Odey Asset Management LLP and Others

JurisdictionUK Non-devolved
Judgment Date04 February 2021
Neutral Citation[2021] UKFTT 31 (TC)
Date04 February 2021
CourtFirst Tier Tribunal (Tax Chamber)

[2021] UKFTT 31 (TC)

Judge Harriet Morgan

Odey Asset Management LLP & Ors

Mr David Goldberg QC, as instructed by Macfarlanes LLP, as Counsel appeared for the appellants

Mr Thomas Chacko and Mr James Kirby, as instructed by the General Counsel and Solicitor to HM Revenue and Customs, as Counsel appeared for the respondents (“HMRC”)

Income tax – Tax effects of a partnership incentive plan – Whether the appellants are taxable on sums allocated to a corporate member of the LLP in the year of allocation – No – Whether the appellants are taxable on sums received on reallocation of special capital to them in the year of receipt under ITTOIA 2005, s. 687 (miscellaneous income) – Yes – Or under ITA 2007, s. 773 to 778 (sales of occupational income) – No – Whether an amendment and various discovery amendments were made validly under TMA 1970, s. 29 and 30B – Appeal allowed in part.

The First-tier Tribunal (FTT) found that amounts reallocated to individual members of an LLP by a corporate member were chargeable to income tax in the hands of the individual members as miscellaneous income under ITTOIA 2005, s. 687.

Summary

This is an appeal by Odey Asset Management LLP (Odey), and by individuals who were members of Odey (the Members), against amendments and discovery assessments made by HMRC which imposed an additional liability to income tax on the Members.

For each relevant year, Odey calculated a deferred profit share amount (the Individual Share) for each Member and paid this amount to a corporate member. Odey made recommendations to the corporate member that it should exercise its discretionary powers in relation to the Individual Share as follows: (1) it should contribute the Individual Share to Odey as Special Capital; and (2) it should reallocate the Special Capital to the member on specified dates over a two to three-year period subject to certain conditions being satisfied. Following the reallocation, the Member could withdraw the Special Capital from Odey.

It fell to the First-tier Tribunal (FTT) to determine the issues set out below.

Issue 1: Whether the Member was subject to income tax in respect of the Individual Share allocated to the corporate member.

ITTOIA 2005, s. 850(1) provides that “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”. The term “profit-sharing arrangements” is defined by s. 850(2) as meaning “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”.

For the FTT, on a purposive construction of s. 850, the term “rights” is to be given the meaning of “entitlement” in a legal sense. As the Member's entitlement to the Individual Share was conditional on future events, some of which were beyond the control of the Member, it did not constitute a legal entitlement to the Individual Share or any reallocation of Special Capital. Therefore, the Member was not subject to income tax in respect of the individual share allocated to the corporate member.

Issue 2: Whether an amount reallocated as Special Capital to a Member was chargeable to income tax under ITTOIA 2005, s. 687.

Income tax is charged under s. 687 on income “from any source” that is not otherwise charged to income tax. The FTT agreed with HMRC that the amounts had a source for the purposes of s. 687, being the Member's work for and membership of Odey. This was not, as in Stedeford (HMIT) v Beloe (1932) 16 TC 505, a receipt which depended entirely on the goodwill of the payer such that it was a voluntary gift.

Issue 3: Whether an amount reallocated as Special Capital to a Member was chargeable to income tax under ITA 2007, s. 773 to 778 (sale of occupation income rules).

The sale of occupation income rules apply where (broadly): the individual carries on an occupation (Condition A); transactions are effected or arrangements are made to exploit the earning capacity of the individual in the occupation by putting another person in the position to enjoy that income (Condition B); in consequence of the transactions or arrangements, an amount not otherwise charged to income tax is obtained by the individual (Condition C); and a main object of the transactions or arrangements is the avoidance or reduction of liability to income tax (the main purpose test).

The FTT found that an amount reallocated as Special Capital to a Member was not chargeable to income tax under the sale of occupation income rules as Condition B was not satisfied: the corporate member received its own income, in the form of its own share of the profits of Odey; the Individual Share was not in the first place the income of the Member, conceptually or actually. Although it was not necessary for the FTT to consider the remaining conditions, the FTT found that Condition A and the main purpose test were met (Condition C was not disputed).

