HFFX LLP and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 February 2021 |
| Neutral Citation | [2021] UKFTT 36 (TC) |
| Date | 08 February 2021 |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 36 (TC)
Judge Anne Fairpo
Kevin Prosser QC and David Yates QC, instructed by Macfarlanes LLP, appeared for the appellants
Rory Mullan, Counsel appeared for the Interested Party
Thomas Chacko and James Kirby, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Whether amounts were partnership profits – Appeals allowed – Whether amounts taxable under ITTOIA 2005, s. 687 – Yes – Whether discovery stale – No – Appeals dismissed.
The First-tier Tribunal (FTT) found that the individual members of an LLP were liable to income tax on the reallocation of amounts to them by the corporate partner.
This is an appeal by HFFX LLP (“HFFX”) against amendments made by HMRC to its partnership returns, and by individuasssls who were members of HFFX (the Individual Appellants) against amendments and discovery assessments made by HMRC in respect of their personal tax affairs. Together, HFFX and the Individual Appellants are referred to as the Appellants.
The Individual Appellants were employed by an investment management business (GSA) as part of a team which designed and implemented software used to undertake foreign exchange trading. In addition to other remuneration, the Individual Appellants were entitled to a share of profits. HFFX was set up and became a member of a GSA LLP. The Individual Appellants left their employment with GSA and became members of HFFX. The Individual Appellants were seconded to GSA by HFFX, undertaking the same work as before. HFFX was entitled to a share of the profits generated by the Individual Appellants for GSA. Under a Capital Allocation Plan (CAP), part of this amount was paid by HFFX to a corporate member and HFFX made recommendations to the corporate member as to when and how those funds should be reallocated (as Special Capital) to the Individual Appellants.
It fell to the FTT to determine the issues set out below.
The FTT allowed the Appellants' appeal, ruling that the profit-sharing arrangements of HFFX did not entitle the Individual Appellants to the amounts allocated to the corporate member.
In coming to this conclusion, the FTT found that, as the recommendations made by HFFX were capable of being varied, there was no guarantee that the amounts would be paid to the Individual Appellants. Further, the rights of the Individual Appellants to be considered for future distribution did not amount to profit-sharing arrangements within the scope of s. 850: “a right to be considered in the exercise of a discretion cannot apply to determine an amount which is taxable”.
Income tax is charged under s. 687 on income “from any source” that is not otherwise charged to income tax. The parties disagreed as to whether the payments had a source or were entirely voluntary payments. The FTT found in favour of HMRC, concluding that the amounts did have a source, being the activities carried on the Individual Appellants. As the FTT had found that the payments were not taxable under s. 850, it followed that the payments were chargeable to income tax under s. 687.
The sale of occupation income rules apply where transactions are effected or arrangements are made to exploit the earning capacity of an individual in an occupation, and the main object or one of the main objects of the transaction or arrangements is the avoidance or reduction of liability to income tax. The FTT agreed with HMRC that the rules applied in this case, finding that the Individual Appellants' activities came within the definition of an “occupation”, and that tax avoidance or reduction was a main object of the arrangements. Accordingly, a charge to income tax would have arisen when the amounts of Special Capital were allocated to the Individual Appellants.
This issue arose in relation to Issue 1, above. The parties disagreed as to whether TMA 1970, s. 30B(1)(b) allowed for an amendment to address the allocation of profits. The FTT agreed with HMRC that it did; had HMRC been successful with regard to issue 1, they would have been successful with regard to issue 3.
An assessment is regarded as “stale” if it is not made within a reasonable time after the discovery is made. The FTT rejected the Appellants' argument that, as the circumstances here were similar to those in other cases, HMRC must have made a relevant discovery some time before the assessments were made. The FTT found for HMRC; on the balance on probabilities, no relevant discovery had been made before the HMRC officer concluded that there were grounds to make the assessments.
Finally, on receipt of the draft decision, the Appellants had asked for some of the information in the decision to be redacted on the basis that the information was “commercially sensitive”. The FTT did not consider that the information should be redacted; however, the information was redacted “to avoid rendering nugatory an application for permission to appeal by the Appellants”.
