Commissioners for His Majesty’s Revenue and Customs v HFFX LLP

For income tax purposes, a partner’s share of partnership profits is determined by contractual profit-sharing rights subsisting during the relevant accounting period. Later discretionary remuneration is outside that allocation rule unless the partner already had a contractual right to it in that period.

A residual income-tax charge can apply where income has an identifiable source. The source may consist of rights under a legal instrument combined with the exercise of a legally constrained discretion. The recipient need not possess the source, and an absolute entitlement to payment is unnecessary.

A purposive construction cannot replace the ordinary meaning of statutory language merely because a broader approach better reflects commercial reality.

These conjoined appeals concerned deferred remuneration paid to individual members of a limited liability partnership engaged in foreign exchange trading. Profits were allocated to a corporate member and later reallocated as Special Capital to individual members under a Capital Allocation Plan.

The First-tier Tribunal held that section 850 of the Income Tax (Trading and Other Income) Act 2005 did not apply, but that the deferred payments were taxable under section 687 of that Act and Chapter 4 of Part 13 of the Income Tax Act 2007. The Upper Tribunal upheld those conclusions. The Court of Appeal dismissed both appeals in [2024] EWCA Civ 813.

The Supreme Court considered the proper allocation of partnership profits, the meaning of a source of income, and whether the alternative sales-of-occupation regime required determination.

Lord Sales gave the judgment, with whom Lord Lloyd-Jones, Lord Hamblen, Lord Burrows and Lady Rose agreed. Both appeals were dismissed.

1. Section 850. Under section 850 of the Income Tax (Trading and Other Income) Act 2005, a partner’s share of profits or losses is determined by the firm’s profit-sharing arrangements for the relevant period. Those arrangements are the partners’ rights and liabilities to share in the trade’s profits and losses. The relevant right must be contractual and subsist during that period. It is the partner’s entitlement, rather than later receipt of money, which determines the taxable allocation.
2. The individual members had no contractual right during the relevant periods to receive the deferred sums allocated to GSAM. The CAP therefore did not allocate those sums to them for section 850 purposes. The Court followed the reasoning in BlueCrest CA [2023] EWCA Civ 1481. A general appeal to commercial reality could not displace the ordinary meaning of the statutory language. The CAP had genuine commercial purposes, so there was no basis for applying the Ramsay approach to ignore its operation.
3. Section 687. Section 687 required income not otherwise charged to arise from an identifiable source in the relevant tax year. The provision retained the scope of the former residual Case VI charge. The source need not be possessed by the recipient. A relevant and sufficient connection between the payment and the recipient was enough.
4. The individual members’ rights under the LLP Deed, combined with decisions by GSAM to reallocate Special Capital in their favour, constituted such a source. The payments were not mere voluntary gifts. The discretion was exercised within a legal framework and was subject to the Braganza obligations, although the members had no absolute right to payment before the discretion was exercised.
5. Section 575. The priority rule in section 575 did not displace section 687. The deferred remuneration was paid from GSAM’s funds and arose from a separate source. The corporate member and the individual members were not the same taxpayer, and they were not taxed on the same income.
6. It was unnecessary to decide the application of Chapter 4 of Part 13 of the Income Tax Act 2007. The Court reserved its opinion and should not be taken to endorse or disapprove the Upper Tribunal’s reasoning on that issue.

• United Kingdom Supreme Court — [2026] UKSC 17: HMRC’s appeal on section 850 and the individual members’ appeal on section 687 were dismissed. The Chapter 4 issue was left undecided.
• Court of Appeal — [2024] EWCA Civ 813: both appeals were dismissed. HMRC’s section 850 appeal was dismissed in light of BlueCrest CA, and the individual members’ section 687 appeal was dismissed.
• Upper Tribunal — [2023] UKUT 73 (TCC); [2023] STC 678: HMRC’s appeal on section 850 and the individual members’ appeals on section 687 and Chapter 4 were dismissed.
• First-tier Tribunal: section 850 was held inapplicable, while the deferred payments were held taxable under section 687 and Chapter 4 of Part 13 of the Income Tax Act 2007.