Capital Allowances On Software

TAX

The United Kingdom Supreme Court's judgment in Tower MCashback LLP1 v HMRC was reported in the latest Simon's Tax Cases. The nature of the case brought the Supreme Court back to analyse its judgment as the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] STC 1. The case involved two LLPs, where the members were individuals with large incomes who put up only 25% of the consideration paid for acquiring the rights in software. The remaining 75% was provided by interest-free loans on non-recourse terms, made to the investor members by Special Purposes Vehicles set up for the purpose. The appellant partnerships were seeking capital allowance on the bits of MRewards technology they had purchased. As Lord Walker of Gestingthorpe put it, those familiar with the leading cases in this troublesome area of the law will not be surprised to hear that the LLPs rely strongly on the decision in Barclays Mercantile, and seek to distinguish the decision of the House of Lords in Ensign Tankers (Leasing) Ltd [1992] STC 226. Her Majesty's Revenue position was not precisely the converse in that they sought to distinguish Barclays Mercantile but did not rely particularly strongly on Ensign, while repudiating any suggestion that Ensign had been impliedly overruled by Barclays Mercantile (at paragraph 26).

The software was a system that MCashback had devised to enable manufacturers to promote their products to retail customers by offering them free airtime on their mobile phones. The manufacturers would pay MCashback a fixed fee per transaction. The software system was called "MRewards". MCashback needed funding to roll out the system. They approached Tower Group PLC, which had experience of arranging finance for similar software companies. The funding arrangement was for MCashback to sell part of its software by means of service level agreements to four newly created Tower LLPs, the members of which included Tower personnel and individual outside investors. The LLPs acquired a right to receive part of the clearing fees derived from the exploitation of the MRewards. LLP 1 raised about £7,3 million and LLP 2 £27,5 million. Apart from the groups of participants, there were two banks involved in the transactions. The first bank held security deposits placed with it by MCashback, which it in turn deposited with the second bank Janus as security for a loan by Janus to Tower Finance Company. The Tower Finance Company then...