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Note: Acornwood LLP, Bastionspark LLP, Edgedale LLP, Starbrooke LLP, and Hawksbridge LLP (Partnerships/Beneficiaries) were “Icebreaker Partnerships”1 formed to acquire and develop intellectual property rights that they licensed from a creator. Partnerships/Beneficiaries borrowed approximately 80 percent of its capital from a lending bank and the remaining 20 percent from the contributions of the partners.

Subsequently, Partnerships/Beneficiaries entered a Principal Exploitation Agreement with the principal exploitation company, Shamrock Solutions Ltd. (Developer/Applicant) in this case. Under the agreement, Developer/Applicant was paid 95 percent of Partnerships/Beneficiaries’ capital to arrange production of the intellectual property and Developer/Applicant deposited 80 percent of the partnership capital that had been received into a blocked account to induce Barclay’s Bank (Issuer) to issue a direct pay standby in favor of Partnerships/Beneficiaries. Developer/Applicant obtained a standby from Issuer in favor of Partnerships/Beneficiaries, but it was never drawn on. Issuer held the cash deposit and paid Partnerships/Beneficiaries the interest earned on the deposit each quarter, which was an amount equal to the quarterly fees due under the standby.

Developer/Applicant then entered into two agreements with a production company to develop the licensed intellectual property. Under the agreements, Developer/Applicant ultimately paid the production company 15 percent of the funds it had received from the Partnership to develop the product. Partnerships/Beneficiaries claimed significant trading losses in the first year, including the 80 percent out of the 95 percent of the partnership capital paid by the Partnerships/Beneficiaries to Developer/Applicant.

The English government sued Partnerships/Beneficiaries claiming that the 80 percent of the partnership capital paid to Developer/Applicant and put into a blocked account was not an allowable trading loss. The First-Tier Tribunal, Bishopp, J., ruled against the Partnerships/Beneficiaries, ruling that the 80 percent of capital that was put into a blocked account by Developer/Applicant was not an allowable trading loss. On appeal, the Commissioners for Her Majesty’s Revenue and Customs, Nugee, J., affirmed the decision of the First-Tier Tribunal.

The Judge affirmed the FTT’s ruling that, “the borrowing was an artificial inflation of the apparent size of the amount paid for the exploitation of the intellectual property rights, that is an arrangement with no commercial but only a tax purpose.” Under the Income Tax (Trading and Other Income) Act (ITTOIA), this factual conclusion barred Partnerships/Beneficiaries losses from qualifying as allowable trading losses.

[CEF]

1
The First-tier Tribunal described the tax avoidance scheme used by the LLP’s as “Icebreaker Partnerships.” The Partnerships consist of individual members who contribute some of their own money and a large amount of borrowed money to finance creative projects. Subsequently, each Partnership claims trading losses that exceed what they invested.

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