The Commissioners For HMRC v Bluecrest Capital Management LP & Ors

The Court of Appeal holds that the introduction of an independent corporate partner and the mechanism of "special capital" does not convert the participating individuals' contingent expectations into rights to share the partnership's trading profits for the purposes of section 850 ITTOIA 2005; instead the corporate partner's allocated share remains the corporate partner's profit. However, where the corporate partner exercises its discretion to reallocate special capital to individual partners, those final awards are, in substance, taxable as miscellaneous income under section 687 ITTOIA 2005 because they constitute deferred contingent rewards analogous to employment bonuses and have a taxable source in the corporate partner's decision.

Parties and procedural history. The appeals arise from Upper Tribunal decisions remaking a First-tier Tribunal decision concerning a Partner Incentivisation Plan (PIP) used by an investment manager. HMRC appealed in respect of the partnerships' tax treatment; the partnerships and individual partners cross-appealed on alternative grounds. The UT decision is reported at [2022] UKUT 200 (TCC).

Facts and issues. The PIP operated by allocating a portion of partnership profits to an independent corporate partner which reinvested post-tax sums as "special capital" and could, at its discretion following board recommendations, reallocate (award) special capital to individual partners after a deferral period. HMRC's primary contention was that those allocations were, in reality, the individual partners' profit shares for the relevant years and taxable as such under section 850 of ITTOIA 2005. HMRC's alternatives were that the awards were taxable under section 687 ITTOIA 2005 or under the sale-of-occupational-income rules in ITA 2007. The UT and the Court of Appeal were asked to determine (a) whether the PIP formed part of the partnership's profit-sharing arrangements for s850 purposes and (b) whether final PIP awards to individuals were taxable as miscellaneous income (s687) or otherwise.

Central question. Whether the PIP reallocation mechanism converts allocated corporate partner profits into individual partners' taxable profit shares, or alternatively whether final awards are taxable to individual partners under the miscellaneous income provisions because they are deferred contingent remuneration with a source in the corporate partner's decision.

Held (majority)

1. Overall disposition. HMRC's appeal is dismissed; the UT's decision remaking the FTT on the PIP issue is upheld. The partnerships' cross-appeal (challenging the UT on the s687 conclusion) is dismissed to the extent argued (see orders below).
2. Construction and application of section 850 ITTOIA 2005.
   1. The statutory concept of the firm's "profit-sharing arrangements" in section 850 must be construed by reference to its purpose and applied realistically to the agreed facts, but it requires identification of the rights of partners to share in the partnership's trading profits for the relevant accounting period (para [66], UT summary; paras [71]–[78], judgment).
   2. Where a genuine commercial arrangement allocates a share of trading profits to a corporate partner, that allocation is not to be recharacterised as additional shares of the individual partners unless the contractual and factual matrix shows that the individual partners held rights to those profits within the meaning of section 850. The PIP did not give participating individuals such rights: the corporate partner was legitimately allocated the profit shares and those allocations remained its post-tax property (paras [73]–[77]).
   3. Accordingly, the PIP is not part of the firm's profit-sharing arrangements for s850 purposes; HMRC's primary case based on recharacterisation of the corporate partner's allocation fails (paras [74]–[79]).
3. Chronology/subsidiary point. The fact that on some early iterations a final award of special capital was made before the partnership accounts were finally signed off does not change the character of the allocation recorded in the accounts; those allocations must be respected (paras [79]–[82]).
4. Ramsay / purposive arguments and analogies to employment taxation. Authorities concerning employment remuneration (notably Rangers) and New Zealand authorities (Hadlee) do not justify a general transposition of principles from employment or foreign partnership regimes into UK partnership taxation to reattribute profit allocations (paras [83]–[93]). The court distinguishes those authorities on statutory and contextual grounds.
5. Section 687 ITTOIA 2005 — miscellaneous income.
   1. The final PIP awards, insofar as they were reallocated by the corporate partner to individual partners, are of the nature of income (Case VI-type receipts) and are analogous to deferred contingent bonuses; the label "special capital" does not determine the legal character (paras [113]–[118]).
   2. The awards have a taxable "source" in the corporate partner's decision to reallocate special capital (analogous to trustee or discretionary-payment authorities such as Cunard and the UT's Spritebeam), because the corporate partner's exercise of discretion created a new source of income for the recipient (paras [119]–[127]).
   3. Accordingly, awards made final by the corporate partner are chargeable to income tax in the hands of the recipient under section 687 (paras [116], [125]).
6. Procedural/consequential matters. The UT lawfully remade the FTT decision on the PIP issue rather than remit, because the material facts were agreed or found and undisputed. The court declines to decide the alternative SOI (sale of occupational income) questions as unnecessary to the disposal (paras [60], [126]–[128]).
7. Orders. HMRC's appeals are dismissed; the partnerships' appeals are dismissed insofar as they challenge the UT's conclusion under section 687; other alternative grounds were not necessary to decide and remain undetermined on this appeal (para [129]).

• Court of Appeal (Civil Division): Appeal from the Upper Tribunal (Tax and Chancery Chamber) in respect of the PIP and IP appeals; judgment given 15 December 2023 (this decision) dismissing HMRC and partnerships' appeals.
• Upper Tribunal (Tax and Chancery Chamber): Remade the First-tier Tribunal decision; delivered 22 July 2022; reported at [2022] UKUT 200 (TCC) and [2022] STC 1696; gave permission for further appeals.
• First-tier Tribunal (Tax Chamber): Original fact-finding and decision released 17 July 2020: [2020] UKFTT 298 (TC).