Spc00736

Closure notice – application for direction to close enquiry into tax return – limited liability partnership – s 28B Taxes Management Act 1970 – direction for closure within three months

THE SPECIAL COMMISSIONERS

	ECLIPSE FILM PARTNERS No 35 LLP	Applicant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	EDWARD SADLER

Sitting in public in London on 27 January 2009

Jolyon Maugham, counsel, instructed by DLA Piper UK LLP, for the Applicant

Victoria Wakefield, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction
1.	Eclipse Film Partners No 35 LLP (“the Applicant”) is a limited liability partnership which has entered into certain transactions in relation to the licensing and distribution of film rights, and is subject to an enquiry by The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) into its tax return for the tax year ended 5 April 2007.  The Applicant has applied to the Special Commissioners under section 28B Taxes Management Act 1970 (“TMA 1970”) for a direction that the Commissioners issue a closure notice in relation to that enquiry within a specified period.  The Applicant considers that the Commissioners now have sufficient information to enable them to issue such closure notice.  The Commissioners consider that they require more time to gather and then to consider further information before they are in a position to complete their enquiries and to inform the Applicant of the conclusions they have reached, with any amendments they propose to make to the Applicant’s tax return.
2.	Section 28B TMA 1970 requires that I should give the direction applied for unless I am satisfied that there are reasonable grounds for not issuing a closure notice within a specified period.  Having heard the evidence and the arguments of the parties in a lengthy hearing, I am not satisfied that there are reasonable grounds for not issuing a closure notice, and it is my decision to direct that the relevant officer of the Commissioners issue a closure notice not later than three months from the date on which this decision is released.
The evidence and the facts
3.	I heard evidence from Mr Nicholas John Hagan, an officer of the Commissioners working in the office of the Specialist Investigations team and responsible for the enquiry which is the subject of this application.  Mr Hagan’s evidence was set out in his witness statement which had exhibited to it 35 documents, for the most part correspondence and notes of meetings between the Commissioners and the Applicant’s agent; correspondence and documents relating to notices served on third parties in the UK by the Commissioners under section 20(3) TMA 1970 in relation to the enquiry; and documents relating to an exchange of information request made to the United States Internal Revenue Service.  Mr Hagan gave further evidence-in-chief in reply to questions put to him by Miss Wakefield, who appeared for the Commissioners, and Mr Hagan was cross-examined by Mr Maugham, who appeared for the Applicant.  Some considerable part of the evidence related to the transactions which the Applicant has entered into in relation to film distribution arrangements and the financing arrangements entered into by the members, or partners, of the Applicant to fund their investment in the Applicant.  It is not necessary for the purposes of this application to make detailed findings of fact on such matters, nor is it appropriate to do so since it is possible that at some point and in some guise the substance of such arrangements will be the subject of an appeal to this tribunal.
4.	The following are the outline facts relevant to reaching a decision on the application for a direction as to a closure notice made by the Applicant:
(1)	The Applicant is a limited liability partnership with approximately 240 members, all, or most, of whom are individuals liable to UK income tax.
(2)	Shortly before 5 April 2007 the Applicant entered into a complex series of transactions whereby it obtained a licence from a United States corporation, Walt Disney Company, for a period of 20 years of the rights to distribute two films, and sub-licensed the distribution rights in those films to another Walt Disney entity in the United States, WDPT Film Distribution VIII LLC (“WDPT”).  The Applicant paid Walt Disney Company approximately £500 million as consideration for the licence to distribute the films, and under the sub-licence the Applicant is entitled to receive from WDPT annual fixed royalties and further royalties contingent upon the earnings from the films.  The production costs of the two films are, in aggregate, approximately £79 million.
(3)	The Applicant was financed for these purposes by its members, who contributed capital to the partnership.  Each member financed his capital contributions in part from his own resources but substantially (as to approximately 94 per cent) by undertaking borrowings for that purpose, borrowing under a 20 year facility made available to him by Eagle Financial and Leasing Services (UK) Limited (“Eagle Financial”).  Eagle Financial is a subsidiary company in the Barclays Bank group of companies.  In aggregate the members borrowed approximately £790 million from Eagle Financial.
(4)	Prior to 5 April 2007 the Applicant made a payment (expressed to be by way of loan on account of anticipated profits) to the members of an aggregate amount of approximately £292 million.  The facility with Eagle Financial includes a term requiring the members to make a payment expressed as a pre-payment in respect of interest accruing over the first ten years of the borrowing, and the members made such payment (of an aggregate amount of approximately £292 million) to Eagle Financial, again, prior to 5 April 2007.