This is another corporate partner case, similar in circumstances and outcome to BCM Cayman LP [2020] TC 07782. Significant changes to the rules for the taxation of mixed partnerships were made by FA 2014.
Table of contents
| Introduction | … paragraph 1 |
| Background | … paragraph 8 |
| Appellants’ evidence | … paragraph 16 |
| Issue 1 – whether amounts taxable as partnership profits | … paragraph 74 |
| Issue 2a – whether Special Capital taxable as miscellaneous income | … paragraph 147 |
| Issue 2b – whether taxable as sale of occupation income | … paragraph 173 |
| Issue 3 – whether discovery amendment invalid | … paragraph 248 |
| Issue 4 – whether discovery assessments stale | … paragraph 266 |
| Conclusion | … paragraph 311 |
| Appendix 1 – decisions appealed |
[1] The appellants appeal against a number of assessments, summarised as follows:
- an amendment dated 22 March 2016 to the HFFX LLP partnership return for the year ended 31 March 2012, stated to have been made under s30B Taxes Management Act (TMA) 1970;
- amendments to the HFFX partnership returns for the years ended 5 April 2013 and 5 April 14, made by closure notices dated 10 August 2017, issued under s28B TMA 1970;
- discovery assessments against the Individual Appellants (the appellants other than HFFX LLP) made under s29 TMA 1970 in respect of the tax years 2011/12 and 2013;
- amendments made by closure notices to the Individual Appellants' personal tax returns, issued under s28A TMA 1970, for the tax years 2013/14, 2014/15 and 2015/16.
[2] The details of the assessments and closures notices are included in Appendix 1 of this decision.
[3] n accordance with the Tribunal's directions, the appeals were listed to be heard together by the same Tribunal.
[4] An individual member of HFFX, Andrey Badzyan, was given permission to make submissions at the hearing as an interested party in relation to the appeal by HFFX LLP. Mr Badzyan was a former member of HFFX LLP and the amendments made by HMRC in respect of the HFFX LLP partnership return for the tax year ended 31 March 2012 would affect Mr Badzyan's tax position.
[5] HMRC contend that amounts allocated to HFFX LLP should have been treated as allocated to individual members of HFFX LLP (Issue 1) or, in the alterative, that amounts of Special Capital received by individual members should have been taxed as miscellaneous income (Issue 2a) or, in the further alternative, such amounts of Special Capital should have been taxed on the basis of the provisions for sale of occupational income (Issue 2b).
[6] The appellants contend that the amounts allocated to GSAM were properly allocated to GSAM and that there was no tax charge on the Special Capital amounts received by individual members. The appellants contend that, if HMRC are correct as to Issue 1, then the discovery amendments issued to HFFX is invalid and that discovery assessments issued in respect of the individual members are stale.
[7]
HFFX – HFFX LLP
AG – Alexander Gerko
AG – Alexander Gerko
PB – Paul Bereza
AB – Andrey Badzyan
GSAM – GSA Member Ltd, Retention Member of HFFX LLP
GSACP – GSA Capital Partners LLP
GSACS – GSA Capital Services Limited, Corporate Member of HFFX LLP and managing member of GSACP
GSA – the investment management business primarily operated through GSACP
[8] The Individual Appellants were initially employed by GSACS to work within the GSA business. They were employed as researchers and developers, in a team established and led by AG after he was employed in June 2009, to design and implement software to be used by GSA funds to undertake foreign exchange trading.
[9] In addition to other remuneration, the team were entitled to a share of GSA profits (the “Trader Pay-Out”) which was allocated by AG amongst the team. Approximately 30% of the Trader Pay-Out was paid in the form of deferred remuneration, whereby individuals were given restricted shares in a GSA fund which could be realised over a period of time, if certain conditions were met. The Trader Pay-Out was initially 35% of the profits generated through the team's work; it was subsequently increased to 50%, with effect from 31 January 2010, in an agreement between AG and GSACS entered into on 1 July 2010.
[10] Following negotiations over the position of AG and the team within GSA, GSA proposed that the team be...
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