HFFX LLP & Ors. v The Commissioners for HMRC
[2023] UKUT 73 (TCC)
The Commissioners for HMRC v HFFX LLP
19 July 2024
[2024] EWCA Civ 813
Court of Appeal
A company tried to avoid paying high income tax for its traders by using a complex scheme. The court said the scheme didn't work, because even though the money wasn't guaranteed, the way it was structured created a taxable event. It's similar to a previous case, *BlueCrest*, and showed that even if a bonus isn't promised in writing, the decision to pay it can trigger tax.
Key Facts
- •Incentivisation arrangements were put in place in October 2010 when GSA transferred its high-frequency foreign currency trading team to HFFX LLP.
- •HFFX members were treated as self-employed partners, with increased payouts, a substantial portion deferred via a Capital Allocation Plan (CAP).
- •50% of payouts were allocated to GSAM, a corporate HFFX member, which invested in GSA-managed funds.
- •GSAM sold investments and returned proceeds as "Special Capital" to HFFX, then reallocated to individual members.
- •Tax issues concerned whether the allocation to GSAM was an allocation to individuals under s.850 ITTOIA, and if not, whether the reallocation was taxable as miscellaneous income or sales of occupation income.
Legal Principles
Section 687 ITTOIA charges income tax on income from any source not otherwise charged.
Income Tax (Trading and Other Income) Act 2005, s.687
For s.687 ITTOIA, income must arise from an identifiable source in the relevant tax year.
BlueCrest CA [102]
A source for income may be found in the exercise of discretion by a corporate partner, even without a legally enforceable right to receive the income, if the discretion is exercised within a legal agreement conferring certain rights on individuals.
BlueCrest CA
The Braganza principle implies that a contractual discretion must be exercised rationally.
Braganza v BP Shipping Ltd [2015] UKSC 17
Outcomes
HMRC's appeal on the s.850 issue dismissed.
The court's decision in HMRC v BlueCrest Capital Management LP is determinative.
Individual members' appeal on the miscellaneous income issue dismissed.
The case is materially indistinguishable from BlueCrest CA; the reallocation of Special Capital, combined with rights under the Partnership Deed, amounted to a source of income taxable under s.687 ITTOIA.
Individual members' appeal on the sales of occupation income issue dismissed.
It was unnecessary to decide this issue to dispose of the appeal; following BlueCrest CA, the court refrained from considering it.
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