Information notices and application for a closure notice
Our pick of this week's cases
In Eastern Power Networks and others v HMRC [2017] UKFTT 494 (13 June 2017), the FTT ordered HMRC to issue closure notices even though the taxpayers had not complied with information notices.
The appellant companies had all applied for closure notices in relation to enquiries into their claims for consortium relief and HMRC had issued information notices. For consortium relief purposes, Devin, CKI1 and Eagle were all members of a consortium, as between them they owned UKPNHL. The surrendering company was Hutchison 3G and the link company was CKI1. Devin was owned by HEH; and CKI1 was owned by CKI2, itself owned by CKI3.
The consortium had completed the acquisition of a business and was restructured. As part of the restructuring, the articles of association of UKPNHL were amended so that: the CKI companies had 74.6 % of the voting rights; the threshold to pass shareholder resolutions was increased to 75%; and CKI13 and HEH entered into a voting agreement by which CKI3 contracted not to exercise its vote without the consent of HEH.
The taxpayers argued that the information requested by HMRC in the notices was not relevant to their consortium relief claims, so that it did not have reasonable grounds for pursuing this information and should have closed the enquiry.
The substantive issue was whether the conditions for consortium relief were satisfied. The tribunal noted that ss 144 and 155 require the mechanical application of a series of arithmetical tests to a series of prescribed relationships between the link company and the claimant company. The issue was whether the voting agreement deprived CKI3 of its voting power, so that the CKI companies no longer held 74.6% of the voting rights. The FTT thought that this was not the case. In any event, the continuing enquiries set out in the information notices were not reasonably required to ascertain the appellants’ tax position in this respect. The construction of the voting agreement was a question of law, which should be addressed as part of a tax appeal.
Finally, the FTT had to decide whether the questions about the purpose of the transactions constituted reasonable grounds for continuing the enquiry. The tribunal noted that s 146B does include a purpose test; whether the arrangements form part of a scheme the main purpose, or one of the main purposes, of which is to obtain group relief. Whether the purpose test was relevant depended on whether the arrangements were ‘of the relevant sort’. The FTT found that although the arrangements were of the type set out in s 146B(3)(a), they did not have the effect set out in s 146B(2). This was because the relevant arrangement was the increase in the voting threshold to 75% and no person was able to prevent the CKI companies from exercising control over UKPNHL as a result of them.
Why it matters: The amount at stake was more than £300m, ‘with other cases in the pipeline’. HMRC had issued information notices after the appellants had made an application for closure notice. The FTT therefore assumed that the information notices should be taken to include the matters which HMRC considered it needed to conclude its enquiry. The questions raised all related to the purpose of the arrangements put in place by the taxpayers and the FTT found that the arrangements were not of the sort which would make their purpose relevant. This case may therefore be a useful reference when HMRC contends that the taxpayer’s purpose is relevant; this may not always be the case.
Information notices and application for a closure notice
Our pick of this week's cases
In Eastern Power Networks and others v HMRC [2017] UKFTT 494 (13 June 2017), the FTT ordered HMRC to issue closure notices even though the taxpayers had not complied with information notices.
The appellant companies had all applied for closure notices in relation to enquiries into their claims for consortium relief and HMRC had issued information notices. For consortium relief purposes, Devin, CKI1 and Eagle were all members of a consortium, as between them they owned UKPNHL. The surrendering company was Hutchison 3G and the link company was CKI1. Devin was owned by HEH; and CKI1 was owned by CKI2, itself owned by CKI3.
The consortium had completed the acquisition of a business and was restructured. As part of the restructuring, the articles of association of UKPNHL were amended so that: the CKI companies had 74.6 % of the voting rights; the threshold to pass shareholder resolutions was increased to 75%; and CKI13 and HEH entered into a voting agreement by which CKI3 contracted not to exercise its vote without the consent of HEH.
The taxpayers argued that the information requested by HMRC in the notices was not relevant to their consortium relief claims, so that it did not have reasonable grounds for pursuing this information and should have closed the enquiry.
The substantive issue was whether the conditions for consortium relief were satisfied. The tribunal noted that ss 144 and 155 require the mechanical application of a series of arithmetical tests to a series of prescribed relationships between the link company and the claimant company. The issue was whether the voting agreement deprived CKI3 of its voting power, so that the CKI companies no longer held 74.6% of the voting rights. The FTT thought that this was not the case. In any event, the continuing enquiries set out in the information notices were not reasonably required to ascertain the appellants’ tax position in this respect. The construction of the voting agreement was a question of law, which should be addressed as part of a tax appeal.
Finally, the FTT had to decide whether the questions about the purpose of the transactions constituted reasonable grounds for continuing the enquiry. The tribunal noted that s 146B does include a purpose test; whether the arrangements form part of a scheme the main purpose, or one of the main purposes, of which is to obtain group relief. Whether the purpose test was relevant depended on whether the arrangements were ‘of the relevant sort’. The FTT found that although the arrangements were of the type set out in s 146B(3)(a), they did not have the effect set out in s 146B(2). This was because the relevant arrangement was the increase in the voting threshold to 75% and no person was able to prevent the CKI companies from exercising control over UKPNHL as a result of them.
Why it matters: The amount at stake was more than £300m, ‘with other cases in the pipeline’. HMRC had issued information notices after the appellants had made an application for closure notice. The FTT therefore assumed that the information notices should be taken to include the matters which HMRC considered it needed to conclude its enquiry. The questions raised all related to the purpose of the arrangements put in place by the taxpayers and the FTT found that the arrangements were not of the sort which would make their purpose relevant. This case may therefore be a useful reference when HMRC contends that the taxpayer’s purpose is relevant; this may not always be the case.
