LLP profit reallocation scheme fails (2)

In Odey Asset Management LLP & Ors v HMRC TC08018, the First Tier Tribunal (FTT) found that a Limited Liability Partnership (LLP) scheme to reallocate profits via a corporate vehicle using allocations of Special Capital failed to work. The allocations were chargeable to Income Tax on the individual partners. 

• Odey Asset Management LLP (Odey) adopted a Remuneration Policy under which a proportion of profits were allocated to a corporate member of Odey, Partners Special Capital Limited (PSCL).
• Odey made recommendations to PSCL that it should exercise discretionary powers to contribute Special Capital to Odey and allow the individual members to withdraw that Special Capital on specified dates.
• PSCL contributed Special Capital to Odey and allowed individual members to withdraw it in line with the recommendations made.
• PSCL had no other purpose but to facilitate the remuneration policy.
• HMRC raised various discovery assessments challenging the arrangements on the basis that:
  • The allocation of profits to PSCL should be reclassified as profits of the individual members (Issue 1), or;
  • The receipt of Special Capital is subject to tax under the miscellaneous income provisions (Issue 2), or;
  • The individual members are subject to tax when Special Capital is allocated to them under the ‘sale of occupational income’ provisions (Issue 3).
• The taxpayers appealed against the technical nature of the assessments as well as their validity (Issue 4a and 4b).

Issue 1: The Partnership share allocated

The FTT considered that the profits allocated to PSCL could not be reallocated to the individual members as:

• The purpose of the legislation is to subject each member to tax on the share of the profits they have a right to.
• The mechanics of the Remuneration Policy did not give the individual member the right to any subsequent reallocation of Special Capital.

Issue 2: Do the miscellaneous income provisions apply?

The FTT found that the individual members were subject to tax on the reallocated amounts of Special Capital under the miscellaneous income provisions as:

• Individual members were rewarded for their work for Odey by annual profits and the reallocations of Special Capital made in subsequent years.
• The Remuneration Policy was designed to provide a deferred bonus to retain and incentivise individual members.
• The allocations of Special Capital were not a voluntary gift, they should be viewed in the context of the Remuneration Policy as deferred remuneration.
• There was a link between receipt of the Special Capital and the individual members' activities for, and their membership of, Odey.

Issue 3: Sale of Occupational Income

The FTT concluded that the reallocation of Special Capital was not taxable under the Sale of Occupational Income provisions as:

• The activities of the appellants were akin to those of a profession.
• One of the main reasons for the Remuneration Policy was the avoidance or reduction of Income Tax.
• No transactions or arrangements were made to exploit the individual members’ earning capacity by putting another person in a position to enjoy that income as the profit share allocated to PSCL was not that of the individual member by right.

This conclusion is different from the FTT decision in HFFX LLP & Ors v HMRC TC8023also recently reported. In that case, it seems to have been accepted that the Corporate Member of the LLP received a profit share in lieu of the individual members and the Sale of Occupational Income provisions would apply.

Issue 4a: Validity of HMRC discovery assessment in respect of Odey

The FTT accepted the appellant’s argument that there could not be an insufficiency of tax if the total profits of the LLP were unchanged (as all of the profits of the LLP had been subject to tax albeit at different rates).

This conclusion differs from that in HFFX LLP & Ors v HMRC TC8023 which concluded that the insufficiency of tax was in relation to the profit of a separate member, rather than the total profits of the partnership.

Issue 4b: Validity of HMRC discovery assessments in respect of individual members

The FTT allowed the appeal in part finding that:

• The discovery was made in February or March 2016.
• That there was no onus on HMRC to rebut the appellant’s argument that an earlier officer made the discovery.
• HMRC awareness of an applicable tax scheme does not mean that it is aware of a specific insufficiency of tax in relation to particular users of that scheme.
• The fact that the officer had requested further information did not mean that they had not discovered that there was an insufficiency of tax.
• While the discovery test is subjective, that does not mean that an officer of HMRC can be held to have made a discovery only when they think that they have made it.
• If an officer believes an amount should be taxable but is unsure of the exact provisions that should tax it, that does not mean a discovery has not been made.
• HMRC failing to issue discovery assessments with a view of reaching a settlement does not mean that a discovery has not taken place.
• Discovery requires detection of an insufficiency of tax, rather than a detailed calculation of what that insufficiency is.
• The length of time between the discovery and the issue of assessments does not of itself make an assessment stale.
• The status of discussions between the parties and the awareness of the likely issue of assessments must be a relevant factor in an assessment becoming stale.
• During the period between the discovery being made (no later than April 2016 based on information being received in September 2015) and the issue of assessments in 2017 and 2018, the appellants must have been aware that if the ongoing issues were not resolved and further assessments would be issued.
• In terms of enquiries into the 2013/14 tax year, by the end of the enquiry window on 31 January 2016, a hypothetical officer would have been aware that there was an insufficiency of tax (based on the information provided in September 2015), thus the conditions for discovery for that year was not met.

Useful guides on this topic

Discovery Assessments: At a glance
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment?

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Sale of occupational income: anti-avoidance
When is there a sale of occupational income? How is it taxed?

Partnerships with mixed membership
What is a mixed-member partnership?  How are the profits of a mixed-member partnership taxed?

LLP profit reallocation scheme fails
In HFFX LLP & Ors v HMRC TC8023, the First Tier Tribunal found that a Limited Liability Partnership (LLP) scheme to reallocate profits via a corporate vehicle using allocations of special capital failed to work and those allocations were chargeable to Income Tax on individual partners.

External Links

Odey Asset Management LLP & Ors v HMRC TC08018