BCM Cayman LP and Another v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 July 2022 |
| Neutral Citation | [2022] UKUT 198 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 198 (TCC)
Mr Justice Leech, Judge Thomas Scott
Upper Tribunal (Tax and Chancery Chamber)
Corporation tax – Acquisition by Cayman Islands limited partnership of interest in UK limited partnership – Liability of general partner in Cayman partnership to corporation tax on certain profit allocations – Whether Cayman partner entitled to tax deduction for interest on borrowings to acquire interest in UK limited partnership – Appeal dismissed.
In BCM Cayman LP & Anor 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 reference to other partners and that interest on borrowings was not a trading loan relationship.
In BCM Cayman LP [2020] TC 07782, the FTT decided a number of issues summarised as:
- the Cayman Appeals;
- the PIP Appeals; and
- the IP appeals.
This case appealed the FTT decisions relating to the Cayman Appeals; the appeals against the decisions in the PIP Appeals and the IP appeals were decided in Bluecrest Capital Management LP v R & C Commrs [2022] BTC 522.
This was an appeal by BCM Cayman LP (BCMC LP) and Bluecrest Capital Management Cayman Limited (BCMCL) (together the Appellants).
The Bluecrest group carried on the trade of investment management, and at all relevant times a UK limited partnership, Bluecrest Capital Management LP (BCM LP), carried on part of that trade. In 2007 certain members of BCM LP wished to sell part of their interest in BCM LP which amounted to 19% of the equity, the remaining members agreed to acquire those interests with a view to providing an equity pool for other members or employees of the group.
BCMC LP, a limited partnership, was formed in the Cayman Islands to hold the interests of the buyers. BCMCL, a limited company incorporated in the Cayman Islands, and a wholly owned subsidiary of Bluecrest Capital Management Cayman Holdings Limited (BCMCHL) become the general partner of BCMC LP.
The sellers assigned their combined 19% interest in BCM LP to BCMCL, it then contributed that interest to BCMC LP as a capital contribution with BCMC LP becoming a party to BCM LP’s amended deed of partnership.
BCMCL funded the acquisition via a bank loan and the issue of loan notes to the sellers. As part of the structure, the bank became a member of BCMC LP (identified as the corporate limited partner) and also entered into a swap transaction with BCMCHL. The bank subsequently assigned its interest in BCMC LP and the swap transaction to Fyled Energy Ltd (Fyled) which became the corporate limited partner.
BCM LP allocated profits to its members in a particular order of priority, first the BCMC LP to cover monthly interest due on the bank loan, then to the limited partners in the agreed proportions.
BCMC LP also allocated profits in a particular order of priority. First to BCMCL to pay interest due under the bank loan, then to pay off interest due under the loan notes, and finally to the limited partners in the agreed proportions.
For accounting periods between 2007 and 2011, the BCMC LP partnership deed also provided for a profit allocation to the corporate limited partner in the event BCM LP made profits in excess of a certain level (superprofits), the purpose of which was to allow BCM LP to prepay part of the debt due to the sellers under the loan notes. BCM LP did not make superprofits when RBS was the corporate limited partner, but BCMC LP made a number of superprofit allocations to Fyled.
In relation to the Cayman Appeals, two issues arise:
- the Profit Allocation Issue – the appellants appealed the FTT’s decision that BCMCL, and it alone, was liable to corporation tax on BCM LP profit allocations (including any profits that it allocated to the corporate limited partner) because only BCMCL was a partner of BCM LP; and
- the Interest Deductibility Issue – the appellants appealed the FTT’s decision that BCMCL was not entitled to any trading deduction for its borrowing costs.
The appellants argued that the parties contracted on the basis that the partners in BCMC LP should become partners in BCM LP and there was no basis on which the tribunal could conclude that BCMCL alone, as general partner in BCMC LP, was a partner to the exclusion of the others. They further argued that even if, contrary to the parties’ agreements, only BCMCL became a partner, BCMCL can only be charged to corporation tax in respect of the part of BCMC LP’s profit allocation to which BCMCL was beneficially entitled.
Although the UT ruled that the FTT had erred in law in failing to address the issue of beneficial entitlement, it was satisfied that BCMCL was the only partner of BCMC LP to become a partner in BCM LP. BCMCL was therefore chargeable to corporation tax on the total profit allocation from BCM LP for the years in question, without reference to the beneficial entitlement of the other partners.
The appellants argued that the FTT was wrong to conclude that there was no provision in tax legislation to relieve BCMCL’s finance costs and that BCMCL incurred its financing costs for the purpose of its UK trade.
The UT agreed that the FTT made an error of law in determining there was no mechanism under CTA 2009 to allow relief for interest costs. However, the UT also concluded that the FTT was entitled to find that the loans did not represent a trading loan relationship.
Both the appeal on the Profit Allocation Issue and the Interest Deductibility Issue were dismissed.
This decision looks at the principle of whether one partnership can be a member of another, and whether, as a result, all members of that partnership automatically become members of the other.
Whilst there was no dispute that the borrowings represented a loan relationship, this appeal focused on relief for interest as a trade loan relationship, no mention was made of any relief that may be due to the company as a non-trade loan relationship.
Comment by Laura Burrows, Senior Tax Writer at Croner-i.
Malcolm Gammie QC and Michael d'Arcy, instructed by Slaughter and May appeared for the appellant
Rupert Baldry QC and Thomas Chacko, instructed by the General Counsel and Solicitor to HM Revenue and Customs appeared for the Respondent
[1] This is the decision on the appeal by BCM Cayman LP (“BCMC LP” or the “Cayman Partnership”) and BlueCrest Capital Management Cayman Limited (“BCMCL”) (together the “Appellants”) against the decision of the First-tier Tribunal (“FTT”) reported at [2020] UKFTT 0298 (TC) (the “Decision”).
[2] The BlueCrest group carries on the trade of investment management. At all relevant times, a UK limited partnership, BlueCrest Capital Management LP (“BCM LP” or the “UK Partnership”), carried on part of that trade. In 2007 certain members of BCM LP wished to sell part of their interests in the UK Partnership which amounted to 19% of the equity. The remaining members agreed to acquire those interests with a view to providing an “equity pool” for other members or employees of the group. BCMC LP, the First Appellant, was formed in the Cayman Islands as a limited partnership to hold the interests of the buyers. BCMCL, the Second Appellant, is a limited company and was incorporated in the Cayman Islands to become the general partner of the Cayman Partnership. BCMCL was wholly owned by BlueCrest Capital Management Cayman Holdings Ltd (“BCMCHL”). The Cayman Partnership was governed by a deed of partnership (the “BCMC LP Deed” or the “Cayman Partnership Deed”).
[3] The sellers assigned their combined 19% interest in the UK Partnership to BCMCL and it then contributed that interest to BCMC LP as a capital contribution. BCMC LP became a party to the BCM LP's amended and restated deed of partnership (the “BCM LP Deed” or the “UK Partnership Deed”). As a limited partnership, BCMC LP did not have separate legal personality and one of the principal issues which we have to determine is the effect of the arrangement whereby BCMC LP became a partner in the UK Partnership and, in particular, whether all of the partners of BCMC LP also became partners in the UK Partnership.
[4] To fund the acquisition BCMCL borrowed $365 million. In particular, it borrowed $200 million from the Royal Bank of Scotland plc (“RBS”) and issued $165 million in loan notes (the “Loan Notes”) to the sellers. As part of the structure which was put in place at the same time, RBS became a member of BCMC LP (and was identified as the “Corporate Limited Partner”). RBS also entered into a swap transaction with BCMCHL governed by the 2002 ISDA Master Agreement which the parties called the “Total Return Swap” or “TRS”.
[5] On 11 June 2008 RBS assigned its interest in BCMC LP to Fyled Energy Ltd (later renamed Morgan Stanley Montrose Investments Ltd) (“Fyled”), which became the Corporate Limited Partner. The TRS was novated with the effect that RBS was replaced by Fyled as the counter-party and BCMCHL also entered into the “Financial Contract” (together with a side letter) with another counter-party, Morgan Stanley Cooper Ltd (“MS Cooper”), a company incorporated in the UK and wholly owned by the Morgan Stanley Group. These new arrangements collectively replaced the TRS.
[6] BCM LP allocated profits in the UK Partnership to the members of the UK Partnership in a particular order of priority. In particular, it allocated profits to BCMC LP to cover the monthly payment of interest due under the RBS loan facility before then allocating profits to the limited partners in the agreed proportions set out in their letters of allocation or the Deeds of Adherence which they executed on admission to the UK Partnership (subject to certain contingencies).
[7] BCMC LP also...
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