An elaborate tax structure was held by the UK Upper Tribunal (Tax and Chancery Chamber) (UT) to have failed in the long-running case of Acornwood LLP and others v HMRC [2016] UKUT 0361, which had been widely reported in the UK press for its high-profile investors.

The taxpayers in the Acornwood case were members of LLPs, which had entered into arrangements giving rise to a significant accounting loss in each LLP’s first accounting period. The individual members then sought to claim the loss against their own income tax liability. The issue was whether the losses claimed to have been made by the LLPs were allowable trading losses i.e. whether they arise from expenses incurred wholly and exclusively for the purposes of trade.

The principal players in this case were:

(i) the individual taxpayers,

(ii) the LLP of which the individual taxpayers are members of, and whose purpose is to acquire rights and exploit intellectual property (Rights);

(iii) a principal exploitation company (known as Shamrock) which helped the LLP arrange for the exploitation of the Rights;

(iv) a commercial producer (Producer) which actually exploited the Rights.

The facts of the case are briefly as follows. (For ease of explanation and understanding, the figures used in this update are examples and not the actual sums involved.)

Individual taxpayers-LLP

- The individual taxpayers contributed a sum of $100 to the LLP. $20 was from the taxpayers’ own resources and $80 was borrowed from a bank with quarterly interest payable.

- In accordance with its purpose, the LLP acquired Rights for a modest sum. (For example, the LLP acquired from Sinead O’Connor a licence in respect of some 20 songs she had written to enable the LLP to exploit master recordings of these songs.)


- As the LLP did not have expertise to exploit the Rights, it licensed the Rights to Shamrock and entered into agreement for Shamrock to exploit the said Rights to turn it into an end product (for example, by arranging for the production of an album of Sinead O’Connor’s songs).

- Under the agreement, the LLP paid Shamrock a fee of $95 for its services.

- The revenue from the end product was to be shared by the LLP and Shamrock, with Shamrock also being allowed to assign a part of the revenue to third parties.

- Shamrock also agreed to pay the LLP quarterly amounts (which matched the taxpayer’s quarterly interest payments to the bank) and a final minimum sum of $80 (which matched the amount the taxpayer had to repay the bank), secured by a letter of credit.


- Shamrock in turn entered into a production agreement with a Producer to develop the end products from the Rights (for example, by producing the Sinead O’Connor album).

- Shamrock paid the Producer $90 under the production agreement for its services.

- At the same time, the Producer and Shamrock entered into a separate agreement called Assignment of Revenues Agreement whereby the Producer paid Shamrock $80 in return for a grant by Shamrock to the Producer of a percentage of the revenues it would receive from the exploitation of the Rights. (For example, Shamrock granted the Producer 50% of the revenues it would receive from its exploitation of the Sinead O’Connor album.)

- The net result was that Shamrock parted with and the Producer received only $10.


- Shamrock, which now held $85, paid $80 into an interest-bearing blocked account with a bank to obtain the letter of credit it required to secure the payment of the quarterly sums and final minimum sum to the LLP.

- The interest earned by Shamrock from the blocked account was paid to the LLP quarterly, to match the interest which the taxpayer had to pay the bank on the $80 loan taken out by the taxpayer.

LLP-Individual taxpayer

- The LLP then claimed a deduction of the $100 it had paid out as an expense, such that it ended up with a substantial loss in its first accounting year.

- The individual taxpayer used the loss to claim against his personal income tax liability.

The HMRC disputed that the sum of $80 (part of the $95) paid by the LLP to Shamrock (which matched the final minimum sum payable by Shamrock back to the LLP) was deductible as an expense incurred wholly and exclusively for the purposes of the trade.

The UT agreed with the First-Tier Tribunal (FTT), who had earlier found against the taxpayers, that the taxpayers’ borrowing of $80 had no commercial reason behind it at all and was not paid by the LLP to Shamrock for the purposes of its trade (i.e. to exploit Rights).

The only cash that Shamrock needed in order to enter into the production agreements and the Assignment of Revenues Agreement was $10 (which is the difference between the $90 payable to the Producer under the production agreement and the $80 it received back from the Producer under the Assignment of Revenues Agreement). As such, the LLP did not need to pay Shamrock $95 at all. Shamrock could have carried out all its activities having received only $15 from the LLP.

The $80 was not, and could not be, used in the exploitation of the Rights (which was the LLP’s trade) and the borrowing was an arrangement with no commercial but only a tax purpose to artificially multiply the LLP’s losses.

The UT also agreed with the FT that purpose of the LLP in paying the $80 of the $95 to Shamrock was to secure the guaranteed income stream to pay the quarterly interest due from the taxpayers to the bank. This however was not a trading purpose as the LLP’s business was the exploitation of Rights and not the acquisition of a guaranteed income stream.

Editorial Note

This case which is touted as a great success for the HMRC is a reminder that in tax planning, economic substance is paramount. It was precisely the lack of substance in the $80 borrowing that resulted in the defeat of the entire structure.

An interesting exercise for the Singapore practitioner is to consider these transactions in the light of our Section 33 of the Income Tax Act.

We will share our analysis of this case in the context of Section 33 in a lead article in our next issue.