The Upper Tribunal (UT) have found in favour of a HMRC despite having their ground of appeal dismissed.  A group of individuals operating in the foreign exchange markets came together to form a limited liability partnership (LLP) to exploit high frequency trading strategies.  These strategies proved successful and the partnership became very profitable.  To comply with regulatory requirements some of the profits had to be deferred and the members settled on a scheme where profits would be allocated to a corporate partner of the LLP.  This company would pay the lower corporate tax rate on the profits allocated.  After some time the corporate partner then resolved to distribute the sums received as capital back to the individual members of the LLP.  The individual members treated the sums received as tax free capital payments.  HMRC disagreed with this treatment and issued assessments on the LLP and the individual partners.

The UT dismissed HMRC appeal against the First-tier Tribunal’s decision that the individual members of the LLP could be taxed on the profits at the point in time when they were allocated to the corporate member.  A similar case had also been heard by the UT that held that this was incorrect.

The UT also dismissed all the grounds of appeal that the taxpayers put forward.  The UT found that the income was miscellaneous income or residual income; a catch all within the legislation that holds that if income isn’t taxable elsewhere then it was taxable under this particular section of the legislation.  The UT found that while the individual partners couldn’t sue for the funds to paid to them, the corporate partner did have a legal obligation to make payments to them.  The UT also found that the corporate partner had an implied term imposed on it of fair play holding that the Braganza principle applied, the corporate partner while it had absolute discretion had to act in a fair manner so would be obliged to pay sums to the individual partners.

The UT also found that if they were incorrect on the miscellaneous income point that the income would also be chargeable under the sale of occupation tax avoidance rules, though for these rules to have affect then the income couldn’t be miscellaneous income.  The taxpayers had argued that they weren’t professionals, but the UT disagreed and found that all other conditions for the rules to apply were met if the income was not to be considered miscellaneous income.

The UT also found that HMRC had satisfied the evidentiary burden to issue a discovery assessment.

The decision can be found at: HFFX LLP, Christopher Shucksmith and others v The Commissioners for HM Revenue and Customs [2023] UKUT 00073 (TCC) – GOV.UK (www.gov.uk)

This case highlights that where using deferred income schemes it is very difficult to avoid the charge to income tax on receipts by any participants after the deferral period has ended.  One hopes that the corporate partner can obtain corporate tax deductions for deferred income paid to the individual partners as otherwise the group and its individual partners will incur double taxation without relief.

Please contact if you have any questions on HMRC investigations, assessments or allocation of partnership profits.  We are experienced with negotiating with HMRC.