The Vaccine Research Limited Partnership & Anor v Revenue And Customs

Factual and Procedural Background

This appeal arises from disputes concerning the tax treatment of capital allowances and income tax relief related to research and development expenditure incurred by a limited partnership ("the Partnership") and one of its partners ("the Partner"). The Partnership engaged in funding vaccine research through a complex financing structure involving multiple entities, including a special purpose vehicle and a biotechnology company conducting the research ("The Company").

The primary issues concern whether the Partnership was carrying on a trade, the amount of qualifying expenditure on research and development, whether the trade was conducted on a commercial basis and within the United Kingdom, and the deductibility of interest and fees associated with the financing arrangements.

The First-Tier Tribunal ("FTT") made findings on these issues, with appeals and cross-appeals brought by both the Partnership and the tax authorities ("the Respondents"). The Upper Tribunal reviewed the FTT's factual findings and legal conclusions.

Legal Issues Presented

1. Whether the Partnership was carrying on a trade ("the trade issue").
2. If trading, what was the quantum of the Partnership's qualifying expenditure on research and development ("the quantum issue").
3. Whether the Partnership's trade was conducted on a commercial basis ("the commercial basis issue").
4. Whether the Partnership's trade was carried on at least partly within the United Kingdom ("the trade location issue").
5. Whether interest payable on borrowings by the partners to fund their capital contributions to the Partnership was eligible for income tax relief ("the interest relief issue").
6. Whether a fee paid by the Partnership for services was deductible from its trading profits ("the fee deductibility issue").

Arguments of the Parties

Appellants' Arguments

• The Partnership and the Partner contended that the Partnership was carrying on a trade through funding and monitoring the research activities of The Company.
• They argued that the full amount paid by the Partnership under the Research Agreement, including the contribution from the special purpose vehicle, constituted qualifying expenditure on research and development.
• The Partner claimed that all borrowings used to fund contributions to the Partnership were wholly for the purposes of the Partnership's trade, entitling him to full interest relief.
• Regarding the fee deductibility issue, the Appellants suggested that an apportionment of the fee between trade and non-trade purposes was possible and should be considered.

Respondents' Arguments

• The Respondents challenged the finding that the Partnership was carrying on a trade, arguing that the funding and monitoring activities were investment rather than trading activities.
• They disputed that the full £193 million paid under the Research Agreement was qualifying expenditure, contending that only the £14 million paid to The Company for actual research and development qualified.
• The Respondents argued that the trade was not conducted on a commercial basis, citing uncommercial elements of the Scheme including the inflated price under the Research Agreement and late additions to the research scope.
• They contended that the trade was carried on wholly outside the United Kingdom, limiting the availability of sideways loss relief.
• On interest relief, they submitted that only the proportion of borrowings funding the trading activities qualified for relief, excluding amounts related to non-trading financing arrangements.
• They argued that the fee paid for services was not wholly and exclusively incurred for the Partnership's trade and thus was not deductible.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed factual and legal analysis, beginning with the financing structure ("the Scheme") underpinning the Partnership's activities. It examined the flow of funds, the contractual arrangements, and the nature of the research and development conducted by The Company.

On the trade issue, the court found that the Partnership was carrying on a trade to the extent that it funded and monitored The Company's genuine research activities. It rejected the Respondents' argument that these activities were merely investments, emphasizing the presence of commercial obligations, customers (the Partnership as counterparty), and the expectation of reward through royalties.

Regarding the quantum of qualifying expenditure, the court endorsed the FTT's approach of dissecting the total sums paid by the Partnership (£193 million) to identify what was genuinely expended "on" research and development. It upheld the exclusion of the contribution by the special purpose vehicle as not representing new money and the exclusion of sums used in a self-contained financing arrangement to generate guaranteed licence fees, finding only £14 million was qualifying expenditure actually spent on research and development.

On the commercial basis issue, the court accepted the FTT's finding that the trade was conducted commercially, noting that the activities were serious and had a reasonable expectation of profit, despite some uncommercial elements and late additions to the research scope.

For the trade location issue, the court found that the Partnership's trade was at least partly conducted in the United Kingdom, as the relevant activities involved funding and monitoring research carried out in the UK, and control or oversight exercised in the UK sufficed to locate part of the trade there.

Concerning the interest relief issue, the court held that only the proportion of borrowings used to fund the trading activities (the £14 million spent on research and development) qualified for relief. Borrowings funding the non-trading financing arrangement did not qualify.

Finally, on the fee deductibility issue, the court accepted the FTT's finding that the fee paid for services was not wholly and exclusively incurred for the Partnership's trade because it related to both trade and non-trade activities, and the fee was not severable. Accordingly, the fee was not deductible.

Holding and Implications

DISMISSED

The court dismissed all appeals and cross-appeals. It upheld the FTT's findings that the Partnership was carrying on a trade limited to funding and monitoring genuine research activities, that only £14 million of expenditure qualified as research and development expenditure, and that the trade was conducted on a commercial basis and partly within the United Kingdom. Interest relief was limited to borrowings funding the trading activities, and the fee paid for services was not deductible.

This decision directly affects the parties by affirming the limitations on qualifying expenditure and relief claims but does not establish new legal precedent beyond applying existing principles to the facts. The court emphasized the importance of detailed factual analysis in determining qualifying expenditure and the nature of trading activities for tax purposes.