or the like” [109].

110. However, at a very basic level, requirement (4) still requires there to be a payment of income. We note in this regard the UT’s reference at [45] to the FTT’s recording that “the parties did not dissent from the proposition that pure income profit at its most basic was essentially income that is received without the person in receipt of that income having to do anything in return, that is no outgoing or expense has been incurred for receipt of the income”.

111. It is accordingly clear to us that payments must constitute “income” in order to be taxable as annual payments under s 683 ITTOIA. Section 687 ITTOIA

112. It is implicit in the wording of s 687 that to be taxable under it a receipt must be of an income nature, with s 687(1) ITTOIA providing that: “Income tax is charged under this Chapter on income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act”.

113. In addition, s 689 ITTOIA provides that: “The person liable for any tax charged under this Chapter is the person receiving or entitled to the income.”

114. Mr Bremner took us also to the decisions of the Court of Appeal in HMRC v BlueCrest Capital Management P [2023] EWCA Civ 1481 (“ BlueCrest ”) and the UT in Kerrison v HMRC [2019] UKUT 8 (TCC) (“ Kerrison ”).

115. In BlueCrest the Court of Appeal had to consider whether payments received from various “partner incentivisation plans” or “PIPs” put in place partly for a perceived fiscal benefit were taxable for individual partners under s 687 ITTOIA.

116. The PIPs involved, broadly, individual partners foregoing an amount of profit which was paid instead to a corporate partner. The corporate partner then invested that profit and, if certain conditions were met, an award of special capital in the corporate partner could be made to an individual partner. The intended fiscal benefit was that the profit allocated to the corporate partner would be subject to corporation tax rather than income tax, and any award to an individual partner was expected to be a capital rather than an income receipt (and even if found to be income was not expected to be regarded as derived from a suitable source so as to be taxable under s 687 ITTOIA).

117. HMRC’s primary case was that the profit share allocated to the corporate partner was properly chargeable to income tax as profit shares of the participating individual partners (based on a realistic application of s 850 ITTOIA to the facts). As one of two secondary arguments, HMRC contended that any reallocation of special capital to individual partners was chargeable in their hands as income not otherwise charged to Income tax under s 687 ITTOIA.

118. In determining the application of s 687 ITTOIA, the Court considered its statutory background and reviewed the explanatory notes accompanying its introduction. Those notes explained that the charge under Chapter 8 was designed to replace the income tax charge in s 18 ICTA which charged tax under Case VI of Schedule D, with the new charge being restricted accordingly to “amounts that are ‘income’ on first principles” or, in other words amounts which, “… are ‘annual profits or gains’ under section 18(1) of ICTA, as that phrase has been interpreted in the case law, and are not profits or gains of a capital nature.”.

119. The Court noted also the decision in Jones v Leeming [1930] AC 415 (HL) in which the House of Lords had held that profits which were not in the nature of income but which amounted to an accretion to capital were not taxable under Case VI.

120. We conclude accordingly that there is little doubt that the charge to tax under s 687 ITTOIA is limited to sums which are of an income nature.

121. Although ss 683 and 687 ITTOIA differ in scope, we consider that the very basic statutory purpose of each provision is to bring amounts of “income” into the charge to income tax. Once an item of income is identified, each provision is engaged if additional criteria are satisfied – the additional criteria for s 683 ITTOIA being different from that for s 687 ITTOIA. The requirement for an item to be income is, however, a threshold condition for each.

122. We agree therefore with Mr Bremner that the initial statutory question is whether the Licence Fees amount to “income”.

123. In coming to our conclusion we have taken into account Ms Nathan’s submission that the Court of Appeal decisions in Khan and Good show that the statutory question of whether a person is the person “entitled to” or “receiving” income for the purposes of sections 385 and 611 ITTOIA does not require there to be consideration of the economic outcome of a linked series of transactions or for the relevant person to be in control over the relevant income.

