Clavis Liberty 1 LP v Revenue and Customs (INCOME TAX/CORPORATION TAX : Anti-avoidance)

Factual and Procedural Background

This appeal concerns a dispute between a limited partnership ("the Partnership") and the tax authorities ("HMRC") regarding the tax treatment of a £60 million dividend paid to the Partnership by a Cayman Islands incorporated company ("Helios"). The Partnership claimed a trading loss based on the application of section 730 of the Income and Corporation Taxes Act 1988 ("ICTA"), contending that the dividend should be treated as the income of another company ("Dickens") that sold the rights to receive the dividend without transferring the shares. HMRC disputed this interpretation.

The Partnership was established in Jersey in March 2006 with the stated purpose of making a profit principally through trading in short-dated financial instruments, including dividend rights. Over 100 individuals subscribed capital to the Partnership, substantially funded by loans from a financial institution ("SGHCI"). The Partnership undertook various short-term financial transactions, including the purchase of US Treasury Bills, commercial paper, and the rights to Helios dividends.

The key transaction involved the Partnership purchasing rights to interim dividends declared by Helios from Dickens, funded by loans and capital contributions. The dividend payment was then used in a circular flow of funds involving the Partnership, Dickens, Helios, and the lenders, with the limited partners ultimately losing their personal capital contributions. The Partnership claimed that these arrangements constituted trading and gave rise to a trading loss for tax purposes.

The procedural history includes the issuance of a closure notice by HMRC in 2013, reducing the Partnership's claimed trading loss to nil. The appeal was heard by the First-tier Tribunal in March 2015. Attempts to obtain evidence from certain administrators were unsuccessful, with the Upper Tribunal ruling that the Tribunal lacked jurisdiction to summons them.

Legal Issues Presented

1. Was the Partnership carrying on a trade during the accounting period ending 5 April 2006?
2. Were the transactions by which the Partnership arranged to receive the Helios dividends trading transactions?
3. Does section 730 ICTA have the effect claimed by the Partnership, namely deeming the dividend income to belong to Dickens and excluding it from the Partnership's income?
4. Were the tax advisory fees paid to Mercury Tax Strategies Limited deductible as trading expenses?

Arguments of the Parties

Appellant's Arguments

• The Partnership contended that it was carrying on a trade of dealing in short-dated securities, supported by evidence of an organised and systematic business strategy and expert testimony.
• The acquisition and receipt of the Helios dividends were trading transactions consistent with the Partnership's overall trading activities.
• Section 730 ICTA should apply to treat the dividend income as that of Dickens, not the Partnership, thereby excluding it from the Partnership's income and enabling the claimed trading loss.
• The tax advisory fees paid to Mercury were wholly and exclusively incurred for the purposes of the Partnership's trade and thus deductible.
• Reliance was placed on authorities affirming that a tax avoidance motive does not preclude a transaction from being a trading transaction, including Lewis Emanuel & Son Ltd v White, Cooper v Clark, Ensign Tankers, and Bupa Insurance Ltd v Revenue and Customs Commissioners.

