The Commissioners for HMRC v HFFX LLP
[2024] EWCA Civ 813
HFFX LLP & Ors. v The Commissioners for HMRC
20 March 2023
[2023] UKUT 73 (TCC)
Upper Tribunal
A company had a complicated bonus plan. The tax man said some bonuses were taxable income; the company disagreed. The court said the tax man was right because the company had a legal duty to fairly consider the bonuses, even if there wasn't a written agreement to pay them. Other arguments about how the bonuses were calculated and whether some numbers should be kept secret were also rejected.
Key Facts
- •Appeal against FTT decision concerning the tax treatment of a deferred remuneration arrangement (Capital Allocation Plan - CAP) for HFFX LLP members.
- •Approximately £22.5 million in tax at stake.
- •CAP involved allocating profits to a corporate LLP member (GSAM) who then had discretion to reallocate sums to individual members.
- •Appellants argued tax only on directly allocated share, with corporation tax on corporate member's share.
- •HMRC argued tax on partnership profits under s850 ITTOIA 2005 or as miscellaneous income under s687 ITTOIA 2005.
- •FTT rejected HMRC's s850 argument but accepted the s687 argument.
- •Appellants appealed FTT's s687 decision and HMRC appealed FTT's rejection of s850.
- •A discovery assessment for Mr Gerko for 2012/13 was also challenged.
- •Appellants challenged FTT's refusal of their application to redact commercially sensitive figures.
Legal Principles
Taxation of partnership profits under s850 ITTOIA 2005.
Income Tax (Trading and Other Income) Act 2005
Taxation of miscellaneous income under s687 ITTOIA 2005.
Income Tax (Trading and Other Income) Act 2005
Sufficient link between source and recipient for miscellaneous income; legal obligation on payer.
Spritebeam v HMRC [2015] UKUT 75 (TCC); BlueCrest Capital Management LP and others v HMRC [2022] UKUT 00200 (TCC)
Implied term of good faith and rationality in exercising contractual discretion (Braganza principle).
Braganza v BP Shipping Ltd [2015] UKSC 17
Sale of occupation income rules under Chapter 4 of Part 13 of ITA 2007.
Income Tax Act 2007
Discovery assessments under s29 Taxes Management Act.
Taxes Management Act
Redaction of commercially sensitive information under Rule 14 FTT Rules.
Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, Rule 14; Unwired Planet International Ltd v Huawei Technologies Co Ltd (No. 3) [2017] EWHC 3083 (Pat)
Outcomes
HMRC's appeal (s850) dismissed.
Followed BlueCrest UT decision; FTT did not err in its statutory interpretation of s850.
Appellants' appeal (s687) dismissed.
Sufficient link between source and payment existed due to a legal obligation on GSAM to exercise its discretion fairly, even without a strict legal right to payment; factual differences from BlueCrest immaterial.
Appellants' appeal (sale of occupation income) dismissed.
Condition A (occupation) and tax avoidance purpose met; FTT's findings on evidence were not unreasonable.
Mr Gerko's appeal (discovery assessment) dismissed.
HMRC provided sufficient evidence of a discovery, even with a different officer's name on the assessment letter.
Appellants' appeal (redaction) dismissed.
FTT's refusal to redact figures was a valid exercise of discretion; information was not sufficiently confidential or commercially sensitive to outweigh the principles of open justice.