In Hamilton & Kinneil (Archerfield) Ltd and others v HMRC7, the First-tier Tribunal (Tax Chamber) (FTT) held that a company which had not made a cash capital contribution to a limited liability partnership could nonetheless claim loss relief against its other profits in respect of losses incurred by the limited liability partnership.
The Renaissance Club at Archerfield LLP (the LLP) was established to develop and run a golf course and related hospitality business. The two members of the LLP were Hamilton & Kinneil (Archerfield) Ltd (HKA) and a Delaware limited liability corporation representing the interests of American investors called Invest Archerfield LLC (IA).
The initial cash contribution into the LLP of $8m was made wholly by IA. However, under an LLP agreement dated 1 April 2005 (the LLP Agreement), the members’ respective shares in the LLP were expressly agreed to be 66.66% as to IA, and 33.34% as to HKA.
The LLP made substantial trading losses in its early years. HKA claimed loss relief against its general trading profits in respect of its 33.34% share of these losses in accordance with the relevant statutory provisions in force at the time, namely, sections 118 and 118ZC, Income and Corporation Taxes Act 1988 (ICTA). HKA’s claims amounted to loss relief of approximately £806,000 and £835,000 for its accounting periods ended February 2008 and 2009 respectively, the majority of which it had surrendered to its two corporate parent companies (which each owned 50% of HKA).
HMRC disallowed HKA’s loss claims, concluding that it was able to do so given that HKA had not made a cash contribution to the LLP. HKA appealed to the FTT.
Unusually, the FTT’s decision was made by majority (with the chairman, Judge Raghaven, having the casting vote) and a dissenting view was also published.
The key part of the dispute centred on the interpretation of the following parts of section 118ZC, ICTA:
- “ … for the purposes of ... section 118, such a member’s contribution to a trade at any time is the greater of (a) the amount subscribed by [it], and (b) the amount of [its] liability on a winding-up.
- The amount subscribed by a member of a limited liability partnership is the amount which [it] has contributed to the limited liability partnership as capital…
- The amount of the liability of a member of a limited liability partnership on a winding-up is the amount which … [it] is liable to contribute to the assets of the limited liability partnership in the event of [the partnership] being wound up … ”.
In the FTT’s majority view, HKA’s share in the LLP was something of value, given that it would be used to satisfy creditors in any winding up. In addition, the terms “contribute” and “liable to contribute”, within section 118ZC, should be given their ordinary meanings. The FTT found it arbitrary and irrational to interpret section 118ZC as meaning that the extent of the contribution should be the greater of two mutually exclusive amounts when the member’s true exposure was to the sum of the two (as was clear from the explanatory note to section 118ZC(3)). It therefore found that the contribution test under section 118ZC was satisfied and that HKA was entitled to claim loss relief in the amounts it had.
In his dissenting decision, the lay member of the FTT (Richard Law), said that the mere fact that his interpretation of ICTA gave an illogical result (in that it treated the initial contribution and any contribution on a winding-up as alternative, rather than cumulative, amounts to be considered) did not necessarily mean that it was incorrect. In his view, the fact that no money actually passed between HKA and the LLP was key. He also considered that the explanatory note to section 118ZC incorrectly interpreted the legislation and corresponded to a version of the legislation that had been contemplated but rejected as open to abuse.
The dissenting view appears to have been based on a more literal interpretation of the substantive provisions of the relevant legislation, whereas the majority decision relied upon the explanatory note and adopted a pragmatic and common sense approach to interpretation. It is also noteworthy that the current iteration of the legislation (sections 59-61, Corporation Tax Act 2010) is in accordance with the FTT’s majority view.
Given the uncertainty around this issue and the FTT’s failure to reach a unanimous decision, it is likely that HMRC will seek to appeal this decision to the Upper Tribunal. In the meantime, we are left with an FTT decision which in many respects raises more questions than it answers.
To read the decision click here.