The Commissioners for HMRC v HFFX LLP
[2024] EWCA Civ 813
The Commissioners For HMRC v Bluecrest Capital Management LP & Ors
15 December 2023
[2023] EWCA Civ 1481
Court of Appeal
A big investment company used a clever plan to lower its taxes. The government tried to say the company was cheating, but the court mostly agreed with the company's interpretation of the tax rules. However, the court also said that some payments the company made to employees could be taxed as income, even though they seemed like capital payments on the surface.
Key Facts
- •BlueCrest Capital Management used a Partner Incentivisation Plan (PIP) from 2008-2014 to incentivize partners and potentially reduce tax liability.
- •The PIP involved allocating a share of profits to corporate partners (SCL and Avon) who would reinvest a portion as 'special capital' and later make discretionary awards to individual partners.
- •HMRC's primary case was that the profit share initially allocated to the corporate partner should be taxed as the individual partners' income.
- •HMRC's alternative case was that the final PIP awards were taxable as miscellaneous income under section 687 of ITTOIA 2005 or under the sale of occupational income (SOI) rules.
- •The PIP had both a commercial purpose (incentivizing partners, discouraging risk) and a tax advantage (lower corporation tax rate vs. income tax rate).
Legal Principles
Partnership taxation in the UK operates on a 'look-through' basis, with profits allocated to partners according to their profit-sharing arrangements.
ITTOIA 2005, sections 848, 849, 850
The Ramsay principle allows for a realistic and purposive interpretation of legislation to prevent tax avoidance, but does not allow rewriting contracts.
WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, Brain Disorders Research Limited Partnership v HMRC [2018] EWCA Civ 2348
Section 687 of ITTOIA 2005 taxes income from any source not otherwise taxed, requiring the receipt to be of an income nature and analogous to other taxable income, with an identifiable source.
ITTOIA 2005, section 687
A discretionary payment can be a taxable source of income if there is an obligation on the payer, even if the recipient cannot enforce payment.
Spritebeam Ltd v Revenue and Customs Commissioners [2015] UKUT 75 (TCC), Cunard’s Trustees v Commissioners of Inland Revenue (1946) 27 TC 122
Outcomes
HMRC's primary appeal (taxing the corporate partner's share as individual partners' income) was dismissed.
The court found that the PIP arrangements, while having a tax mitigation purpose, also had a genuine commercial purpose. Treating the corporate partner's share as the individual partners' income would rewrite the agreement and ignore the commercial realities of the scheme, including the forfeiture of some awards.
The partnerships' appeal against HMRC's alternative case (taxing final PIP awards under section 687 of ITTOIA 2005) was dismissed.
The court found that the PIP awards were of an income nature, analogous to deferred bonuses, with a taxable source in the corporate partner's decision to make the awards. The commercial reality was a form of deferred and contingent reward for work.
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