Swift v HMRC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 February 2010 |
| Neutral Citation | [2010] UKFTT 88 (TC) |
| Date | 22 February 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 88 (TC)
Judge John F Avery Jones CBE (Chairman), Ian Menzies-Conacher FCA CTA (Fellow) ACIB
Jonathan Peacock QC, counsel, instructed by Ernst & Young LLP, for the Appellant
David Ewart QC, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
Double taxation relief - individual investor in Delaware LLC - whether entitled to the profits as they arise - yes - accordingly the appellant is entitled to credit for US tax paid by him, the LLC being transparent for US tax purposes - if wrong, the LLC is not treated as transparent by Income and Corporation Taxes Act 1988 section 739s. 739 on the basis that Income and Corporation Taxes Act 1988 section 741s. 741 is satisfied - if wrong R & C Commrs were entitled to make discovery assessments
The tribunal decided that a UK taxpayer was entitled to double taxation relief for US tax paid on his share of the profits of a Delaware LLC since UK tax was "computed by reference to the same profits or income" within terms of relevant UK-US double tax conventions.
This was an appeal against discovery assessments made in 2004 for the years 1997-98, 1998-99 and 1999-2000, and amendments to the taxpayer's self-assessment income tax returns for 2000-01, 2001-02, 2002-03 and 2003-04.
The taxpayer was UK resident and ordinarily resident and since the 1997-98 tax year he had filed his UK tax returns on a non-UK domiciled basis. The taxpayer was at all material times an employee of S, a UK incorporated company. The taxpayer also indirectly participated in various venture capital funds sponsored by the S Group via an interest in the entities (either limited partnerships or limited liability companies) which served as the general partners of those funds. The taxpayer was treated as a non-resident for US tax purposes and therefore only included his US sourced income in his US federal and Massachusetts state tax returns. The taxpayer included his total employment earnings from S in his UK income tax returns.
The taxpayer, along with a number of colleagues involved in venture capital activities in the US, formed a limited liability company, constituted under Delaware law (SPLLC). Its place of business had always been located in Massachusetts, US. Each calendar year, all profits were distributed to members on a quarterly basis in arrears, so that the fourth quarter distribution was paid out after 31 December of the relevant US financial year. The income generated by SPLLC was shared amongst its members in accordance with prescribed profit sharing ratios. The taxpayer's profit share was made up of a number of different profit sharing interests which in aggregate were similar to the taxpayer's proportion. Not all members received a profit share in the same proportion to their ownership interest. Profit allocations were credited to the relevant member's capital accounts against which distributions were charged. During the relevant period, SPLLC primarily carried out its business in the US. SPLLC was classified as a partnership for US tax purposes and each member, including the taxpayer, was considered to be liable for US federal and state tax on his or her distributive share of LLC profits, whether distributed or retained.
Between 1997 and 2003 distributions by SPLLC to the taxpayer were received in the UK, after the payment of US federal income tax and state income tax. For the tax years ended 5 April 1998 to 2004 the gross figures for the taxpayer's share of SPLLC profits were reported as partnership income in the partnership supplementary pages of the self-assessment tax return. For the years in question, the taxpayer remitted all of his profit distributions. The total amount of federal and state taxes during the relevant periods exceeded the highest UK personal tax rate of 40 per cent. Therefore, the foreign tax credit relief claimed by the taxpayer in his UK income tax return was restricted to a maximum of 40 per cent of the LLC income reported.
HMRC enquired into the taxpayer's UK employment and US partnership activities in 2001 and raised discovery assessments and issued amended self-assessments. The taxpayer appealed and filed protective error and mistake claims under TMA 1970, Taxes Management Act 1970 section 33 subsec-or-para 1s. 33(1), advising that the foreign income arising from SPLLC should have been reported on the foreign pages of the tax return forms, as opposed to the partnership pages.
