Craig William Burley v The Commissioners for HMRC

The Appellant (“Mr Burley”) assigned his interest in two partnerships (“the Partnerships”) to a limited liability partnership (“LLP”) of which he was a member. Another member of that LLP was a company (Craig Burley Limited (“CBL”)), and that company was entitled to the profits of the LLP which arose because of these assignments.

Mr Burley says that the result of this transaction is that he is not liable to income tax (or, in the alternative, is only liable to income tax at the basic rate) on the profits of the Partnerships. He says this is because he is no longer entitled to those profits.

HMRC do not agree with Mr Burley, and on 9 June 2023 they issued him with five closure notices (“the Closure Notices”) charging additional amounts of income tax based on their view that his tax returns should have included the partnership profits which were the subject of the assignment. The tax years and amounts in the Closure Notices are set out below:

There are no closure notices for 2012/13 and 2013/14. Mr Waldegrave says this is for procedural reasons, and not for any reason that impacts on the issues we are considering.

Mr Burley used to be a professional footballer (Mr Cannon told us that he played for Scotland in the World Cup, although not how well Scotland fared) and, rather like a game of football, there are two halves to HMRC’s case that these arrangements did not achieve the effect Mr Burley intended. The first is their argument that the assignments were ineffective as a matter of general (non-tax) law. The second is their argument that, as the profits of the Partnerships continued to be used for Mr Burley’s benefit (to pay interest on and repay the principal of loans he had taken out to fund his investment in the Partnerships), he would still be taxable on them even if the assignments had been legally effective. Unlike a game of football, Mr Burley must win both halves.

Before dealing with those arguments, there are some preliminary points we should make. The first is that, as a result of having had Mr Burley’s rights to income from the Partnerships assigned to it, CBL has paid corporation tax which it would otherwise not have done. Whilst the detailed mechanics and quantum need to be resolved, HMRC are clear as a matter of principle that the Partnerships’ profits should not be taxed twice, in CBL’s hands and Mr Burley’s. This appeal is concerned only with Mr Burley’s tax position. The interplay of our conclusions on Mr Burley’s tax position and the corporation tax CBL has already paid has been flagged as an issue by HMRC and Mr Burley’s advisers, but it is not a matter for us.

Next, we should note that Judge Baldwin is the co-author of a textbook (Footnote: ¹) which deals in some detail with some of the issues raised in this appeal. He alerted Mr Cannon and Mr Waldegrave to this in advance of the hearing and neither took any issue with this. As (disappointingly, at least for Judge Baldwin) neither owned a copy of the book, Judge Baldwin provided them both with copies of the relevant passages, so that we all started on (or at least in possession of) the same page/s.

Finally, in their Statement of Case HMRC ran a further argument based on section 8(1B) of the Taxes Management Act 1970 and the fact that the returns submitted by the Partnerships showed Mr Burley as having a full share of partnership profits (unaffected by the assignment). HMRC criticise Mr Burley for failing to explain in the “white space” on his tax returns why he thought the partnership returns and their allocation of income to him were wrong, but the argument on section 8(1B) was not pursued before us.

The events we are concerned with took place a long time ago; Mr Burley invested in the Partnerships around 2000/2002 and effected the assignments around 2011. There are only a few contemporaneous documents available, but fortunately the key facts are not in dispute.

We received witness statements from Mr Burley and two of his advisers (Mr Alan Pink and Mr Conor McErlean). Given the passage of time, their recollection of some events was not detailed, but we found all three to be straightforward witnesses and we accept their evidence.

During Mr McErlean’s evidence and later, we were provided with material and explanations relevant to the accounts of the LLP. This was not provided in advance of the hearing but evolved in an ad hoc way during the hearing. Whilst the Tribunal adopts a flexible and accommodating approach to procedure and evidence, this was far from ideal. In the event, although we considered it important to understand the LLP’s accounts as best we could, nothing we learned from that exercise proved significant.

The two Partnerships are Bothwell Media I (“BMI”) and Bothwell Media II (“BMII”). Each of the Partnerships purchased rights in a film from a production company, and then leased those rights back to the same production company in return for a revenue stream. There is no dispute that at all material times the Partnerships carried on trades in the UK.

