In HFFX LLP and Ors v HMRC [2023] UKUT73, the Upper Tribunal (UT) found that allocations by a corporate member of a mixed member partnership to individual members should be subject to Income Tax under the miscellaneous income provisions.

  • Individuals were members of HFFX LLP, a Mixed Member Partnership, who provided services to GSA Capital (GS).
  • HFFX LLP also had a corporate member, GSAM which was independent of the individual members.
  • HFFX received 50% of the profits generated for GS by its members.
  • The profits of the Limited Liability Partnership (LLP) were subject to a 'Capital Allocation Plan' (CAP) which was challenged by HMRC by way of Discovery Assessment as follows:
    • HFFX was forced to pay 50% of the profits made to GSAM.
    • The profits paid to GSAM were recommended for future allocation to individual members of the LLP by its designated member.
      • HMRC contended that this allocation invoked the Mixed Member Partnership rules.
  • The balance of profits of HFFX were allocated by the managing partners to the individual members.
  • One, two and three years after the recommended allocations were made, the monies were injected into HFFX as 'Special Capital'.
  • GSAM then provided its discretion to HFFX to allow individual members to withdraw the Special Capital from the LLP largely in line with the recommended allocations made.
    • HMRC contended this withdrawal of special capital was the receipt of miscellaneous income, or alternatively, the Sale of Occupational Income provisions applied and income tax was due accordingly.
  • The Appellants Appealed those assessments to the FTT who found the allocation of Special Capital was subject to tax as miscellaneous income.
  • The taxpayers appealed to the UT.

The UT found:

  • The Mixed Partnership rules did not apply as:
    • The UT decision in BlueCrest Capital Management LP and others v HMRC [2022] UKUT200 was binding:
      • The CAP solved a business issue, to defer bonuses to reflect long-term trading success, a regulatory requirement, it was not a sham arrangement.
      • The Corporate Partner was bound by the Partnership Deed.
      • The individual partners had no contractual right to share in the profits of the corporate member of the LLP, the corporate member could do what it wanted with those profits.
      • Not all profits of the corporate member were later used to remunerate the individual members.
      • The CAP did not form part of the profit-sharing arrangements of the LLP.
  • The allocation of special capital was Miscellaneous Income as:
    • It was of the nature of annual profits.
    • The receipts were of an income nature.
    • They were the income of the recipient.
    • GSAM had the discretion to allocate payment of special capital, this discretion in turn gave GSAM the obligation to pay the individual member.
    • There was a link between the activities of the member and the allocation of special capital.
  • The Sale of occupational income provisions would have applied to subject allocations of special capital to income tax if the miscellaneous income provisions didn’t as:
    • Using research and software development skills to develop and implement foreign exchange trading strategies was a profession.
    • Tax reduction was an object of the introduction of the CAP.
  • The discovery assessments had been validly issued.

Useful guides on this topic

Mixed members: Partnership with company members
What is a mixed-member partnership? How are profits of a mixed-member partnership taxed? What tax adjustments are required? Are there any relieving provisions?

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Discovery Assessments: At a glance
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment?

Sale of occupational income: Anti-avoidance
What are the tax effects of the anti-avoidance sale of occupational income provisions?  How do you tax a capital sum received on the sale of an individual's earnings?

LLP profit reallocation scheme fails
In HFFX LLP & Ors v HMRC [2021] TC8023, the First Tier Tribunal found that a LLP scheme to reallocate profits via a corporate vehicle using allocations of special capital failed to work and those allocations were chargeable to Income Tax on individual partners.

External link

HFFX LLP and Ors v HMRC [2023] UKUT73

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