BCM Cayman LP and Others

JurisdictionUK Non-devolved
Judgment Date17 July 2020
Neutral Citation[2020] UKFTT 298 (TC)
Date17 July 2020
CourtFirst Tier Tribunal (Tax Chamber)

[2020] UKFTT 298 (TC)

Judge John Brooks

BCM Cayman LP & Ors

Malcolm Gammie QC and Michael d'Arcy, instructed by Slaughter and May, appeared for the appellants

Rupert Baldry QC and Thomas Chacko, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents

Corporation tax/income tax – Acquisition by Cayman Islands limited partnership (of which Cayman Islands limited company general partner) of 19% interest in UK limited partnership financed through borrowing – Profit allocation of UK limited partnership made to general partner of Cayman Islands limited partnership – Whether all members of Cayman Islands limited partnership members of UK limited partnership – Whether entitled to a deduction for interest on borrowing – If so, should any deduction be reduced under loan relationship provisions – Whether bank loan and loan notes classified as trading loan relationships or non-trading loan relationships – Whether discovery amendment valid – Appeal dismissed.

Corporation tax/income tax – Whether Partner Incentivisation Plan (PIP) profit-sharing arrangements under ITTOIA 2005, s. 850 and/or CTA 2009, s. 1262 – Whether Cayman Islands company liable to tax on all profit allocations from UK limited partnership – What profit sharing arrangement were relevant to the Cayman Islands limited partnership – Appeal allowed.

Corporation tax/income tax – Whether sums received pursuant to PIP capital or income – If income, whether charged to tax under ITTOIA 2005, s. 687(1) – If capital, whether main or one of main objects avoidance or reduction of liability to income tax – Whether transactions effected to exploit earning capacity in an occupation – Whether carrying out an occupation of a kind undertaken in profession or vocation – Appeal dismissed.

The First-tier Tribunal (FTT) found that:

  • a company was chargeable to corporation tax on profits allocated to it by a partnership via a sub-partnership and that it was not entitled to a trade deduction in respect of interest paid on loans to finance the acquisition of its interest in the partnership; and
  • individual partners were chargeable to income tax on benefits they received under arrangements which involved the allocation of profits to a corporate partner and the reinvestment of those profits into the partnership by the corporate partner as a capital contribution.
Summary

The Cayman Appeals, the PIP Appeals and the IP Appeals concern the profit sharing arrangements of a UK limited partnership (BCM LP) and successor firms. The appeals were heard consecutively.

The Cayman Appeals
Background (paragraphs 8 to 101 of the decision)

The Cayman Appeals are the appeals brought by the Cayman Appellants. The facts agreed by the parties to the case are summarised below.

  • In June 2007, BCMC LP, a Caymans Island limited partnership, was formed by BCMCL, a Caymans Island company, RBS and an individual.
  • In July 2007, BCMCL purchased a 19% interest in BCM LP, a UK limited partnership carrying on a trade of investment fund management, from Sugarquay, WR and MP in consideration for cash (financed by a loan from RBS) and the issuance of loan notes. BCMCL made a capital contribution to BCMC LP of its interest in BCM LP in consideration for BCMC LP granting it certain partnership interests.
  • In June 2008, Fyled replaced RBS in the arrangements.
  • In December 2008, the business of BCM LP was transferred as a going concern to BCM LLP.
  • In April 2010, a reorganisation was effected under which BCM LLP migrated to Guernsey and a new entity, BCM UK LLP, was incorporated and commenced trading in the UK. BCMC LP became a partner in BCM UK LLP.
  • In 2011, BCMCL renegotiated its debt arrangements, redeeming the loan notes and refinancing the remaining balance due to Flyed as part of a new syndicated loan.
  • In July 2013, BCMCL refinanced the existing balance on the syndicated loan as part of a new loan facility.

Between July 2007 and July 2013, BCM LP (and successor firms) allocated profits to BCMC LP which in turn allocated profits to BCMCL. BCMCL used those profits to pay interest to the holders of the loan notes and on the RBS/Fyled loan/the syndicated loan.

The Cayman Appellants appealed to the FTT in respect of closure notices issued by HMRC assessing additional profits chargeable to BCMCL. It fell to the FTT to determine a number of issues, referred to as the “Profit Allocation Issues”, the “Interest Deductibility Issues” and the “Discovery issue”, as set out below.

Profit Allocation Issue 1 (para. 102 to 114)
Is BCMCL liable to corporation tax on all of the profit allocations of BCM LP in respect of the 19% interest in BCM LP purchased in July 2007? In this regard was BCMC LP a partner of BCM LP and, if not, were all the partners of BCMC LP to be treated as partners of BCM LP?

Having regard to the various deeds and agreements, and to Caymans Islands law, the FTT found that BCMC LP could best be described as a “sub-partnership”; broadly, a partnership within a partnership. It followed that only BCMCL was a partner in BCM LP (rather than all the partners in BCMC LP) and therefore, that BCMCL was liable for corporation tax on its profit allocations in respect of the 19% interest in BCM LP.

