Mark Benedict Holden v The Commissioners for HMRC

Payments described as the sale of partnership capital interests are not capital receipts merely because the relevant agreement uses that terminology. The court must identify the rights actually created and examine the commercial reality of the arrangements. A future contingent right on a winding-up, or a token redeemable under contractual arrangements, is not necessarily an interest in partnership capital or goodwill.

Under the mixed member partnership rules, the counterfactual asks whether the individual’s profit share and relevant tax amount would have been higher without the deferred profit or power to enjoy. It is not answered by assuming that an alternative arrangement would have deferred the profit in another form. Carelessness must cause the loss of tax, but HMRC need not prove the precise counterfactual outcome.

The appeals and cross-appeals arose from arrangements implemented by The Boston Consulting Group UK LLP under three limited liability partnership agreements. Senior members received rights called Capital Interests, whose value was linked to increases in the value of shares in the global group. Payments were reported as capital gains.

The First-tier Tribunal held that the rights were not interests in the LLP’s capital, that payments in earlier years were miscellaneous income, and that the mixed member partnership rules did not apply. It also made findings on occupational income and procedural time limits. The Upper Tribunal had to determine the character of the rights, the application of Conditions X and Y in ITTOIA s 850C, the alternative income charges, and whether assessments and amendments were procedurally valid.

1. Capital character. The Capital Interests did not give the individual members an identifiable interest in the capital or goodwill of the LLP. Under the 2011 agreement, the most that could be identified was a future contingent right under the winding-up waterfall. The Schedule 3 price was so disconnected from the real value of that right that the payments could not be treated as genuine consideration for a capital asset. Under the 2014 and 2016 agreements, all capital profits belonged to BCG Ltd and the winding-up right had been removed. The defined term Capital Interest therefore operated only as a token for the payment arrangements.
2. Mixed member partnership rules. Conditions X and Y in ITTOIA s 850C were satisfied for 2014-15 to 2016-17. The payments were deferred benefits and amounts representing them were included in BCG Ltd’s profit share. The correct counterfactual was whether the individual members would have received higher profit shares without the deferral or power to enjoy. It was not appropriate to assume that a replacement global scheme would have produced the same result. The profits were to be reallocated annually on a just and reasonable basis by reference to annual increases in the value of the Capital Interests.
3. Miscellaneous income. For 2012-13 and 2013-14 the payments were income from a source not otherwise charged to tax under ITTOIA s 687. The rights were capable of annual calculation and recurrence, formed part of the members’ reward for services, were analogous to remuneration, and arose from the LLP agreements.
4. Occupational income. If the Capital Interests had been capital, the alternative occupational income provisions would have applied. The value was not attributable to the LLP as a going concern, but to increases in the value of BCG Inc shares. Conditions B and C in ITA s 777 were satisfied.
5. Procedural issues. The LLP was careless in implementing and reporting the arrangements because it relied on inadequate advice without obtaining specialist counsel’s opinion. Applying Mainpay v HMRC [2025] EWCA Civ 1290, the carelessness caused the loss of tax without HMRC having to prove the precise alternative course. The LLP acted on behalf of Mr Krinks and Mr Nascimento when it instructed PwC and supplied instructions for their returns. The assessments against them were therefore valid. The hypothetical officer test was met for the 2016-17 partnership return.
6. The Upper Tribunal set aside the FTT’s findings that the mixed member partnership rules did not apply and that the LLP had not acted on behalf of the relevant individuals. It remade the decision rather than remitting it.

1. Upper Tribunal (Tax and Chancery Chamber): appeals and cross-appeals against the FTT decision were determined. The FTT decision was upheld in part, certain findings were set aside, and the decision was remade under section 12 of the Tribunals, Courts and Enforcement Act 2007.
2. First-tier Tribunal (Tax Chamber): the FTT decision was reported at [2024] UKFTT 00084 (TC). It held that the Capital Interests were not interests in the LLP’s capital, that payments were miscellaneous income, and that the mixed member partnership rules did not apply.