(5)	Complex arrangements were put in place to secure the obligations of the various parties.  Barclays Bank plc (“Barclays”) issued a letter of credit supporting the payment by WDPT to the Applicant of the fixed royalties due under the sub-licence, with Walt Disney Company depositing with Barclays approximately £495 million as security for that letter of credit.  The Applicant assigned that letter of credit to Eagle Financial as security for the members’ borrowing.
(6)	The Applicant contracted with a number of other parties for advisory and other services, and in particular with a UK company in the Walt Disney group, WDMSP Limited, which agreed, for a fee, to act as the Applicant’s agent in developing marketing and release plans for the two films in question.
(7)	On 11 September 2007 the Applicant filed its tax return for the tax year ended 5 April 2007.  That return shows no profit and no loss.
(8)	Also on 11 September 2007 the Applicant wrote to the Commissioners with copies of the principal transaction documents relating to the film licensing and distribution arrangements, the marketing and sales documentation whereby the arrangements were proposed to prospective members, the Applicant’s partnership documents, the documents entered into by the members in relation to their membership of the Applicant (including their capital and current accounts with the Applicant) and their borrowings from Eagle Financial, bank statements and other records and documents.
(9)	On 15 October 2007 the Commissioners gave notice under section 12AC TMA 1970 of their intention to enquire into the Applicant’s partnership tax return for the year ended 5 April 2007.  By reason of section 12AC(6) TMA 1970 such notice of enquiry was also treated as the giving of notice of enquiry to each member in relation to his tax return for that year.
(10)	Beginning on 19 October 2007 and until 7 February 2008 there was a series of meetings and correspondence between the Applicant and the Commissioners.  On 14 November 2007 the Applicant provided further documents to the Commissioners, stating that the Commissioners now had the complete “Bible” of documents for the transactions entered into by the Applicant.
(11)	The Commissioners made no further enquiries of the Applicant until 19 September 2008, when they asked the Applicant to provide documents or other evidence as to the information given to the members concerning funding the payment to Eagle Financial expressed to be a pre-payment of interest.  The Applicant replied to this enquiry on 27 November 2008.
(12)	During the period 7 May 2008 to 17 December 2008 the Commissioners issued a series of notices under section 20(3) TMA 1970 to Barclays, Eagle Financial, and Lloyds TSB Bank plc seeking, in the customary wide terms, documents, records and correspondence relating to customers of those banks.  The notices issued to Barclays related to the accounts with that bank of the members and the deposit account which provided security for the letter of credit issued by Barclays in respect of WDPT’s obligations.  The notices issued to Lloyds TSB Bank plc related to the account of the Applicant with that bank.  The notice issued to Eagle Financial related to the facility provided to the members.
(13)	Barclays sought legal advice on the section 20(3) TMA 1970 notices issued to it.  The initial notice of 7 May 2008 was found to be defective, and a further notice was issued by the Commissioners.  Again Barclays sought legal advice as to the validity of that further notice, and this was also found to be defective.  A further (and correct) section 20(3) TMA 1970 notice was issued to Barclays on 13 August 2008.  Barclays complied with that notice on 19 September 2008.  
(14)	On 17 December 2008 the Commissioners issued a further section 20(3) TMA 1970 notice to Barclays.  This related to the arrangements between Barclays and its subsidiary Eagle Financial for the funding of Eagle Financial to enable it to provide the facility to the members, and also requested documents relating to the manner in which the Barclays group treated the various transactions involving the Applicant and its members for its regulatory capital purposes.  The compliance date specified in the notice was 30 January 2009, and as at the date of the hearing of the application (27 January 2009) Barclays had not complied with this latest notice.
(15)	Also on 17 December 2008 the Commissioners issued a section 20(3) TMA 1970 notice to Eagle Financial requiring documents relating to the accounts held by the members of the Applicant with Eagle Financial, the facility extended to them (including fees paid), and the treatment of the facility for regulatory capital purposes by Eagle Financial.  The compliance date specified in the notice was 30 January 2009, and as at the date of the hearing of the application Eagle Financial had not complied with this notice.
