In HMRC v HFFX LLP [2024] EWCA Civ 813, the Court of Appeal (CoA) affirmed the Upper Tribunal's (UT's) decision that allocations by a corporate member of a mixed member partnership to individual members constituted miscellaneous income.
The individuals included were members of HFFX LLP, a Mixed Member Partnership, providing services to GSA Capital (GS). HFFX LLP had a corporate member, GSAM which was independent of the individual members.
The profits of HFFX LLP were subject to a 'Capital Allocation Plan' (CAP). Under this, HFFX LLP was forced to pay 50% of profits to GSAM.
- These profits were recommended for future allocation to individual members of the Limited Liability Partnership (LLP) by its designated member.
- After the recommended allocations were made, the monies were injected into HFFX LLP as 'special capital'.
- GSAM then provided its discretion to HFFX LLP to allow individual members to withdraw the special capital from the LLP largely in line with the recommended allocations made.
HMRC raised a Discovery Assessment, arguing that the profit share belonged to the individuals (Mixed Partnership rules), or the withdrawal of special capital was the receipt of miscellaneous income.
- The taxpayers Appealed to the FTT, which found the allocation of Special Capital was subject to tax as miscellaneous income.
- The taxpayers Appealed to the UT, which found that the Mixed Partnership rules did not apply in line with the binding decision in BlueCrest Capital Management LP and others v HMRC [2022] UKUT200. However, the allocation of special capital was miscellaneous income.
- The taxpayers appealed to the Court of Appeal (CoA).
The CoA found:
- s.687 ITTOIA 2005 provides that “Income tax is charged ...on income from any source that is not charged to income tax under or as a result of any other provision of this Act...”
- The central issue in this case is whether the income from the withdrawal of special capital had a source.
- A legally enforceable right to a payment is not required for a source to exist. A payment of an income nature made under a contract in return for a service can be sufficient to bring the sum within the charge to Income Tax.
- The decisions to reallocate special capital to individual members, in combination with their rights under the partnership deed provided, amounted to a source.
- The CoA rejected the suggestion that GSA’s power to prevent a reallocation to individual members in certain circumstances makes any difference.
- The amounts reallocated to the individual members were income in their hands. The receipts were taxable as miscellaneous income.
The CoA dismissed the appeal.
Comment
Despite obtaining permission to appeal the decision that the allocation of profits to GSAM should not be considered to be an allocation to the individual members under s.850 ITTIOA 2005, HMRC chose not to pursue this appeal. They accept that the court’s decisions in HMRC v BlueCrest Capital Management LP and Dodd v HMRC [2023] EWCA Civ 1481, [2024] STC 92 are determinative in favour of HFFX. However, HMRC reserves the right to seek permission to appeal to the Supreme Court in the future.
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Partnership planning subject to Income Tax
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.
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In HFFX LLP & Ors v HMRC [2021] TC8023, the First Tier Tribunal found that an 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.
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