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

The first of these specific points relies on the Upper Tribunal’s reasoning in BCM UT (Footnote: ¹). The appellants say the FTT was wrong to dismiss the relevance of that case. The appellants refer in particular to the Upper Tribunal’s analysis that the reference to “a” non-UK resident company

“…was intended to ensure that the assumption in s1259 extended only to profit calculation and had no other effect. If Parliament had intended the assumption in that paragraph to have a general effect on the way profits were ascertained and the classification of loan relationships, then, at the very least, it would have used the words ‘if the partner itself carried on the trade’ (or to the same effect).”.

Although the issues there concerned a notional non-UK resident companyas referred to in s1259(4), the points the appellants rely on were equally applicable to their arguments on s1259(3). However, the relevant issue in that case had nothing to do with the correct accounting treatment for an acquisition of intangibles. Rather, it was whether a non-UK resident corporate member could claim relief for interest incurred on its borrowing to acquire an interest in a UK trading partnership. The taxpayer submitted that the effect of s1259 was that the corporate member was to be treated as if it carried on the activities of the partnership directly and that the corporate member, should therefore be treated as if it were carrying on the trade of the partnership (alternative asset management). In order to obtain the relevant relief the corporate member had to establish that the loan relationship was for the purposes of the trade it carried on.

The Upper Tribunal rejected the taxpayer’s argument for a number of reasons: As the title to s1259 stated, the section was concerned with the calculation of a firm’s profits which are then allocated between the partners. In that context, it was “highly improbable” that Parliament would have intended the provision to have the effect of determining the trading or non-trading nature of loan relationships. Nothing in the relevant subsections required “the assumption that the company partner carries on the trade, far less that that it has borrowed for the purpose of that trade”. The only assumption was that a non-UK resident partner had carried on the trade. That did not require the same assumption to be made against the corporate partner itself or applied to the ascertainment of its profits more generally ([161]).

We do not consider that BCM UT helps the appellants’ case given the particular issues involved. It was a case where the real corporate member was seeking to have an assumption attributed to itself by reference to the assumption the legislation required regarding the notional company (viz. that it was carrying on the trade of the partnership) in circumstances where the corporate member’s challenge to the FTT’s finding of fact that the corporate member was not carrying on any trade had failed. The current case concerns the converse situation, namely, to what extent are the real circumstances regarding ownership and control as they pertain to a real entity (LLP) to be attributed to the notional company? The Upper Tribunal’s essential point was that the statutory assumption was only for calculating the corporate members’ share of the partnership profits – it did not extend to provision against the corporate members’ profits more generally. If it had been intended to do so, it would have been worded differently. In our view, the reasoning in BCM UT, insofar it is confirmed that any assumption or statutory fiction did not extend beyond calculation of the corporate member’s profits, is in fact more consistent with HMRC’s construction as to the scope of s1259. As the related party provisions are part and parcel of the calculation process, so too they fall within the purpose of the deeming.