Bluecrest v HMRC
| Jurisdiction | England & Wales |
| Judge | Sir Launcelot Henderson,Falk LJ,Lewison LJ |
| Judgment Date | 15 December 2023 |
| Neutral Citation | [2023] EWCA Civ 1481 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case Nos: CA-2022-002223; CA-2022-002238; CA-2022-002242; CA-2022-002243; CA-2022-002244; CA-2022-002246 |
[2023] EWCA Civ 1481
Lord Justice Lewison
Lady Justice Falk
and
Sir Launcelot Henderson
Case Nos: CA-2022-002223; CA-2022-002238; CA-2022-002242; CA-2022-002243; CA-2022-002244; CA-2022-002246
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE LEECH AND UPPER TRIBUNAL JUDGE TIMOTHY HERRINGTON
Royal Courts of Justice
Strand, London, WC2A 2LL
Jonathan Peacock KC, John Brinsmead-Stockham KC and Edward Hellier (instructed by Slaughter and May) for the Individual Partner Appellants and the Partnership Respondents
Rupert Baldry KC, Thomas Chacko and James Kirby (instructed by HMRC Solicitors' Office and Legal Services) for HMRC
Hearing dates: 14 th, 15 th and 16 th November 2023
Approved Judgment
This judgment was handed down remotely at 2.00pm on 15 th December 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
BlueCrest Capital Management is one of the world's largest investment management businesses. It was founded in 2000 by Michael Platt (“Mr Platt”) and William Reeves. During the period with which these appeals are concerned, running from 2008 until 2014, BlueCrest carried on its business in the United Kingdom through three partnerships, which broadly operated in succession: first, a limited partnership called BlueCrest Capital Management LP (“BCM LP”); next, a limited liability partnership (“LLP”) called BlueCrest Capital Management LLP (“BCM LLP”); and then, after the migration of BCM LLP to Guernsey in April 2010, another LLP called BlueCrest Capital Management (UK) LLP (“BCM (UK) LLP”). Except where it is necessary to distinguish between them, I will refer to the UK business of the firm, and to the three partnerships collectively, as “BlueCrest”.
In April 2008, a pilot phase of a “Partner Incentivisation Plan”, or “PIP”, was introduced on a voluntary basis for some of the senior partners in BlueCrest. This phase operated for the accounting period of BCM LP ending on 30 November 2008.
From its inception, the PIP had both a genuine commercial purpose and a perceived fiscal advantage for the participating partners.
The commercial purpose, which was explored in evidence before the First-tier Tribunal (“FTT”) and is reflected in their unchallenged findings of fact, was (in short) to incentivise the partners to remain with BlueCrest, in a highly competitive market, for periods of between six months and three years; to discourage excessive risk-taking; and to permit account to be taken of the partners' subsequent performance before awards under the PIP were finalised. In bare outline, these objectives were to be achieved by exchanging a proportion of the partner's prospective share of profit in the partnership business for a deferred entitlement, which was both contingent on the satisfaction of specified conditions and wholly discretionary, to a corresponding award of so-called “special capital” made to him by a newly introduced corporate partner. Meanwhile, the corporate partner would be allocated initial shares of profit equivalent to those forgone by the individual participating partners, and it was then in practice obliged to invest those shares, after retention of a sum sufficient to satisfy its expected liability to corporation tax and expenses, in the special capital from which final awards to the relevant partners might in due course be made.
During this pilot phase, the corporate partner was a limited company incorporated in England and Wales in April 2008 called Special Capital Limited (“SCL”). SCL became a partner of BCM LP by a Deed of Adherence on 30 April 2008.
The perceived fiscal advantage of the PIP lay in the difference between the marginal rate of income tax (then 40%) which the partner would otherwise have been liable to pay on his prospective share of profits diverted to the corporate partner, and the rate of corporation tax (then 28%) payable by the corporate partner on the profits reallocated to it. If, and when, an award of special capital was later made to an individual partner, it was expected that this would escape liability to income tax in the partner's hands for two separate reasons. First, it would be a receipt of capital, not income; and secondly, even if it had the character of income, the receipt would not be derived from a taxable source.