The main issue on the appeal was whether the taxpayer was entitled to double taxation relief for US tax paid on the profits of SPLLC, the taxpayer's share of which was taxed on him personally in the US on the basis that for US tax purposes it was a "transparent" entity, whereas in the UK HMRC contended that it was a corporate entity that had paid the equivalent of dividends so that the taxpayer had not been taxed on the same income in the UK. In round terms the financial effect was that out of the taxpayer's share of a profit of 100 roughly 45 had been paid in US federal and state tax, 55 had been distributed to him and 22 tax had been charged in the UK. There were two subsidiary issues: first, if SPLLC was "opaque" and HMRC were right that there was no entitlement to double taxation relief, the taxpayer contended that he should have been taxed under ICTA 1988, Income and Corporation Taxes Act 1988 section 739s. 739, in which case his share of the profits of SPLLC were deemed to be his and he would be entitled to relief for the US tax. Secondly, the taxpayer further contended that the discovery assessments were invalid.
Whether the taxpayer was entitled to double taxation relief for US tax paid on the profits of SPLLC, the taxpayer's share of which was taxed on him personally in the US on the basis that for US tax purposes it was a transparent entity; if S was "opaque" and there was no entitlement to double taxation relief, whether the taxpayer should have been taxed under ICTA 1988, Income and Corporation Taxes Act 1988 section 739s. 739 so that he was entitled to relief for the US tax; and whether the discovery assessments were invalid.
The First-tier Tribunal (Dr John Avery Jones and Ian Menzies-Conagher) allowed the appeal in principle.
The taxpayer had been charged to tax in the US on his share of the profits of SPLLC, and the issue was whether the UK tax was "computed by reference to the same profits or income" within the terms of the relevant UK-US Double Tax Conventions or whether he was taxable on the equivalent of a dividend (Memec plc v IR CommrsTAX[1998] BTC 251 and Garland (HMIT) v Archer-SheeTAX(1929) 15 TC 693 considered). Asking whether SPLLC was transparent or opaque might be another way of asking the same question but it was preferable to apply the words of the Treaty.
Considering the characteristics of SPLLC in accordance with Delaware law, it (and not the members) carried on its business as principal. Likewise, it was liable for its debts and obligations, it owned the business and it did not have anything equivalent to share capital. The main factor in relation to the double tax treaty was whether the profits belonged to the members as they arose and the tribunal found that the effect of the LLC operating agreement and the Delaware LLC Act was that the profits did belong to the members as they arose. Accordingly the taxpayer was taxed on the same income in both countries and was entitled to double taxation relief under the Treaty for the federal tax. For the same reason he was entitled to unilateral relief for the Massachusetts state tax.
Although it was not necessary to decide the point, the tribunal considered the arguments. It was common ground that the conditions for s. 739 to apply were fulfilled and accordingly in principle a proportion of the income of SPLLC was deemed to be the taxpayer's by Income and Corporation Taxes Act 1988 section 739 subsec-or-para 2s. 739(2). The consequence was that he would be entitled to double taxation relief, either in principle or as specifically provided by s. 743(2). However, the application of s. 739 was subject to s. 741 and one or both of the conditions in Income and Corporation Taxes Act 1988 section 741s. 741 was satisfied so that s. 739 could not apply. Therefore if the first issue had been decided in favour of HMRC, s. 739 would not provide double taxation relief to the taxpayer.
It was not necessary to decide this issue either. If the income had been reported, correctly, on the foreign pages coupled with the double taxation relief claim on the same pages, an ordinary competent inspector would have spotted the reference to "LLC" and would have known of HMRC's published view that no double taxation relief was available because credit for what HMRC considered to be underlying tax paid by an LLC was not available for credit by an individual. However, the use of the partnership pages which led the tax inspector to believe that the entity was a partnership and, as could be deduced from the double taxation relief claim, a US partnership, a reasonable inspector could not have been expected to work out solely from the "LLC" in the name both that it was not a partnership and that no double taxation relief was available. Accordingly, HMRC would not have been prevented by Taxes Management Act 1970 section 29s. 29 from raising the discovery assessments.
1. This is an appeal against discovery assessments made on 15 January 2004 for the year 1997-98 and on 23 November 2004 for the years 1998-99 and 1999-2000, and amendments to the Appellant's self-assessment income tax returns for 2000-2001, 2001-02, 2002-03 and 2003-04 by closure notices dated 11 April 2007. The Appellant was represented by Mr Jonathan Peacock QC, and the Respondent ("HMRC") by Mr David Ewart QC.
2. The main issue in this appeal is whether the Appellant is entitled to double taxation relief for US tax...
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