TC09613 - [2025] UKFTT 00989 (TC)

Mr Cannon says that the Minute records the intention of Mr Burley that his income from the Partnerships should be held by him absolutely for the LLP from 6 April 2009 and amounts to an equitable assignment of his income from the Partnerships from that date. He remained a partner in the Partnerships but gave over the economic benefit of his membership of the Partnerships to the LLP.

The accounts of the LLP give a true and fair view of the LLP’s affairs (Mr McErlean’s evidence, which was not disputed by HMRC nor challenged by them in cross-examination, was that the accounts of the LLP showed a true and fair view and complied with GAAP), and they show income rights assigned to it from 6 April 2009. £1.7m was credited to Mr Burley’s capital account in the books of the LLP as what was contributed was the right to income stripped of the liability to the lender, which was retained by Mr Burley. There is, Mr Cannon says, a “golden rule” endorsed by the Supreme Court in HMRC v NCL Investments Ltd, [2022] UKSC 9 (“NCL”), that accounts prepared in line with generally accepted accounting principles must be respected for tax purposes. Nothing in the purposive approach to statutory construction espoused by cases such as RossendaleBorough Council v. Hurstwood Properties (A) Limited [2021] UKSC 16 (“Rossendale”) entitles HMRC to “outmanoeuvre” the effect of a properly prepared set of accounts in a straightforward case such as this where a taxpayer is exercising a legitimate choice.

He says (relying on the paragraphs in Snell’s Equity 35^th edn (2025) (“Snell”) identified in parentheses below) that:

Mr Cannon does not concede that a right to future partnership profits is a future chose, although he agrees the “likelihood” is that it is looking at the examples given in Snell at 3-032 (although noting that partnership interests are not referred to). However, he says that, if the right to partnership income is a future chose (so that consideration is needed to support an agreement to assign), the required consideration can be found in CBL agreeing to bear the cost of the write-down in value in the Florida properties, which is given in return for CB agreeing to hold the right to income from the Partnerships for the LLP. Although we do not have a copy of the LLP members’ agreement, he says that the crediting of the value of these rights to Mr Burley’s capital account and CBL agreeing to shoulder the cost of these write-downs means that Mr Burley received a valuable interest in the LLP. He would receive that value on the liquidation of the LLP or an in specie distribution. There is no need for the LLP to give consideration; it is sufficient that there is a series of valuable promises given by the members to each other. He described the objection that the LLP had not given consideration as a “very technical” one which did not hold water.

He also submits that the assignment by Mr Burley of his rights to income from the Partnerships was possible in equity notwithstanding the contractual bar on assignments under the lending agreements and the prior legal assignments of the income to the lenders by way of security. While the lenders as secured legal assignees would have had a prior claim to the income in priority to the LLP as an equitable assignee, and a remedy against Mr Burley for breach of contract had they taken issue with the equitable assignment, this did not prevent the equitable assignment taking effect to transfer Mr Burley’s rights to the income from the Partnerships to the LLP. The equitable assignment took effect subject to the prior security rights granted to the lenders and meant that Mr Burley had divested himself of the income such that a court exercising its equitable jurisdiction would restrain Mr Burley at the request of the LLP from dealing with the income in any way that was inconsistent with the assignment. Right to apply for permission to appeal.

In this context Mr Cannon drew our attention to the discussion in Chitty on Contracts (35^th ed) (“Chitty”) at 23-043 et seq., which indicates that, if rights arising under a contract are declared by the contract to be incapable of assignment, a purported assignment will be invalid as against the debtor, but a prohibited assignment can be effective as between assignor and assignee. He referred us to Darling J’s famous dictum (in Tom Shaw & Co v Moss Empires Ltd, (1908) 25 TLR, 190, 191) that a prohibition “could no more operate to invalidate the assignment than it could interfere with the laws of gravitation”.

Moving on to HMRC’s tax point, Mr Cannon says that, because of the equitable assignment reflected in the Minute, Mr Burley did not remain entitled to the income from the Partnerships in terms of section 8 ITTOIA 2005. The right to that income had been validly vested in the LLP, and by implication subject to the prior security rights of the lenders.

He says that HMRC’s analogy with the position in Good v HMRC. [2023] EWCA Civ 114 (“Good”) is not on all fours with this appeal. In that case the Court of Appeal rejected the argument that the security arrangements had the effect of divesting the taxpayer of all benefit in and entitlement to the income. There is nothing remarkable in that conclusion; English Sewing Cotton Co Ltd v IRC, [1947] 1 All ER 679, tells us that, where security arrangements are put in place, beneficial ownership of the charged assets remans with the charger. However, Mr Burley is not arguing that the security arrangements with the lenders meant that he was divested of the income but rather that the separate equitable assignment had the effect in equity of divesting himself of entitlement. In Good there had been no assignment of the rights to the partnership income to a third party and so that decision is not good authority on the facts in this appeal.

While it is true that the income continued to be applied in discharge of Mr Burley’s liabilities to repay the loans, and to pay interest on them (and Mr Burley continued to claim deductions in respect of the interest), so that the income was in fact used in a way which benefitted Mr Burley, this does not affect the fact that the entitlement to that income had been assigned to the LLP thus divesting Mr Burley of that income.

In his final written submissions after the hearing Mr Cannon criticised HMRC’s case as exhibiting what he called “a common, and in this case absolutely crucial, confusion between the concepts of income on the one hand and money on the other”. He says that the “income” was not applied in repaying the banks. Money received by the Partnerships was so applied and Mr Burley was poorer because of the transactions because CBL was credited with the income and in consequence had a greater capital stake in the LLP, while he was debited with the payments to the banks and so had a lesser stake in the LLP. Mr Cannon submits that, where partnership profits are concerned, tax is due on the partner who is credited in the accounts with a profit share, regardless of whether the partner draws any money out of the partnership. He says that it is inconceivable that HMRC could dispute this universally applied rule. Here CBL received the credits in respect of the partnership profits. 

We asked Mr Cannon whether Mr Burley had only assigned the “rump” of income from the Partnerships, i.e. the net income payable to him (which would be little or nothing, given the borrowing/security arrangements). He replied that Mr Burley had assigned the gross income flows and payment rights; this is what is reflected in the LLP accounts. Mr Burley intended to, and did, hold his rights for the LLP absolutely, but this must be after paying interest and making loan repayments.

Mr Cannon submitted that, if Mr Burley received or was entitled to the Partnership income (and his primary argument is that this is not the case), this would be in a representative capacity and as a result he would be taxable only at the basic rate of income tax (producing a liability no greater than the corporation tax already paid by CBL). He referred us to passages in HMRC’s Savings and Investment Manual (SAIM2400 and SAIM 2410, which deal with the charge on interest where the person chargeable is the person receiving or entitled to the interest), which make it clear that HMRC would only argue that a person who receives interest in a representative capacity is taxable on that interest “in exceptional circumstances” and, as it is not their income, such a person’s liability to income tax would be at the basic rate only.

Mr Cannon also pointed us to “Spotlight 63” (HMRC guidance on an avoidance scheme using hybrid partnerships used by individual landlords). HMRC discuss the arrangements without taking any point that they would seem to be in breach of individual borrowers’ security obligations. In fairness to HMRC, their discussion is confined to the tax issues arising from these arrangements, and we do not consider that Spotlight 63 advances our understanding of the position..