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

A number of propositions about how corporate members of a limited liability partnership are to be taxed were helpfully common ground. There is also no dispute that on the facts LLP was a limited liability partnership which was carrying on a trade with a view to profit, with the consequence, pursuant to s1273 CTA 2009, that its members were to be treated, for CT purposes, as if it were a partnership.

Part 17 of CTA 2009, as explained by the overview provision in s1256(1), contains special rules about partnerships. Section 1257 CTA 2009 provides that persons carrying on a trade in partnership are referred to collectively as a “firm”. The key provision in Part 17 for the purposes of this appeal is s1259 CTA 2009. It applies where a member of a partnership which carries on a trade is a company within the charge to CT, as is the case with the Corporate Members. The section provides as follows:

“s1259 Calculation of firm's profits and losses

(1)

This section applies if a firm carries on a trade and any partner in the firm (“the partner”) is a company within the charge to corporation tax.

(2)

For any accounting period of the firm, the amount of the profits of the trade (“the amount of the firm's profits”) is taken to be the amount determined, in relation to the partner, in accordance with subsection (3) or (4).

(3)

If the partner is UK resident—

(a)

determine what would be the amount of the profits of the trade chargeable to corporation tax for that period if a UK resident company carried on the trade, and

(b)

take that to be the amount of the firm's profits.

(4)

If the partner is non-UK resident—

(a)

determine what would be the amount of the profits of the trade chargeable to corporation tax for that period if a non-UK resident company carried on the trade, and

(b)

take that to be the amount of the firm's profits.

(5)

The amount of any losses of the trade for an accounting period of the firm is calculated, in relation to the partner, in the same way as the amount of any profits….”

The Corporate Members are UK resident so the applicable subsection as between (3) and (4) is subsection (3). However, both subsections (3) and (4) use a similar form of words and subsection (4) is relevant to an argument made by the appellants based on BCM Cayman LP and another v HMRC [2022] UKUT 198 (TCC) (“BCM UT”). We will come back to it in that context. The amount of a corporate member’s profits is determined by asking what the profits of the trade chargeable to CT would be if a company (UK resident in the case of subsection (3), or non-UK resident in the case of subsection (4)), carried on the trade. The words in subsection (2) “is taken to be” and the references in subsections (3) and (4) to “would be the amount…if” make provision for a deemed state of affairs for the purpose of calculating the amount of the firm’s profits. The use of this language has also variously been described as calling for an “assumption” or making a “statutory direction” or creating a “statutory fiction” – we use the terms interchangeably.

The issue on this appeal is how this deeming provision relates to the regime for intangible assets which allows acquirers of certain assets to claim deductions, but denies them where the parties are “related parties”. The intangible assets regime is contained within the provisions of Part 8 of CTA 2009. It is common ground that the brands, licenses and software which were transferred to LLP in 2013 are within the definition of “intangible fixed assets” in s712 CTA 2009 and that the goodwill is treated as an intangible fixed asset pursuant to s715 CTA 2009.

Section 882(1)(b) CTA 2009 provides that for Part 8 to apply the intangible assets had to be ones which:

“are acquired by the company on or after [1 April 2002] from a person who at the time of the acquisition [was] not a related party in relation to the company” (emphasis added).

Section 835 CTA 2009 then defines “related party” as follows:

“835 “Related party”

(1)

This section explains when a person (“A”) is a “related party” in relation to a company (“B”) for the purposes of this Part.

(2)

In a case where A is a company, A is a related party in relation to B if—

(a)

A has control of, or holds a major interest in, B, or

(b)

B has control of, or holds a major interest in, A.

(3)

In a case where A is a company, A is a related party in relation to B if A and B are both under the control of the same person…”

For the purposes of CTA 2009, the definition of the word “company” is contained in s1121 Corporation Tax Act 2010. It means “any body corporate or unincorporated association, but does not include a partnership…”.

The term “control” is defined by s836 CTA 2009 and means:

“…the power of a person to secure that the company's affairs are conducted in accordance with the person's wishes—

(a)

by means of the holding of shares or the possession of voting power in or in relation to the company or any other company, or

(b)

as a result of powers conferred by the articles of association or other document regulating the company or any other company”.

Section 838(4) CTA 2009 provides that, for the purpose of determining whether a person (A) has “control” of a company, A was to be treated as having rights and powers of a person connected with A. Section 843 CTA 2009 provides that “a person is connected with a company if they are related parties because of section 835(2) or (3).”

It is not in dispute that, if LLP were to be treated as a company, the Corporate Members would have exercised control over LLP for the purposes of s836 CTA 2009. The proposition that this should therefore mean that the notional company contemplated by s1259(3) is also deemed to be controlled by the Corporate Members is at the heart of HMRC’s argument, but is disputed by the appellants. However the parties accept that, ifHMRC are right and the proposition is correct, then the Corporate Members and the notional company will be “related parties”, and the appellants will be ineligible to claim the debits sought on amortisation of the relevant assets.

The basis for this was explained by the FTT at [79] of its decision, which was not challenged on this appeal. The FTT recorded that the appellants accepted that, if it were to be assumed that there was a single notional company in relation to a partnership for the purposes of s882(1)(b) CTA 2009, and, if that notional company were to be regarded as an actual company for the purposes of the related party definition in s835 CTA 2009:

What is not explicit from the above analysis is the basis upon which each Corporate Member (through the rights and powers attributed to it through the other Corporate Members to which it was connected) had control of LLP. In other words what was the nature of any given Corporate Member’s rights and powers which gave them control? We did not understand this to be in issue and it appears to us to that each Corporate Member’s control derives from their holdings of Membership Units in LLP and their status as members which gave them rights and powers to appoint persons to the decision making board of LLP. Understood within the framework of the terms of s836 CTA 2009, their powers under the LLP agreement, a “document regulating the [LLP]”, thus enabled them “to secure that the [LLP’s] affairs are conducted in accordance with [the Corporate Member’s] wishes”.