The sale and leaseback transactions described above resulted in both Partnerships realising losses in their first years of trading. A proportion of these losses were allocated to Mr Burley and were set against his income from other sources. In later years the Partnerships realised profits. Mr Burley was allocated a proportion of those profits and was prima facie liable to tax in respect of them.

Investors in the Partnerships (including Mr Burley) funded their investment by borrowing from banks. The relevant loans were repaid in instalments together with interest, and income arising to the Partnerships under the sale and leaseback transactions described above was paid directly to the banks in discharge of those liabilities, which meant that Mr Burley did not receive cash distributions in respect of his profit allocations. The interest paid on the loans by investors was eligible for tax relief against their income, including their entitlement to profits from the Partnerships. It appears that the Partnerships ceased to receive income from the underlying films at or about the time that the loans were repaid.

The hearing bundle contained a copy of a loan agreement dated 25 July 2001 between Mr Burley and Société Générale (“SG”). Under it, SG agreed to lend Mr Burley £1.144m to fund a capital investment of £1.4m in BMII. The loan agreement contained the following key provisions:

The hearing bundle contained a copy of a Companies House Form 395, which records the particulars of a mortgage or charge. It shows that on 11 September 2001 MFB Film (UK) Limited (“MFB”) granted a charge over assets (for itself and as agent and attorney for BMII) in favour of SG. Key features of the charge are:

As we do not have any financing documents relating to BMI, it was agreed that we should proceed on the basis that finance for Mr Burley’s investment in BMI was provided in the same way as his finance for BMII, although the financing for BMI came from Barclays Bank. We do not have copies of any other documentation (for example, partnership agreements for the Partnerships or a members’ agreement for the LLP).

Mr Burley told us that in about 2001 he was persuaded to invest in two “film schemes” (the Partnerships), which were presented to him as having the effect of reducing his personal tax liability by making use of government incentives to invest in the film industry. He does not recall it being made clear to him that, if the films were successful, he would be obliged to pay tax on the proceeds even though those proceeds were not paid to him but were instead applied in reducing associated bank loans. He was therefore faced with unexpected tax liabilities when the films returned profits. He and his accountant (Mr McErlean) met with Alan Pink of Alan Pink Tax who suggested that the interest Mr Burley had in the Partnerships could be introduced to the LLP and those profits could be attributed to CBL which would then bear tax at a lower rate.

Conor McErlean was (and still is so far as his UK affairs are concerned) Mr Burley’s accountant.

He explained that he and Mr Burley went to see Alan Pink (“Mr Pink”) to discuss the question of unforeseen income tax liabilities that were arising to Mr Burley in connection with his membership of two film schemes, BMI and BMII. Mr Pink suggested to Mr Burley that it would be possible to mitigate the effect of these tax liabilities by introducing his interests in the Partnerships to the LLP, and subsequently attributing profits of the LLP to CBL, thereby bringing about the result that the profits would be chargeable at a lower rate of tax than if they had been income attributable to Mr Burley himself.

Mr Pink corroborated Mr Burley’s narrative and added that Mr Pink had also suggested that there was also the possibility of mitigating tax by attributing profits in the LLP to Mr Burley's wife, Sheryl Burley. He explained that Mr Pink subsequently drafted a brief minute on Mr Burley's behalf which he signed, giving effect to the transfer of his beneficial interest in the Partnerships to the LLP. Mr Pink also advised Mr McErlean on the disclosure of this assignment in the accounts of the LLP.

Mr Pink’s evidence corroborates that of Mr Burley and Mr McErlean

The hearing bundle contained a copy of an engagement letter between Mr Pink and the LLP dated 10 January 2011. The services to be performed included advising on and supervising the implementation of tax planning using the LLP “including the appropriate terms surrounding the recent admission of [CBL] as a member and will settle the appropriate LLP and asset transfer documentation in accordance with our advice”. This was said to involve advice in relation to the claiming of losses on properties owned by the LLP in the US and possibly elsewhere and “the inclusion of these properties in the LLP with corresponding credits to your capital account on which drawings may then be made”. The engagement would conclude with a review of the accounts for the 2010-year end.