124. In this regard Ms Nathan directed us to Khan at [52]: “In my judgment, this is a case in which the legal nature to which a tax consequence is attached does not emerge from looking at the connected transactions as a whole. On the contrary, the statutory provisions require the focus to be on the transaction under which the taxable distribution arose.” and also at [73] “on the face of it, therefore, s.385(1) is not a statutory provision that is concerned with the overall economic outcome of a series of commercially interlinked transactions, but only with the question of who was entitled to the distribution or who actually received it.”

125. This was affirmed in Good at [52].

126. It is also clear to us that this applies for the general purposes of ITTOIA where that phraseology is used, the court in Khan accepting that the phrase “the person(s) receiving or entitled to” must be given a consistent meaning wherever it appears in ITTOIA.” [11]

127. However, although we agree with Ms Nathan as to the principle to be extracted from these cases, as pointed out by Mr Bremner, that principle is irrelevant to the question of whether, as a starting point, the amount under consideration is or is not “income”.

128. In Good the amounts under consideration were payments (referred to as “minimum annual payments” or “MAPs”) representing a portion of the income arising the sale of film rights. It was accepted by the parties that those payments were “income” for tax purposes and so that issue was not considered further. In Khan the payment in question was a payment made by a company to Mr Khan on the purchase of its own shares. It was common ground that the payment was a distribution chargeable to income tax and so again the issue was not considered further.

129. To put it simply, these cases deal with whether a person receives or is entitled to an amount. They do not address the evaluation of whether that amount is “income”. Step 2

130. Having established the statutory question we move on to step two which is to discover whether the relevant facts fall within that class, i.e. whether the Licence Fees are income.

131. Whether a receipt is capital or income for tax purposes is a question of first principles which has been considered judicially many times.

132. In BlueCrest , when considering the issue in the context of s 687 ITTOIA, Sir Launcelot Henderson said that he considered the question of whether an item was income or capital to be, in principle, one of law rather than fact, citing in support of his view, the House of Lord’s conclusion in Beauchamp v F W Woolworth Plc [1990] 1 AC 478 in which it had to consider whether a currency exchange loss was of an income or capital nature [104]. He went on to state at [114] that the: “… homely metaphor of fruit of the tree has often provide helpful in the search for guiding principle to distinguish capital from income receipts”.

133. Although he was referring to the judgment of Rowlatt J in Ryall v Hoare [1928] 2 KB 447 which considered the scope of “profits or gains” in Case VI, this seems to us to also be of significance generally to the capital/income distinction. Consistent with the breadth of that comment, he went on to refer more generally to what he saw as a “reminder” that “income tax is a tax on income” and that “the distinction between capital and income receipts is sometimes easier to recognise than to define, and that in reaching a conclusion there is a place for the intuitive common sense of judges or tribunals well versed in tax law” – despite the issue being ultimately one of law.

134. Of particular relevance in the context of our discussion, was Sir Launcelot Henderson’s approach in determining whether the PIP awards were “income”. Here he said: “.. it is in my view necessary to stand back and examine the commercial reality of the PIP scheme as a whole. So viewed, the economic substance of the matter is that the final PIP awards constitute a form of deferred and contingent reward to the participating partners for their work in the relevant accounting period of the partnership. … Although as I have sought to explain, this view of the facts cannot support HMRC’s primary case, because (put shortly) it cannot be reconciled with the actual machinery which the parties adopted to implement the PIP scheme, it is in my judgment entirely legitimate to rely on an overall assessment of this nature when answering the question whether the awards were of an income nature.”

135. He went on to say: “It is also at this point that the need for an analogy with some form of taxable income becomes relevant, and the latter requirement is in turn satisfied by the realistic view taken of the scheme as a whole”

136. He concluded that the PIP awards were income: “if the partnership was the tree, the deferred PIP award was part of the fruit which the partner derived from his membership of the partnership and his exertions on its behalf during the relevant accounting period. To tax the award under section 687 is appropriate because it reflects the underlying economic reality of the arrangements, and the way in which they were perceived by the parties”

137. His approach shows that in determining whether the sums in question were “income”, he considered it necessary to consider the arrangements in their entirety, including their economic effect. On a “realistic view taken of the scheme as a whole” the payments were income notwithstanding the legal terms of the documents.