(16)	The Commissioners have also made enquiries in respect of the various Walt Disney companies involved in the Applicant’s affairs.  In the case of the UK company, WDMSP Limited (which is contracted to act as agent of the Applicant in relation to marketing services) the Commissioners sent a precursor letter to a section 20(3) TMA enquiry on 31 October 2008 seeking documents relating to marketing strategies for the two films; the fees charged or to be charged to the Applicant for the services supplied; and the royalties and other sums payable to the Applicant by WDPT.  WDMSP Limited replied on 11 December 2008 sending documentation.  On 23 January 2009 the Commissioners wrote to WDMSP Limited asking for copies of all other correspondence relating to that company’s involvement with the Applicant, requesting a response by 10 February 2009.
(17)	Walt Disney Company and WDPT are outside the jurisdiction.  The Commissioners therefore sought an exchange of information with the Internal Revenue Service of the United States through the London office of the Joint International Tax Shelter Information Centre.  This enquiry was made on 26 February 2008, and requested copies of all documentation held by the Walt Disney entities relating to the arrangements entered into with the Applicant (including the deposit and security arrangements with Barclays) and a statement as to the US accounting and tax treatment of the transactions by the Walt Disney entities.  Walt Disney Company replied to the Internal Revenue Service, who forwarded that reply to the Commissioners on 5 August 2008.  Walt Disney Company provided a list of the documents to which the Walt Disney entities were parties (and which the Applicant had already provided to the Commissioners); copies of documents relating to the deposit and security arrangements with Barclays; and a statement summarising the US tax treatment of the transactions (treating the net present value of the benefit obtained from the transactions as income recognised in the tax year in which the transactions were entered into).  On 11 September 2008 the Commissioners made a further request of the Internal Revenue Service, seeking emails and original or copy documents in relation to the involvement of the Walt Disney entities in the transactions.  This request was framed in these terms: “We are working our case with a view to possible litigation where original documents, or at least copies, are likely to be important and informative.”  No reply to this further request has yet been received.
(18)	On 11 April 2008, and in response to a request by the Applicant as to the anticipated length of the Commissioners’ enquiry, the Commissioners explained that they were making third party enquiries which they anticipated would be completed within three months.  The officer then conducting the enquiry (Mr Hagan’s predecessor) wrote: “Realistically, I expect to have sufficient information to enable me to issue a closure notice within 6 to 8 months of today’s date.”
The Commissioners’ grounds for resisting a closure notice direction
5.	The Applicant applied to the Special Commissioners on 6 August 2008 for a direction requiring the Commissioners to issue a closure notice.  On 15 August 2008 the Special Commissioners issued a Direction requiring the Commissioners to serve a statement of its grounds for not issuing a closure notice.  
6.	In compliance with that Direction the Commissioners wrote on 12 September 2008 to the Special Commissioners.  The letter runs to five pages, detailing the transactions entered into by the Applicant and its members, the scope of the Commissioners’ enquiry and the chronology of the enquiries made to date.  It states that the Commissioners wish to oppose the application as third party requests are, at that date, outstanding; further information requests may be required; requests from a foreign fiscal authority are outstanding; and the Commissioners will need to appoint counsel to advise further.
7.	As to the nature and scope of the enquiry, the Commissioners set out in their letter in some detail the transactions entered into by the Applicant and the members, with particular emphasis on the funding and security arrangements, including the borrowings made by the members to fund their capital contributions, the future income advance made to them by the Applicant, and the pre-payment of interest to Eagle Financial made by the members.  The letter continues in these terms:
“The members of the LLP funded the payment of the interest from monies claimed to have been provided by the LLP in advance of future income.
The LLP has made returns on the basis that it is carrying on a trade (that trade being the exploitation of films) and has self assessed itself to Income Tax, whilst being a body corporate it would be deemed to be a partnership for taxation purposes in the event that it is carrying on a trade.
The members claim to relief is made under s 353 ICTA 1988.  S 362(1) ICTA 1988 provides for eligible claims to relief under s 353 ICTA 1988 where the interest is paid on loans to acquire an interest in a partnership.  S 362(2) ICTA 1988 contains an exclusion in that interest paid on loans invested in investment LLPs does not qualify for relief under s 353.  S 118ZA ICTA 1988 deems LLPs to be a partnership for taxation purposes where the LLP is carrying on a trade with a view to a profit.  HMRC is seeking to establish whether the LLP is carrying on a trade with a view to a profit.
It follow, in this case, that the validity of the claims made by the members is dependent upon the outcome of the enquiries into the LLP which in part are seeking to establish whether the LLP is carrying on a trade.
