TC09613 - [2025] UKFTT 00989 (TC)

HMRC’s first submission is that it was not legally possible for Mr Burley to assign his rights to the income from the Partnerships to the LLP as he claims to have done.

Mr. Waldegrave says that Mr. Burley did not divest himself of any or all of his beneficial interest in the Partnerships as a whole; if anything at all, he simply assigned his rights to receive income. This was not a statutory assignment under section 136 LPA. If anything, it was an equitable assignment or an agreement to assign. This was a clear case of an assignment of an expectancy (see the discussion in Snell at 3-030/031) and so consideration was required. Mr Waldegrave accepts that his point that this was an assignment of a future chose invalid for want of consideration was raised late, but it was not something to which Mr Cannon objected.

Mr. Waldegrave says that there was no consideration here. Mr Cannon relies on the crediting of Mr Burley‘s capital account with £1.7 million, but we do not have the LLP agreement, and we do not know how these arrangements or the accounts fit in with the agreement and what (if any) real rights Mr Burley received in return. There needs to be something that the LLP gives in return. CBL agreed to bear losses on the write-downs of the Florida properties, but that is not consideration given by the LLP. Conceivably, it could be third-party consideration, although Mr. Cannon has not explained how this might operate or indeed suggested that there is any third-party consideration.

Any crediting of Mr Burley‘s capital account is entirely notional. It never had any effect on his rights and cannot therefore constitute consideration.

As far as the prohibition on assignment is concerned, Mr Waldegrave’s position moved from an assertion that, if SG had been a party to the subscription agreement (which contained the rights Mr Burley purported to assign), the prohibition on assignment in the lending and security documents would have rendered the assignment ineffective to one where HMRC accepts that the ordinary position is that a bar on assignment does not mean that an asset assigned in breach of the bar is not held on trust for the assignee. Mr Waldegrave accepts that there is nothing in the relevant contractual provisions that stops Mr. Burley holding his rights on trust for someone else, but in the context of the financing arrangements for the Partnerships he says that the prohibition should be understood in that way. He says that there was no freedom for Mr Burley to deal as he sees fit with his rights under the Partnership agreements. There was nothing meaningful for Mr Burley to assign, given that the cash flowed directly to the banks, and on that basis the prohibition should be read as just not allowing Mr Burley to hold his interest on trust for anyone else.

As far as the pre-existing assignment of the lease rentals to SG by way of security for the obligations which Mr Burley and other members of the partnership owed to SG is concerned, Mr Waldegrave said it is uncontroversial that assignees take subject to any pre-existing equity. The effect of the security assignment means that the LLP got nothing as the cash would always flow to the banks to discharge Mr Burley‘s obligations. In fact, Mr. Burley made an assignment of nothing.

On the question whether a partner can assign their interest in a partnership, in his Grounds of Appeal Mr Burley says the asset he assigned was his partnership share. The focus has moved on to the subject matter of his assignment being his right to partnership income (which is what the Minute purports to assign). On that basis, Mr Waldegrave says that there is no need for us to trouble ourselves with how we would analyse an assignment of an entire partnership share, indeed whether this is even possible. Mr Waldegrave cautions that HMRC do not agree that a partner who assigns his partnership share holds that share on trust for the assignee, although they do not take issue with a partner’s ability to assign partnership profits (or at least to agree to do so in a way which takes effect in equity). They do accept the assignee would have a contractual right to sue the assignor if they failed to account for amounts due to the assignee, but it is the assignor who remains the partner entitled to all partnership rights. As Mr Burley no longer submits that he assigned his partnership share, as opposed to a right to partnership income, this point does not fall to be considered. We did, however, promise to record HMRC’s position on this point, which is at variance with the approach taken in the book Judge Baldwin co-authored, and Judge Baldwin’s undertaking that he and his co-author would reflect on HMRC’s reservations before any third edition is published.

As far as the timing point is concerned, Mr Waldegrave says that, even if the assignment is effective, it could not operate before it was signed by the parties, and this could not be before January 2011. There is no basis for saying that a minute signed in January 2011 can change entitlement to income which arose before that time. It may be correct in accounting terms to reflect the agreement and intention of the parties, but this cannot alter the person to whom income which has already arisen belonged.

Even if the assignments were effective in law HMRC say that Mr Burley nevertheless remained the person who received or was entitled to the Partnership Income in terms of section 8 ITTOIA 2005. Despite the assignment, partnership income continued to be dealt with in the same way as it had been before the assignment. Specifically, it was applied in discharge of Mr Burley’s obligations in relation to the loans and appears to have been paid directly to the lenders. At no time either before or after the assignment did Mr Burley or the LLP have any control over the cash concerned. Despite the accounting entries, neither Mr Burley nor the LLP received any money from the Partnerships and the LLP got no benefit from them at all. Consistently with this, Mr Burley continued to claim tax deductions in respect of the interest on the loans. He continued to “receive” income from the Partnerships in the sense that his indebtedness to the lenders reduced as it was paid (and his obligations to pay interest were discharged).

HMRC submits that, taking a realistic view of the facts and applying the relevant legislation, construed purposively (as is required under the Ramsay case law) Mr Burley continued to be the person who received or was entitled to the Partnership Income. The principles developed in the Ramsay case law were discussed by the Supreme Court in UBS AG v. HMRC [2016] UKSC 13 at paragraphs [61] – [68], and Rossendale at paragraphs [9] – [17].

