UT (Tax & Chancery) UT/2023/000062 - [2024] UKUT 00273 (TCC)

As identified by the FTT, the issue between the parties turned on a “short but difficult” point of statutory interpretation. In this section we seek to summarise the key propositions from the FTT’s reasoning necessary to understand the parties’ arguments. In broad outline, the issue in dispute is whether adoption of the statutory fiction in s1259 imports the related party provisions in Part 8 so as to disallow deductions for intangibles as HMRC argue, which the appellants dispute.

The appellants’ case is that the Corporate Members were not related parties of the notional UK resident company, and rests on their argument that the only assumption that can be made about the notional company, consistent with the wording and purpose of the legislation, is that such company carries on the trade of LLP. No assumption is warranted regarding the notional company’s ownership or by whom it was controlled. As the notional company has no shareholders, no members and no articles of association or other document regulating it, no relationship of control can be found to exist between the Corporate Members and the notional company. The FTT therefore erred in holding that s1259 directed an assumption that the trade of LLP is being carried on by a UK resident company in which each Corporate Member has the same voting rights and powers as such member has in LLP.

HMRC’s case is that the FTT was right to attribute the Corporate Member’s ownership and control of LLP to the notional company. HMRC emphasised that the purpose of the deeming is to enable the calculation of LLP’s profits on which the Corporate Members are taxed and that the related party provisions were simply part of the calculation process for working out such profits.

The FTT sought to reflect the appellants’ main argument in terms of the following proposition explained in [103] of its Decision. That even if the concept of a “related party” had relevance in the context of the notional company calculation, the fact that the person called “B” referred to in s835(1) was required to be a company meant that on an application of the terms of the definition, none of the Corporate Members could be said to be a “related party” of the notional company.

Before addressing that core issue the FTT dealt with an initial, more basic, argument it understood the appellants to have been making. The appellants say that this argument was not part of their case, and they did not in any event pursue it on this appeal, but we think that it is appropriate to explain the point, albeit briefly. The point was that s882(1)(b) CTA 2009 was incapable of applying for the simple reason that the notional company was no more than a statutory construct for calculation purposes and was not “an actual or deemed company”.

The FTT rejected what it had understood to be the appellants’ argument in short order, considering it was “impossible” to carry out the notional company computation required by s1259 without asking whether the notional company assumed to carry out the calculation had acquired the relevant assets/goodwill in one of the related party scenarios described ([111]). In the same way that the actual transactions carried out by the partnership informed the notional company calculation, so too did the actual identities of the counterparties to such transactions for precisely the same reasons. The FTT thus rejected the proposition that just because the company was notional, the identity of the person from whom the partnership acquired the relevant assets was somehow irrelevant. As the FTT explained at [112]:

“The Appellants accept that the provisions in Part 8 of the CTA 2009 generally apply in carrying out the notional company calculation and that, in carrying out that calculation, it is necessary to look at the actual transactions entered into by the partnership. However, they claim that, because the notional company is just that – a generic company which is assumed for computational purposes only and not an actual company – the identity of the person or persons from whom the partnership acquired the relevant assets is somehow irrelevant. We disagree. We think that, in the same way that the actual transactions carried out by the partnership inform the notional company calculation, so too do the actual identities of the counterparties to those actual transactions, and for precisely the same reason. It is implicit in carrying out the notional company calculation that all of the actual facts and circumstances surrounding the transactions into which the partnership has entered are taken into account when the notional company calculation is carried out.”

The FTT then moved on to reject the appellants’ more sophisticated core argument by holding that the notional company was a statutory fiction which represented the partnership as a whole. The FTT considered it followed logically from the assumption that the trade was being carried on by a notional company that where the term “related party” appeared in one of those computational provisions, it was appropriate to make that same assumption when applying the term “related party”. That meant “ s835 should apply in the context of s882 by reference to the notional company whose taxable profits are being calculated and not by reference to the partnership” ([117(2)]). The application of the related party rules was part of the calculation of profits, and as directed by s1259, for the purposes of that calculation it was to be assumed it was the notional company carrying on the trade ([117(3)]).

The FTT also held that, for each corporate member of a partnership, the notional company was to be treated as having the ownership [or control] characteristics of the partnership as a whole. On the facts of this case that meant the notional company would be treated as having three owners (the three Corporate Members) ([117(5)]). As regards the ownership characteristics it was accepted that if, contrary to the appellants’ case those could be attributed to the notional company, then the requirement for control was satisfied as between each Corporate Member and the notional company ([117(6)]). The FTT clarified that did not require it to be assumed the rights and powers were to be assumed to be shares, or that any assumption need be made that each Corporate Member was a “shareholder” of the notional company. It noted the concept of “control” and “major interest” was based on the power to secure the wishes of a person and that each Corporate Member did have such power (in conjunction with the attribution of the control of the others because the Corporate Members were related as between themselves ([117(7)]). The FTT did not consider that voting or economic rights in relation to a partnership under a partnership agreement were conceptually different from rights in relation to a company under a company’s articles of association.

The FTT had also earlier noted that: