Bluecrest Capital Management LP and Others v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 July 2022 |
| Neutral Citation | [2022] UKUT 200 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 200 (TCC)
Mr Justice Leech, Judge Timothy Herrington
Upper Tribunal (Tax and Chancery Chamber)
Corporation tax/income tax – Whether Partnership Investment Plan (PIP) profit sharing arrangements under ITTOIA 2005, s. 850 and/or CTA 2009, s. 1262 – Whether amounts received under PIP income or capital – If income, whether charged under ITTOIA 2005, s. 687 – If capital, whether charged under ITA 2007, s. 776 – Appeal dismissed.
In Bluecrest Capital Management LP & Ors v R & C Commrs [2022] BTC 522, the Upper Tribunal (UT) dismissed appeals against decisions of the First-tier Tribunal (FTT) in BCM Cayman LP [2020] TC 07782 finding that individual partners were chargeable to income tax on awards received under arrangements that involved the allocation of profits to a corporate partner which were reinvested as a capital contribution.
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 PIP Appeals and the IP Appeals; the appeal against the Cayman Appeals was decided in BCM Cayman LP v R & C Commrs [2022] BTC 523.
Bluecrest Capital Management LP (BCM LP), Bluecrest Capital Management LLP (BCM LLP) and Bluecrest Capital Management (UK) LLP (BCM UK LLP) (together the Partnership) operated an alternative asset management business during the relevant years. The PIP Appeals concerned the proper taxation of the PIP, described as a mechanism to retain and incentivise partners in the Partnership.
To facilitate the PIP a corporate partner was introduced to the Partnership. This corporate partner was entitled to be considered for a discretionary allocation of partnership profits which, if made, would be used by the corporate partner to acquire special capital which could be used to acquire investments in Bluecrest managed funds. After a period of time the corporate partner made individual PIP awards of special capital to individual partners based on recommendations by the partnership.
It was the Partnership’s view that when the corporate partner made PIP awards to individual partners this did not give rise to a tax charge because the transfer of special capital to satisfy the award was a transfer of a capital asset rather than an income payment.
HMRC did not accept this view, arguing that profit allocations made to the corporate partner and subsequent PIP Awards to individual partners were profit allocations to the individual partners.
The FTT rejected HMRC’s argument and held that the corporate partner had been allocated a share of the profits of the partnership and that share could not be treated as an allocation to the individual partners.
HMRC appealed to the UT on the basis that the FTT erred in law by taking too narrow a view of the profit sharing arrangements and, in particular, that it limited itself to the formal allocation of profits made according to the terms of the relevant partnership deed rather than looking at the allocation in its true factual context.
The UT found that the FTT made an error of law by failing to consider the application of the Ramsay principle to the construction of ITTOIA 2005, s. 850.
Remaking the decision but with the same outcome (ie in favour of the partnership), the UT considered the profit-sharing arrangements of the partnership (including the PIP) realistically and as a whole. Although it accepted that the corporate partner had no function other than to distribute special capital to individual partners; that individual partners had an expectation of receiving a PIP award; and that the corporate partner had a contractual obligation to give effect to those expectations, the UT ruled that the PIP did not form part of the profit-sharing arrangements of the Partnership and the rights of individual partners under the PIP should not be treated as rights to share in the profits of the Partnership
These appeals relate to HMRC’s argument that when PIP Awards were made to individual partners, the value of those awards was taxable income in their hands either as miscellaneous income under ITTOIA 2005, s. 687, or as capital amounts treated as income under ITA 2007, Pt. 13, Ch. 4 as the sale of occupational income.
The FTT had found in favour of HMRC on both arguments.
The IP appellants appealed these findings on the grounds that the PIP awards made to them were capital not income in nature and so could not fall within the charge to income tax as miscellaneous income. They further argued that a charge to income tax on the transfer of special capital to them by the corporate partner out of post-tax profits would amount to taxing the same profits twice.
