In Nicholas Walewski v HMRC [2020] TC7554, the First Tier Tribunal dismissed an appeal against a reallocation of the profits of mixed-member LLPs to an individual partner. There was no evidence the profit allocations were for any reason other than the individual’s power to enjoy them.

Since April 2014 anti-avoidance rules have applied to individual partners who are members of mixed partnerships. They deal with situations where individual partners use flexible profit or loss-sharing arrangements to obtain a tax advantage.

The excess profits allocation rule applies if a mixed partnership makes a taxable profit and either of the following conditions apply:

Mr Waleswki (“Mr W”), an investment adviser, was a partner in two LLP’s; Alken Asset Management LLP (“AAM”) and Alken Finance LLP (“AF”).

HMRC assessed Mr Walewski as having £18,088,195 of profits from AAM and £1,372,510 of profits from AF which had been allocated to WL for the 2014/15 tax year.

The FTT dismissed Mr W’s appeal. The only point of contention, it said, was whether Mr W had met the second limb of condition Y.

The tribunal found that the profit allocations exceeded both what would be an appropriate notional consideration for Mr W’s services through WL and what would be an appropriate notional return on WL’s capital in the partnerships.

As Mr W could not provide any other reasonable explanation for the profits being paid to WL by AAM and AF, the FTT found that the only explanation was that the profits were allocated to WL due to Mr W’s power to enjoy them through the trust for his children.

The tribunal considered whether there should be any time apportionment of the profits to account for Mr W ceasing to be a partner in AAM part way through the period. It concluded that this was not reasonable; most of the profits were earned whilst he remained a partner. They did, however, allow an adjustment to be made for return on capital for the relevant period, at 5%.

Given the amounts involved, we anticipate that the taxpayer may look to appeal to the Upper Tribunal.

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Partnerships with mixed membership

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Nicholas Walewsk iv HMRC [2020] TC7554