The LLP claims that it commenced trading on 3 April 2007.  The first period of account ended two days later on 5 April 2007.  No profit was made in this period.  The total claims to relief by the members result in a claim for repayment amounting to approximately £117 million for the year 2006/07 (£292 million @ 40%).  The repayments are, in the main, being withheld in respect of the members’ acquisition of an interest in the LLP.
….
HMRC is investigating whether the LLP is part of a tax avoidance scheme to exploit the relief available for interest paid on loans effected by individuals to acquire an interest in certain trading entities, to reduce the UK investors’ liability to Income Tax.”
8.	It is clear, therefore, that in September 2008 the Commissioners considered that they were principally concerned with the question of whether the Applicant was carrying on a trade during the three days to (and including) 5 April 2007 in order to determine whether any interest paid by the members on their borrowings made to acquire their interests in the Applicant during that period qualified for relief for income tax purposes.  They claimed that until the information from the then outstanding information requests (and from possible follow-up information requests) was received, and until counsel had been appointed to advise further, they should not be required to issue a closure notice.
9.	This essentially remained the Commissioners’ case at the hearing of the Applicant’s application, as apparent from Mr Hagan’s witness statement and further evidence.  Having set out in detail the history of the investigation, as described above, Mr Hagan explained that there were outstanding four information requests (from Barclays, Eagle Financial, WDMSP Limited and (through the exchange of information process) the US Walt Disney entities), and that any information received would have to be considered in detail once it is received, with possible follow-up requests.  He also confirmed that the Commissioners’ concern is with the interest relief claims of the members, describing the enquiry as “a complicated and high value enquiry (with a UK tax risk of £117 million)”.  He was unable to suggest a period by the end of which the Commissioners would be in a position to issue a closure notice.
The Commissioners’ submissions
10.	Miss Wakefield, in her submissions on behalf of the Commissioners, reviewed the evidence of Mr Hagan and argued that the enquiry had been conducted in an orderly manner with no undue delays on the part of the Commissioners.  She referred to the decision of the Special Commissioner in the case of Jade Palace Ltd v HMRC [2006] STC (SCD) 419, which makes it clear (at [38]) that the purpose of the right for the taxpayer to apply for a closure notice direction is to give protection against enquiries being left open for protracted periods.  This was an enquiry into complex transactions with a number of different parties, and where the amount of tax involved is very substantial.  The enquiry was commenced in October 2007 and in the circumstances was not protracted.  
11.	Miss Wakefield contended that the outstanding information requests were relevant to the enquiry and might lead to further enquiries.  She also argued that the Commissioners would need time to consider and assimilate all the information once it is gathered, and that it is reasonable for the Commissioners to seek legal advice following that process.
12.	Finally, Miss Wakefield stressed the importance of the Commissioners reaching correct, and comprehensive, conclusions before issuing their closure notice and (if required) making any amendments to the Applicant’s return.  She referred to the comments of Henderson J in Tower MCashback v HMRC  [2008] EWHC 2387 (at [111] to [128]) as to the definitive and conclusive nature of a closure notice and the conclusions stated in such notice, which determines the scope of any litigation should the taxpayer appeal against the notice or the amended tax return.  In a complex enquiry where substantial amounts of tax are at risk the Commissioners must have due time to issue a closure notice which sets out the correct conclusions, having completed all relevant enquiries and having taken legal advice if they consider that to be required in reaching those conclusions.
The Applicant’s submissions
13.	For the Applicant, Mr Maugham emphasised that the Applicant has done all in its power to supply voluntarily and expeditiously to the Commissioners all relevant information and generally to facilitate and co-operate in the enquiry.  He submitted that the Commissioners’ enquiry is, by their own admission, concerned with whether the Applicant is trading with a view to a profit, so as to determine the eligibility of the members to relief for income tax purposes for interest paid on their borrowings to make their capital contributions to the Applicant.  The enquiry is therefore concerned with the tax liability of the members, rather than that of the Applicant, for whom the question (at least in relation to the tax year to 5 April 2007) is not relevant, the Applicant neither having made an under-declaration of profits nor having claimed any losses for that tax year.  It is in any event a relatively straightforward factual issue about which the primary facts have been known for some months: the question is whether the facts justify an inference that the Applicant is, or is not, trading.  The Commissioners can form a view or make an inference on that question without the need to make exhaustive enquiries into the detail of the transactions entered into by the Applicant in April 2007.  It is also an issue as to which the Commissioners should be able without difficulty to frame a closure notice which, even having regard to the words of caution sounded in the Tower MCashback case, preserves their ability to argue any related points in any subsequent appeal against the notice and amendments to the return.
