The Commissioners for HMRC v HFFX LLP

For the miscellaneous-income charge under Income Tax (Trading and Other Income) Act 2005, a source need not be an enforceable legal right to receive the payment. A source may arise from a legal framework giving members relevant rights, together with a decision made under that framework to reallocate Special Capital. In an LLP incentivisation arrangement, the Braganza principle may constrain a member’s discretion despite words such as sole and absolute discretion. The discretion must be exercised rationally and in the context of the arrangement’s purpose. A payment made pursuant to that framework is not a pure gift and can be taxable under s.687. The court declined to decide an unnecessary alternative issue concerning sales of occupation income.

HFFX LLP transferred a high-frequency foreign-exchange trading team into an LLP structure. Under a Capital Allocation Plan, profits were allocated to a corporate member, invested, contributed back as Special Capital and later reallocated to individual members.

The First-tier Tribunal found against HMRC on the allocation issue under Income Tax (Trading and Other Income) Act 2005, s.850, but accepted HMRC’s case on miscellaneous income and sales of occupation income. The Upper Tribunal dismissed the individual members’ appeal on miscellaneous income and also decided the alternative issue against them: [2023] UKUT 00073 (TCC). The appeals concerned whether the reallocations had a source for the miscellaneous-income charge and whether the corporate member’s discretion was unfettered.

1. Disposition. Both appeals were dismissed. HMRC’s appeal concerning s.850 was dismissed because BlueCrest CA was accepted as determinative in favour of HFFX. The individual members’ appeal on miscellaneous income was also dismissed.
2. Source of income. The decision in BlueCrest CA materially governed the miscellaneous-income issue. Under Income Tax (Trading and Other Income) Act 2005, s.687, an enforceable legal right to receive the payment is not essential. The combination of rights under the Partnership Deed and decisions made in favour of members to reallocate Special Capital could constitute an identifiable source in the relevant tax year. The receipt was therefore not a pure gift and was taxable.
3. Discretion. The Braganza principle can apply where an individual works as a member of an LLP rather than an employee, particularly where the arrangement involves discretionary remuneration and an imbalance of power. The Partnership Deed, its schedules and the purpose of the Capital Allocation Plan showed that GSAM’s discretion was subject to a requirement of rational and proper exercise. The words “sole and absolute discretion” did not make it unfettered. The power to prevent reallocations in limited circumstances did not alter the source of reallocations actually made.
4. Unnecessary issues. The court left open whether activities or services could independently create a source without a contractual framework. It also declined to determine the sales of occupation income issue, following the approach in BlueCrest CA, and did not endorse the reasoning below on that issue.

Lady Justice Whipple and Lady Justice Asplin agreed with Lady Justice Falk.

1. Court of Appeal (Civil Division). Both appeals were dismissed in [2024] EWCA Civ 813.
2. Upper Tribunal (Tax and Chancery Chamber). In [2023] UKUT 00073 (TCC), the Upper Tribunal dismissed the individual members’ appeal on miscellaneous income, decided the alternative sales-of-occupation-income issue against them, and granted permission to appeal on those issues. It also granted HMRC permission to appeal on s.850.
3. First-tier Tribunal. The Tribunal found against HMRC on the s.850 issue but accepted HMRC’s arguments on miscellaneous income and sales of occupation income.