Inverclyde – Enquiry into LLP returns invalid as opened under incorrect statutory provisions

In Inverclyde and another v HMRC [2019] UKFTT 0408 (TC), the First-tier Tribunal (FTT) has held that enquiries opened, and closure notices issued, to LLPs  were invalid as HMRC should have enquired into the LLPs' returns under paragraph 24, Schedule 18, Finance Act 1998 (FA 1998) and not section 12AC, Taxes Management Act 1970 (TMA).

Background

Inverclyde Property Renovation LLP and Clackmannanshire Regeneration LLP (the LLPs) submitted partnership returns to HMRC which included claims for Business Property Renovation Allowance (BPRA). 

HMRC opened enquiries into the LLPs under section 12AC, TMA, and on 24 February 2017 issued closure notices to the LLPs, pursuant to sections 28B(1) and (2), TMA.  The closure notices denied the LLPs' claims for BPRA on the basis that the LLPs did not carry on a business with a view to profit and therefore  the activities were to be treated as carried on by the LLPs themselves, rather than by their members (section 863(1) Income Tax (Trading and Others Income) Act 2005 (ITTOIA)). 

The LLPs appealed on the basis that they did carry on a business with a view to profit.  

FTT decision

The appeals were allowed.

The LLPs brought as a preliminary issue an amended ground of appeal, namely, that in accordance with the decision of the Court of Session in Spring Salmon and Seafood Limited, Re Petition for Judicial Review [2004] Scot CS, 39, HMRC had no power to open an enquiry into their returns under section 12AC, TMA, and therefore the closure notices issued under section 28B, TMA, were invalid.  

The LLPs argued that the enquiries into their returns should have been made under paragraph 24, Schedule 18, FA 1998 (the corporation tax self-assessment provisions) and if HMRC wanted to challenge the relevant return of any of the LLPs' members it should have opened an enquiry into those members' own returns under section 9A, TMA. 

HMRC argued that the carrying on by a LLP of a business with a view to profit is a requirement for the tax transparent treatment of a LLP under section 863, ITTOIA, and that the LLPs' principal contention on the merits of the appeal is that they were carrying on business with a view to profit.  HMRC's principal contention on the merits of the appeal was that the LLPs were carrying on a business with a view to profit.  The LLPs were thus to be treated as transparent for tax purposes and as a result the LLPs, being bodies corporate for the purposes of section 112A, Corporation Tax Act 2010, should have submitted company tax returns.  Having received a partnership return from each of the LLPs, HMRC was entitled to open an enquiry under section 12A, TMA, and to issue a closure notice under section 28B, TMA.

The FTT considered the deeming provisions in section 863, ITTOIA, in respect of the LLPs carrying on a business with a view to profit.  LLPs are body corporates and liable for corporation tax, subject to the deeming provisions in section 863 in respect of income tax.  Under section 863(1), where an LLP carries on a business with a view to profit, the activities of the LLP are treated as carried on in partnership by its members.  In such circumstances, the LLPs should pay tax as if they were partnerships rather than companies, and any reliefs should be applied to their members' tax liabilities.  

However, in the view of the FTT, in either case, for tax administration purposes, the LLPs were companies because the deeming provisions in section 863, ITTOIA, do not apply to the TMA.  The LLPs therefore revert to the default position of being bodies corporate, under section 1(2), Limited Liability Partnership Act 2000.  This was because section 863(2) (treatment of LLPs as partnerships) applies for the purposes of the 'Income Tax Acts'.  The FTT followed Spring Salmon (which it considered binding on it) and held that 'Income Tax Acts' did not include the TMA.  As such, the deeming provisions did not apply to the TMA and the LLPs were to be treated as body corporates liable to corporation tax for the purpose of tax administration.    

HMRC was therefore wrong to open the enquiries into the LLPs' returns under section 12AC, TMA, and to issue closure notices under section 28B, TMA.  The LLPs were to be treated as body corporates, governed by paragraph 24, Schedule 18, FA 1998.  If HMRC wanted to challenge the relevant return of any of the LLPs' members they should have opened an enquiry into those members' own returns under section 9A, TMA. 

The FTT also confirmed that the LLPs were not prevented from challenging the notices of enquiry and closure notices even though they had submitted partnership returns, accepted the notices of enquiry and sought closure notices under section 28B, TMA. 

Accordingly, the closure notices were invalid and the case was struck out under Rule 8(2)(a) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  

Comment 

This case is yet another example of HMRC seeking to exercise its statutory enquiry powers in the wrong context (see, for example, Patel v HMRC [2018] UKFTT 0185 (TC)).  The LLPs' case did not rely on any lacuna in the legislation.  This was simply a case of HMRC failing to follow the correct procedural course of action.

Further, taxpayers will not be prevented from challenging the procedural course adopted by HMRC simply because they have accepted incorrectly issued notices of enquiry. 

The decision can be viewed here.