14.	Mr Maugham referred to the four lines of enquiry which the Commissioners claim to be pursuing and which are the grounds advanced for not yet being in a position to issue a closure notice:
(1)	As to the documents and information sought from the Walt Disney entities under the exchange of information procedure with the US Internal Revenue Service, that relates to further information as to how those entities treat the transaction for US accounting and tax purposes.  It is difficult to see the relevance of that enquiry, and in any event the Commissioners have been given a statement of these matters, and are effectively now only seeking documentary evidence against the possibility of litigation;
(2)	As to the request made of WDMSP Limited, all the transactional documents have been provided, and it is unlikely that the correspondence requested will shed further light on the contractual arrangements between that company and the Applicant;
(3)	As to the further request (in the form of a second section 20(3) TMA 1970 notice) made of Barclays, it is difficult to see their relevance to the Applicant’s tax return and the question of whether or not it is trading with a view to profit, since the information requested relates to internal funding arrangements within the Barclays group of companies and the treatment of the financing and security arrangements for bank regulatory purposes.  In any event, that information is due to be delivered to the Commissioners by the end of January 2009;
(4)	As to the request (in the form of a section 20(3) TMA 1970 notice) made of Eagle Financial, that relates to the accounts of the members, and not the Applicant, and also relates to bank regulatory treatment of the financing arrangements.  That information, too, is due to be delivered to the Commissioners by the end of January 2009.
None of these matters, in Mr Maugham’s submission, comprised reasonable grounds for not issuing a closure notice within a specified period – he suggested a period ending six weeks after 12 February 2009, to enable the Commissioners to receive and reflect upon replies to the current outstanding enquiries.
The relevant statutory provisions
15.	The relevant provisions in relation to enquiries into partnership self-assessment returns and the closure of such enquiries are straightforward and can be summarised as follows:
(1)	An enquiry can be made by the Commissioners into a partnership return under the provisions of section 12AC TMA 1970.  Such an enquiry “extends to anything contained in the return, or required to be contained in the return”;
(2)	Section 12AC(6) TMA 1970 provides that “the giving of notice of enquiry [into a partnership return] at any time shall be deemed to include the giving of notice of enquiry under section 9A(1) of this Act to each partner who at that time has made a return under section 8 or 8A of this Act or at any subsequent time makes such a return”;
(3)	By section 28B TMA 1970 an enquiry under section 12AC(1) TMA 1970 is completed when an officer of the Commissioners by a closure notice informs the taxpayer that he has completed his enquiries and states his conclusions;
(4)	A closure notice must either state that no amendment of the return is required, or make the amendments of the return required to give effect to the officer’s conclusions;
(5)	If the partnership return is so amended, “the officer shall by notice to each of the partners amend the partner’s return under section 8 or 8A of this Act…so as to give effect to the amendments of the partnership return;
(6)	By section 28B(5), “The taxpayer may apply to the [General or Special] Commissioners for a direction requiring an officer of the Board to issue a closure notice within a specified period.”
(7)	By section 28B(7), “The [General or Special] Commissioners hearing the application shall give the direction applied for unless they are satisfied that there are reasonable grounds for not issuing a closure notice within a specified period.”
(8)	Although the closure notice will close the enquiry into the partnership return, it will not in itself close the respective enquiries into the returns of the individual partners which were opened by the notices of enquiry deemed to be given to them when the enquiry into the partnership return began – presumably because those partners may have other matters in their tax return, unrelated to the partnership, for which the enquiry should remain open.  Those partners will therefore rely on the closure notice provisions (including the right to apply for a direction requiring the issue of a closure notice) applicable to individuals (or corporations, in the case of corporate partners).
Reasons for decision to give a direction
16.	The issuing of a closure notice is a significant event.  It closes the enquiry and requires the Commissioners’ officer concerned to state his conclusions and, where those conclusions so require, to amend the taxpayer’s tax return to give effect to those conclusions.  Only then will the taxpayer be able to make any appeal to the tribunal for determination of any matters disputed between the taxpayer and the Commissioners (such matters having been crystallised in the conclusions in the closure notice and the amendments to the return).  The scope of any such appeal is shaped and limited by the terms of the closure notice: as Henderson J expressed it in the Tower MCashback case (at [128]), “Issue of the notice is an irrevocable step, and once it has been taken the battle ground on any future appeal will be defined by reference to it.”  It is understandable, therefore if the Commissioners are somewhat cautious as to when their enquiries may be regarded as sufficiently complete to enable them to issue a closure notice – Miss Wakefield expressed this sense of caution when she pointed out that the Commissioners were mindful of the lessons to be learnt from the decision in the Tower MCashback case, summed up by Henderson J in these terms (at [128]): “If there is a moral to be drawn, it is that HMRC should ensure that they have considered all the points on which they may wish to rely before a closure notice is issued.”