The approach of the Court of Appeal in Good illustrates the application of the relevant principles. In that case, the main question was whether the taxpayer was “entitled” to income in terms of section 611 ITTOIA 2005. Section 611 was drafted in materially identical terms to section 8 but concerned “non-trade” film income. The taxpayer argued that security arrangements, by which his rights to payments arising from film rights had been assigned to a lender to secure and discharge repayment and interest payment obligations, meant that he was not “entitled” to the income in terms of section 611 (and so was not liable for tax in respect of it).

The decision in Good was not driven by any circularity of funds flow or any avoidance driver. There was an element of circularity in funds flow in BCM Cayman LP and ors v HMRC (“BCM”), [2023] EWCA Civ 1179. In broad terms, if a partnership made super profits they would (at least in part) be allocated to a partner (Cayman Ltd). That would trigger an allocation by Cayman Ltd to another company which would make a payment under a total return swap to a third company which would use that money to subscribe for capital in Cayman Ltd. One question was whether Cayman Ltd received its allocation in a fiduciary capacity, as to which Whipple LJ observed (at [82]):

“Once the totality of arrangements including the TRS is considered, it is clear that the Superprofits paid to Cayman Ltd are returned to Cayman Ltd, by a series of preordained transactions, in the form of a capital contribution from Cayman Holdings. To address the statutory question raised by section 6(1): on a realistic view, Cayman Ltd does not act in a fiduciary capacity when it obtains the Superprofits which it pays (pursuant to a contractual obligation under the Cayman Partnership Deed) to RBS/Fyled; rather, it retains the beneficial interest in the Superprofits throughout, because those Superprofits are returned as capital from Cayman Holdings and are then used by Cayman Ltd to repay its borrowings. There is no significance to be attached to the difference between what is paid out by Cayman Ltd to the Corporate Limited Partner and the lesser amount which is returned to Cayman Ltd by way of capital contribution from Cayman Holdings: that difference represents the fee paid by Cayman Ltd to the Corporate Limited Partner for its participation in these arrangements and is simply a cost of putting these arrangements in place.”

Circularity was no part of her analysis, which simply looked at what was a “realistic view” of the arrangements.

The Court of Appeal rejected the taxpayer’s argument in Good, concluding that the taxpayer remained entitled to the income in the relevant sense notwithstanding the security arrangements. In reaching this conclusion, Whipple LJ (who gave the leading judgment) commented on the required approach in the following terms (at paragraph [55]):

“The words in the statute [i.e. in section 611 of ITTOIA 2005] are not defined and fall to be construed and applied according to their ordinary, non-technical meaning. What is required is a realistic appraisal of the commercial reality or substance of the arrangements in light of the words of the statute, properly construed.”

Commenting on the actual arrangements in Good, Whipple LJ said (at paragraph [62]):

“The MAPs [being the income which was assigned in that case] were assigned in parallel with the Lender’s obligation to use them to discharge the taxpayer’s obligations under the Loan. The taxpayer derived a clear benefit from the MAPs, each time they were paid while the Loan remained outstanding, sufficient to mean that the taxpayer remained “entitled to” the MAPs for the purposes of section 611.”

Applying these principles to the facts of this case, HMRC submits that, if the assignment was effective, Mr Burley nevertheless remained the person who received or was entitled to the partnership income in terms of section 8 ITTOIA 2005. On a “realistic appraisal” of the “substance” of the arrangements, he clearly continued to benefit from the profits of the Partnerships, in that the profits continued to be used to discharge his loan obligations. In such circumstances, Mr Burley must be regarded as having been the person who received or was entitled to the Partnership Income.

Mr Waldegrave submits that the LLP accounts do not assist Mr Cannon in his search for real world consequences. Mr Burley‘s capital account was credited with £1.7 million. However, this was not done at the time of contribution but only in later. We do not have a copy of the LLP agreement, so we cannot tell what rights (if any) partners obtained as a result of a capital contribution. In any event, it is hard to see any real-world significance in this contribution as the LLP did not acquire an asset of substance. The crediting of the capital account was just a paper entry, as meaningless as the allocation of Mr Burley’s rights to partnership income. Mr Burley was debited each year with the Partnerships’ profit share and his capital account was amortised as that income was used to repay Mr. Burley’s borrowing. These artificial entries had no real-world effect.

Mr Cannon says that the use of this money to benefit Mr Burley is not relevant as he was not entitled to anything, having assigned his rights to this income to the LLP. This, Mr Waldegrave, says is a highly legalistic analysis at odds with the approach in Ramsay/Good and similar cases. If the income in the Partnerships, which Mr Burley had purported to be assign to the LLP, was used to pay Mr Burley‘s loan obligations, then the LLP should have allocated that income to Mr Burley or, if the income was allocated to CBL, CBL would need to make a distribution to Mr. Burley. It is unrealistic to analyse income within the Partnerships as being used to discharge Mr Burley‘s personal liabilities without there being any form of income credit to him. Mr Waldegrave accepts the taxpayers have choices about how they organise their affairs, but those choices must be realistic, effective ones. This was not a real choice with any real effect.