The hearing bundle also contains an extract from a tax planning document, prepared by Mr Pink, dated June 2011. The note reflects the fact that, although Mr Pink was first approached in October 2010, it was not possible to agree his engagement until mid-January 2011. Since the advice related to the correct preparation of accounts and tax returns for the year 2009/2010 it was not possible to prepare a “full dress tax planning document” before the filing deadline of 31 January 2011. For that reason, the document did not contain detailed calculations or specific timings. It said that the relevant accounts and tax returns had already been completed and so the exact numbers were already known. The extract in the hearing bundle focussed on the allocation of film partnership income to the LLP. It referred to the “inevitable element of retrospection” in the allocation of film partnership income to the LLP with effect from 6 April 2009. It said that it would no doubt be open to HMRC to argue that this allocation should not be treated as having effect until the date of the minute. It took the view, however, that it would be correct to reflect the film income within the LLP from 6 April 2009 because this would reflect the agreement between the parties. If the intended retrospection were ignored in the accounts, they would not be true and fair. 

The hearing bundle contains a copy of a “Minute of Agreement”, which is undated but signed by Mr Burley and Mrs Burley and again by Mrs Burley as a “Director for and on behalf of Craig Burley Limited”. The text of the Minute is as follows:

“Minute of Agreement
It is agreed that:

1.

Craig Burley will hold the four properties in Florida USA, legally registered in his name, for the benefit of the LLP absolutely, with effect from 1 September 2009.

2.

This introduction will be equity capital of the LLP, and will be valued for the purposes of the LLP accounts at the cost of the properties, translated into Sterling at the rate applicable on 1 September 2009.

3.

Craig Burley Limited (the "Company") will be a member of the LLP from 1 September 2009.

4.

In the accounting period beginning 1 September 2009, the Company will bear an amount of any losses in respect of the Florida properties equivalent to any income allocated to it in the LLP from other sources.

5.

All capital profits of the LLP will accrue to Craig Burley.

6.

In succeeding periods following that referred to in 4 above, income profits and losses will be allocated according to a unanimous vote of the members following the accounting period end.

7.

Craig Burley will hold his rights to income from investment in film partnerships for the LLP absolutely with effect from 6 April 2009 in respect of all such partnerships held on that date.”

As we have just observed, the Minute was undated. It was clearly prepared by (or on the instructions of) Mr Pink. The document referred to at [24] indicates that Mr Pink’s firm was formally engaged on 13 January 2011 and this suggests that the Minute would have been executed before the 31 January 2011 tax filing deadline for the 2009/10 tax year. On that basis, we find that the Minute was executed no earlier than 13 January 2011 and no later than 31 January 2011.

We asked Mr Cannon about Mr Burley’s CGT analysis of these arrangements. Did Mr Burley dispose of an asset (his right to partnership income) on contribution or at any time subsequently (e.g. when the income was allocated to CBL)? Mr Cannon told us that under the LLP agreement Mr Burley would have been entitled to 100% of capital profits in respect of the assets he introduced to the LLP. Therefore, under the CGT regime applying to partnerships and LLP’s as set out in HMRC Statement of Practice D12 he was deemed for CGT purposes to own 100% of the asset after the introduction (although for all other purposes the LLP owned it). In consequence no disposal for CGT purposes was considered to have occurred.

The LLP accounts for the period 1 September 2009 to 28 February 2010 (which were approved by the members on 28 January 2011) show that CBL became a member on 1 September 2009.

We spent some time looking at the LLP’s accounts for a number of periods and the post-hearing submissions from the parties comprised Mr Cannon’s answers to a series of questions we put to him on those accounts and HMRC’s observations on those answers. So far as the LLP’s accounts are concerned, we note the following:

Mr Cannon says that the Minute records the intention of Mr Burley that his income from the Partnerships should be held by him absolutely for the LLP from 6 April 2009 and amounts to an equitable assignment of his income from the Partnerships from that date. He remained a partner in the Partnerships but gave over the economic benefit of his membership of the Partnerships to the LLP.