Respondents' Arguments

• HMRC submitted that the Partnership was investing, not trading, in short-dated securities, noting minimal risk, holding to maturity, and the absence of speculative dealing.
• The transactions involving the Helios dividends were artificial, not trading transactions, and formed part of a tax avoidance scheme.
• Section 730 ICTA does not have the effect claimed by the Partnership; it attributes the dividend income to the owner of the shares (Dickens) but does not exclude the Partnership from also being taxed on the dividend.
• The tax advisory fees paid to Mercury were not deductible as they related to non-trading, tax avoidance transactions.
• HMRC relied on the Ramsay principle to argue that the relevant transactions were a single composite transaction lacking commercial reality.
• Authorities cited included Eclipse Film Partners LLP v Commissioners for HMRC, Clarke v British Telecom Pension Scheme, Lupton, and R v Dimsey.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Lewis Emanuel & Son Ltd v White (1965) 42 TC 369	Trade is a question of fact and degree; evaluation of evidence is required to determine if an activity is a trade.	Supported the approach that the Partnership's activities could be trading based on factual findings.
Cooper v Clark [1982] STC 335	Trade encompasses every trade, manufacture, adventure or concern in the nature of trade.	Reinforced the broad interpretation of trade relevant to the Partnership's activities.
IRC v Livingston (1926) 11 TC 538	Test for trade is whether operations are of the same kind and carried on in the same way as ordinary trading in that line of business.	Applied to assess whether the Partnership's activities were trading.
Ransom v Higgs [1974] STC 539	Guidance on assessing whether activities amount to trade.	Used to support the factual analysis of the Partnership's activities.
FA and AB Ltd v Lupton [1972] AC 634	Transactions may be so affected by fiscal considerations that they cease to be trading transactions.	Applied to determine that the Helios dividend transactions were not trading transactions.
Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655	Tax avoidance motive alone does not preclude a transaction from being trading.	Considered but distinguished due to artificiality of the Helios transactions.
New Angel Court Ltd v Adam (HMIT) [2004] STC 779	Confirmed that tax advantage motive does not negate trading status.	Referenced in submissions; court found Helios transactions artificial.
Coates v Arndale Properties Ltd [1984] STC 637	Artificial profit can give a transaction a commercial appearance (verisimilitude).	Used to highlight the artificial nature of the Helios dividend profit.
W T Ramsay Ltd v IRC [1981] STC 174	Composite transactions intended to operate as a whole can be treated as such for tax purposes.	Applied to treat the Helios dividend arrangements as a single composite transaction lacking commercial effect.
Marshall (HMIT) v Kerr [1993] STC 360	Construction of deeming provisions; consequences flowing from deemed states of affairs.	Discussed in relation to section 730 ICTA's interpretation.
R v Dimsey [2001] STC 1520	Deeming provisions refer to transferor's position; removal of protection against double taxation.	Supported HMRC's interpretation that section 730 ICTA does not exclude taxing the transferee.
UBS AG v Commissioners for HMRC [2016] UKSC 13	Tax exemption provisions should not apply to artificial transactions lacking commercial purpose.	Supported the court's view that section 730 ICTA should not apply to the artificial Helios transactions.
Eclipse Film Partners LLP v Commissioners for HMRC [2015] EWCA Civ 95	Proper characterisation of business depends on the totality of activity and enterprise.	Referenced in HMRC submissions on characterisation of the Partnership's activities.
Clarke v British Telecom Pension Scheme [2000] STC 222	Frequency and organisation alone do not determine trading versus investing.	Used to argue that the Partnership's activities were consistent with investment.
Vestey v IRC [1980] AC 1148	Presumption against double taxation.	Referenced by the Partnership in support of their interpretation of section 730 ICTA.

Court's Reasoning and Analysis

The Tribunal first considered whether the Partnership was carrying on a trade. Applying established tests, including the Livingston test, the court found that the Partnership’s acquisitions of short-dated securities (excluding the Helios dividend rights) were consistent with trading activities as understood in the relevant markets. Although the transactions were low risk and held to maturity, these characteristics did not preclude trading. The subjective intention of the Partnership, evidenced by the Limited Partnership Agreement and Information Memorandum, was to trade rather than invest.

Regarding the specific transactions involving the Helios dividends, the Tribunal found them to be artificial and not trading transactions. Applying principles from Lupton and the Ramsay principle, the Tribunal concluded that the composite nature and circular money flows demonstrated that these transactions were contrived for tax avoidance and lacked commercial substance. The artificial profit made was insignificant and funded by limited partners’ contributions, reinforcing this conclusion.

On the interpretation of section 730 ICTA, the Tribunal accepted HMRC’s submission that the provision attributes dividend income to the owner of the shares but does not exclude the transferee from taxation. The removal of subsection (1)(c) by subsequent legislation indicated Parliamentary intent to allow the income to be taxed on more than one person in certain circumstances. The Tribunal applied a purposive construction of the statute, supported by authority including R v Dimsey and UBS AG v HMRC, concluding that section 730 ICTA does not have the effect claimed by the Partnership.

Finally, as the Helios dividend transactions were not trading transactions, the tax advisory fees related to those transactions were not deductible as trading expenses.

Holding and Implications

The Tribunal DISMISSED the appeal.

The decision means the Partnership’s claim to exclude the Helios dividends from its income under section 730 ICTA was rejected, resulting in the denial of the claimed trading loss. The fees paid for tax advice related to the non-trading transactions were also disallowed as deductions. The ruling clarifies that artificial tax avoidance schemes relying on contrived transactions will not be upheld under section 730 ICTA, and that the removal of subsection (1)(c) permits income to be taxable on both transferor and transferee in certain contexts. No new precedent was established beyond the application of existing legal principles to the facts of this case.