Acornwood – UK Upper Tribunal softens a judicial rule that the income-producing purpose test should not track the actual use of the expenditure by the expenditure’s recipient

A UK tax shelter entailed the investors using borrowed money of 80 and their own funds of 20 to fund an LLP, which used 95 of this sum to purchase rights to a future stream of payments from a company (“Shamrock”) whose business it was to exploit IP. Shamrock used the 95 to purchase rights from an artistic production company. However, that company spent only 10 on the production. The balance of 85 went back to Shamrock as the consideration for a share of revenues from the production, with Shamrock using 80 of that sum to purchase a deposit which was used, as to the interest thereon, to fund the required stream of income payment to the LLP (which matched the investors’ interest expense) and, as to the deposit’s principal, to ultimately make a final payment to be applied to fund the repayment of their principal owing.

Nugee J affirmed that the expenditure of the 80 by the LLP was not an expense incurred wholly and exclusively for the purposes of the LLP’s trade, given that only 10 was needed to secure the production, so that that the 80 funded through the LLP members' borrowings “was not in any sense used by Shamrock in fact for exploitation.” He stated:

That last point of course does indeed look at what the recipient does with the money, but in circumstances where this is to the knowledge of, and indeed intended and required by, the payer. …There is no commercial difference between the members paying 15 for Shamrock’s services without having borrowed 80 and without any rights to guaranteed repayment of the 80, and the members paying 95, of which they have borrowed 80 and are guaranteed to be repaid 80.

Neal Armstrong. Summary of Acornwood LLP & Ors v. Revenue and Customs Commissioners, [2016] BTC 517, [2016] UKUT 0361 (Tax and Chancery Chamber) under s. 18(1)(a) - income-producing purpose.