Second Icebreaker LLP scheme loses at tribunal

Thursday, 15 May 2014
Last week’s tribunal victory for HM Revenue & Customs in the Icebreaker tax planning case has attracted much media attention because some participants were former members of a popular boy band.

The scheme’s users contributed borrowed capital to more than 50 private equity funds that invested in the music industry – collectively called the Icebreaker Partnerships. The partnerships’ accounts showed big trading losses, the idea being that the scheme members would use these losses to claim tax relief on their other income. In the meantime, the arrangements provided the members with guaranteed returns so that they could repay their secured borrowings.

In total, they claimed of GBP336 million tax relief on the combined losses – far more than the cash they actually contributed to the investments.

As with many such arrangements, HMRC challenged the relief claims on the grounds that the Icebreaker partnerships were not really carrying on a trade.

Because of the complexity of the scheme, the First Tier Tax Tribunal’s judgment in the case runs to over 500 paragraphs. Briefly, the tribunal judge Colin Bishopp decided that the partnerships were indeed trading in music and other rights. But their accounts had been incorrectly drawn up, in that the amounts contributed by the members were shown as being used to pay the trade’s revenue expenses. In fact they were being used to buy the capital assets, and thus were not eligible for sideways relief claims against other income. Moreover, Bishopp decided, the losses claimed were greatly overstated.

The Icebreaker funds did in fact incur some genuine trading losses, and the scheme members tried to claim those, at least, against their other income. But Bishopp refused this too. He decided that the trades were not being run on a commercial for-profit basis and none of the members was an ‘active partner’.

Moreover, he said, the main purpose of the arrangements was tax planning by securing sideways relief. Thus, even if the scheme had succeeded on other grounds, some of the relief would have been disqualified by section 74ZA of the Income Tax Act 2007, an anti-avoidance measure that took effect in October 2009 before some of the Icebreaker partnerships were set up (Acornwood LLP and others v HMRC, 2014 UKFTT 416 TC).

The participants can still appeal to the Upper Tribunal. But according to BKL Tax, the case will probably go no further, given the Upper Tribunal’s decision in the closely-related Icebreaker 1 case in 2011.


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