Revenue and Customs Commissioners v Vaines
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 January 2016 |
| Neutral Citation | [2016] UKUT 2 (TCC) |
| Date | 28 January 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Judge Malcolm Gammie CBE QC; Judge Judith Powell
Mr Michael Jones (Counsel) instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellants
The Respondent appeared in person
Partnership – Whether a member of a limited liability partnership was entitled to deduct a payment of €300,000 (£215,455) to settle German litigation in computing his liability to tax on his share of LLP profits – Whether the payment was an expense incurred wholly and exclusively for the purposes of the LLP's trade or of the individual member's notional trade – Whether the payment was revenue or capital expenditure.
The Upper Tribunal (UT) allowed HMRC's appeal against the decision of the First-tier Tribunal (FTT) in Vaines TAX[2013] TC 02965 finding that a partnership trade is to be regarded as a single trade carried on by the partners collectively and not as a trade carried on by the partners individually and, therefore, the wholly and exclusively rule applies in the context of the partnership's trade and not by reference to a partner's individual circumstances. The expense claimed by Mr Vaines was not incurred wholly and exclusively for the purposes of the partnership trade but was a personal expense and, as such, fell to be disallowed.
Mr Vaines was a partner in the law firm of Squire Sanders & Dempsey (SSD). Previously, he had worked for the law firm Haarmann Hemmelrath which had ceased to trade owing some €17m to a number of banks. Under a compromise agreement with one of the banks, Mr Vaines had made a payment of €300,000 (£215,455) to release him from all claims. Mr Vaines had deducted the payment against his professional income from SSD in his 2007–08 tax return. The FTT in Vaines TAX[2013] TC 02965 had allowed the claim on the basis that the payment was incurred wholly and exclusively for the purposes of the profession or trade that Mr Vaines was carrying on and because the payment was revenue and not capital expenditure.
HMRC appealed the decision to the UT on three grounds:
1) the FTT were wrong to conclude that each partner was carrying on a trade as an individual, albeit collectively with others; there was but one trade being the partnership (or LLP) trade;
2) even if that were not the case, the FTT had been wrong to conclude that the payment was made wholly and exclusively for the purposes of Mr Vaine's trade; and
3) the FTT were further wrong to conclude the payment was not capital in nature.
On the first issue, the UT noted that SSD was a limited liability partnership and that ITTOIA 2005, s. 849 provided that where an LLP was carrying on a trade and a member of the LLP was a UK resident individual (such as Mr Vaines), the profits of the LLP were to be calculated as if the LLP were a UK resident individual. The legislation specifically envisaged that it was the LLP that was carrying on the trade and although its activities were to be treated as carried on in partnership by its members rather than by the LLP itself (s. 863(1)(a)) there was nothing in that to indicate that Mr Vaines was carrying on a trade alone. The profits of that one trade were computed and charged and ITTOIA 2005, s. 850 then provided the natural link to the partners who were chargeable in respect of them according to the LLP's profit sharing arrangements for the period. Although ITTOIA 2005, s. 852 introduced the concept of a notional trade and that each partner's share of the firm's trading profits or losses was treated as profits or losses of a trade carried on by the partner alone, that concept was designed for the purposes of the applying the basis period rules only so as to enable Mr Vaines to self-assess tax on his share of the profits of the partnership trade by reference to the correct basis period.
In conclusion, the trade that was being carried on was SSD's trade as carried on in common by all the members and not by Mr Vaines alone and as such, his payment fell to be deducted, if at all, in the context of SSD's trade and not as the FTT supposed by reference to Mr Vaines' circumstances alone.
Turning to the second issue, the UT noted that their conclusion on the first issue inevitably led to a conclusion adverse to Mr Vaines on the second. ITTOIA 2005, s. 34(1) provided that in calculating the profits of a trade, no deduction was allowed for expenses not wholly and exclusively incurred for the purposes of the trade. The payment in question was not borne by SSD and the FTT's conclusion that Mr Vaines' purpose in making the payment was to preserve and protect his professional career or trade indicated that this was a personal expense, directed at resolving Mr Vaines' situation, and not one that was related to the professional activities of SSD. Furthermore, having arisen from his previous engagement with the law firm Haarmann Hemmelrath, it had nothing whatsoever to do with the business of SSD. The payment was not made wholly and exclusively for the purposes of the trade of SSD but to enable Mr Vaines to be secure in the knowledge that he could continue as a member of SSD. The UT found that the FTT's conclusion was wrong and that no deduction could be claimed. The UT further noted that this would remain the case even if it were wrong on the first issue.
On the third issue, the UT decided that, given their conclusions on the first two issues, it was unnecessary to deal with the question of whether the payment was a capital or a revenue expense, however, noted that had it been able to conclude in Mr Vaines' favour on the first two issues, it might well also have concluded that he was entitled to succeed on issue three.
The appeal was allowed.
In this case, Mr Vaines had claimed a deduction on his tax return against the trading profits of his current partnership for a payment made in settlement of legal claims against him in relation to his former partnership. The FTT (Vaines TAX[2013] TC 02965) had allowed the claim as incurred wholly and exclusively for the purposes of the trade which Mr Vaines carried on as an individual albeit collectively with others (in partnership), and because the payment was revenue and not capital. The UT has overturned this decision, finding that a partnership's (or LLP's) trade is a single trade carried on by the partners (or members) in common and not individually and, therefore, it is by reference to the partnership trade that deduction for expenses must be justified. As the expense was not wholly and exclusively incurred for the purposes of that trade but was a personal expense of Mr Vaines, it fell to be disallowed. In light of these findings, the UT did not need to consider whether the expense was capital or revenue.
