In George Anson v HMRC [2015] UKSC 44 the UK's Supreme Court overturned HMRC's established practice with regard the tax treatment of Delaware LLCs.

Mr Anson was a participant in a Delaware LLC. He was at the relevant time non-domiciled in UK, and so was taxed on the remittance basis. He remitted his income from LLC to the UK. 

After making a discovery HMRC assessed Mr Anson to tax on the basis that the income remitted from the LLC was treated as a dividend. HMRC contended that in English law the LLC fell to be treated as “opaque” so Mr Anson was not entitlement to Double Tax Relief for various federal taxes paid personally.

The taxpayer claimed double tax relief on his allocated share of profits arising within a US (Delaware) LLC. He argued that despite being a separate legal entity, the profit sharing arrangement (and US tax treatment) of this kind of LLC was akin to that of an English Partnership. Mr Anson had already paid Federal and State taxes on his profit share, regardless of whether that income was actually received.

Earlier hearings

The First Tier Tribunal thought hard about the conundrum and found that members of an LLC have interests akin to the interests of a Scottish partner, although both Mr Anson's barrister and HMRC's had difficulty in deciding what the First Tier really thought.

Mr Justice Mann sitting at the Upper Tier Tribunal unpicked the First Tier's decision and found that he did not agree. He thought that unlike a partnership the members of an LLC do not have an interest in its profits in “any meaningful sense”; and that therefore the profits on which tax has been paid in the US are the profits of the LLC. He decided that Mr Anson was taxed on something different in the UK which were distributions from (or entitlement under) the LLC agreement. 

Supreme Court decision

The Supreme Court stated that the ‘only relevant question’ was whether the income being taxed in both jurisdictions were one and the same. If so, then relief should be allowed. The Court found that the income referenced was the same, and so relief should be allowed. It cited the fact that Mr Anson was entitled to and so taxed on the profits accruing to him in accordance with the LLC agreement.

The LLC was therefore held to be ‘fiscally transparent’ for UK tax purposes.  

Commentary

The decision is at odds with established HMRC practice in respect of US (Delaware) LLCs, and could have implications that practitioners should be aware of:

  • Clients with income from similar entities may be entitled to double tax relief.
  • Precedent may indicate shift toward claiming relief first, and awaiting HMRC challenge (this case sets a new precedent).
  • Wider reaching implications where tax treatment in foreign jurisdiction is inconsistent with legal entity focus on question of whether profits taxed are identical may indicate relief is due.

Allan Cinnamon, a cross boarder expert, writing in Tax Adviser magazine notes that that there may be other entities which have similarly been classed previously as opaque by HMRC, including LLCs in Anguilla, Isle of Man and Russia. However some other (non-Delaware) US LLCs may be taxed opaquely by their states and so tax credits may not be available.

External link: George Anson v HMRC [2015] UKSC 44

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