The second phase of the PIP operated for BlueCrest's accounting period ending on 30 November 2009. Participation was now open to a wider group of senior personnel than before, and on an opt-out basis, with the result that participation was the default position. By this stage, BlueCrest had also undergone some organisational changes:
a) a new corporate partner, ABM Avon Limited (“Avon”), joined BCM LP by a Deed of Adherence on 27 November 2008;
b) in December 2008 the business of BCM LP was transferred as a going concern to BCM LLP; and
c) although SCL remained a partner of BCM LP, and then a member of BCM LLP, by late 2009 Avon had taken over the main role of facilitating the PIP, and the residual special capital held by SCL had been transferred to Avon.
Apart from those changes, the second phase operated in substantially the same way as the pilot, but with one important difference. Unlike SCL, Avon was willing to retain only 15%, rather than 28%, of its initial allocation of profits representing the contributions to the PIP of the participating members. This meant that, for every 100 of partnership profits allocated to Avon, 85 instead of 72 would be available to be invested in special capital and made the subject of future final awards. The reasons why Avon was able to proceed in this way remain obscure, in the absence of any relevant findings by the FTT; but presumably Avon had been able to arrange its tax affairs so that its trading profits were subject to an effective rate of corporation tax of only 15% or less. Whatever the reason may have been, the attraction to BlueCrest was obvious. For every 100 that was contributed to the PIP, the amount of special capital available for future final awards would be substantially greater than under the previous arrangements with SCL.
The third, and last, phase of the PIP began with the first accounting period of BCM (UK) LLP, which was extended to end on 31 December 2010, and continued for subsequent annual accounting periods until the end of 2014. With effect from February 2010, participation in the PIP became mandatory for all individual members of the LLP, with some immaterial exceptions. The PIP did not, however, become obsolete after the end of 2014. To the contrary, the evidence was that it continued to operate thereafter across the global BlueCrest businesses, but the UK fiscal benefits which I have mentioned were effectively countered by remedial legislation in the Finance Act 2014 (“FA 2014”) concerning excess profit allocations to non-individual partners: see sections 850C to 850E of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”), inserted by FA 2014 section 74 and schedule 17, para 7(3).
Throughout the three phases of the PIP with which we are concerned, the participating partners fell into three main groups, comprising (a) discretionary traders, (b) systematic traders, and (c) others who fulfilled various supporting or “back office” functions. Broadly speaking, discretionary traders were engaged in the active management of investment portfolios, while systematic traders performed investment management services based on algorithmic trading.
Between 2010 and 2015, HMRC opened enquiries into the relevant tax returns of BCM LP, BCM LLP and BCM (UK) LLP, as well as into the returns of Mr Platt and other individual participants in the PIP, including Andrew Dodd, Leda Braga, Simon Dannatt and Jonathan Ward. In due course, those enquiries led to the sending of closure notices whereby HMRC sought to give effect to their primary case and to their alternative case.
HMRC's primary case was, and remains, that, having regard to the PIP arrangements as a whole, the profit share initially allocated to the corporate partner/member (i.e. SCL or Avon) is properly chargeable to income tax as the separate profit shares of the participating individual partners in the proportions in which they were intended to benefit from those allocations by final awards, or “re-allocations”, of special capital. This result is said to follow from a realistic application to the undisputed facts of section 850 of ITTOIA 2005, which states that:
“(1) For any period of account a partner's share of a profit or loss of a trade carried on by a firm is determined for income tax purposes in accordance with the firm's profit-sharing arrangements during that period.
…
(2) In this section … “profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.”
It is implicit in this argument that, if it is correct, the individual profit shares allocated to SCL or Avon cannot simultaneously be treated as profits which are subject to corporation tax in the hands of the corporate partner or member. HMRC accordingly accept in principle that, if their primary argument succeeds, all necessary adjustments must be made to ensure that there...
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