Muller UK and Ireland Group LLP & Ors v The Commissioners for HMRC

For the purpose of calculating a corporate member’s share of partnership profits, a statutory fiction requiring the trade to be treated as carried on by a notional company extends to the related-party rules that form part of the calculation. The notional company must be attributed the partnership’s ownership characteristics to the extent necessary to determine control. Consequently, corporate members controlling a limited liability partnership may be related parties to the notional company, preventing deductions for amortisation of acquired intangible assets. The court also held, obiter, that an evident drafting defect in the Finance Act 2016 amendments could be corrected under the Inco Europe principles.

The corporate members of a limited liability partnership transferred trades, intellectual property and goodwill to the LLP in return for membership units. The assets were recorded at fair value and amortised. Deductions for the amortisation were denied under the related-party exception in Part 8 of the Corporation Tax Act 2009.

The First-tier Tribunal held that the corporate members controlled the notional UK-resident company required by section 1259 of the Act and were therefore related parties. The appellants appealed, contending that the statutory fiction concerned profit calculation only and did not import ownership or control characteristics into the notional company. The Upper Tribunal also considered, in the alternative, the effect of amendments made by section 52 of the Finance Act 2016.

1. Appeals dismissed. The statutory fiction in section 1259 of the Corporation Tax Act 2009 requires the profits of the trade to be calculated as if a UK-resident company carried on it. The fiction must be construed by reference to the statutory purpose and applied to consequences which inevitably flow from the assumed state of affairs.
2. Calculation of profits includes determining whether the related-party exception in Part 8 prevents a debit for amortisation of intangible fixed assets. Treating the related-party rules as inapplicable would omit a material part of the statutory calculation.
3. The statutory concept of control is deliberately broad. It is not confined to share ownership or articles of association. It can arise from voting power or powers under another document regulating the entity. Accordingly, the ownership and control characteristics of the LLP could be attributed to the notional company to the extent necessary to perform the calculation. The corporate members therefore controlled the notional company and were related parties.
4. BCM Cayman LP and another v HMRC [2022] UKUT 198 (TCC), affirmed by BCM Cayman LP and another v HMRC [2023] EWCA Civ 1179, did not assist the appellants. That case concerned the limits of the fiction when determining the nature of a corporate member’s own loan relationship, whereas the present case concerned attribution of the real partnership’s ownership and control to the notional company.
5. Obiter, the court held that the Finance Act 2016 amendments applied to debits arising in the relevant accounting periods, even where the assets had been acquired earlier. It further held that the defective wording of section 882(5B) could be corrected under the principles in Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586 and Pollen Estate Trustee Co Ltd v HMRC [2013] EWCA Civ 753. The intended substance was sufficiently clear.

• Upper Tribunal (Tax and Chancery Chamber): appeals dismissed. The Tribunal upheld the First-tier Tribunal’s decision that the corporate members and the notional company were related parties.
• First-tier Tribunal (Tax Chamber): in [2023] UKFTT 00221 (TC), the appellants’ appeals against HMRC closure notices were dismissed.