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BKL considers the findings of the Upper Tribunal at the recent Ingenious Games hearing.

After 22 days hearing the case earlier this year, the Upper Tribunal published at the end of July its decision in Ingenious Games LLP and others v HMRC [2019] UKUT 0226 (TCC), also involving Inside Track Productions LLP and Ingenious Film Partners 2 LLP. It's a lengthy document (though less than a third of the First-tier Tribunal's gargantuan 1,843 paragraphs) analysing in detail the arguments and counter-arguments put forward by the seven QCs and eight junior counsel involved in the case. Nonetheless the key point could be understood by a child of ten.

The scheme depended upon the ability to offset trading losses against participants' other income. It was therefore a necessary condition of the scheme that a trade should be carried on. If it was not, the edifice that had been carefully and expensively constructed would prove to have been built on sand, with the same sad results as are biblically foreseen for such architectural insouciance.

The FTT had thought that Ingenious Games LLP was not trading but making investments; but that, despite the strong similarities between the activities of the three LLPs, the other two fell just about the right side of the trading line. The Upper Tribunal disagreed: none was trading. That was enough to (changing the metaphor) hole the scheme below the waterline; but the Upper Tribunal went on to open the seacocks and scuttle the lifeboats by finding that even if there had been a trade, it would not have been one carried on on a commercial basis and even if it had, the expenditure giving rise to the alleged tax loss would not have been deductible.

It is said that the aggregate loss claims in the case exceed £1.6 billion. It may therefore be expected that a further appeal will be made. However, since the matter is heavily dependent on the findings of fact made by the FTT (which findings are not susceptible of reversal by the higher courts, though the legal conclusions to be drawn from them are), some dismay may be expected among the passengers on the good ship Ingenious.

Maritime and building metaphors aside, the lesson of the case is this: it reminds us of the importance, in contemplating any tax planning, of examining not only the abstruse and sophisticated parts of the arrangements, but also the simplest and most fundamental points. The little boy who dared to question the Emperor's new clothes has grown up: and he now works for HMRC.