In summary, the FTT rejected the argument put forward by the Cayman Appellants, finding in favour of HMRC.

Profit Allocation Issue 2 (para. 115 to 137)

Did BCMCL's entitlement to the profits of BCMC LP include those allocated to RBS/Fyled? In this regard:

  • What were the profit-sharing arrangements, within the meaning of CTA 2009, s. 1262, relevant to BCMC LP?
  • In particular, were they confined to the BCMC LP Deed, or did they encompass other contractual agreements and, if so, which other agreements?

Given the FTT's conclusion with regard to Profit Allocation Issue 1 (above), it was not strictly necessary for the FTT to consider the Profit Allocation Issue 2; however, it did so as the issue was fully argued and in case of any further appeal.

As a matter of Cayman Islands law, the profit sharing agreements were confined to the BCMC LP Deed under which BCMCL's entitlement to profits of BCMC LP did not include those allocated to RBS/Flyed.

Interest deductibility issue 1 (para. 138 to 161)
Are BCMCL's interest costs on the RBS loan and the loan notes, entered into by BCMCL to acquire a 19% partnership interest in BCM LP, allowable deductions under CTA 2009 in calculating BCMCL's chargeable profits for corporation tax purposes? If so, to what extent are they allowable?

It was common ground that BCMCL, as a partner of BCM LP (and successor firms) which carried on its trade through a fixed place of business in the UK, was trading through a UK permanent establishment and that it had no separate or other trading activity in the UK.

As a result, BCMCL was chargeable to UK tax only on those profits specified in CTA 2009, s. 19(3). Therefore, it was necessary to identify BCMCL's trading profits in accordance with the partnership rules contained in CTA 2009, Pt. 17 (in particular, CTA 2009, s. 1259) and CTA 2009, s. 380, which concerns the deduction of interest where “a money debt is owed by or to the firm”.

In this case, the interest was not due on a debt owed by a “firm” but by an individual partner, BCMCL, in its own right; therefore, s. 380 could not apply and, as there was no mechanism by which BCMCL could claim a deduction for interest on the loan or the loan notes, BCMCL was not entitled to claim a deduction for the interest.

In summary, the FTT rejected the argument put forward by the Cayman Appellants, finding in favour of HMRC.

Interest deducibility issue 2 (para. 162 to 206)
Is the equity and debt structure of BCMCL's UK PE in any way not representative of a structure that could have been achieved if the parties were operating on an arm's length basis (i.e. is BCMCL's UK PE thinly capitalised) such that the deduction claimed by BCMCL in respect of interest costs on the RBS Loan Facility and the Loan Notes is to be restricted? If so, to what extent is the deduction restricted? In this regard:
  • Are the conditions of ICTA 1988, Sch. 28AA, para. 1(1) and (2) (since rewritten as TIOPA 2010, s. 147(1)) for the application of the transfer pricing provisions of ICTA 1988, Sch. 28AA (since rewritten as TIOPA 2010, Pt. 4) satisfied in relation to the RBS Loan Facility and the Loan Notes?
  • In particular:Were the RBS Loan, the Sugarquay Loan, the MP Loan and the WR Loan arm's length provisions?Is it necessary that MP or WR be characterised as enterprises, for them to be within the scope of Pt. 4 of TIOPA 2010 and, if so, is such characterisation merited based on the facts of the case?

The FTT having concluded Interest Deductibility issue 1 in favour of HMRC, this issue was academic; however, the FTT addressed the issue in case of any further appeal.

As each of the parties had their own “divergent and differing” interests in the transactions, the transactions were at arms-length and BCMCL was not related to any of RBS, Sugarquay, WR and MP; therefore, the transfer pricing provisions did not apply to the transactions. It was accepted that both the concept of “persons”, as used in the legislation, and “enterprises”, as used in the OECD's guidelines, includes individuals.

Applying the legislation (ICTA 1988, s. 11AA and Sch. A1 since rewritten as CTA 2009, Pt. 2, Ch. 4) and guidance published by the OECD, it was necessary to consider the debt/equity ratio of BCMCL. Having found that the borrowing from RBS and the loan notes were issued on an arm's length basis, the FTT was unable to find that the UK PE could or would have acted differently or that there would have been any other debt/equity ratio than the one that there was.

Interest Deductibility Issue 3 (para. 207 to 211)
Are the RBS loan and the loan notes to be classified as “trading loan relationships” or non-trading loan relationships for the purposes of CTA 2009, Pt. 5? In relation to this, was BCMCL party to the RBS loan and the loan...

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3 cases
  • BCM Cayman LP and Another v R & C Commissioners
    • United Kingdom
    • Upper Tribunal (Tax and Chancery Chamber)
    • 22 July 2022
    ...v R Commrs [2022] BTC 523, the Upper Tribunal (UT) dismissed an appeal against the First-tier Tribunal’s (FTT) decision in BCM Cayman LP [2020] TC 07782, finding that the general partner in a Cayman partnership was liable to corporation tax on UK partnership profit allocations without refer......
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