Dismissing the appeal, the UT found that although individual partners did not have the right to receive PIP awards as part of the profit-sharing arrangements of the partnership, that did not prevent them being charged as miscellaneous income, and that the case did not involve double taxation as the corporate partner and the IP appellants were not the same person and were not taxed on the same income.
HMRC applied to strike out certain paragraphs of the IP appellant’s grounds of appeal arguing that the two new arguments raised did not form part of the grounds of their appeal against the closure notice before the FTT and were not agreed issued of the decision.
The IP appellants argued that the decision was a decision in principle and the disputed paragraphs were consequential issues that arose out of the decision.
The UT did not find that the FTT erred in law in reaching a final decision and so did not have jurisdiction to grant permission for the IP appellant’s to amend the grounds of appeal to add the additional issues.
The PIP appeals, and IP appeals were dismissed. The strike-out application was allowed, and the disputed paragraphs struck out.
This case relates to tax years before the changes to the rules for the taxation of mixed partnerships were introduced by FA 2014.
For commentary on the rules for the taxation of mixed partnerships, see In-Depth at .
Comment by Laura Burrows, Senior Tax Writer at Croner-i.
Rupert Baldry QC and Thomas Chacko, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs appeared for HMRC
Malcolm Gammie QC and Michael d'Arcy, Counsel, instructed by Slaughter and May appeared for the respondents and the appellants
[1] This decision relates to appeals brought against findings made by the First-tier Tribunal (“FTT”) in its decision (the “Decision”) released on 17 July 2020. In particular, this decision deals with the following matters:
- HMRC appeal against the FTT's decision to allow the appeals of BlueCrest Capital Management LP (BCM LP), BlueCrest Capital Management LLP (BCM LLP) and BlueCrest Capital Management (UK) LLP (BCM UK LLP) (together the Partnership) against amendments to the Partnership's tax returns made by various closure notices issued between 25 May 2017 and 25 January 2019. In those closure notices HMRC challenged the Partnership's tax treatment of profit allocations made pursuant to the Partner Incentivisation Plan (PIP) operated by the Partnership (the PIP Appeals).
- Mr Andrew Dodd, Ms Leda Braga, Mr Simon Dannatt, Mr Michael Platt and Mr Jonathan Ward, who were all individual partners in the Partnership, (the IP Appellants) appeal against the FTT's decision to dismiss their appeals against amendments to the IP Appellants' tax returns made by various closure notices issued in August 2018. In those closure notices HMRC asserted that the IP Appellants would be liable to income tax in respect of receipts under the PIP either pursuant to sections 687 to 689 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) or section 776 of the Income Tax Act 2007 (ITA 2007) in the event that the PIP Appeals were determined in the Partnerships' favour (the IP Appeals).
- HMRC apply to strike out certain paragraphs of the IP Appellants' Grounds of Appeal or, alternatively, apply for a direction that the IP Appellants require permission to appeal in the IP Appeals (the Strike-Out Application). They do so on the basis that the Upper Tribunal has no jurisdiction to hear them or that the IP Appellants require permission to appeal and have not sought and obtained it. The IP Appellants resist the application on the basis that they do not require permission but, if they do, they apply for permission to appeal (the Permission Application). We refer to the Strike-Out Application and the Permission Application together as the Procedural Applications.
[2] We defined the term “Partnership” above, and use it in this decision, to refer collectively to the various entities which have operated the BlueCrest alternative asset management business during the years which are relevant to the PIP Appeals. Those appeals concern the proper taxation of the PIP (which was described as a mechanism to facilitate the retention and incentivisation of partners in the Partnerships). The PIP provided for a discretionary award of “Special Capital” to be made to an individual partner if he or she remained a partner and had not engaged in behaviour that was, broadly speaking, detrimental or prejudicial to the Partnership's business. If a partner complied with the qualification requirements, the PIP provided that partners were eligible for an award but had no right to receive it. In particular:
- Each year individual partners had historically received performance related profit shares in the Partnership which involved an element of discretion on the part of management.
- A new corporate partner (the Corporate Partner) was introduced into the Partnership to facilitate the PIP. The Corporate Partner was entitled to be considered for a discretionary allocation of...
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