[1] The Commissioners for Her Majesty's Revenue and Customs (HMRC) appeal the decision of the First-tier Tribunal (Judge John Brooks and Rebecca Newns) of 15 October 2013 in which they allowed the Respondent's claim to be able to deduct a payment of €300,000 to Bayerische Landesbank on the basis that the payment was incurred wholly and exclusively for the purposes of the profession or trade that the Respondent (Mr Vaines) was carrying on and that the payment was revenue and not capital expenditure.
[2] The circumstances in which Mr Vaines came to make the payment were not in dispute and were the subject of a Statement of Agreed Facts. It is relatively brief and we reproduce it below for ease of reference:
1) At all material times [Mr Vaines] was a partner in the law firm of Squire Sanders & Dempsey. In the year ended 5 April 2008 [Mr Vaines] was in professional practice as a partner in Squire Sanders & Dempsey and his share of profits from the firm represented his only source of professional income for the year.
2) Until 31 December 2005 [Mr Vaines] had worked in the London office of law firm Haarmann Hemmelrath which had many offices, in Germany and elsewhere.
3) On 27 October 2009, [Mr Vaines] made an amendment to his personal income tax return for the year ended 5 April 2008, claiming a deduction of £215,455 against his professional income from Squire Sanders & Dempsey.
4) The deduction claimed related to a payment to Bayerische Landesbank under an agreement made by a number of individuals who were connected with the law firm Haarmann Hemmelrath. Haarmann Hemmelrath had ceased to trade and owed approximately €17 million to Bayerische Landesbank and other banks.
5) [Mr Vaines] believed that the risk of challenging the German banks through the German courts was unacceptably high because if they were successful he would be made bankrupt. If he were made bankrupt, [Mr Vaines] would lose his position as a Partner in Squire Sanders & Dempsey.
6) Following negotiations with Bayerische Landesbank, [Mr Vaines] agreed to pay them €300,000 (£215,455) to release him from all claims to the Bank. The payment was made to the Bank in January 2008, in the tax year 2007–08.
[3] The only other finding that the First-tier Tribunal made was that, Although [Mr Vaines] accepted that the payment to Bayerische Landesbank had enabled him to avoid bankruptcy and protect his reputation, we find, as a matter of fact, that his purpose for making that payment was to preserve and protect his professional career or trade. We will need to consider the precise scope and import of this finding in due course.
[4] Mr Jones for HMRC says that the First-tier Tribunal was wrong on all counts to find as it did. Mr Vaines asks us to uphold the First-tier Tribunal's decision.
[5] The building blocks for Mr Vaines' success before the First-tier Tribunal were relatively brief. In a succinct decision, having set out the relevant provisions of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) relating to limited liability partnerships specifically and partnerships in general, the Tribunal concluded that their effect, certainly since...
To continue reading
Request your trial
-
King and Others
...allocated to him as shown in the partnership statement in his own tax return: s 8(1B) of the TMA … [61] In R & C Commrs v Vaines TAX[2016] BTC 502, the Upper Tribunal (Judge Gammie QC and Judge Powell) observed [23] At the same time new sections 8 and 9 TMA provided for returns to include......
-
Bloomberg Inc. (UK Permanent Establishment) and Another
...788 – IR Commrs v Gray (executor of Lady Fox (deceased)) [1994] BTC 8,034 – Major (HMIT) v Brodie [1998] BTC 141 – R & C Commrs v Vaines [2016] BTC 502. The First-tier Tribunal (FTT) found that the acquisition of intangible fixed assets was that of an investment by the corporate partners an......
-
BCM Cayman LP and Another v R & C Commissioners
...section 5 of the CTA 2009. This formulation repeated the conclusion of the Upper Tribunal (of which Mr Gammie was a member) reported at [2016] BTC 502. ...
-
BCM Cayman LP and Bluecrest Capital Management Cayman Limited v The Commissioners for HM Revenue and Customs [2022] UKUT 00198 (TCC)
...Major v Brodie was 16 This formulation repeated the conclusion of the Upper Tribunal (of which Mr Gammie was a member) reported at [2016] UKUT 2 (TCC). 70 clearly distinguishable and the fact that BCM LP’s profits are “taken to be the amount determined” “if a non-UK resident company carried......
-
Table of Cases
...v Hodge [2009] EWHC 786 (Ch), [2010] 1 BCLC 30, (2009) 153(17) SJLB 29, [2009] All ER (D) 156 (Apr) 17 Commissioners for HMRC v Vaines [2016] UKUT 2 (TCC), [2016] STC 1201, [2016] SWTI 239, [2016] All ER (D) 238 (Jan) 197 Commissioners for HM Revenue and Customs v Pal [2006] EWHC 2016 (Ch),......
-
Taxation
...the LLP. The system was that the profits of that single trade were computed and charged, and s 850 15 Commissioners for HMRC v Vaines [2016] UKUT 2 (TCC), [2016] STC 1201. 198 Partnership and LLP Law made the members chargeable according to the LLP’s profit sharing arrangements for the peri......