THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS v BLUECREST CAPITAL MANAGEMENT LP & Ors

Income Tax (Trading and Other Income) Act 2005 section 850 requires a purposive and realistic assessment of partnership profit-sharing arrangements. That assessment does not permit a tribunal to rewrite genuine contractual arrangements or attribute a corporate partner’s allocated profits to individual partners merely because the corporate partner operates an incentive plan and is generally expected to make later capital awards.

A deferred award of partnership capital may nevertheless be taxable as miscellaneous income where it is a reward for services, analogous to a bonus, and its source is the corporate partner’s legally constrained decision to make the award. It is not double taxation where the corporate partner and recipient are separately taxed on income from distinct sources.

The sale-of-occupational-income provisions may also apply where arrangements exploit a partner’s earning capacity and tax reduction is a main object.

HMRC appealed against the First-tier Tribunal’s conclusion that profit allocations to a corporate partner, used to fund the BlueCrest Partner Incentivisation Plan, were not instead allocations of partnership profits to individual partners. The individual partners appealed against the Tribunal’s alternative conclusion that final awards of Special Capital were taxable as miscellaneous income and under the sale-of-occupational-income provisions.

The plan gave individual partners provisional, conditional indications of future capital awards. The corporate partner received a discretionary profit allocation, reinvested post-tax profits as Special Capital, and later reallocated that capital if eligibility conditions were met.

The Upper Tribunal also determined HMRC’s application to strike out new foreign-source and treaty issues advanced by the individual partners only in their Upper Tribunal grounds.

1. The PIP appeals were dismissed. The First-tier Tribunal erred in treating the contractual rights under the partnership deed as conclusive and in failing to apply the purposive, realistic approach explained in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] 2 WLR 1125. The Upper Tribunal set aside and remade that part of the decision.

   However, a realistic appraisal did not make the PIP part of the firm’s profit-sharing arrangements under Income Tax (Trading and Other Income) Act 2005 section 850. The corporate partner was a genuine partner. It had a real, commercially important role, and its profit allocation had to be respected. Individual partners had an expectation of a final award, and the corporate partner’s discretion was constrained by an implied good-faith obligation. But they acquired no right or entitlement to Special Capital until a final award was made. Forfeited awards also showed that profits allocated to the corporate partner could not simply be attributed to other individual partners.

2. RFC 2012 plc (formerly the Rangers Football Club) v Advocate General for Scotland [2017] 1 WLR 2767 and Hadlee v CIR [1993] STC 294 did not require a different result. They concern taxation of employment earnings, or a materially different New Zealand income-tax regime, rather than the United Kingdom system which taxes partners by reference to their agreed shares of partnership profits.

3. The individual partners’ appeals were dismissed. Final PIP awards were income taxable under Income Tax (Trading and Other Income) Act 2005 section 687(1). They were deferred rewards for services, analogous to bonuses. Their source was the corporate partner’s decision, made pursuant to a legally constrained discretion, to reallocate Special Capital. The awards did not represent the individual partner’s share of trading profits. Taxing the corporate partner on its allocation and the individual on a later award was not impermissible double taxation.

4. The awards also satisfied the conditions in Chapter 4 of Part 13 of the Income Tax Act 2007. The partners’ skilled activities could properly be found to be activities of a kind undertaken in a profession or vocation. The arrangements put the corporate partner in a position to enjoy receipts derived from individual earning capacity, and the awards were capital amounts. Tax avoidance or reduction was, on the evidence, one of the PIP’s main objects, notwithstanding its substantial commercial retention and incentivisation purposes.

5. The procedural applications were determined in HMRC’s favour. The First-tier Tribunal’s decision finally disposed of the issues raised in the individual partners’ appeal. Having found no error of law requiring remittal or remaking, the Upper Tribunal lacked power to determine new fact-sensitive foreign-source and treaty issues. It struck out the additional grounds and refused permission to amend them.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal on the PIP issue was dismissed, although the First-tier Tribunal’s reasoning was set aside and remade. The individual partners’ appeals were dismissed. HMRC’s strike-out application was allowed.
• First-tier Tribunal: Its decision, released on 17 July 2020, allowed the partnership appeals on the PIP issue and dismissed the individual partners’ alternative tax appeals. No citation is stated in the judgment.