TC09613 - [2025] UKFTT 00989 (TC)

As a starting point, the person chargeable to income tax on the profits of a trade is the person who receives or is entitled to them; section 8 ITTOIA. In the case of a partnership, there is a further provision we need to consider. This is section 850 ITTOIA. It provides as follows:

“(1)

For any period of account a partner's share of a profit or loss of a trade carried on by a firm is determined for income tax purposes in accordance with the firm's profit-sharing arrangements during that period. This is subject to sections 850A and 850B.”

To the extent there is a tension between these provisions (perhaps more accurately, that they might not always lead to the same answer in a given situation), we have seen Mr Cannon’s submission that 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 this is a cardinal principle, and it is fundamentally wrong to confuse the question of the person to whom profits are credited and economic entitlement. In essence, his submission is that profits here are allocated to Mr Burley but that right has been assigned to the LLP and through it to CBL, so that it is CBL which is taxable on those profits. He also says that Mr Burley was poorer because of these transactions because CBL was credited with the income and in consequence had a greater capital stake in the LLP, which we take to be a submission that CBL is entitled to the share in profits allocated to Mr Burley.

In BCM the Court of Appeal considered the relationship between sections 6(1) and 1262(1) of the Corporation Tax Act 2009 (“CTA 2009”). In terms very similar to section 850 ITTOIA, section 1259(1) provided that:

“For any accounting period of a firm a partner’s share of a profit or loss of a trade carried on by the firm is determined for corporation tax purposes in accordance with the firm’s profit-sharing arrangements during that period.”

Section 6(1), on the other hand, provides that corporation tax is not to be charged on the profits which accrue to a company in a fiduciary capacity. The Upper Tribunal had held that the allocation of profits under section 1262 was part of an “entirely separate free-standing regime for the taxation of profits accruing under a partnership” and section 6(1) had no application. So, it was not necessary to establish whether a particular company partner had a beneficial interest (or received those moneys in a merely fiduciary or representative capacity) for it to be liable for corporation tax on the whole amount. Whipple LJ considered this view to be wrong. She commented as follows (at [67]):

“I would accept the appellants’ basic premise that section 6(1) of CTA 2009 is a charging provision and that section 1262 of CTA 2009 is a computational provision. I would further accept that the two provisions must be read together and that computation issues only arise once established that tax is chargeable. That means that section 6(1) is very much in focus and the UT were wrong to say that the question of beneficial ownership was irrelevant.”

Carrying that logic through to our situation, section 850 ITTOIA tells us what Mr Burley’s share of profits of each of the Partnerships is (it being “Mr Burley’s partnership share”, because he is the partner), but section 850 does not impose a tax charge on him (or anyone else for that matter). The person chargeable on Mr Burley’s profit share is determined (as we are concerned with trading profits) by section 8 ITTOIA; that person is the person who receives or is entitled to Mr Burley’s profit share.

In the case of straightforward partnership situations, the partner to whom a share of profits is allocated under the firm’s profit-sharing arrangements for a particular period will also be the person who receives and is entitled to them. However, we are not analysing a straightforward partnership situation here, as Mr Burley is (for now) assumed to have made an effective assignment of his rights to partnership profits, and so we need to decide whether, that assignment notwithstanding, he remained the person who received or was entitled to “his” share of partnership profits.

Before we turn to the task of answering that question, we would observe that we do not agree with Mr Cannon’s submission that tax is due on the partner who is credited in the partnership accounts with a profit share, regardless of whether that partner draws any money out of the partnership, at least not if he is suggesting that a partnership can allocate profits among its partners for tax purposes without regard to any consideration of economic substance. Section 850 ITTOIA refers to a partner’s share of a profit or loss for a period, and we cannot see how any interpretation (let alone a purposive one) of a straightforward concept such as a partner’s share of a firm’s profit could ever refer to an entry in a set of accounts which is divorced from commercial reality. Just like any other, the question “What is a particular partner’s share of profits under a partnership’s profit-sharing arrangements?” is to be answered based on a realistic appraisal of the commercial reality or substance of the arrangements in the light of the words of the statute, purposively construed; see [69] below. Even if we are wrong and there are no restrictions on those to whom profits (or losses) can be allocated, we have just seen that the person to whom those profits accrue for tax purposes is the person who receives or is entitled to them.

Turning back to the task in hand, the question we need to answer is whether, assuming the assignments were effective as a matter of general (non-tax) law, Mr Burley nevertheless received or was entitled to his share of the profits of the Partnerships for the purposes of section 8 in the periods we are concerned with.

