Ramsay principle catches partnership tax planning

In BCM Cayman LP & BlueCrest Capital Management Cayman Limited v HMRC [2023] EWCA Civ 1179, the Court of Appeal (CoA) found that a series of pre-ordained transactions kept the beneficial ownership of profits with the taxable entity under the Ramsay principle, and so within the charge to UK Corporation Tax.

• The BlueCrest group operates an investment management trade.
• Part of the trade was carried out through a UK limited partnership.
• In 2007, some of the members agreed to sell their interest in the partnership (19% of equity) to the remaining members. This interest was held for those remaining members via a limited partnership in the Cayman Islands (Cayman LP).
• The Cayman LP had a Corporate general partner, Cayman Ltd, wholly owned in turn by BlueCrest Capital Management Cayman Holdings Ltd (Cayman Holdings).
• The 19% interest was originally assigned to Cayman Ltd, which contributed it to Cayman LP. Cayman LP became a party to the UK LP partnership deed. Under Cayman law, Cayman LP was not a separate entity from Cayman Ltd. Cayman LP was within the scope of UK Corporation Tax as a partner in a UK LP (carrying on a trade through a Permanent establishment).
• The acquisition was funded by a loan from RBS and paid for using Loan notes. RBS became a partner in Cayman LP.
• RBS entered into a swap arrangement (TRS) with Cayman Holdings (see the 'super-profits arrangements below).In 2008, RBS assigned its interest to Fyled Energy Ltd (Fyled). 
• Profits were allocated under the UK partnership deed from the UK LP to Cayman LP to cover the monthly interest payments on the loan and the loan notes.
• When available, 'super-profits' were paid to Cayman Ltd as general partner of Cayman LP. This triggered the TRS, where those super-profits were paid to RBS/Fyled who in turn paid Cayman Holdings an equivalent amount less an agreed amount. Cayman Holdings used the funds to subscribe for further capital in Cayman Ltd. This additional funding then allowed Cayman Ltd to repay the loan and loan notes.
• The TRS arrangement ended in 2010.
• BlueCrest filed tax returns on the basis that Cayman Ltd was not subject to UK Corporation Tax on the super-profits as it was acting in a fiduciary or representative capacity for other Limited Partners. Additionally, it claimed that being a member of Cayman LP automatically meant that RBS/Fyled became a partner of the UK LP.
• It also claimed trading deductions for the loan interest paid.
• HMRC disputed both elements and issued Closure notices taxing the profits and denying the trading deductions.
• The notices were appealed to the First Tier Tribunal (FTT) and the Upper Tribunal (UT). Both tribunals dismissed the appeals and the appellants appealed to the CoA.

The CoA found that:

• The super-profits were allocated to Cayman Ltd which was a partner in UK LP in its capacity as general partner for Cayman LP.
• When looking at the arrangements as a whole, applying the Ramsay principle, the profit allocation made its way back to Cayman Ltd through a series of pre-ordained steps and transactions, proving Cayman Ltd was the beneficial owner of those profits.
• Cayman Ltd was not acting as a fiduciary or representative of RBS/Fyled when the right to super-profits accrued, but rather in its own right, as the ultimate beneficiary of that profit share.
• The partnerships were set up to be distinct from each other, operating independently. Being a partner in one did not automatically make RBS/Fyled a partner in the other UK LP.
• The RBS loan was secured for acquiring the equity interest in the UK LP. This was not for the purposes of the UK LP's trade. 
• Disallowing the deduction was also justified by applying Ramsay, as the whole arrangement was set up to avoid tax and obtain interest deductions.
• A non-trading Loan relationship debit may have been available but not the trading deduction that was claimed.

The appeal was dismissed.

Useful guides on this topic

Partnerships: Unlimited or limited
What types of partnership are there? What are the differences? 

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

What is the Ramsay principle in tax?
Not sure what is meant by the Ramsay principle? Here is a quick guide.

Loan relationships
What is a loan relationship? How are profits and losses made from loan relationships taxed? What happens if loans are written down or written off? What is the difference between a trading and non-trading loan relationship? What are the rules for connected party loans?

External links

BCM Cayman LP & BlueCrest Capital Management Cayman Limited v HMRC [2023] EWCA Civ 1179