HFFX LLP & Ors. v The Commissioners for HMRC

Amounts reallocated to individual members under a deferred remuneration arrangement were not partnership profits under Income Tax (Trading and Other Income) Act 2005, s 850, but were taxable as miscellaneous income under s 687.

A sufficient link between a payment and its source may arise where payment follows the exercise of a contractual discretion subject to an implied obligation to act fairly, rationally and consistently with the contractual purpose. Such an obligation may apply to an LLP agreement and is not excluded merely because the discretion is described as sole or absolute.

The tribunal also upheld findings that the sale-of-occupation-income provisions applied, that a valid discovery had been made, and that redaction of commercially sensitive figures was unjustified.

HFFX LLP and its individual members appealed against a First-tier Tribunal decision concerning deferred remuneration under the Capital Allocation Plan. HMRC cross-appealed the FTT’s rejection of its argument that amounts allocated to a corporate LLP member were partnership profits of the individuals under s 850 of the Income Tax (Trading and Other Income) Act 2005.

The FTT had held that reallocations from the corporate member were taxable as miscellaneous income under s 687 and, alternatively, under the sale-of-occupation-income provisions in the Income Tax Act 2007. It had also upheld a discovery assessment and refused an application to redact figures from its decision. The central issues were whether the Upper Tribunal should follow BlueCrest Capital Management LP and others v HMRC, whether the corporate member’s discretion was subject to an implied obligation governing its exercise, and whether the FTT had erred in law.

1. Issue 1: partnership profits. HMRC’s cross-appeal was dismissed. Applying BlueCrest Capital Management LP and others v HMRC [2022] UKUT 00200 (TCC), the amounts allocated to the corporate member were not amounts to which the individual members had rights to share under s 850 of the Income Tax (Trading and Other Income) Act 2005. The Upper Tribunal normally follows an earlier decision of co-ordinate jurisdiction unless satisfied that it is wrong.

2. Issue 2a: miscellaneous income. The appellants’ appeal was dismissed. Section 687 of the Income Tax (Trading and Other Income) Act 2005 covers income from a source not charged under another provision. The necessary connection between recipient and source is not confined to an enforceable right to receive payment. Following Spritebeam v HMRC [2015] UKUT 75 (TCC), payment pursuant to a legal duty owed by the payer may suffice. That duty may include an obligation to exercise a contractual discretion fairly.

3. Clause 11.9(C) of the LLP deed conferred a contractual discretion on the corporate member. It was not merely a recognition of an existing power. Under Braganza v BP Shipping Ltd [2015] UKSC 17, an implied obligation arose to exercise the discretion in good faith, rationally and consistently with its contractual purpose. The discretion involved selecting recipients and amounts, rather than a simple binary choice. The words sole and absolute discretion, and the absence of an obligation to follow recommendations, did not exclude that obligation.

4. The resulting reallocations were therefore made pursuant to a legal duty and had a sufficient link with their source for s 687. The alternative argument that the members’ activities supplied a source was also capable of succeeding, because the payments rewarded services and incentivised future conduct. The fact that the activities had already generated partnership profits did not prevent a further income charge.

5. Issue 2b: sale of occupation income. Although unnecessary to the result, the alternative appeal was dismissed in any event. The FTT was entitled to find that the appellants’ activities were activities of a kind undertaken in a profession for Condition A under s 774 of the Income Tax Act 2007, and that tax reduction was one of the main objects of the arrangements under s 773(2)(b). Its findings were open to it and did not disclose an Edwards v Bairstow error.

6. Issue 3: discovery assessment. Mr Gerko’s appeal was dismissed. The evidence established that the officer had subjectively discovered an insufficiency of tax and had made the assessment. Section 113(1B) of the Taxes Management Act 1970 permitted another officer to complete the assessing procedure and serve the notice. No presumption arose that the evidence had to explain delegation merely because another officer’s name appeared on the assessment letter.

7. Issue 4: redaction. The appeal against refusal of redaction under Rule 14 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 was dismissed. The FTT applied the correct approach under Unwired Planet International Ltd v Huawei Technologies Co Ltd (No. 3) [2017] EWHC 3083 (Pat). The evidence did not establish powerful reasons for withholding figures relevant to understanding the tax decision, particularly as the information was several years old and tax litigation is ordinarily subject to open justice.

8. All appeals and the cross-appeal were dismissed. The existing redaction remained pending any application for permission to appeal.

• First-tier Tribunal (Tax Chamber): rejected HMRC’s s 850 argument, held the reallocations taxable under s 687 and alternatively under the sale-of-occupation-income provisions, upheld a discovery assessment, and refused redaction of figures.
• Upper Tribunal (Tax and Chancery Chamber): dismissed HMRC’s cross-appeal and the appellants’ appeals.