The cases make it clear that answering this question requires us to arrive at a realistic appraisal of the commercial reality or substance of the arrangements in the light of the words of the statute, purposively construed.

Pausing here, we have seen Mr Cannon draw a distinction between income (possibly profits too) and money. We have already explained why we do not think that money (or, at least, economic substance) can be ignored when allocating partnership profits or deciding who is entitled to them. Similarly, if this is a further point Mr Cannon is making, the question who is entitled to partnership profits can only be answered by looking at how the economic value that goes to make up the profit was used. The Partnerships did not account to the lenders for an amount which reflected their profits. The totality of their receipts from the film transactions, which were (as we understand the position) all the Partnerships’ receipts and therefore all (or more than all) of their profits, were assigned and paid to the lenders. To the extent Mr Cannon is seeking to create a dichotomy between receipts and cash on the one hand and profits on the other, we consider that to be a wholly unrealistic and uncommercial distinction. A profit as an abstract number cannot be received or enjoyed, whereas the economic assets which go to make up that number can be. Anything that happened to or in relation to the film lease rentals (or rights and obligations relating to those amounts) is relevant to questions relating to the receipt of or entitlement to profits, as those receipts and the Partnerships’ profits are effectively interchangeable here.

Good concerned the meaning of the same phrase “receiving or entitled to” non-trade film income in section 611 ITTOIA. Mr Good used film distribution rights as security for the finance he took out to fund the acquisition of those rights. The film distribution rights were then sold for a consideration comprising a fixed element (the MAPs) and an entitlement to a variable element calculated by reference to the gross receipts of the relevant film.

The security documents relating to Mr Good’s borrowings included a security assignment under which he assigned his interest in the film distribution agreements until he had discharged all his obligations in relation to his borrowings. The film distribution company was directed to pay sums due under the distribution agreement to the lender “until repayment in full of the aggregate amount of all indebtedness owing”. Included in the sums directed to be paid to the lender were the MAPs. The lender undertook to apply all sums received from the distribution company under the terms of this direction to the repayment of capital and interest on the taxpayer’s loan.

The Court of Appeal held that the taxpayer was entitled to the MAPs. Whipple LJ started by noting that it was common ground that the Ramsay approach to statutory interpretation should be applied, and she summarised that approach (at [50]) as:

“It is necessary to “have regard to the purpose of a particular provision and interpret its language, so far as possible, in the way which best gives effect to this purpose” (per Lord Reed [in UBS AG v Revenue and Customs Commissioners [2016] UKSC 13] at [61]); the “ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically” (per Lord Reed at [66], citing Ribeiro PJ in Arrowtown Assets 6 ITLR 454, para 35, also cited in Barclays Mercantile Finance Ltd v Mawson [2005] 1 AC 684 at [36] and in Khan at [49]).”

At [53]-[54] she noted that receipt and entitlement are different concepts, and so “A person who is entitled to a payment from a third party may not in fact receive the money; and the person who receives the money may not be the person who was entitled to do so as against the third party. It is accordingly clear that the class of persons intended to be caught by s 611 is wider than simply those who receive income.” More than one person could come within the ambit of section 611 and HMRC might be put to an election as to which taxpayer should be pursued for the tax.

As to the meaning of “entitled to” she said that these “are words of ordinary usage and should be given their ordinary meaning. ... The words in the statute 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.” Here, the words were not to be equated with “beneficial ownership” or “belong”. The wider circumstances and the way the particular payment is used may well be relevant to the question of entitlement.

On the question of assignment (which the taxpayer’s counsel argued meant that the taxpayer had alienated all his interest in the MAPs), she agreed (at [59]) with the Upper Tribunal’s comment that the question of entitlement is not “necessarily determined solely by reference to the effect of any charge, settlement or assignment which takes effect in relation to such income. … other factors, such as whether the relevant person has a right to the income and whether he or she derives a real benefit from that income, are relevant to the question of entitlement. Furthermore, section 611, like section 385 in Khan, requires focus on the particular transaction under which the income arose rather than the scheme as a whole.”. As she summarised the issue (at [61]), “The existence of an assignment is not necessarily determinative of the s 611 question: whether it is or not will depend on the wider facts.”

Looking at the security assignment in that case, at [62] she rejected “the proposition that the taxpayer had completely alienated his rights in the MAPs so as no longer to be entitled to them. That does not reflect the reality of these arrangements. The MAPs 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 s 611.”

