Both HMRC and a group of taxpayers and partnerships have lost their appeals at the Court of Appeal (CoA) in a decision upholding the prior decisions of both tax tribunals below.  The taxpayers were individual members of certain BlueCrest (the hedge fund managers) partnerships.

To affect a deferred bonus scheme, the profits of a partnership were allocated to a corporate member. The corporate member would then reinvest the profits allocated to it and under recommendation from the group would then reallocate the profits back to the individual members at a later date.  The plan was that the reallocations to individual members would be considered capital and would be free of tax.  The schemes were in operation before the implementation of the mixed partnership rules that became effective in 2014 which would defeat the scheme currently, though the scheme is to be considered ineffective as the reallocations are treated as taxable miscellaneous income.

The CoA, found, in agreement with the lower tribunals that there was no grounds to ignore the partnership agreement when considering how the profits should be taxed.  The CoA found that the allocations to the corporate partner were not a sham and the corporate partner, even though it made limited contributions to the business of the partnership, did have a role, being that of receiving deferred allocations of profit for later reallocation.  There were no (pre 2014) grounds for saying that the profits arose to the individual partners and that allocations to the corporate partner should be ignored.

The CoA also found, again agreeing with the lower tribunals, when the profits were reallocated back to the individuals members that the individual members received income and not capital receipts and that these income receipts qualified as miscellaneous income and could be taxed as such.  The reallocations had all the necessary attributes to be considered miscellaneous income; they were calculated annually, the corporate partner was the source as it had an implicit duty to behave in a ration manner and they were akin to deferred bonuses.

The CoA dismissed both HMRC’s and the taxpayers’ appeals.

The decision can be found at: The Commissioners For HMRC v Bluecrest Capital Management LP & Ors – Find case law – The National Archives

While legislation was implemented many years ago to counteract the allocation of profits to corporate members for deferred payments to income tax paying partners, this case has highlighted the difficulty in reobtaining amounts that have so allocated.  In this case, tax was not avoided, only delayed.

Please contact us if you have any questions over tax avoidance schemes, negotiations with HMRC or mixed partnership rules.  We are experienced with these issues along and can provide experienced advice and assistance.