BCM Cayman LP & Anor v The Commissioners for HMRC

Membership of one partnership does not automatically make its partners members of another. Partnership membership depends on agreement, consent and the substance of the arrangements. Statutory requirements also govern membership of a limited liability partnership.

Under Corporation Tax Act 2009, section 6(1), the fiduciary or representative exception is determined by the reality of the arrangements. The court may consider pre-ordained, commercially linked transactions and cannot be bound by contractual labels. Where profits are returned to the company as capital and used for its benefit, the company may be their beneficial owner.

Interest on borrowings used to acquire a partnership interest is not incurred for the purposes of the partnership’s trade merely because the partnership carries on a trade.

The appellants challenged corporation-tax liabilities arising from arrangements under which a Cayman limited partnership acquired a 19% interest in a UK investment-management partnership. Cayman Ltd, its general partner, borrowed $365 million. Superprofits allocated through the structure were paid to the corporate limited partner and returned through total-return-swap arrangements as capital contributions used to repay the borrowings.

The First-tier Tribunal dismissed the appellants’ appeal: [2020] UKFTT 0298 (TC). The Upper Tribunal upheld that decision: [2022] UKUT 00198 (TCC), reported at [2022] STC 1586. The issues before the Court of Appeal were whether the corporate limited partner was also a partner in the UK partnership, whether Cayman Ltd received the Superprofits in a fiduciary or representative capacity, and whether the borrowings were for the purposes of a trading business.

Lady Justice Whipple delivered the judgment of the court. Lord Justice Lewison and Lord Justice Nugee agreed. The appeal was dismissed.

1. Partnership membership. There was no principle making Fyled a partner in the UK partnership merely because it was a partner in the Cayman partnership. Partnership is a relationship arising from express or implied agreement between identified persons. Admission of a new partner requires the necessary consent and compliance with the governing deed. The position in [1998] STC 491 was distinguishable because it concerned general partners already participating in a second partnership. It did not concern limited partners whose statutory role prevented participation in management.
2. For the UK LLP, the Limited Liability Partnerships Act 2000 required members’ names and addresses to be stated in the incorporation document and relevant changes to be notified to the registrar. An unincorporated body could not be an LLP member. Cayman Ltd was a member; Fyled was not. The Superprofits were therefore allocated to Cayman Ltd as general partner for the Cayman partnership.
3. Fiduciary capacity and the Ramsay approach. The Upper Tribunal was wrong to treat section 6(1) of the Corporation Tax Act 2009 as irrelevant to the charging question. Section 6(1) had to be read with the partnership computation provisions. Whether Cayman Ltd acted in a fiduciary or representative capacity was a domestic tax question requiring a realistic view of the totality of the arrangements. The total-return-swap arrangements showed that the Superprofits were returned to Cayman Ltd as capital and used to repay its borrowings. Cayman Ltd was therefore the beneficial owner, and the fiduciary exception did not apply.
4. The foreign-law findings concerning the Cayman partnership’s profit-sharing arrangements did not determine the separate domestic tax question under section 6(1). The court left open the wider partnership-law issue concerning whether one partner may receive partnership money in a fiduciary capacity.
5. Interest deductions. Under section 297(1), a debtor loan relationship is trading only where the borrowing is for the purposes of the trade carried on by the company. The borrowings were used to acquire an interest in the UK partnership, not to support its investment-management trade. The interest was therefore not deductible under the trading loan-relationship rules.

The closure notices, as adjusted, were correctly issued to Cayman Ltd.

• Court of Appeal (Civil Division) — Appeal dismissed: [2023] EWCA Civ 1179.
• Upper Tribunal (Tax and Chancery Chamber) — Appeal dismissed: [2022] UKUT 00198 (TCC), reported at [2022] STC 1586.
• First-tier Tribunal (Tax Chamber) — Appeal dismissed: [2020] UKFTT 0298 (TC).