The accounts of the LLP give a true and fair view of the LLP’s affairs (Mr McErlean’s evidence, which was not disputed by HMRC nor challenged by them in cross-examination, was that the accounts of the LLP showed a true and fair view and complied with GAAP), and they show income rights assigned to it from 6 April 2009. £1.7m was credited to Mr Burley’s capital account in the books of the LLP as what was contributed was the right to income stripped of the liability to the lender, which was retained by Mr Burley. There is, Mr Cannon says, a “golden rule” endorsed by the Supreme Court in HMRC v NCL Investments Ltd, [2022] UKSC 9 (“NCL”), that accounts prepared in line with generally accepted accounting principles must be respected for tax purposes. Nothing in the purposive approach to statutory construction espoused by cases such as RossendaleBorough Council v. Hurstwood Properties (A) Limited [2021] UKSC 16 (“Rossendale”) entitles HMRC to “outmanoeuvre” the effect of a properly prepared set of accounts in a straightforward case such as this where a taxpayer is exercising a legitimate choice.

He says (relying on the paragraphs in Snell’s Equity 35^th edn (2025) (“Snell”) identified in parentheses below) that:

Mr Cannon does not concede that a right to future partnership profits is a future chose, although he agrees the “likelihood” is that it is looking at the examples given in Snell at 3-032 (although noting that partnership interests are not referred to). However, he says that, if the right to partnership income is a future chose (so that consideration is needed to support an agreement to assign), the required consideration can be found in CBL agreeing to bear the cost of the write-down in value in the Florida properties, which is given in return for CB agreeing to hold the right to income from the Partnerships for the LLP. Although we do not have a copy of the LLP members’ agreement, he says that the crediting of the value of these rights to Mr Burley’s capital account and CBL agreeing to shoulder the cost of these write-downs means that Mr Burley received a valuable interest in the LLP. He would receive that value on the liquidation of the LLP or an in specie distribution. There is no need for the LLP to give consideration; it is sufficient that there is a series of valuable promises given by the members to each other. He described the objection that the LLP had not given consideration as a “very technical” one which did not hold water.

He also submits that the assignment by Mr Burley of his rights to income from the Partnerships was possible in equity notwithstanding the contractual bar on assignments under the lending agreements and the prior legal assignments of the income to the lenders by way of security. While the lenders as secured legal assignees would have had a prior claim to the income in priority to the LLP as an equitable assignee, and a remedy against Mr Burley for breach of contract had they taken issue with the equitable assignment, this did not prevent the equitable assignment taking effect to transfer Mr Burley’s rights to the income from the Partnerships to the LLP. The equitable assignment took effect subject to the prior security rights granted to the lenders and meant that Mr Burley had divested himself of the income such that a court exercising its equitable jurisdiction would restrain Mr Burley at the request of the LLP from dealing with the income in any way that was inconsistent with the assignment. Right to apply for permission to appeal.

In this context Mr Cannon drew our attention to the discussion in Chitty on Contracts (35^th ed) (“Chitty”) at 23-043 et seq., which indicates that, if rights arising under a contract are declared by the contract to be incapable of assignment, a purported assignment will be invalid as against the debtor, but a prohibited assignment can be effective as between assignor and assignee. He referred us to Darling J’s famous dictum (in Tom Shaw & Co v Moss Empires Ltd, (1908) 25 TLR, 190, 191) that a prohibition “could no more operate to invalidate the assignment than it could interfere with the laws of gravitation”.

Moving on to HMRC’s tax point, Mr Cannon says that, because of the equitable assignment reflected in the Minute, Mr Burley did not remain entitled to the income from the Partnerships in terms of section 8 ITTOIA 2005. The right to that income had been validly vested in the LLP, and by implication subject to the prior security rights of the lenders.

He says that HMRC’s analogy with the position in Good v HMRC. [2023] EWCA Civ 114 (“Good”) is not on all fours with this appeal. In that case the Court of Appeal rejected the argument that the security arrangements had the effect of divesting the taxpayer of all benefit in and entitlement to the income. There is nothing remarkable in that conclusion; English Sewing Cotton Co Ltd v IRC, [1947] 1 All ER 679, tells us that, where security arrangements are put in place, beneficial ownership of the charged assets remans with the charger. However, Mr Burley is not arguing that the security arrangements with the lenders meant that he was divested of the income but rather that the separate equitable assignment had the effect in equity of divesting himself of entitlement. In Good there had been no assignment of the rights to the partnership income to a third party and so that decision is not good authority on the facts in this appeal.