17.	The taxpayer, on the other hand, has a legitimate concern that the enquiry is concluded as soon as it is reasonable so to expect, so that he has the certainty of knowing either that his return is accepted unamended, or that he may appeal so as to determine any matter of dispute identified in the closure notice.  His right to apply to the General or Special Commissioners for a direction requiring that a closure notice be issued within a specified period is his protection against undue delay or caution on the part of the officer in bringing the enquiry to a close.
18.	Self-evidently, the more complex the affairs of the taxpayer, the more detailed, wide-ranging, and, in practice, the longer will be the enquiry conducted by the Commissioners before they are in a position to reach the conclusions required to issue a closure notice.  Miss Wakefield also argued that where there is a very large amount of tax at risk (in this case in the order of £117 million) that in itself requires the enquiry to be thorough, extensive and completed to their entire satisfaction before the Commissioners issue a closure notice.  The other side of that coin is that where the taxpayer is being denied a claim for repayment of, or relief for, a very substantial amount to which it is eventually proved that he is entitled, he may be considerably out of pocket (notwithstanding any repayment supplement which may be payable) if the issue of the closure notice is delayed, so that in such cases the taxpayer will reasonably require the enquiry to be concluded as expeditiously as possible.
19.	The provisions of section 28B TMA 1970 are (as with the corresponding provisions relating to companies discussed in the case of HMRC v Vodafone 2 [2006] STC 483 at [44]) “constructed so as to produce a reasonable balance”, given these different interests of the Commissioners and the taxpayer.  It is implicit in the powers given to the General or Special Commissioners to give a direction requiring the issue of a closure notice, and is part of that “reasonable balance”, that a closure notice can be required notwithstanding that the officer has not pursued to the end every line of enquiry or investigation – what is required is that he should have conducted his enquiry to a point where it is reasonable for him to make an informed judgment as to the matter in question, so that, exercising such judgment, he can state his conclusions and make any related amendments to the taxpayer’s return.  The exercise of that judgment may require the officer to express his conclusions in broad terms, or even express alternative conclusions (see the observations made in the case of D’Arcy v HMRC [2006] UKSPC 549 at [12]) – which should at the practical level allow an officer of the Commissioners to avoid the pitfalls identified in the Tower MCashback case of a closure notice too restrictively drafted in its conclusions.
20.	Turning to this particular case, it is clear that the enquiry being made by Mr Hagan is concerned with the claim of the members of the Applicant for tax relief for a payment (which they contend is by way of interest on borrowings) of approximately £292 million, where the amount of tax relief claimed is £117 million.  That is the clear focus of the letter of 12 September 2008 to the Special Commissioners setting out the grounds for not issuing a closure notice (see [6] and [7] above), and it is the only tax matter referred to by Mr Hagan in his witness statement prepared for the hearing of this application.  In this connection the only issue touching upon the Applicant and its tax return is whether, for the three days to 5 April 2007, it was carrying on a trade with a view to profit, for that is a requirement if interest paid on a loan applied in contributing money to a limited liability partnership by way of capital or advance is to be eligible for tax relief under the provisions of sections 353 and 362 Income and Corporation Taxes Act 1988.  For the individual members there may, of course, be other issues concerning their claim for interest relief, such as whether the payments made were in the nature of interest, or whether they are treated as repaying the loan to the extent of any capital recovered from the partnership (with a consequent reduction in interest eligible for relief).  Such issues do not concern the Applicant and its tax return, and there is no indication that Mr Hagan was pursuing such issues as part of his enquiry into the tax return of the Applicant.
21.	For the Applicant itself, as Mr Maugham made clear, the issue of whether or not it is carrying on a trade with a view to profit for those three days is a matter of  little significance or even indifference (at least, in relation to the tax year under review).  Mr Hagan admitted, in cross-examination, that he was pursuing the enquiry in relation to the Applicant’s tax return effectively as a convenient alternative to pursuing an enquiry on the same matter of each of the 240 or so members, for whom it is a matter of great significance.  In the course of the hearing that gave rise to two concerns in my mind: first, in taking account of the balance referred to above in dealing with the Applicant’s application, how did one give weight to the interest of the Applicant (put bluntly, why should the Applicant be concerned to bring the enquiry to an end?); and secondly, would directing a closure notice simply be a meaningless formality when (since it would not of itself bring to an end the enquiry automatically opened into the returns of the members) the matter would remain an issue to be explored in the continuing enquiry made of the members?
