Tax Treatment of Capital Interests in Partnership Dispute Addressed in Landmark Case of The Boston Consulting Group UK LLP & Ors v HMRC

Citation: [2024] UKFTT 84 (TC)
Judgment on


In the case of The Boston Consulting Group UK LLP & Ors v The Commissioners for HMRC, the tribunal was presented with intricate questions pertaining to the tax treatment of certain interests held by partners (MDPs) in a management consulting firm. The issues revolved around whether payments received upon disposal of these interests, termed “Capital Interests,” should be taxed as income or capital gains.

Key Facts

The controversy fundamentally hinged on the characterization of “Capital Interests” and their corresponding tax implications within The Boston Consulting Group UK LLP (“the UK LLP”). These interests were aligned with the global compensation policy, constituting a core element of the firm’s remuneration framework. The challenge was determining if these interests could be perceived as part of the firm’s profit-sharing arrangement and if the subsequent payments on their disposal represented a capital transaction or were of an income nature for tax purposes.

The tribunal meticulously applied multiple legal principles to address the central questions:

  1. Transparency of Limited Liability Partnerships (LLPs): Under Section 848 ITTOIA, an LLP is not a separate entity for income tax purposes, and the profits are taxed as if the members themselves earned them (Sections 12AA, 12AB, and 8(1B) TMA).

  2. Profit Allocation: The remuneration of partners, as delineated in Section 850 ITTOIA, should adhere to the firm’s profit-sharing arrangements. The dispute was whether the Capital Interests fell within this definition. The tribunal ultimately found that the Capital Interests did not have the intrinsic character of profit-sharing arrangements.

  3. Mixed Member Partnerships (MMR): Section 850C ITTOIA addresses arrangements aimed to divert profits to a corporate partner, like BCG Ltd, potentially at lower tax rates. Despite HMRC’s argument, the tribunal concluded that the conditions for invoking this section (Conditions X and Y) were not satisfied as the Capital Interest structure was not designed to accumulate profits in a corporate partner to exploit tax advantages.

  4. Miscellaneous Income and Anti-Avoidance: Section 687 ITTOIA was scrutinized to ascertain if it applied to the disposal of Capital Interests. The tribunal decided that the payments were of an income nature and analogous to Schedule D, satisfying the miscellaneous income charge. It further assessed Chapter 4, Part 13 ITA, which imposes charges on income arising from capital amounts obtained through the exploitation of an individual’s occupational income for tax avoidance purposes. The tribunal found that the avoidance of income tax was a main object in this case.

  5. Discovery Assessments and Amendments: Sections 29 and 30B TMA govern the circumstances under which HMRC may raise discovery assessments or amendments following a loss of tax due to carelessness. For the UK LLP, these sections were debated to determine if the underpayments were due to carelessness and if the hypothetical HMRC officer could have been aware of the insufficiency based on the information made available.


The tribunal’s analysis led to the following conclusions:

  • The Capital Interests were not part of the profit-sharing arrangements under Section 850 ITTOIA.
  • The miscellaneous income charge under Section 687 ITTOIA was applicable to the payments received upon disposal of the Capital Interests, as they were income in nature.
  • The anti-avoidance provisions under Chapter 4, Part 13 ITA applied to the transactions, as the avoidance of income tax was one of the main objects.
  • The tribunal allowed the appeals by the UK LLP and individual appellants against the discovery amendments and assessments, concluding that there was no carelessness, and the hypothetical HMRC officer condition was not met for the tax year 2016/2017.


The tribunal’s detailed examination provided exacting clarification on the multifaceted issues surrounding the tax treatment of partnership interests. This case illustrates the complexities inherent in discerning the tax nature of innovative remuneration structures and underscores the necessity for comprehensive disclosure to HMRC to circumvent the imputation of carelessness in tax filings. The decision reaffirms key legal principles around partnership taxation, profit allocation, anti-avoidance norms, and the scrutiny of discovery assessments, furnishing valuable precedent for legal professionals navigating similar tax disputes.

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