Looney – Termination payments were trading receipts

In Kieran Looney & Anor v HMRC [2020] UKUT 0119 (TCC), the Upper Tribunal (UT) has dismissed an appeal against the First-tier Tribunal's (FTT) decision that a termination payment and other payments made under a contract entered into by a partnership to provide management training, were trading receipts of a partnership.

Background

Mr Kieran Looney was the nominated partner of Kieran Looney & Associates (KLA) (together the taxpayers). KLA provided leadership training and business coaching. KLA operated from October 2003 until December 2009. There existed a contract for services under which KLA agreed to provide management training to the senior management of Trafigura Beheer BV (Trafigura), a substantial commodities trading company. KLA received c.£3m as income from the contract and a further c.£1m on early termination of the contract.

In February and August 2009, Trafigura made payments of £2,343,522.70 and £500,000 to the Swiss PFK bank account of Nower Inc (Nower), a Panamanian company of which Mr Looney was a director and shareholder. The balance of the £3m income payment had previously been paid directly to Mr Looney. Nower was incorporated by Mr Looney at or around the same time as KLA entered into the contract. Trafigura gave notice of early termination of the contract in October 2009 and paid the agreed termination fee to KLA.

In April 2009, Mr Looney had also incorporated a UK company, Kieran Looney and Co Ltd (KLCL). 

Following the termination of the contract in October 2009, Mr Looney claimed that the contract for services had in fact been between Trafigura and KLCL, and not between Trafigura and KLA, and that Trafigura's payments to KLA were made by mistake.  He also claimed that the £1m payment was made in return for Trafigura's continued use of the intellectual property in his proprietary performance management system (made net of tax) and was not a termination payment.  It was therefore a non-taxable capital receipt. 

HMRC disagreed with this interpretation, contending that both payments were correctly made to KLA and that the termination payment was a revenue receipt. HMRC relied on the fact that Trafigura and KLA were the signatories to the contract and no evidence existed to suggest that the contract had been novated to KLCL. In its view, the income from the services was therefore taxable on the partners and it amended both personal and partnership returns accordingly.

The taxpayers appealed.

FTT decision

The appeals were dismissed.

The FTT considered whether:

i. the £3m paid by Trafigura to KLA as income was attributable to KLA or KLCL (the Income Recognition issue);

ii. the £1m termination payment was paid in respect of the trade, and thus a revenue receipt liable to income tax, or compensation paid to acquire intellectual property and thus a capital receipt (or some other form of non-taxable compensation payment) (the Termination Payment issue). 

With regard to the Income Recognition issue, the FTT disagreed with the taxpayers' contention that the payments were not the income of KLA. It was not persuaded that there existed an unwritten agreement between KLA and KLCL to transfer income and expenses under the contract to KLCL and determined the Income Recognition issue in HMRC's favour. 

Similarly, the taxpayers' contention that the £1m payment was capital was rejected. The FTT preferred HMRC's argument that the payment was in fact a termination payment and therefore a trading receipt. In the view of the FTT, nothing in the contract supported the claim that the payment was made in respect of intellectual property. The Termination Payment issue was therefore determined in favour of HMRC. 

The taxpayers appealed.

UT decision

The appeals were dismissed.

With regard to the Income Recognition issue, although Mr Looney had  given evidence before the FTT that there was an unwritten agreement between KLA and KLCL to transfer the income and expenses under the contract to KLCL, the FTT had rejected his evidence and the UT was of the view that there was insufficient evidence from which the existence of the agreement could be inferred.

Similarly, in relation to the Termination Payment issue, the UT upheld the decision of the FTT that the payment was compensation for the lost opportunity to profit from the remaining period of the contract and  was therefore a trading receipt of KLA. There was nothing in the contract which transferred intellectual property or secret processes to the customer and nothing in the surrounding circumstances which indicated the payment was as Mr Looney contended. Such a claim was not supported on the facts which were before the FTT.

Comment

Appeals to the UT are limited to points of law. The UT must ask itself whether the FTT made an error of law in its decision which needs to be corrected. In concluding that there was no such error of law in the instant case, the UT said at [58]: 

"Standing back, we ask ourselves: did the FTT err in its task of looking at the circumstances and applying judicial common sense? We consider it did not make any such error and that there is no basis for interfering with the FTT’s conclusion regarding the characterisation of the termination payment … ".

This decision demonstrates the importance of evidence when bringing an appeal before the FTT. A party wishing to rely upon a contested fact at an appeal hearing must establish that fact by adducing lawful evidence which the FTT will then evaluate before deciding whether the fact in question has been established. In this case, Mr Looney failed to produce satisfactory evidence of the alleged unwritten contract between KLA and KLCL, or the alleged payment for intellectual property. Both tribunals therefore concluded that these claims were not supported by the evidence which was before them and dismissed the appeals. 

The decision can be viewed here.