While it is true that the income continued to be applied in discharge of Mr Burley’s liabilities to repay the loans, and to pay interest on them (and Mr Burley continued to claim deductions in respect of the interest), so that the income was in fact used in a way which benefitted Mr Burley, this does not affect the fact that the entitlement to that income had been assigned to the LLP thus divesting Mr Burley of that income.

In his final written submissions after the hearing Mr Cannon criticised HMRC’s case as exhibiting what he called “a common, and in this case absolutely crucial, confusion between the concepts of income on the one hand and money on the other”. He says that the “income” was not applied in repaying the banks. Money received by the Partnerships was so applied and Mr Burley was poorer because of the transactions because CBL was credited with the income and in consequence had a greater capital stake in the LLP, while he was debited with the payments to the banks and so had a lesser stake in the LLP. Mr Cannon submits that, where partnership profits are concerned, 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 it is inconceivable that HMRC could dispute this universally applied rule. Here CBL received the credits in respect of the partnership profits. 

We asked Mr Cannon whether Mr Burley had only assigned the “rump” of income from the Partnerships, i.e. the net income payable to him (which would be little or nothing, given the borrowing/security arrangements). He replied that Mr Burley had assigned the gross income flows and payment rights; this is what is reflected in the LLP accounts. Mr Burley intended to, and did, hold his rights for the LLP absolutely, but this must be after paying interest and making loan repayments.

Mr Cannon submitted that, if Mr Burley received or was entitled to the Partnership income (and his primary argument is that this is not the case), this would be in a representative capacity and as a result he would be taxable only at the basic rate of income tax (producing a liability no greater than the corporation tax already paid by CBL). He referred us to passages in HMRC’s Savings and Investment Manual (SAIM2400 and SAIM 2410, which deal with the charge on interest where the person chargeable is the person receiving or entitled to the interest), which make it clear that HMRC would only argue that a person who receives interest in a representative capacity is taxable on that interest “in exceptional circumstances” and, as it is not their income, such a person’s liability to income tax would be at the basic rate only.

Mr Cannon also pointed us to “Spotlight 63” (HMRC guidance on an avoidance scheme using hybrid partnerships used by individual landlords). HMRC discuss the arrangements without taking any point that they would seem to be in breach of individual borrowers’ security obligations. In fairness to HMRC, their discussion is confined to the tax issues arising from these arrangements, and we do not consider that Spotlight 63 advances our understanding of the position..

HMRC’s first submission is that it was not legally possible for Mr Burley to assign his rights to the income from the Partnerships to the LLP as he claims to have done.

Mr. Waldegrave says that Mr. Burley did not divest himself of any or all of his beneficial interest in the Partnerships as a whole; if anything at all, he simply assigned his rights to receive income. This was not a statutory assignment under section 136 LPA. If anything, it was an equitable assignment or an agreement to assign. This was a clear case of an assignment of an expectancy (see the discussion in Snell at 3-030/031) and so consideration was required. Mr Waldegrave accepts that his point that this was an assignment of a future chose invalid for want of consideration was raised late, but it was not something to which Mr Cannon objected.

Mr. Waldegrave says that there was no consideration here. Mr Cannon relies on the crediting of Mr Burley‘s capital account with £1.7 million, but we do not have the LLP agreement, and we do not know how these arrangements or the accounts fit in with the agreement and what (if any) real rights Mr Burley received in return. There needs to be something that the LLP gives in return. CBL agreed to bear losses on the write-downs of the Florida properties, but that is not consideration given by the LLP. Conceivably, it could be third-party consideration, although Mr. Cannon has not explained how this might operate or indeed suggested that there is any third-party consideration.

Any crediting of Mr Burley‘s capital account is entirely notional. It never had any effect on his rights and cannot therefore constitute consideration.