22.	Taking this second point first, in the course of the hearing Miss Wakefield, having taken instructions on the point, was able to confirm that any conclusions reached in a closure notice issued in relation to the Applicant’s tax return on the question of the Applicant’s trading status would be applied on the same terms on the eventual closure of the enquiries into the tax returns of each member.  I am prepared to accept her assurances on that point.  As to the first point, given the relationship between a partnership and its partners (and the particular features of that relationship where the partnership, as a limited liability partnership, is a separate legal entity from its members, but may be fiscally transparent) a pragmatic approach is required, recognising an alignment or correspondence, in a broad sense, of the interests of the partnership with those of its partners or members.
23.	With these points in mind I come to the particularities of this application.  The burden is on the Commissioners to satisfy me that there are reasonable grounds for not issuing a closure notice within a specified period.  As mentioned, the issue they have identified for enquiry is that of the tax relief claimed by the members on their borrowings made to invest partnership capital in the Applicant.  Where it concerns the Applicant, that issue is refined to the issue of whether or not it is trading with a view to a profit in the tax year ending 5 April 2007.  The Commissioners point out that they have extant four lines of enquiry, and that until those lines of enquiry are completed to their satisfaction it is not reasonable that they should issue a closure notice.  They are not prepared to speculate as to when those lines of enquiry will be completed to their satisfaction.
24.	First I note that the Applicant has given every assistance to the Commissioners in the enquiry, consistent with its desire to have matters resolved as speedily as possible, so that it is concluded, or can proceed to an appeal and to a final determination by that route.  It has volunteered documents and information from the outset and has for the most part responded fully and promptly to subsequent requests from the Commissioners.  From the day the Applicant filed its tax return (11 September 2007) the Commissioners have had most of the documents and ancillary papers (the balance were supplied by 14 November 2007) relating to the transactions in which the Applicant was involved.  Those documents in themselves should have been sufficient for the Commissioners to come to a provisional view, by way of inference from the primary facts, as to whether or not the Applicant was carrying on a trade with a view to a profit during the relevant three-day period.
25.	I also note that in April 2008 the officer then in charge of the enquiry anticipated that he would be in a position to issue a closure notice “within six to eight months”.  That estimate was made after the Commissioners had begun the procedure to obtain information from the US Internal Revenue Service as to the Walt Disney entities in the US, and as the Commissioners were on the brink of issuing a section 20(3) TMA notice to Barclays – in other words, when they were well aware of the scope of their enquiries.  Of course, they did not know for certain what documents or information would be forthcoming from those enquiries, but there was nothing in subsequent correspondence or in the evidence of Mr Hagan to indicate that any major new issue or line of investigation did in fact open up as a result of such enquiries.  It is difficult to see, therefore, why the Commissioners now seem unable not only to conclude matters within that time-frame, but also to give any future time-frame within which they will be in a position to issue a closure notice.
26.	Two of the continuing lines of enquiry on which the Commissioners base their case concern section 20(3) TMA 1970 notices issued to Barclays and its subsidiary company Eagle Financial.  The Commissioners began this process in relation to Barclays on 7 May 2008 (in practice, before that date, as they will have sent a precursor letter to Barclays).  This enquiry has been delayed by reason of the Commissioners issuing two flawed notices which Barclays, upon advice, refused to accept.  Furthermore, the Commissioners have given no reason for their delay until 17 December 2008 in issuing a section 20(3) TMA 1970 notice to Eagle Financial.  I conclude therefore that there have been undue delays on the part of the Commissioners in pursuing these lines of enquiry.
27.	Moreover, it is difficult to see that the documents requested in the latest section 20(3) TMA 1970 notices are relevant to the issue in point, namely the trading status of the Applicant.  Those documents concern the bank accounts of the members, the loan facility provided to them, the arrangements made within the Barclays group for funding Eagle Financial, and the treatment of the Walt Disney Company deposit and the letter of credit security arrangements for bank regulatory purposes.
28.	It is difficult to see that the need to continue these enquiries comprises a reasonable ground for not issuing a closure notice.  In any event, the direction I propose to make will allow time for the Commissioners to consider the responses they will receive and even, if they see fit, to issue a further section 20(3) TMA 1970 notice and to receive a response to that before the closure notice is issued.
