The BlueCrest hedge fund group have lost their case at the Court of Appeal (CoA) after similar losses at the First-tier Tribunal and Upper Tribunal. The case concerned the allocation of profits at limited partnerships and whether a total return swap should be ignored for tax purposes, following Ramsay principles. While the decision at the CoA is also in HMRC’s favour and in line with the lower tribunals the CoA did arrive at their decision via a different route. This different route clarifies and upholds an important concept about companies that received funds in a fiduciary or representative capacity, that companies that are general partners in a limited partnership typically do.
Some of BlueCrest’s trade was conducted in the UK via a limited partnership and some of the partners of this limited partnership wished to sell their equity interests and BlueCrest wished to acquire these interests so it could then allocate the interests to other BlueCrest partners or employees at a later point. It was agreed that a Cayman limited partnership would acquire the UK partnership interests and this limited partnership would be represented by a Cayman limited company general partner. The Cayman limited partnership borrowed funds from a bank and entered into a total return swap with the bank that would allow profits above a certain level (Super-profits) to be paid to the bank that would then be reinjected to the BlueCrest group so it could be considered a capital contribution to the Cayman limited partnership which could then be used to pay down the bank borrowings. The idea being that the Super-profits allocated to the bank wouldn’t be taxed within the BlueCrest group.
To enable the tax avoidance scheme to work profits had to be allocated to the bank for tax purposes so the BlueCrest group wouldn’t pay tax on these profits. The bank would then take deduction for the payment to BlueCrest under the total return swap while BlueCrest would consider this tax-free capital contribution after passing through a tax-exempt Cayman limited company.
The CoA held that there was not an ‘omnibus’ partnership and that the partners in the Cayman limited partnership could not be considered partners in the UK limited partnership. The CoA also found that the Cayman limited company did receive funds in a fiduciary or representative capacity meaning that the general partnership wouldn’t be taxed on the Super-profits allocated to the bank. The CoA then held that the total return swap should be ignored for tax purposes, under Ramsay principles, as it was a means of rebadging profits into capital contributions, the fact that the bank retained some of the profits was representative of a fee for entering into the arrangements. Therefore the Cayman general partner limited company was subject to tax on the Super-profits and the tax avoidance scheme was ineffective.
The decision can be found at: BCM Cayman LP & Anor v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
While this is a complex decision it is positive news that the normal treatment for general partner companies has been upheld, a decision at a lower tribunal had overturned this long held practice whereby companies can receive income and profits on behalf of other parties, the limited partners in limited partnerships. This treatment is codified in statute, so the CoA have upheld the treatment that was legislated for by Parliament.
Please contact us if you have any questions about the allocation of partnership profits, we are experienced with these matters.
