In BlueCrest Capital Management Cayman Limited (& others) v HMRC  TC 07782, the First Tier Tribunal (FTT) agreed that the sale of occupational income rules could apply to charge Income Tax on partnership capital contributions.
Bluecrest are hedge funds set up with UK partnership structures, a Cayman partnership and companies. This was a complex case where the key issues involved partnership profit/loss allocations for mixed member partnerships and the associated anti-avoidance legislation, the Restriction for tax relief for interest on unallowable purpose loans and the Sale of Occupational income provisions.
- Where an individual exploits their occupational earnings capacity in return for a capital sum, property or right obtained and the main object or one of the main objects of the transactions or arrangements is the avoidance or reduction of liability to Income Tax, the Sale of Occupational income anti-avoidance rules at s.773-789 ITA 2007 allow HMRC to impose an Income Tax charge.
- 'Occupation' includes carrying on a profession or vocation on the individual's own account.
The structure here involved a mixed-member partnership which operated as an investment fund manager and had put in place a Partner Incentivisation Plan (PIP) as a form of deferred bonus scheme.
- The PIP also provided for awards of ‘special capital’ which were reinvested into the partnership as capital contributions of the partners.
- Part of HMRC’s argument in the case was that the individual partners should be subject to Income Tax on the special capital either under s.687 ITTOIA 2005, the miscellaneous income rules, or under s.773-789 ITA, the sale of occupational income rules.
The FTT found that s.687 applied as the payments were like deferred discretionary bonuses but went on to consider HMRC’s alternative argument that the occupational income rules applied:
- Although the PIP arrangements clearly did have a commercial purpose, the retention and incentivisation of partners, they also had as a main object the avoidance or reduction of liability to Income Tax so the motive test behind the rules was met.
- The appellants were carrying on a profession.
- Had s.687 not applied, the sale of occupational income rules could have applied instead and the special capital awards would still have been subject to Income Tax.
Although the analysis and application of the occupational income rules was not a deciding factor in this case it is helpful that the judge went on to consider them. This is an area of anti-avoidance legislation which does not often come before the Tribunal and one which most partnerships probably overlook, but which can be relevant, as in this case, in circumstances where it is assumed payments are capital and not subject to Income Tax.
Sale of occupational income: Anti-avoidance
These measures are broadly drafted but designed to prevent individuals from turning income into capital and so a variety of tax planning arrangments could potentially be affected.
Partnerships with mixed membership
From 5 December 2013 anti-avoidance rules apply to individuals who are partners in mixed partnerships, corporate partnerships or members of mixed Limited Liability Partnerships (LLPs).