Nicholas Walewski v The Commissioners for HMRC

Section 850C of the Income Tax (Trading and Other Income) Act 2005 operates by reference to a partnership’s period of account. It does not require the individual and corporate partners to have been partners throughout the same parts of that period. If the statutory conditions are met and the individual receives a profit share during the period, the provision may require reallocation of the corporate partner’s profits on a just and reasonable basis.

An appellate tribunal will not re-determine factual findings or the just-and-reasonable determination merely because another apportionment might have been available. Intervention requires an error of law, irrationality, perversity, or a determination that is plainly wrong.

The appellant and his company, Walewski Limited, were partners in two LLPs. HMRC amended the LLPs’ partnership statements for 2014–15 under section 850C of the Income Tax (Trading and Other Income) Act 2005, reallocating to the appellant the whole of the company’s allocated profits.

The First-tier Tribunal dismissed the appellant’s challenge. It found that the company’s profits were attributable to the appellant’s power to enjoy them and that full reallocation was just and reasonable. The appellant appealed on two grounds: first, that profits attributable to a period when he was not a partner in one LLP could not be reallocated; secondly, that the Tribunal’s finding that his services were fungible required a partial allocation instead.

1. Appeal dismissed. Neither ground disclosed an error of law in the First-tier Tribunal’s decision.

2. Section 850C applies for a period of account. Its language imposes no requirement that the individual partner must have been a partner throughout that period, or during the time when profits allocated to the corporate partner were generated. It is sufficient that the statutory conditions are met during the relevant period and that the individual receives a share of profit. Reading in a temporal correlation between partnership status and profit allocation would contradict the statutory language and permit arrangements that would undermine the provision’s anti-avoidance purpose.

3. The provision therefore permitted consideration of the corporate partner’s whole profit share for the relevant period. The First-tier Tribunal’s conclusion that full reallocation was just and reasonable could not be impugned merely by proposing alternative time-based or turnover-based apportionments. Those submissions challenged factual and evaluative findings without identifying a legal error.

4. The finding that the appellant’s work for the company and LLPs was fungible meant that his services could not realistically be separated into discrete roles. The First-tier Tribunal was entitled to find that the company had not earned any part of its profit share through services supplied by him as its employee, that its profits were excess profits, and that all were attributable to his power to enjoy them.

5. The Upper Tribunal held that those findings were rational and available on the evidence. The just-and-reasonable determination was not plainly wrong, applying the appellate restraint explained in Piglowska v. Piglowski, [1999] 1 WLR 1360.

• Upper Tribunal (Tax and Chancery Chamber): dismissed the appellant’s appeal from the First-tier Tribunal.

• First-tier Tribunal: dismissed the appellant’s appeal against HMRC’s closure-notice amendments. Its decision was released on 30 January 2020 and amended on 21 April 2020.