Revenue And Customs v Lansdowne Partners Ltd Partnership

The Court of Appeal held that fees received by the limited partnership from the group manager under the investment management arrangements were income of the partnership and taxable under Schedule D. The court rejected a mutuality argument: the partnership's receipts were payable by the manager under the Investment Management Agreement, were not paid by investors as agents, and therefore constituted trading receipts. The rebates paid back to partners were not deductible under s.74(1)(a) Income and Corporation Taxes Act 1988 because they represented repayments related to the partners' personal investment purpose and so were not "wholly and exclusively" laid out for the purposes of the trade (applying the principle in Mackinlay v Arthur Young McLelland Moores).

On the discovery/time-bar issue the court concluded that, on the information available to HMRC before the expiry of the period for enquiry (in particular the partnership return and accounts and the partner's letter of 30 March 2006 adopting the inspector's note), a reasonably informed officer could have been expected to be aware that the partnership's return understated profits. Because the discovery condition in s.30B(6) Taxes Management Act 1970 was not satisfied, HMRC were not entitled to amend the return for the year in question. The court therefore dismissed both HMRC's appeal and the partnership's cross-appeal and declared the partnership's taxable profits for the year ended 5 April 2005 to be £69,142,423.

Background and parties: Lansdowne Partners Limited Partnership (LPLP) acted as investment manager to funds managed by group entities. Fees flowed from an open-ended investment company (LEEF) to a Cayman manager (LPIL) and then to LPLP under contractual arrangements. In the accounting year to 31 March 2005 LPLP received substantial management and performance fees and made "rebates" to investors including certain limited partners. HMRC sought to amend the partnership return for the year to include amounts rebated to partners as taxable income and to disallow their deduction.

Procedural history: The General Commissioners and, on appeal, Lewison J in the Chancery Division (see [2010] EWHC 2582 (Ch)) considered: (i) whether the rebated fees formed part of LPLP's taxable income; (ii) whether the rebates were deductible under s.74(1)(a) ICTA; and (iii) whether HMRC were entitled to amend the return under the discovery provisions (s.30B TMA). The case came to the Court of Appeal by HMRC's appeal on the third point and by LPLP's cross-appeal on points (i) and (ii).

Nature of the application / relief sought: HMRC sought to uphold its amendment of the partnership return made after the normal enquiry period on the basis of a discovery under s.30B TMA. LPLP challenged inclusion of the rebated fees in partnership income and contended the rebates were deductible.

Issues framed: (1) Were the fees receivable by LPLP part of its taxable income? (2) If so, were the amounts paid as rebates to partners deductible under s.74(1)(a) ICTA? (3) If not deductible, was HMRC nonetheless entitled to amend the partnership return because of a discovery under s.30B(1) read with s.30B(6) TMA?

Court's reasoning and conclusions: On issue (1) the court concluded the fees were income of LPLP. The mutuality principle did not apply because the contractual and commercial relationships showed the fees were payable to LPLP by LPIL, not paid by investors as agents or retained in a mutual fund for distribution. On issue (2) the court applied Mackinlay v Arthur Young McLelland Moores and held rebates paid to partners were not "wholly and exclusively" incurred for the trade: they were repayments connected to partners' personal investment purpose and therefore not deductible. On issue (3) the court held that, on the material available to HMRC before the expiry of the enquiry period (notably the partnership accounts and the partner's letter of 30 March 2006 adopting the inspector's note), a reasonably informed officer could have been expected to be aware that profits were understated; accordingly the statutory discovery condition in s.30B(6) TMA was not met and HMRC were not entitled to amend. The Court dismissed both HMRC's appeal and LPLP's cross-appeal and declared the taxable profits for the year in question to be £69,142,423.

Wider observations: The court emphasised the proper statutory test under the discovery provisions requires objective awareness on the part of a reasonably informed officer and that awareness does not require the officer to resolve legal disputes or reach probabilistic conclusions. The court also expressed caution about treating "awareness" as equivalent to a balance-of-probabilities conclusion in every case.

Appeal dismissed. The Court of Appeal held that (1) the management and performance fees received by LPLP from the group manager were income of the partnership; (2) the rebates paid back to partners were not deductible under s.74(1)(a) ICTA because they represented repayments linked to the partners' personal investment purpose and thus were not "wholly and exclusively" for the trade; and (3) HMRC were not entitled to amend the partnership return under the discovery provisions because, on the information available before the expiry of the enquiry period, a reasonably informed officer could have been expected to be aware that the partnership's return understated profits. Both HMRC's appeal and LPLP's cross-appeal were dismissed; the court declared taxable profits of £69,142,423 for the year ended 5 April 2005.

General Commissioners (case stated 4 March 2010) → High Court, Chancery Division (Lewison J) [2010] EWHC 2582 (Ch) → Court of Appeal [2011] EWCA Civ 1578. The appeal concerned HMRC's exercise of the discovery power under s.30B TMA and LPLP's cross-appeal on inclusion and deductibility of rebates.