The Commissioners For HMRC v Bluecrest Capital Management LP & Ors

For the purposes of section 850 of the Income Tax (Trading and Other Income) Act 2005, a genuine allocation of partnership trading profits to a corporate partner must be respected. A realistic and purposive construction does not permit the tribunal to rewrite the partners’ agreement by treating the corporate partner’s post-tax special capital as profit shares of individual partners.

Final deferred awards of that special capital were nevertheless income. They were contingent rewards for a partner’s services and membership, analogous to deferred employment remuneration, and arose from the corporate partner’s exercise of its constrained discretion. They were therefore taxable as miscellaneous income under section 687.

BlueCrest operated a Partner Incentivisation Plan under which a corporate partner received allocations of partnership profit, paid corporation tax, and contributed the balance as special capital. Individual partners could later receive final awards of that capital if conditions, including continued service, were met.

HMRC’s primary case was that the profit allocated to the corporate partner was, realistically, profit of the individual participants and taxable under section 850 of the Income Tax (Trading and Other Income) Act 2005. Its alternative case was that final awards were taxable under section 687, or under the sale-of-occupational-income rules.

The First-tier Tribunal dismissed HMRC’s primary case but upheld its section 687 case: [2020] UKFTT 298 (TC). The Upper Tribunal remade the primary issue to the same effect and upheld the section 687 conclusion: [2022] UKUT 200 (TCC). HMRC appealed on the primary case and the partnerships appealed on the miscellaneous-income issue.

1. Both appeals were dismissed. The court upheld the Upper Tribunal’s conclusions that HMRC’s primary case failed and that final PIP awards were chargeable under section 687 of the Income Tax (Trading and Other Income) Act 2005.

2. Section 850 requires the actual profits of a partnership trade for an accounting period to be allocated among the partners in accordance with their rights to share them. The allocations to the corporate partner were genuine contractual allocations. The corporate partner held the resulting special capital beneficially, and the individual partners had no right to that capital unless and until an award was made final.

3. The Ramsay principle required a realistic examination of the arrangements as a whole, but did not permit a reconstruction of their legal and commercial substance. The PIP had genuine commercial purposes. Its deferral, performance and forfeiture conditions were substantive, and some provisional awards did not become final. Treating the corporate partner’s allocated profits as disguised individual profit shares would rewrite the agreement and conflict with the requirement to allocate all profits in the relevant year.

4. The timing of some early awards did not alter that conclusion. Even where an award preceded finalisation of the annual accounts, it remained an award of special capital belonging to the corporate partner, not a direct allocation of partnership trading profit. The employment-income reasoning in Rangers, and the New Zealand partnership-tax reasoning in Hadlee, could not be extended to the distinct United Kingdom statutory regime for partnership taxation.

5. Final PIP awards were income for section 687. Commercially, they were deferred and contingent rewards for services and continued membership. They were analogous to deferred employment remuneration and had the requisite income character, despite the label “special capital”. The source of each award was the corporate partner’s decision to exercise its discretion, which was constrained by contractual good-faith principles. The court declined to determine the alternative sale-of-occupational-income issue and expressly did not endorse the Tribunals’ obiter reasoning on it.

• Court of Appeal (Civil Division) — dismissed HMRC’s appeal on the partnership-profit issue and the partnerships’ appeal on section 687: [2023] EWCA Civ 1481.
• Upper Tribunal (Tax and Chancery Chamber) — set aside the First-tier Tribunal’s reasoning on the primary issue, remade it with the same result, and upheld the section 687 conclusion: [2022] UKUT 200 (TCC).
• First-tier Tribunal (Tax Chamber) — dismissed HMRC’s primary PIP case but upheld HMRC’s alternative case under section 687: [2020] UKFTT 298 (TC).