The Commissioners for HMRC v HFFX LLP
[2024] EWCA Civ 813
The Boston Consulting Group UK LLP & Ors v The Commissioners for HMRC
23 January 2024
[2024] UKFTT 84 (TC)
First-tier Tribunal
Imagine a company gave its top managers special 'points' that grew in value based on the whole company's success, not just their own office's. When the managers left, they got paid for these 'points'. The taxman said this payment was income, like a bonus, not a sale of company stock like the managers argued. The court agreed the payments were income but said the taxman hadn't followed the right rules for issuing some of the tax bills.
Key Facts
- •The Boston Consulting Group UK LLP (UK LLP) appeals tax assessments on payments made upon disposal of individual partners' interests (Capital Interests).
- •HMRC argues these payments should be taxed as income under partnership profit-sharing rules (ss850-850C ITTOIA), miscellaneous income (s687 ITTOIA), or proceeds from the sale of occupational income (Chapter 3, Part 13 ITA 2007).
- •Appellants claim the payments should be taxed as capital gains.
- •Disputes involve discovery assessments (s29 TMA), partnership amendments (s30B TMA), and the validity of profit deferral.
- •The case involves 63 Managing Directors and Partners (MDPs).
- •The Capital Interests were structured as long-term capital vehicles (LTCV), similar to share-based payments, but without direct ownership of UK LLP assets.
- •The value of Capital Interests was linked to the value of BCG Inc. shares, not the UK LLP's performance.
Legal Principles
Partnership profit-sharing rules determine how a firm's profits are allocated among partners for income tax purposes.
ss850-850C ITTOIA
Miscellaneous income is taxed if not covered by other provisions.
s687 ITTOIA
Tax on sales of occupational income applies if transactions exploit an individual's earning capacity to avoid income tax.
Chapter 3, Part 13 ITA 2007
Discovery assessments (s29 TMA) and partnership amendments (s30B TMA) require establishing a loss of tax, often due to carelessness.
s29, s30B TMA
LLP members have rights determined by the LLP agreement and statutory defaults.
LLPA 2000, s5; LLP Regulations 2001, reg 7
Outcomes
UK LLP's appeal of discovery amendments (s30B TMA) is allowed.
HMRC failed to demonstrate carelessness or meet the hypothetical officer test.
Individual appeals regarding profit allocation (s850/850C ITTOIA) are allowed.
No adjustments were needed; the Capital Interests were not part of the profit-sharing arrangements.
Individual appeals regarding Capital Interest disposals (s29 TMA) are mixed.
Assessments outside the 4-year limit are allowed due to lack of proven carelessness; 2013/14 assessments are dismissed; 2016/17 assessments are allowed due to failure to meet the hypothetical officer test.
Payments on Capital Interest disposals are treated as income under s687 ITTOIA (or Chapter 4, Part 13 ITA 2007 if s687 doesn't apply).
Capital Interests were part of the remuneration package, analogous to other income, and met the conditions for miscellaneous income or sales of occupational income.
Profit deferral from 2012/13 was valid.
The LLP agreement required a committee allocation before entitlement; no allocation was made for the deferred period.