BCM CAYMAN LP & Anor v THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS

A partnership’s existence and membership are questions of mixed law and fact, determined from the contractual documents and the substance and reality of the relationship. Membership of one partnership does not automatically make a person a member of another partnership. A corporate partner’s tax liability is determined by the statutory partnership and loan-relationship regimes, without reference to beneficial ownership of allocated profits. A corporate partner may in principle obtain relief for debits on its own loan relationships under the general loan-relationship code. However, borrowing to acquire an existing partnership interest is not borrowing for the purposes of the partnership’s trade where the funds are not used in that trade.

The appellants were a Cayman Islands limited partnership and its Cayman company general partner. The general partner acquired a 19% interest in a UK investment-management partnership, financed by bank borrowing and loan notes, and contributed that interest to the Cayman partnership.

The First-tier Tribunal held that only the company was a partner in the UK partnership, that it was taxable on the relevant profit allocations, and that the borrowing costs were not deductible. The company appealed on partnership membership, beneficial entitlement and interest deductibility. HMRC cross-appealed on the scope of the Cayman partnership’s profit-sharing arrangements. The central issues were whether the other Cayman partners became partners in the UK partnership and whether the borrowings were trading loan relationships.

1. Profit allocation and partnership membership. The appeal on membership was dismissed. Whether a person is a partner is a question of mixed law and fact. The tribunal must construe the relevant documents and then assess the substance and reality of the relationship. A partnership without separate legal personality may be a partner in another partnership, but its members do not automatically become members of that other partnership. Admission depends on the relevant agreements, intention, authority and consent of the existing partners.
2. The evidence supported the conclusion that neither RBS nor Fyled became a partner in the UK partnership. Neither had executed the required deed of adherence, contributed capital or been registered under Limited Partnerships Act 1907. There was also no evidence of an intention by either to join or of consent by the existing UK partners. The Cayman partnership could properly be treated as a sub-partnership, although that conclusion was not necessary once the tribunal found that RBS and Fyled were not UK partners.
3. Beneficial entitlement. The FTT erred in failing to determine the argument under section 8(2) of Income and Corporation Taxes Act 1988 and section 6 of Corporation Tax Act 2009. The Upper Tribunal remade that decision. The statutory partnership regime charges a corporate partner on its allocated share without reference to how the partnership assets or subsequent distributions are held. Section 8(2) did not exclude partnership profits held in a fiduciary or representative capacity, and Part 17 of the 2009 Act operated independently of section 6(1).
4. Interest deductibility. The FTT erred in holding that no statutory mechanism existed to relieve interest on a corporate partner’s own borrowings merely because section 380 did not apply. The loan-relationship code is a self-contained regime. Debits on a company’s own loan relationships may be brought into account under sections 296, 297, 301 and 307, subject to whether the relationship is trading or non-trading. Section 29 did not provide a separate route because section 464 made the loan-relationship code exclusive.
5. Nevertheless, the loans were not trading loan relationships. The relevant trade was the investment-management trade carried on by the UK partnership. The borrowings financed the acquisition of existing partnership interests from outgoing partners, not the partnership’s working capital or trading activities. The FTT’s finding that the loans were taken for investment in the partnership, rather than for the purposes of its trade, was open to it. The loans therefore remained non-trading loan relationships.
6. The appeal was dismissed overall. HMRC’s cross-appeal on the profit-sharing arrangements was unnecessary to decide and was not determined.

• Upper Tribunal (Tax and Chancery Chamber) On appeal from the First-tier Tribunal’s decision reported at [2020] UKFTT 0298 (TC), the Upper Tribunal dismissed the Cayman Appeals. It upheld the result on partnership membership and interest deductibility, while remaking the decision on beneficial entitlement after identifying an error of law.
• First-tier Tribunal The FTT held that only BCMCL was a partner in the UK partnership, that it was taxable on the relevant allocations, and that its borrowing costs were not allowable deductions.