LLP and corporate members were related for IP amortisation

In Muller UK & Ireland Group LLP & Ors v HMRC [2023] TC08742, the First Tier Tribunal (FTT) held that a Limited Liability Partnership (LLP) was related to all of its corporate members despite not being a 'company'.  As a consequence, the relief claimed for the amortisation of Intellectual Property (IP) acquired from those companies was denied.

• Muller UK & Ireland Group LLP (LLP) was incorporated in 2013. Its Corporate Members were the other appellants in the case:
  • Muller Diary UK Ltd (MDUK).
  • Robert Wiseman & Sons Ltd (RWS).
  • TM UK Production Ltd (TMUK).
• The corporate members are all UK companies, who transferred their trade and assets to the LLP in return for membership units, shortly after the incorporation.
• The key issue, in this case, concerns the transfer of IP, namely brands, licences, software and Goodwill.
• The IP was recorded in the LLP's accounts and amortised. The calculation of the LLP's profits was then included in each of the corporate member's tax returns.  It included a deduction for the Amortisation for the periods ended 31 December 2013 - 2018.
• HMRC opened enquiries into the tax returns of the LLP and each of the corporate members for the accounting periods up to 2017. Closure Notices were issued which denied the deducted amortisation and the parties appealed to the FTT.

The two principles in dispute were:

• The taxation of a trading LLP and its corporate members for Corporation Tax purposes.
  • The profits of the LLP are calculated by treating the LLP as a 'notional company'.
• The treatment of intangible fixed assets and goodwill for Corporation Tax purposes.
  • From 1 April 2002, the Corporate Intangible Regime was created, taxing assets through the Profit & Loss account and not subject to capital gains.
  • From this date, only internally generated IP or IP acquired from third parties could give rise to a deductible amortisation. Amortisation on IP acquired from related parties is not an allowable deduction.
  • The term 'related party' within CTA 2009 is defined in terms of companies and control. Under the definition, there is no scope for a partnership to be classed as a related party until changes made by FA 2016, which widened the definition to include partnerships (and the participation condition in general).

The FTT held that:

• The identities of the parties from whom the IP was acquired could not be ignored simply because the profit calculations were based upon a notional company. The notional company had actual transactions with actual persons and the LLP's relationship with those persons was relevant and deemed to belong to the notional company.
• It is not logical to argue that the corporate members could not be classed as related parties due to the other party being an LLP. As the profit calculations are to be made as if a UK company were undertaking the trade, so to the relationship of the corporate members to the LLP should be judged as if the LLP were a company.
• Whilst the calculations have to be undertaken for three notional companies, one for each corporate member, the corporate member should not be deemed to wholly own the notional company and so be limited to its membership share alone. Each corporate member was related to the others and so took on the rights and powers of them all. In turn, each corporate member had control of each notional company, making all parties related.
• The changes made by FA 2016 to the definition of a related party for the purposes of corporate intangibles did not preclude the legislation being interpreted to allow the parties to be related pre-2016. However, if this conclusion was incorrect, it was clear that upon the widening of the definition in 2016, the parties became related from the point of acquisition and any relief for amortisation claimed after the effective date of the change would be denied.

The appeal was dismissed.

Useful guides on this topic

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What types of partnership are there? What are the differences? 

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Intangibles regime and partnership interests
How is an interest in a partnership held by a company accounted for? How and when does the Intangibles regime apply?

External link

Muller UK & Ireland Group LLP & Ors v HMRC [2023] TC08742