As far as the prohibition on assignment is concerned, Mr Waldegrave’s position moved from an assertion that, if SG had been a party to the subscription agreement (which contained the rights Mr Burley purported to assign), the prohibition on assignment in the lending and security documents would have rendered the assignment ineffective to one where HMRC accepts that the ordinary position is that a bar on assignment does not mean that an asset assigned in breach of the bar is not held on trust for the assignee. Mr Waldegrave accepts that there is nothing in the relevant contractual provisions that stops Mr. Burley holding his rights on trust for someone else, but in the context of the financing arrangements for the Partnerships he says that the prohibition should be understood in that way. He says that there was no freedom for Mr Burley to deal as he sees fit with his rights under the Partnership agreements. There was nothing meaningful for Mr Burley to assign, given that the cash flowed directly to the banks, and on that basis the prohibition should be read as just not allowing Mr Burley to hold his interest on trust for anyone else.

As far as the pre-existing assignment of the lease rentals to SG by way of security for the obligations which Mr Burley and other members of the partnership owed to SG is concerned, Mr Waldegrave said it is uncontroversial that assignees take subject to any pre-existing equity. The effect of the security assignment means that the LLP got nothing as the cash would always flow to the banks to discharge Mr Burley‘s obligations. In fact, Mr. Burley made an assignment of nothing.

On the question whether a partner can assign their interest in a partnership, in his Grounds of Appeal Mr Burley says the asset he assigned was his partnership share. The focus has moved on to the subject matter of his assignment being his right to partnership income (which is what the Minute purports to assign). On that basis, Mr Waldegrave says that there is no need for us to trouble ourselves with how we would analyse an assignment of an entire partnership share, indeed whether this is even possible. Mr Waldegrave cautions that HMRC do not agree that a partner who assigns his partnership share holds that share on trust for the assignee, although they do not take issue with a partner’s ability to assign partnership profits (or at least to agree to do so in a way which takes effect in equity). They do accept the assignee would have a contractual right to sue the assignor if they failed to account for amounts due to the assignee, but it is the assignor who remains the partner entitled to all partnership rights. As Mr Burley no longer submits that he assigned his partnership share, as opposed to a right to partnership income, this point does not fall to be considered. We did, however, promise to record HMRC’s position on this point, which is at variance with the approach taken in the book Judge Baldwin co-authored, and Judge Baldwin’s undertaking that he and his co-author would reflect on HMRC’s reservations before any third edition is published.

As far as the timing point is concerned, Mr Waldegrave says that, even if the assignment is effective, it could not operate before it was signed by the parties, and this could not be before January 2011. There is no basis for saying that a minute signed in January 2011 can change entitlement to income which arose before that time. It may be correct in accounting terms to reflect the agreement and intention of the parties, but this cannot alter the person to whom income which has already arisen belonged.

Even if the assignments were effective in law HMRC say that Mr Burley nevertheless remained the person who received or was entitled to the Partnership Income in terms of section 8 ITTOIA 2005. Despite the assignment, partnership income continued to be dealt with in the same way as it had been before the assignment. Specifically, it was applied in discharge of Mr Burley’s obligations in relation to the loans and appears to have been paid directly to the lenders. At no time either before or after the assignment did Mr Burley or the LLP have any control over the cash concerned. Despite the accounting entries, neither Mr Burley nor the LLP received any money from the Partnerships and the LLP got no benefit from them at all. Consistently with this, Mr Burley continued to claim tax deductions in respect of the interest on the loans. He continued to “receive” income from the Partnerships in the sense that his indebtedness to the lenders reduced as it was paid (and his obligations to pay interest were discharged).

HMRC submits that, taking a realistic view of the facts and applying the relevant legislation, construed purposively (as is required under the Ramsay case law) Mr Burley continued to be the person who received or was entitled to the Partnership Income. The principles developed in the Ramsay case law were discussed by the Supreme Court in UBS AG v. HMRC [2016] UKSC 13 at paragraphs [61] – [68], and Rossendale at paragraphs [9] – [17].

The approach of the Court of Appeal in Good illustrates the application of the relevant principles. In that case, the main question was whether the taxpayer was “entitled” to income in terms of section 611 ITTOIA 2005. Section 611 was drafted in materially identical terms to section 8 but concerned “non-trade” film income. The taxpayer argued that security arrangements, by which his rights to payments arising from film rights had been assigned to a lender to secure and discharge repayment and interest payment obligations, meant that he was not “entitled” to the income in terms of section 611 (and so was not liable for tax in respect of it).