Issue 4: Whether the discovery amendment made under TMA 1970, s. 30B to Odey's return was valid.

The FTT agreed with Odey that the amendment was invalid because section 30B could not be used to adjust the allocation of income between the Members; it could only be used to adjust the total profits of Odey.

Issue 5: Whether discovery assessments issued with regard to some of the Members' returns were valid.

The FTT considered whether an HMRC officer could have been reasonably expected, on the basis of the information made available to him, and before the expiry of the time limit for HMRC to raise (or, depending on the circumstances, close) an enquiry into the tax return, to be aware that there was an insufficiency of tax in that return. Applying this test to each return, the FTT allowed the appeal with regard to some of the returns.

The FTT rejected the argument put forward on behalf of the Members that the disclosure had become stale: “in my view, on the basis of the case law, this is not just a question of simply how much time has elapsed between the discovery and the issue of the assessments and whether the assessments could have been made sooner. The status of discussions and awareness of the likely issue of the assessments must be a relevant factor in assessing whether the issue remains “live” or has becomes “stale”.”

In conclusion, the appeals were dismissed except to the extent set out under issues 4 and 5, above.

Comment

As in HFFX LLP [2021] TC 08023, another recent corporate partner case, the FTT found in favour of HMRC that individual members of an LLP were chargeable to income tax on profits reallocated to them by the corporate member under the catch-all “tax on income not otherwise charged” provision. However, the two decisions differ in some regards; for example, in the application of the sales of occupational income rules to the arrangements.

Significant changes to the rules for the taxation of mixed partnerships were made by FA 2014.

DECISION

[1] These appeals concern the tax consequences of arrangements operated by Odey Asset Management Limited (“Odey” or “the Partnership”) during the 2011/12 to 2015/16 tax years for the remuneration of the members of Odey (“the Members”) including the other appellants (“the Plan”). At all relevant times Odey carried on an investment fund management business.

[2] In outline, under the arrangements Odey adopted a remuneration policy (“the Remuneration Policy”) under which, for each relevant tax year, a proportion of Odey's profits which could otherwise have been allocated to and received by certain of the individual Members in that year were subject to a “deferral” mechanism whereby those Members could receive them only over two to three years if certain conditions were satisfied. I refer to the total sum of such profits for each tax year as “the deferred share” and the proportion of the deferred profit share “awarded” to each relevant Member as “an individual share”:

  • In each relevant tax year, Odey calculated and paid the individual shares to a corporate member of Odey, Partners Special Capital Limited (PSCL), which was specifically set up to play its role in the Plan and had no other purpose.
  • Odey made recommendations to PSCL that it should exercise the discretionary powers given to it in the agreement governing the relations between the Members to (a) contribute each individual share awarded to each specified Member to Odey as Special Capital on the basis that Odey would invest that share in the Fund which the relevant Member managed, and (b) reallocate the Special Capital referable to each individual share to the named Member on specified dates over a two or three year period subject to the satisfaction of certain conditions in the Remuneration Policy on the basis that, following any such reallocation, the Members could withdraw the monies referable to the Special Capital from Odey.
  • In all cases, PSCL acted in accordance with the recommendations made by Odey and, on having received a reallocation of Special Capital, the relevant Members withdrew the related monies from Odey.

[3] The appellants' stance is that the individual Members are not subject to income tax (a) on the individual shares “awarded” to them in the tax year in which they were calculated and paid to PSCL and they were notified of the “award” (“the year of allocation”), or (b) on the funds they received when the Special Capital referable to the individual shares was later reallocated to them in the tax year of receipt (“the year of receipt”).

[4] HMRC said that, on the contrary:

  • adopting a purposive approach to the construction of the relevant legislation, on a realistic view of the facts, each Member is subject to an upfront income tax on the individual share awarded to him in the year of allocation under s 850 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) (relating to the allocation of partnership profits); and
  • alternatively, each Member is subject to income tax on the sums received when the Special Capital...

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