UK and International Tax news

SC Judgment In Tower MCashback Case

Monday 13th June 2011

The Supreme Court has recently issued its judgment in CIR v Tower MCashback LLP1 and another [2011 – UKSC19]  and found that first year allowances were only available on 25% of the expenditure incurred by the taxpayer in acquiring software. The remaining expenditure, being financed by way of limited recourse loans was held not paid to acquire the software and did not qualify for allowances.

MCashback had originally developped software which it wanted to exploit and raised finance with the help of Tower Finance and two banks based in the Channel Islands.  Two LLPs were formed to acquire licences over part of the software, with individual investors in the LLPs contributing 25% of the costs of the software and Tower Finance providing 75% to the LLPs by way of non recourse loans.

In the original appeal to the Special Commissioners in 2008, it was held that entitlement to allowances was only on 25% of the expenditure incurred.  The High Court and Court of Appeal both disagreed with this decision and held the the taxpayers were entitled to allowances on the full 100% purchase price.

 In the Supreme Court, there were two remaining issues on which appeals were heard. The first covered a procedural issue involving the adequacy or otherwise of the closure notice issued by HMRC. The second and main issue related to whether the individuals entitled to first year allowances on 100% or 25% of the purchase price.

With detailed references to the cases of W T Ramsay [1981 – STC174], Ensign Tankers (Leasing) Ltd [1992 – STC226] and Barclays Mercantile Business Finance Ltd [2005 –STC1], their Lordships [seven rather than the customary five] examined the purpose of the expenditure,  structure and financing in detail.

It was held that the LLP did not spend all of the finance received from the individual investors and Tower Finance [plus the banks] in acquiring the software rights from MCashback, as it was obliged to deposit 82% of the total price paid as indirect securtity for the borrowing of the LLP.

Overall the 25% of the purchase price which was funded by the individuals was incurred on the provision of the software and allowances were only available on this amount.

If you would like further information on this case, please contact Keith Rushen on 0044 (0)20 7486 2378.

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