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Ensign flashback setback for MCashback

The Supreme Court has recently released its judgement in the case of Tower MCashback. Not only is it bad news for the many high-profile investors involved in the scheme (one of the drawbacks of tax schemes using membership of LLPs is that the identity of participants is a matter of public record!); it will also make for far from happy reading for promoters and users of other structured tax avoidance products which rely on limited recourse loans to multiply tax relief.

To expect to do justice in a couple of paragraphs to the 42 pages of legal analysis contained in the decision would be wildly optimistic, but let’s try. Investors bought assets on which capital allowances were claimable. For each pound of expenditure they put in 25p of their own money and borrowed 75p on non-recourse terms. The 75p was (in effect) placed on deposit by the vendor as security for the investors’ loans. And the investors claimed tax relief on the basis that they had paid £1 for the assets.

HMRC suggested that the reality was that the amount the investors had paid for assets was the 25% they had actually contributed and not the 75% they might never have to pay. The Supreme Court held in favour of HMRC and in doing so restored authority to the decision in Ensign Tankers, which was widely (though, it now seems, incorrectly) thought to have been over-ruled – or at least severely undermined – by the later Barclays Mercantile Finance case.

Ensign and Barclays were both cases in which, very broadly, assets were acquired with limited- or non-recourse finance and the MCashback case does much to explain and rationalise the apparently conflicting decisions in these earlier cases. It is now clear that the simple rule in such cases is that there is no simple rule – in every case it is necessary to examine the facts and the surrounding circumstances and to establish as a matter of fact whether the full amount claimed was in reality "paid". Different facts may lead to different decisions.

Two quotes are telling, both by Lord Walker:

"there was a loan but there was not, in any meaningful sense, an incurring of expenditure of the borrowed money in the acquisition of software rights. It went into a loop in order to enable the LLPs to indulge in a tax avoidance scheme."

"it is to be expected that commentators will complain that this Court has abandoned the clarity of BMBF and returned to the uncertainty of Ensign. I would disagree. Both are decisions of the House of Lords and both are good law. The composite transactions in this case, like that in Ensign (and unlike that in BMBF) did not, on a realistic appraisal of the facts, meet the test laid down by the CAA, which requires real expenditure for the real purpose of acquiring plant for use in a trade. Any uncertainty that there may be will arise from the unremitting ingenuity of tax consultants and investment bankers determined to test the limits of the capital allowances legislation."

For more, please contact help@bkltax.co.uk.