HM Revenue and Customs v Lansdowne Partners Ltd Partnership
| Jurisdiction | England & Wales |
| Judge | Mr Justice Lewison |
| Judgment Date | 18 October 2010 |
| Neutral Citation | [2010] EWHC 2582 (Ch) |
| Docket Number | Case No: CH/2010APP/0132 |
| Court | Chancery Division |
| Date | 18 October 2010 |
[2010] EWHC 2582 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: The Hon Mr Justice Lewison
Case No: CH/2010APP/0132
CH/2010/APP/0176
Richard Coleman (instructed by HMRC) for the Appellant
Conrad McDonnell (instructed by PriceWaterhouseCoopers) for the Respondent
Hearing dates: 7 th and 8 th of October 2010
Mr Justice Lewison:
Introduction
Lansdowne Partners Limited Partnership (“the partnership”) is a fund manager. The funds it manages are open ended investment companies. The partners in the partnership are Lansdowne Partners Ltd, as general partner, and a number of individuals as limited partners. The funds in question had appointed Lansdowne Partners International Ltd (“International”) as manager of the funds under the terms of a written agreement which entitled International to delegate its functions. It delegated those functions to the partnership. Investors in the funds subscribed for shares on the terms of a written prospectus. The prospectus described International as the Manager; and the partnership as the Investment Manager. The prospectus informed investors that the Manager was entitled to a management fee and a performance fee; and also informed them that the Manager shared those fees with the Investment Manager. The management fee and the performance fee were collected monthly. The prospectus also stated:
“Without prejudice to the above the Manager and the Investment Manager may from time to time and at their sole discretion and out of their own resources decide to rebate to some or all Shareholders … part or all of the Management Fee and/or Performance Fees in respect of the A Class Shares or the B Class Shares. Any such rebates may be applied in paying up additional Shares to be issued to the Shareholder. The Investment Manager may at its discretion rebate its share of the Performance Fee attributable to Shares issued to it or its partners, employees or related entities.”
A number of the individual limited partners made investments in the fund on the terms of the prospectus. The fund paid the monthly fees to the Manager (International) on behalf of the investors, and International shared the fees with the partnership. As envisaged by the prospectus, the partnership rebated the management fee and the performance fee to the partners in respect of their individual investments. When the partnership submitted its partnership statement for the year 2004/05 these rebates were treated as deductible expenditure in computing its taxable profit. On 27 August 2008 HMRC notified the partnership that it had amended the partnership statement for the tax year 2004/05 by adding back an estimate of the payments made to partners when arriving at the partnership profit. The partnership appealed against the amended assessment.
The General Commissioners for Income Tax (“the Commissioners”) decided that the rebates were deductible expenses in computing the partnership's profits. They also decided that HMRC were out of time in amending the partnership statement. HMRC now appeal against the Commissioners’ decision by way of case stated. The partnership seeks to uphold the decision; and advances a further ground for challenging the assessment. The partnership says that the flow of funds attributable to management and performance fees passing between the partnership and the partners was simply mutual trading and should not have featured in its tax computation at all.
The case stated
The case stated leaves a lot to be desired, even if it does not warrant the excoriating criticism to be found in Leith, Hull and Hamburg Steam Packet Co v Bain (1897) 3 TC 560, 567. The primary function of a case stated is to set out the facts that the Commissioners found (either admitted or proved); to summarise the contentions of the parties; to state what legal test they applied to the facts as found and then to pose the questions of law for the court. The case stated in the present case contains a long and discursive recitation of the evidence adduced on each side and the submissions (both legal and factual) made on each side. But it does not clearly state what facts were found; nor what legal test the Commissioners applied. HMRC rightly complained to the Commissioners that the draft case was not in proper form; but the complaints fell largely on deaf ears. Neither side asked for the case to be remitted to the Commissioners for amendment or clarification, so I will have to do the best I can.
