BCM Cayman LP & Anor v The Commissioners for HMRC

The Court of Appeal dismissed the appellants' appeal against the Upper Tribunal and First-tier Tribunal decisions. The central legal questions were whether Superprofits allocated by a UK limited partnership (UK LP/LLP) were chargeable to corporation tax on Cayman Ltd (the general partner of a Cayman limited partnership) and whether interest on borrowings by Cayman Ltd qualified as deductible trading loan relationship interest. The court held that (i) the Corporate Limited Partner (RBS, later Fyled) did not become a partner in the UK partnership; the Superprofits were allocated to Cayman Ltd as general partner; (ii) on a purposive, Ramsay-style analysis, taking into account the totality of the arrangements (including the total return swap arrangements), Cayman Ltd was the beneficial owner of the Superprofits and not merely a fiduciary or representative under section 6(1) of the Corporation Tax Act 2009; and (iii) the borrowings were taken to enable Cayman Ltd to acquire the partnership interest (an investment) rather than for the purposes of the trade carried on by UK LP/LLP, so the interest did not qualify under the trading loan relationship rules (section 297 CTA 2009).

This appeal concerned closure notices issued by HMRC in respect of tax returns for years ending 30 November 2007 to 31 December 2013. The appellants (Cayman LP and Cayman Ltd) challenged assessments totalling, after agreed adjustments, £32,247,848. The factual background involved a structure by which Cayman LP (a Cayman limited partnership) acquired a 19% interest in a UK limited partnership (UK LP), Cayman Ltd acted as Cayman LP's general partner, and a Corporate Limited Partner (initially RBS, later Fyled) participated in arrangements linked to total return swap (TRS) documentation and capital repayments.

Procedural history: the First-tier Tribunal dismissed the appellant's case ([2020] UKFTT 0298 (TC)); the Upper Tribunal dismissed the appeal from the FTT ([2022] UKUT 00198 (TCC)); permission to appeal to this Court was granted.

(i) Nature of the application/relief sought: the appellants sought to overturn HMRC's closure notices and avoid corporation tax liability on Superprofit allocations and to obtain deduction for interest as trading loan relationship expense.

(ii) Issues framed by the court:

• Whether the Corporate Limited Partner (RBS/Fyled) became a partner in UK LP/LLP such that Superprofits were allocated to it rather than to Cayman Ltd (the "Partnership issue").
• Whether Cayman Ltd received Superprofits in a fiduciary or representative capacity so as to fall within the exception in section 6(1) CTA 2009 (the "Fiduciary issue").
• Whether Cayman Ltd's borrowings were "for the purposes of a trade" so as to qualify as trading loan relationships under section 297 CTA 2009 (the "Interest Deduction issue").

(iii) Court's reasoning in brief: the court accepted the UT's approach that partnership status depends on substance and reality and on compliance with the admission formalities in the partnership deeds; it concluded that RBS/Fyled did not become partners in the UK partnership. On the fiduciary point the court held that section 6(1) CTA 2009 must be construed by reference to the reality of the arrangements: taking the TRS and related contractual steps into account (Ramsay analysis), Cayman Ltd was the effective beneficial owner of the Superprofits rather than a mere trustee or representative and so was chargeable. On interest deductibility, the court agreed with the tribunals that the borrowings funded Cayman Ltd's acquisition of a partnership interest (an investment) and not the trade of UK LP/LLP, so the trading loan relationship rules did not apply.

Appeal dismissed. The Court upheld the UT and FTT conclusions: Cayman Ltd (as general partner) was chargeable to corporation tax on the Superprofits because it was the beneficial owner on a realistic, purposive construction of CTA 2009 (section 6(1)), taking into account the TRS arrangements (Ramsay approach). The interest on Cayman Ltd’s borrowings did not qualify as trading loan relationship interest (section 297 CTA 2009) because the loans were used to acquire a partnership interest rather than for the purposes of the trade carried on by UK LP/LLP.

Appeal from Upper Tribunal (Tax and Chancery Chamber) Mr Justice Leech and UT Judge Thomas Scott [2022] UKUT 00198 (TCC), which itself was an appeal from the First-tier Tribunal (Judge John Brooks) [2020] UKFTT 0298 (TC). Permission to appeal to the Court of Appeal was granted and appeal dismissed on 12 October 2023.