Revenue And Customs v Lansdowne Partners Ltd Partnership

Fees paid to a partnership under an investment-management agreement are trading receipts, even where partners invest in the managed fund and later receive rebates. The mutuality principle applies only where the activity is not a profit-making trade or is a mutual arrangement returning surplus to members. Under section 74(1)(a) of the Income and Corporation Taxes Act 1988, the relevant purpose for deductibility is that of the original expenditure. A repayment to a partner is not deductible merely because the partnership made it for business reasons. Under section 30B(6) of the Taxes Management Act 1970, the discovery condition concerns awareness of an actual insufficiency, not merely grounds for further investigation.

Lansdowne Partners Limited Partnership received investment-management fees and deducted rebates paid to limited partners and connected persons in its partnership return. The General Commissioners held that the receipts were partnership income, that the rebates were deductible, and that HMRC was out of time to amend the return. Lewison J agreed on the inclusion of the receipts and the time-bar point, but considered that the Commissioners had asked the wrong question on deductibility: [2010] EWHC 2582 (Ch). HMRC appealed on the discovery issue, while LPLP cross-appealed on the income and deductibility issues. The central questions were whether the fees were taxable partnership profits, whether the rebates were deductible, and whether HMRC could amend the return under the discovery provisions.

1. Disposition. The Court of Appeal unanimously dismissed HMRC’s appeal and LPLP’s cross-appeal. It declared that LPLP’s taxable profits for the year ended 5 April 2005 were £69,142,423.
2. Trading receipts and mutuality. Fees received by LPLP from LPIL under the Investment Management Agreement were consideration for LPLP’s investment-management services and were taxable trading profits under Schedule D. The mutuality principle did not apply. The contractual relationships showed that the fees were paid to LPLP by LPIL, not by the investors, and were not paid from money in which the investors retained a beneficial interest. LPLP conducted a profit-making trade and had none of the features of a mutual arrangement.
3. Deductibility. Under section 74(1)(a) of the Income and Corporation Taxes Act 1988, the relevant purpose was the purpose of the original expenditure by the partner, not merely LPLP’s purpose in making the repayment. Following Mackinlay v Arthur Young McLelland Moores [1990] 2 AC 239, a payment to a partner is deductible only where it reimburses expenditure incurred for partnership purposes or is entirely collateral to the partner’s capacity as partner. The rebates were paid because the recipients were both investors and limited partners. They were therefore not collateral and were connected with personal investment expenditure. They were not deductible. There was no need for remission.
4. Discovery amendment. Section 30B(6) required consideration of whether a hypothetical officer, with reasonable knowledge and understanding, could have been expected to be aware of an actual insufficiency in the declared profits. The officer did not need to resolve every disputed factual or legal issue. Oral information alone would not satisfy section 29(6)(d)(ii), but Mr Tai’s written adoption of Mr Gregory’s note made the recorded information available. The return, accounts, note and letter showed that rebates had been deducted from partnership income and paid to limited partners. The statutory condition for a discovery amendment was therefore not met.
5. Further observation. Moses LJ expressed doubt about equating statutory awareness with a conclusion that insufficiency was more probable than not, and left open the possibility that legal complexity could prevent reasonable awareness even after sufficient factual disclosure. This was a concurring, non-dispositive observation.

• Court of Appeal (Civil Division) — On 20 December 2011, dismissed HMRC’s appeal and LPLP’s cross-appeal and declared the taxable profits at £69,142,423: [2011] EWCA Civ 1578.
• High Court, Chancery Division — Lewison J agreed with the General Commissioners on the inclusion of the fees and the discovery issue, but held that they had asked the wrong question on deductibility. Remission was unnecessary because of the conclusion on the discovery issue: [2010] EWHC 2582 (Ch).
• General Commissioners — In a case stated dated 4 March 2010, held that the rebates formed part of LPLP’s income, were deductible, and could not be recovered through a discovery amendment.