Ms Nutton and Mr Tai made witness statements on behalf of the partnership, which they confirmed in evidence. They were then cross-examined. The Commissioners said that they accepted the evidence of Ms Nutton and Mr Tai as modified under cross-examination (although without identifying the modifications they had in mind) (§ 10). Thus it is necessary to combine what they said in their witness statements with what the Commissioners recorded about their respective cross-examinations. On that basis I can, I think, conclude that the Commissioners found the following facts relevant to the first two questions I have to decide:
i) It is the strong norm in the industry for the investment manager principals or partners to make substantial investments of their personal monies in the funds to which their fund provides investment management services (Ms Nutton's witness statement § 3; Case §10.2.2);
ii) Investment by partners is not compulsory (§ 7A.8); and there is no formal requirement about how much partners should invest (§ 7B.7);
iii) Ms Nutton did not invest her own money immediately on becoming a partner but did so later on (§ 7A.3). Mr Tai made his first personal investment six to nine months after becoming a partner (§ 7B.2);
iv) Investments by partners were partly for creating confidence in clients; partly for financial gain, and partly for convenience. Partner investment gives a strong message to clients and makes investment managers risk averse (§ 7A.10). There were advantages to partners in investing in the funds under management by the partnership. It avoided having to contact brokers and keep a separate check on personal investments; avoided conflicts of interest, and simplified the obtaining of consents needed for regulatory purposes (§ 7B.6);
v) In so far as the individual limited partners manage investments, they do so as employees of the general partner under contracts of employment (§ 7B.12);
vi) Investment manager principals who invest in the funds under management do not pay performance fees or management fees on their investments. Either they have zero fee shares, or the fees are rebated to them (§ 7A.14);
vii) Rebates to partners are discretionary (§ 7B.8). However, it was inevitable that at the end of the year rebates would be paid, and so the partnership's accounts record this. The partnership receives management fees monthly. It makes accruals for rebates in the accounts on a monthly basis. Performance fees are only shown in the accounts when they are received in cash after the fund year, which is typically 10 days after 31 December in each year. Rebates of performance fees are typically paid within ten days. (§ 7B.4);
viii) Rebates are also given to members of partners’ families and their trusts such as pension schemes. The thinking behind this is that if a partner puts money into a pension scheme he looks on it as his own money (§ 7B.11)
ix) Fees are rebated to outside investors, but this will always be covered by a written agreement. Rebates made under such an agreement are not discretionary (§ 7A.17), but are contractual (§ 7B.8). Some investors positively demand rebates (§ 7B.8). In the case of rebates to outside investors the level of rebate is lower, amounting to between a third and a quarter of the fees (§ 7A.17);
x) Performance and management fees received by International come directly from the funds that it manages (§ 7A.20). There is no contractual relationship between the funds and the partners (§ 7A.19); although there is a contractual relationship (in the shape of the prospectus) between investors (including partners who invest) and the funds (§ 6.10);
xi) The partnership receives from International 90 per cent of the management fee and 100 per cent of the performance fee (Mr Tai's witness statement § 35). However, the fees rebated to the partners amounts to 100 per cent of both fees (Mr Tai's witness statement § 47);
xii) As from the beginning of 2008 partners no longer paid fees and received rebates. Instead they subscribed for zero fee shares (Ms Nutton's witness statement §§ 8, 9); and their existing holdings were converted into zero fee shares (Ms Nutton's witness statement § 20).
Mutual trading
Logically the place to begin is with the partnership's argument that both the receipts and the rebates fall outside the scope of tax because they amount to what is (somewhat inaccurately) called mutual trading. The General Commissioners rejected this argument. It forms the subject of the partnership's Respondent's Notice.
The argument is based on the common sense proposition that you cannot trade with yourself or make a profit out of yourself. If a plumber mends his own tap he does not have to bring into account what he would have charged a client to carry out that work. Even if he were to “pay” himself for the work by transferring money from his personal account to his business account, it would make no difference.
In Thomas v Richard Evans & Co Ltd [1927] 1 K.B. 33 Rowlatt J said:
“It is true to say that a person cannot make a profit out of himself if what is meant is that he may provide himself with something at a less cost than that at which he could buy it, or if he does something for himself instead of...
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