Icebreaker 2 appeal thrown out by Upper Tribunal

The lead appeal in Icebreaker 2 partnerships has been dismissed by the Upper Tribunal after it was ruled investments constituted purchases of guaranteed income streams

Members of pop group Take That were among the big names caught up in the case, which saw five partnerships including Acornwood LLP, Bastionspark LLP, Edgedale LLP, Starbrooke LLP and Hawskbridge LLP lead the appeal. There are a further 46 Icebreaker partnerships which are appellants in related cases.

The ruling showed that under the Icebreaker 2 scheme individual partnership members contributed some money of their own and a larger amount of borrowed money to the LLPs in order to provide finance for a range of creative projects. Each LLP claimed to have made a significant trading loss in its first year which the individual members sought to claim as an allowable loss against their income tax liability.

The appeal considered whether the expenditure claimed by the LLPs satisfied the requirement that for losses to be allowable as trading losses they must arise from expenses incurred wholly and exclusively for the purposes of the trade.

Upholding the first-tier tribunal’s findings, the Upper Tribunal found the investments constituted the purchase of guaranteed stream income.

How it worked

In illustrating the mechanism of the scheme, the tribunal found that, in the case of a £100 investment, the investor paid £20 of their own money into the LLP and borrowings of £80. The LLP then paid £5 to a management company as an advisory fee and the remaining £95 to the principal exploitation company. Approximately £90 of the £95 was then paid by the exploitation company to a production company, responsible for producing an end product such as a book or album.

The production company simultaneously purchased a share in the revenues from exploitation of the product for £80 from the exploitation company. This meant the production company was paid only the net amount of £10 and the exploitation company retained £85 of the £95 it had received. Then £80 of the £85 was placed on deposit with interest used to pay an income stream by quarterly payments to the LLP and in turn used to finance the interest costs of the £80 borrowed by the investors.

The exploitation company retained the remaining £5. The £80 on deposit was then ultimately, after four years, returned to the LLP and used to repay the £80 initial borrowings by the LLP investors.

In his decision, Mr Justice Nugee said: ‘I do not see how the acquisition of a guaranteed income stream on the facts of these cases can be said to be part of the LLPs’ trade of exploiting intellectual property rights.’

The matter of whether the individuals could claim sideways loss relief is the subject of a separate appeal still to be heard.

The full decision Acornwood LLP v R & C Commrs [2016] BTC 517 can be read here.

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