Tribunal accepts taxpayers' Ramsay argument and allows their appeals

In The Vaccine Research Ltd Partnership & Anor v HMRC [2025] UKFTT 402 (TC), the First-tier Tribunal (FTT) decided in favour of the taxpayers, concluding that licence fees received under a circular financing arrangement intended to generate income tax losses were neither annual payments nor income, for the purposes of sections 683 and 687, Income Tax (Trading & Other Income) Act 2005 (ITTOIA 2005).

Background

This case concerned the tax treatment of guaranteed licence fees received by the Vaccine Research Ltd Partnership (the Partnership), as part of a complex, circular financing arrangement (the Scheme). Patrick Lionel Vaughan, an individual partner in the Partnership, and the Partnership, were the appellants (the Appellants).

The Scheme was designed to generate trading losses for income tax purposes through claimed research and development expenditure and associated capital allowances. While some qualifying expenditure was accepted (approximately £14 million out of £193 million claimed), the majority of the activity was found by the Upper Tribunal, in Vaccine Research Ltd Partnership and Anor v HMRC [2014] UKUT 359 (TC), to lack genuine trading substance and involved a circular flow of funds.

The earlier decisions dealt primarily with the partners' entitlement to loss relief and did not address whether the incoming licence fees were taxable (one feature of the Scheme was the guaranteed receipt of licence fees by the partners to fund the cost of repaying the loans taken out to fund the Scheme). This issue was considered in the present appeal, with HMRC contending that the fees were taxable under either section 683 (annual payments) or section 687 (income not otherwise charged), ITTOIA 2005.

FTT's decision

The appeals were allowed.

HMRC argued that the licence fees were taxable under sections 683 or 687, as they were payments made for the use of intellectual property and therefore should be treated as income.

The Appellants contended that the licence fees were not taxable for two primary reasons. Firstly, they argued that the funds borrowed to finance the Scheme were not used to acquire the licence fees. Instead, the money was returned to the bank as part of a circular arrangement, and thus no income had been generated in the transaction. This circular flow of funds meant that the licence fees should not be considered taxable income.

The FTT rejected this argument. Despite the circular nature of the arrangement, the FTT noted that the legal rights and obligations set out in the relevant documentation were clear and the original decision of the FTT had accepted these terms. Disregarding the rights and obligations outlined in the documents would be inconsistent with the factual findings of the FTT and so this ground of appeal was rejected.

The Appellants' second argument was that, applying the Ramsay principle of statutory interpretation, the Scheme should be treated as a single composite self-contained transaction. Accordingly, the circular flow of funds did not create any income for tax purposes and therefore the licence fees were not taxable under sections 683 or 687, ITTOIA 2005.

The FTT agreed that it was bound to apply the Ramsay principle of statutory interpretation and it therefore adopted the requisite two two-step process of: (1) identifying the class of facts intended to be affected by the legislation interpreted purposively; and (2) determining whether the facts of the case fell within that class, namely, whether the licence fees were income.

The FTT noted that, in economic reality, the licence fee payments were simply part of a circular flow of funds. The borrowed money was returned to the lender to service the debt and nothing substantive had occurred to generate income in the traditional sense. Accordingly, the FTT concluded that the licence fees did not meet the definition of income and were not subject to tax under sections 683 or 687, ITTOIA 2005.

Comment

This case is noteworthy because it was the taxpayers, rather than HMRC, who successfully relied on the Ramsay principle of statutory interpretation by persuading the FTT that the Scheme should be viewed as a composite transaction. The FTT's decision confirms that the Ramsay principle is not the exclusive preserve of HMRC. The key issue in this case was the economic reality of the transactions under consideration. Despite the appearance of licence fee payments, the circular flow of funds meant that no income had been generated.

The FTT’s approach in this case can be contrasted with its recent decision in Lynch v HMRC [2025] UKFTT 300 (TC) (which was heard after The Vaccine Research case had been heard but in which the FTT delivered its decision before the FTT delivered its decision in the The Vaccine Research case), where the FTT found that part of a composite transaction could be taxed notwithstanding that the scheme, as a whole, was ineffective. While both decisions involve the application of the Ramsay principle, there are slight differences in the legal reasoning of the FTT and the application of the principle, in each case. Any taxpayer seeking to invoke the Ramsay principle as an aid to statutory interpretation, will no doubt wish to consider both decisions carefully.

The decision can be viewed here.