HM Revenue & Customs v Lansdowne Partners Ltd Partnership

For partnership tax purposes, the relevant purpose of a payment reimbursed or rebated to a partner is ordinarily the purpose of the partner’s original outlay, not the purpose of the reimbursement. Expenditure is deductible only where that original outlay was made wholly and exclusively for the purposes of the trade. A payment may fail that test where it serves both business and private purposes.

A discovery assessment may be made where HMRC had sufficient information to decide whether an additional assessment should be raised. The information must clearly alert HMRC to an insufficiency in the partnership return for the particular year. A change in HMRC’s interpretation of the law may constitute a discovery.

Lansdowne Partners Limited Partnership appealed against an amended partnership statement for 2004/05. HMRC had added back rebates of management and performance fees made to individual partners in respect of their investments in funds managed by the partnership.

The General Commissioners held that the receipts and rebates fell within mutual trading principles, that the rebates were deductible expenses, and that HMRC’s amendment was out of time. The issues before the High Court were whether the receipts were taxable, whether the rebates were deductible, and whether HMRC could rely on the discovery-assessment provisions.

1. Mutuality. The partnership’s receipts from partners were properly taken into account in computing its profits. The relevant question was whether the arrangements constituted a trade producing profits or a mutual arrangement giving rise only to a surplus. The Commissioners were entitled to find that the arrangements were trading activities. The partners paid fees as investors but received rebates as partners; the partnership rebated the full fees although it received only 90 per cent of the management fees; and rebates were also made to family members, pension funds and connected trusts. Those features were inconsistent with a mere return of a common surplus.
2. Deductibility. The Commissioners applied the wrong legal test. Following the principles identified in Mackinlay v Arthur Young McClellend Moores & Co [1990] 2 A.C. 239, the relevant expenditure was the partners’ original payment of management and performance fees, not the later rebate. The relevant purpose was therefore the purpose of the original outlay.
3. Under section 74(1) of the Income and Corporation Taxes Act 1988, the original outlay had to be made wholly and exclusively for the purposes of the partnership business. Applying Mallalieu v Drummond [1983] 2 A.C. 861, the court had to identify the taxpayer’s object in making the expenditure, distinguishing purpose from effect. A mixed purpose would prevent deduction. The question was one of fact, and had to be reconsidered by the fact-finding tribunal if necessary.
4. Discovery assessment. The meaning of “discovers” had not changed. A change in HMRC’s interpretation of the law could amount to a discovery. Under sections 30B and 29 of the Taxes Management Act 1970, the question was whether an officer could reasonably have been expected, by 31 January 2007 and on the prescribed information, to be aware of an insufficiency in the partnership return for 2004/05.
5. The 2000 correspondence did not clearly alert HMRC to an insufficiency for 2004/05. The 2006 correspondence, read with the surrounding communications, disclosed the partners’ fee rebates and their relevance. The Commissioners were entitled to find that HMRC had sufficient information to decide whether to raise an additional assessment. HMRC’s amendment was therefore out of time.
6. HMRC’s appeal was dismissed because the discovery assessment was out of time, notwithstanding that the rebates had been incorrectly treated as deductible.

The judgment states that the appeal was brought by way of case stated from the General Commissioners for Income Tax. No further appellate history is stated.