Whipple LJ considered that this approach was supported by cases such as CIR v Paterson, (1924) 9 TC 163, Dunmore v McGowan, [1978] STC 217, and Peracha v Miley, [1990] STC 512. In the last of these cases, the taxpayer was liable to tax on interest credited to a deposit account held by the bank as security for a third-party loan for which the taxpayer had become personally liable. The interest on the deposit was set off by the bank against the interest due on the loan. Dillon LJ said at p 515d:

“… this case is to my mind indistinguishable from Dunmore v McGowan, because at each stage the taxpayer is liable for the interest on the debt and on being credited with interest on his deposit he gets the benefit, as in Dunmore v McGowan, that his liability for the interest falls to be reduced by the interest on the deposit which is credited to him.”

She concluded that the security arrangements did not divest the taxpayer of all benefit in and entitlement to the MAPs.

“74 … The effect of those agreements was not to alienate all interest in the MAPs away from the taxpayer. Neither the Security Assignment nor the Direction touched the Distribution Agreement, which stood intact and bestowed on the taxpayer the right to the MAPs. The assignment of the taxpayer’s rights under the Distribution Agreement combined with the Direction meant that he retained a real interest in the MAPs, which were paid to the Lender subject to the condition about how they were to be used, and the Lender’s hands were tied by the obligation to apply the MAPs to meet the Loan obligations. That was of clear benefit to the taxpayer who was relieved of obligations he otherwise would have owed in relation to the Loan. Further, the taxpayer had a right to redeem his rights to the MAPs once the Loan was paid off.

75.

The effect of the assignment was to divert payment of the MAPs to a third party, but as the cases in the line ending with Peracha v Miley show, the person can still be entitled to the payments (and liable to tax on them) if that person stands to benefit from the payments to the third party, and the way they are used by the third party. That principle applies here.”

Turning to the facts of this case, until he assigned his “rights to income from investment in film partnerships [to] the LLP absolutely”, Mr. Burley‘s rights were effectively the same as Mr. Good’s. He was involved in an enterprise which earned profits from transactions in film rights. Mr Good was entitled to non-trade film income; Mr Burley was a partner in a partnership which made trading profits out of transactions with film rights.

Both Mr. Good and Mr Burley had borrowed to finance their investment in these projects, and they had granted security interest over the assets they acquired with the borrowed money. Mr. Good executed a security assignment of his rights to income from the distribution agreement. Mr Burley agreed not to assign any of his rights under Partnership Agreements. He agreed that the lender would take security from the Partnership in respect of the loan, although it was made abundantly clear that this did not remove Mr Burley‘s personal liability in respect of the loan, for which he remain fully responsible. The Partnerships assigned to the lender by way of security all present and future amounts due under the film leases. In just the same way as Mr. Good assigned by way of security his interest in the film distribution agreement, Mr Burley (through the agency of the Partnerships) assigned his right to receive income.

Although they both assigned their right to receive income and the relevant cash flows did not pass through them, the income was still benefiting them since it was being used by their lender to discharge their obligations to pay interest on and repay their borrowing. That is why the Court of Appeal held that Mr Good was entitled to, and chargeable to income tax on, the non-trade film income and the same would be the case here for Mr Burley in respect of his share of trading profits earned in the Partnerships. It was not suggested that, in the absence of his assignment of his rights to income from the Partnerships, Mr Burley would not have been chargeable to tax on his share of the Partnerships’ income; indeed, it was that accepted tax liability that drove him to effect the assignments.

The question then is whether the assignment that Mr Burley made of his right to receive income from the Partnerships changed that position. As Mr Cannon correctly points out, the assignment in Good was no more than a security assignment, the income stream was assigned to the lender subject to a right of reconveyance once the loans had been repaid. The assignment Mr Burley made here is different. He agreed to “hold his rights to income from investment in film partnerships for the LLP absolutely”. That was an absolute, proprietary assignment; it passed the benefit of Mr Burley’s rights to income from the Partnerships to the LLP absolutely and was a very different arrangement from the security assignment Mr. Good entered or the ones the Partnerships had executed in relation to their lease receipts.

That notwithstanding, Mr Burley’s share of the lease receipts of the Partnerships continued to be used to discharge his obligations to his lenders. The security arrangements over the film leasing transactions had been entered into by the Partnerships as a collective, and they continued wholly unaffected by the additional, personal arrangements between Mr Burley and the LLP. Mr Burley’s share, through the Partnerships, of the film leasing income continued to be applied by the Partnerships in the same way as it had been before the Minute was signed. The income was paid directly to Mr Burley’s lenders and used by them to discharge his obligations to them. If the use of income in that way meant that Mr. Burley was entitled to the profits of the Partnerships before he executed the assignment in favour of the LLP, it is hard to see why the same analysis did not obtain afterwards, since nothing changed so far as the receipt, use and application of those amounts were concerned.