29.	The other two continuing lines of enquiry on which the Commissioners base their case concern the Walt Disney entities which are parties to the transactions undertaken by the Applicant.  
30.	In the case of the US entities enquiries were made through the Joint International Tax Shelter Information Centre beginning in February 2008.  Of its nature that is an uncertain process both as to the response of the foreign entity and the timescale for any response.  In this particular case the Commissioners received a response to a principal enquiry, namely the US tax treatment by those entities of their participation in the transaction, and copies of certain documents (it was pointed out that all the transaction documents had already been supplied to the UK tax authorities by other parties).  On 11 September 2008 the Commissioners made a further request for documents and emails.  As yet no reply has been received to that further request.  That further request does somewhat give the Commissioners’ game away: it is justified to the US Internal Revenue Service in these terms, “We are working our case with a view to possible litigation where original documents, or at least copies, are likely to be important and informative.”  In other words, by that stage of the enquiry, the Commissioners were not seeking to further their enquiries to enable them to reach a point where they could issue a closure notice, but were looking to what they anticipated would be the next stage, namely defending an appeal by the Applicant (or the members) consequent upon a closure notice adverse to their interests.
31.	In any event it is difficult to see that anything yielded up by the further request is at all likely to provide information beyond what is already available so as to materially influence the views of the Commissioners as to the trading status of the Applicant – Mr Hagan in his witness statement refers to the fact that the basis on which the Walt Disney entities recognise for tax and accounting purposes their financial benefit from the transactions is important evidence, but that is evidence he already has from the reply to the initial information request.  This further request has been extant since 11 September 2008, and there can be no certainty that the Walt Disney entities can or will provide anything beyond that which they have already provided, or that they will do so within a timescale which meets the legitimate concerns of the Applicant to have this enquiry closed.  The fact that this line of enquiry is still outstanding does not, in all the circumstances, comprise a reasonable ground for not issuing a closure notice.
32.	As to the enquiries made of WDMSP Limited, this was begun on 31 October 2008, one year after the enquiry began.  The Commissioners knew of WDMSP Limited’s part in the transactions as early as September 2007, and no reason was given for the delay in making those enquiries (such delay was notwithstanding the assertion made by Mr Hagan in his witness statement that, “It is clear from the documents that the Walt Disney companies play a key role in the scheme.”)  The initial enquiry yielded up some documents, and Mr Hagan made on 23 January 2009 a further request for ancillary documents and emails and an analysis of the expenditure on marketing expenses.  In his evidence he does not explain why that information is or may be relevant to, much less decisive in determining, the question of the trading status of the Applicant.  He therefore fails to make a case that the closure notice should not be issued pending completion of this line of enquiry.
33.	I conclude that the Commissioners have reached a stage in their enquiries where they have sufficient information to enable them to make an informed judgment as to the matter they have identified as relevant to the tax return of the Applicant, namely whether or not it was, in the three days to 5 April 2007, carrying on a trade with a view to a profit.  In itself it can hardly be said to be an issue of great complexity or difficulty of concept.  The lines of enquiry they say are still open will not yield further material which is at all likely to inform that judgment further and therefore do not comprise reasonable grounds for not issuing the closure notice which the Applicant seeks.  
34.	Nevertheless, some period of grace is appropriate before such notice is issued, as the Applicant at the hearing was prepared to accept.  I propose a period of three months.  That allows the Commissioners time to receive and consider replies to the enquiries made under the section 20(3) TMA 1970 notices and the further enquiry made of WDMSP Limited (and to buttress this latter enquiry with a section 20(3) TMA 1970 notice if they think that is an appropriate course of action).  If there is likely to be any response at all from the US Walt Disney entities, that should be received within such three month period.  It also allows the Commissioners to draw the threads of their enquiry together with time to seek the advice of counsel if they wish to do so.
Direction
35.	Accordingly I direct that an officer of the Commissioners issue a closure notice within three months of the date of release of this decision informing the Applicant that he has completed his enquiries into the tax return of the Applicant for the tax year ended 5 April 2007 and stating his conclusions.

EDWARD SADLER

SPECIAL COMMISSIONER

RELEASE DATE: 17 February 2009

SC/3152/2008 

Authorities referred to in skeletons and not referred to in the decision:

R v The Commissioners of Customs and Excise (on the application of UK Tradecorp Limited) [2004] EWHC 2515