No relief for IP amortisation

In Muller UK and Ireland Group LLP & Ors v HMRC [2024] UT 00273, the Upper Tribunal (UT) held that the Limited Liability Partnership (LLP) was related to all of its corporate members despite not being a 'company'.  As a consequence, the relief claimed for the amortisation of Intellectual Property (IP) acquired from those companies was denied.

Shortly after its formation, Muller UK & Ireland Group LLP (the LLP) received the trade and assets of its Corporate members in exchange for membership units.

• The key issue concerns the transfer of intellectual property, including brands, licenses, software and Goodwill from the corporate members to the LLP.
• The IP was recorded in the LLP's accounts at fair value and amortised. The calculation of the LLP's profits, which included a deduction for the Amortisation, was then included in each of the corporate member's tax returns for the periods ended 31 December 2013 to 2018.
• HMRC opened enquiries into the tax returns for the accounting periods up to 2017. Closure Notices were issued, which denied the deducted amortisation on the basis that the IP was acquired from 'related parties'. 
• The taxpayers appealed the First Tier Tribunal (FTT). 

What is the issue? 

• Under UK legislation, when an LLP has corporate members, its profits are calculated by deeming the LLP to be a notional company, the profits are then allocated to the corporate members. 
• The intangible asset regime allows companies that acquire certain assets to claim deductions, but denies them where the parties are 'related parties'.
• A 'related party' for these purposes includes a company that controls another company or where both companies are under the control of the same person. The word ‘company’ means ‘any body corporate or unincorporated association, but does not include a partnership’.
• The central issue is whether the corporate members and the LLP are related parties. This is dependent on whether the ownership characteristics of a partnership are deemed to be attributed to the notional company.
• The taxpayers argue that the legislation does not refer to its ownership characteristics, meaning that the notional company was incapable of being a 'related party', and therefore, relief for amortisation was due.

The FTT held that: 

• The identities of the parties from whom  IP was acquired could not be ignored simply because the profit calculations were based upon a notional company. 
• The relationship of the corporate members to the LLP should be judged as if the LLP were a company.
• The corporate members are 'deemed' to be treated as controlling the notional company, with the consequence that they were related parties to the LLP. There was relief for amortisation.

The taxpayers appealed to the Upper Tribunal (UT), which found that: 

• For the ‘deeming’ provision to fulfil its statutory purpose, the ownership characteristics of the partnership must be attributed to the notional company.
• The related party provisions are part and parcel of the calculation process, so too they fall within the purpose of the deeming.
• Given the notional company was there to fulfil a calculation purpose its characteristics could not be viewed in isolation but had to be considered in the context of the provision. The corporate members and the LLP were related parties and relief for amortisation was denied.

FTT was correct in its view and the UT dismissed the appeals. 

Comment

Finance Act 2016 includes provisions to confirm that no relief is available for amortisation in this scenario. The UT noted that there was a defect in the drafting which made this legislation ineffective. The criteria for ‘the correction of drafting errors’ was met. The UT confirmed that it was entitled to look past this defect, considering the intended purpose of the legislation, to ensure the amended rules could deny relief.

The taxpayers sought to rely on HMRC’s Statement of Practice 4/98 in relation to an earlier version of the legislation, which stated that "the statutory fiction did not extend to making a partnership a 'company' for the purposes of applying the connected person legislation (FA 1996, s.87(3)). As a result, a partnership was not considered connected with any of its members who provided loans to the partnership". The UT agreed with HMRC that in hindsight this statement was incorrect.

Useful guides on this topic

Running an LLP in tandem with a company
It is possible to run a Limited Liability Partnership (LLP) or another form of partnership in tandem with a company. Partnerships can also have corporate partners. What needs to be considered?

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?

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

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Intangibles regime and partnership interests
How is an interest in a partnership held by a company accounted for? How and when does the Intangibles regime apply?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?

External Link

Muller UK and Ireland Group LLP & Ors v HMRC [2024] UKUT 00273