It is not clear from the material before the tribunal whether Mr Burley could repay his loan and effectively receive his share of the lease rentals from the Partnerships at a time when the other partners continued with their borrowing and security arrangements. Assuming for a moment that he could, it would still be the case that, until he did so, the only income he would be entitled to was whatever was left after the obligations to the banks had been discharged.

That was the clear, and intended, effect of the borrowing and security documents: that the Partnerships would divert Mr Burley’s share of income to the lenders until his obligations had been fully discharged.

So far as the impact of the LLP’s accounts are concerned, we do not agree with Mr Cannon that the accounts are determinative (or indeed a relevant factor at all) here. The “golden rule” Mr Cannon referred to as derived from NCL is to be found in the judgment of Lord Hamblen and Lady Rose at [23], where it is identified as the provision in section 46 CTA 2009, that “The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for corporation tax purposes.” We are not concerned with the calculation of the profits of a trade, but with an entirely different question: Who receives, or is entitled to, the profits of a trade, calculated (no doubt) in accordance with the “golden rule”? The “golden rule” is not (as Mr Cannon suggests) that all tax issues are inevitably determined by the underlying accounting treatment of the item the tax treatment of which is in issue. We agree with Mr Waldegrave that the question who receives or is entitled to income is a legal question which focuses on the position when the income arose. It focuses on where the profits went (who received them) and people’s rights in relation to the profits (who was entitled to them).

Turning to the LLP’s accounts themselves, it is Mr McErlean’s unchallenged accounting evidence that the LLP’s accounts give a true and fair view of the LLP’s financial position in accordance with generally accepted accounting practice. That notwithstanding and without in any way casting doubt on the sophisticated way these transactions were accounted for, we cannot see how on any realistic view Mr Burley transferred anything of any value to the LLP. Whilst the LLP was not bound by Mr Burley‘s obligations to his lenders, those obligations influenced the value of the interests in the Partnerships transferred, since their effect, whilst they remained in place (and when they fell away, because they had been fully discharged, the Partnerships’ interests in the films would terminate too), was that whoever had the benefit of that partnership interest would never receive any income distributions in respect of that participation. The assignment took effect subject to the lenders’ pre-existing rights. Mr Burley could not (and, in fairness it was not suggested that he could) use an assignment to defeat a lender’s rights.

Despite the accounting analysis, that Mr Burley contributed an asset worth £1.7 million, which the LLP then wrote off as the underlying income in the Partnerships was used to discharge Mr Burley‘s personal obligations, the LLP never really received any benefit from the interest in the Partnerships transferred to it at all. In truth, the accounting treatment the LLP adopted recognised this, as it showed the value of the asset (the interest in the Partnerships) in its accounts being amortised, with no benefit left in the LLP, as lease rentals were received and used solely to benefit Mr Burley. The reason why there was no benefit for the LLP in this transaction is that the lease rentals received by the Partnerships had to be used to discharge Mr. Burley‘s personal obligations, in the same way as they had been before the assignment, and there was no benefit or advantage in this for the LLP at all. Those amounts were still being used after the assignment to benefit Mr Burley, in effectively the same way as Mr. Good’s non-trade film income was being used to benefit him.

This did not happen by chance; the matrix of agreements (those governing the LLP and the borrowing/security arrangements as well as the Minute) to which Mr Burley (personally or as a member of one of the Partnerships) was a party created a mechanism for the lease rentals received by the Partnership to be applied automatically in the way Mr Burley had agreed to and contracted for some years previously. This resulted in the Partnerships’ profits being used to benefit Mr Burley: pound for pound as the receipts which made up those profits were paid to the lender they reduced his liabilities, and it was made very clear from the outset that Mr Burley remained personally liable for all the obligations under his loan. Mr Burley was (and continued despite the Minute to be) entitled to see the receipts of the Partnerships (which comprised their profits) applied this way for his exclusive benefit. The only realistic conclusion is that he was entitled to the profits of the Partnerships.

This is not a case where the income Mr Burley was receiving was being received by him in some fiduciary or representative capacity. Mr. Burley was entitled to the income for the purposes of section 8 because the income was being applied for his benefit, and his benefit only; it is his income on which he is fully chargeable to income tax.