In Nicholas Millican v HMRC [2024] TC09239, the First Tier Tribunal (FTT) found that the post-July 2015 carried interest rules did not apply for Capital Gains Tax (CGT) purposes. Although the individual supplied investment management services, they were not supplied to an investment scheme.
Nicholas Millican was a member of Greycoat EPIC Capital Limited Liability Partnership (GEC LLP), which carried on a joint venture, EPIC Investor LLP (EPIC LLP), with several funds collectively called the ‘Cheyne Funds’.
- EPIC LLP indirectly held a 17.49% stake in the MOTO group via two other companies.
- Mr Millican was responsible for most of the day-to-day management of EPIC LLP. He was extensively involved in managing an intermediary company as a representative of GEC LLP.
- The MOTO group holding was sold in 2015 and EPIC LLP’s share of disposal proceeds were distributed to its members.
- Mr Millican received £6.3 million under his interest in GEC LLP.
- Mr Millican’s 2016-17 tax return recorded his capital receipt, with his gain calculated on the basis that the 2015 carried interest legislation did not apply.
- The consequence of this was that he benefited from a 'base cost shift’. Due to the operation of the Partnership Capital Gains Tax (CGT) rules, Mr Millican was treated as having a CGT base cost in proportion to his share in the asset surpluses of the partnership, rather than an amount equal to the capital he invested.
- Finance (No 2) Act 2015 introduced legislation designed to prevent individuals who derived carried interest from benefiting from base cost shift on or after 8 July 2015, when calculating gains in respect of partnership assets.
- Following an enquiry, HMRC issued a Closure notice assessing an additional £1.399m of CGT on the basis that the post-8 July 2015 legislation applied.
- Following a Statutory review which upheld HMRC’s position, Mr Millican Appealed to the First Tier Tribunal (FTT).
For the 2015 carried interest legislation to apply, Mr Millican had to have:
- Performed ‘investment management services’
- Directly or indirectly in respect of an investment scheme.
- Under arrangements involving at least one partnership.
- With Carried interest arising under those arrangements.
The FTT found that:
- Mr Millican performed investment management services.
- One of the services that GEC LLP was obliged to perform for the Cheyne Funds was to act as EPIC LLP’s nominee on the board of an intermediary company.
- This was an investment management service because it pertained to the management of EPIC LLP’s most significant investment asset.
- The investment management services were performed under arrangements involving at least one partnership.
- Carried interest arose to Mr Millican under the arrangements.
- The investment management services were performed directly in respect of EPIC LLP. It was common ground that this LLP was not an ‘investment scheme’.
- While some or all of the Cheyne Funds may have been investment schemes, no services were performed either directly or indirectly in respect of them.
The appeal was allowed.
Useful guides on this topic
Tax on carried interest: The tax loophole for fund managers
Investment partners can legitimately avoid Income Tax and National Insurance Contributions (NICs) by having their profits taxed under the Capital Gains Tax (CGT) regime.
Partnerships: Capital Gains Tax
How does Capital Gains Tax (CGT) work for partners and partnerships? What is HMRC’s Statement of Practice D12? How are transactions between partners treated? What if the partners are connected persons for CGT?
Statutory Review (by HMRC)
What is a Statutory Review? When does HMRC offer a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review? When does HMRC offer a Statutory Review?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
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