138. Although Ramsay was not mentioned specifically by Sir Launcelot Henderson, this approach seems consistent with the second step of the Ramsay approach which is to ascertain the facts in the light of the statutory question.

139. In our case it is not disputed that the arrangements entered into by the Partners and the Partnership in respect of the Licence Fees formed a circular scheme which the FTT found to be a self-cancelling financing arrangement. We have also been able to trace clearly how the amounts borrowed by the individual Partners from BOS were, via acquisition of the Licence Fees, used to repay principal and interest on those borrowings.

140. As a matter of economic reality, as Mr Bremner has pointed out, in this part of the Scheme nothing has really happened – money had been borrowed and that money is passed back to repay the borrowing.

141. On first principles, and applying the basic “fruit and branch” analogy referred to by Launcelot Henderson in BlueCrest – there is no “fruit” for the individual partners

142. We do not consider therefore that the arrangement gives rise to income. As Mr Bremner has submitted – the circular flow of funds does not answer to the description of income for tax purposes.

143. We conclude accordingly that as the Licence Fees do not amount to “income” for the purposes of s 683 or s 687 ITTOIA, neither of those provisions are engaged. Sham

144. We note Ms Nathan’s reference to the FTT’s finding that that the Scheme documentation did not amount to a sham. We found this point a persuasive one in relation to the private law interpretation issue (see [76]-[79]above). However, it does not impact a Ramsay based analysis – as Ramsay itself makes clear. Inconsistency

145. We note also HMRC’s submission that a Ramsay analysis in line with Mr Bremner’s submissions would be inconsistent with the facts found by the FTT. Again, although this point was compelling in relation to the private law interpretation issue, it is less significant in the case of a Ramsay based analysis. We note in this regard the observation in Ingenious (UT) (at [111]) that a Ramsay analysis might lead to different conclusions on the same facts if there is more than one tax question to answer.

146. We observe also that our conclusion on income is broadly consistent with the approach taken in the Earlier Decisions in determining the expenditure incurred by the Partnership. Although we have arrived at our conclusion for different reasons, there is broad alignment with the approach to the expenditure elements of the Scheme – as both income and expenditure are ignored.

147. We appreciate also that the Appellants’ submissions contradict their submissions in the earlier appeals, another point raised by Ms Nathan. In those appeals the Appellants sought, as a key part of their argument that the Partnership was trading, to characterise the Licence Fees as trading income. This issue was, however, addressed as a case management issue prior to this hearing and here we follow Judge Richard’s Case Management Decision to allow the current arguments to be run notwithstanding the Appellants’ earlier position.

148. Finally, we are of course aware that it is uncommon for a taxpayer to seek to rely on Ramsay – particularly in the context of an avoidance scheme. However, as stated by Andrews LJ in Khan , the Ramsay principles are of general application (see [55]) and so the identity of the party seeking to rely on them is not a determining factor. The application of the principle is driven purely by the statutory provisions in question. Disposition

149. For the reasons given we find that the Licence Fees were not “income” for the purposes of s 683 or s 687 ITTOIA and that consequently neither provision is engaged. The Licence Fees are not, therefore, taxable under those provisions.

150. Given our conclusion that ss 683 and 687 ITTOIA are not engaged, it follows that the Appellants’ further grounds of appeal cease to be relevant. Any discussion of those grounds would, therefore, be obiter and we do not consider them further in this Decision.

151. The Appeal is accordingly allowed Right to apply for permission to appeal

152. This document contains full findings of fact and reasons for the Decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 04 th APRIL 2025