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

The appellants are producers, marketers and distributors of dairy products in the UK and the Republic of Ireland and are part of the Muller Group, the well-known dairy product multinational. In 2013 the second, third and fourth appellants (the “Corporate Members”) transferred their trade together with intellectual property (such as trademarks and domain names) and goodwill to the first appellant (“LLP”) in return for membership units of LLP. After the transfers had occurred the transferred assets were recorded at their fair value in LLP’s accounts and then amortised over five years.

The question of how profits of a partnership are calculated when a member of the partnership is a company is addressed by s1259 Corporation Tax Act 2009 (“CTA 2009”), a provision within Part 17 CTA 2009, the scope of which is at the heart of this appeal. The profits of the trade are taken to be the amount that “(3)(a) …would be the amount of the profits of the trade chargeable to corporation tax if a… UK resident company carried on the trade”. Section 1259(3) therefore directs a statutory fiction whereby profits are calculated in respect of what both parties and the First-tier Tribunal (Tax Chamber) (“FTT”) called a notional company. Section 1273 CTA 2009 provides that a limited liability partnership, which is carrying on a trade with a view to profit, is to be treated for corporation tax (“CT”) purposes as if it were a partnership.

The central issue of statutory interpretation with which this appeal is concerned relates to the interaction between s1259 and the intangible assets provisions within the CT regime. The intangible assets provisions are contained within Part 8 CTA 2009 and entitle companies to claim debits on the amortised depreciation of intangible assets such as intellectual property and goodwill which have been acquired. This entitlement is, however, only available if the acquirer is not a “related party” (“the related party exception”). A party will be a “related party” to another if it controls, or is controlled by, the other, or if the parties are subject to common control.

The appellants’ deduction in respect of the amortisation of the intellectual property and goodwill held by LLP was denied by HMRC on the basis the appellants were considered by HMRC to be related parties. The appellants say that was wrong because the calculation of the notional company’s profits prescribed by s1259 does not refer to its ownership characteristics (i.e. who was assumed to own or control the notional company and in what proportions). The notional company was thus incapable of being a “related party” to the Corporate Members and accordingly LLP was entitled to claim the relevant debits in computing its profit.

In its decision published as Muller UK & Ireland Group LLP and others v HMRC [2023] UKFTT 00221 (TC), the FTT, in agreement with HMRC, rejected the appellants’ case that they were not “related parties”. The FTT held that, in line with the Corporate Members’ holding of all the membership units of LLP, they were also to be treated as controlling the notional company posited under s1259, with the consequence that they were related parties to LLP and therefore could not claim the relevant debits. With the permission of the FTT, the appellants now appeal to the Upper Tribunal arguing that the FTT’s conclusion was wrong in law. The central issue remains whether the appellants were related parties which in turn depends on the effect of s1259(3) and whether the ownership characteristics of a partnership are to be attributed to the notional company for which that section provides.