The decision in Good was not driven by any circularity of funds flow or any avoidance driver. There was an element of circularity in funds flow in BCM Cayman LP and ors v HMRC (“BCM”), [2023] EWCA Civ 1179. In broad terms, if a partnership made super profits they would (at least in part) be allocated to a partner (Cayman Ltd). That would trigger an allocation by Cayman Ltd to another company which would make a payment under a total return swap to a third company which would use that money to subscribe for capital in Cayman Ltd. One question was whether Cayman Ltd received its allocation in a fiduciary capacity, as to which Whipple LJ observed (at [82]):

“Once the totality of arrangements including the TRS is considered, it is clear that the Superprofits paid to Cayman Ltd are returned to Cayman Ltd, by a series of preordained transactions, in the form of a capital contribution from Cayman Holdings. To address the statutory question raised by section 6(1): on a realistic view, Cayman Ltd does not act in a fiduciary capacity when it obtains the Superprofits which it pays (pursuant to a contractual obligation under the Cayman Partnership Deed) to RBS/Fyled; rather, it retains the beneficial interest in the Superprofits throughout, because those Superprofits are returned as capital from Cayman Holdings and are then used by Cayman Ltd to repay its borrowings. There is no significance to be attached to the difference between what is paid out by Cayman Ltd to the Corporate Limited Partner and the lesser amount which is returned to Cayman Ltd by way of capital contribution from Cayman Holdings: that difference represents the fee paid by Cayman Ltd to the Corporate Limited Partner for its participation in these arrangements and is simply a cost of putting these arrangements in place.”

Circularity was no part of her analysis, which simply looked at what was a “realistic view” of the arrangements.

The Court of Appeal rejected the taxpayer’s argument in Good, concluding that the taxpayer remained entitled to the income in the relevant sense notwithstanding the security arrangements. In reaching this conclusion, Whipple LJ (who gave the leading judgment) commented on the required approach in the following terms (at paragraph [55]):

“The words in the statute [i.e. in section 611 of ITTOIA 2005] 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.”

Commenting on the actual arrangements in Good, Whipple LJ said (at paragraph [62]):

“The MAPs [being the income which was assigned in that case] 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 section 611.”

Applying these principles to the facts of this case, HMRC submits that, if the assignment was effective, Mr Burley nevertheless remained the person who received or was entitled to the partnership income in terms of section 8 ITTOIA 2005. On a “realistic appraisal” of the “substance” of the arrangements, he clearly continued to benefit from the profits of the Partnerships, in that the profits continued to be used to discharge his loan obligations. In such circumstances, Mr Burley must be regarded as having been the person who received or was entitled to the Partnership Income.

Mr Waldegrave submits that the LLP accounts do not assist Mr Cannon in his search for real world consequences. Mr Burley‘s capital account was credited with £1.7 million. However, this was not done at the time of contribution but only in later. We do not have a copy of the LLP agreement, so we cannot tell what rights (if any) partners obtained as a result of a capital contribution. In any event, it is hard to see any real-world significance in this contribution as the LLP did not acquire an asset of substance. The crediting of the capital account was just a paper entry, as meaningless as the allocation of Mr Burley’s rights to partnership income. Mr Burley was debited each year with the Partnerships’ profit share and his capital account was amortised as that income was used to repay Mr. Burley’s borrowing. These artificial entries had no real-world effect.

Mr Cannon says that the use of this money to benefit Mr Burley is not relevant as he was not entitled to anything, having assigned his rights to this income to the LLP. This, Mr Waldegrave, says is a highly legalistic analysis at odds with the approach in Ramsay/Good and similar cases. If the income in the Partnerships, which Mr Burley had purported to be assign to the LLP, was used to pay Mr Burley‘s loan obligations, then the LLP should have allocated that income to Mr Burley or, if the income was allocated to CBL, CBL would need to make a distribution to Mr. Burley. It is unrealistic to analyse income within the Partnerships as being used to discharge Mr Burley‘s personal liabilities without there being any form of income credit to him. Mr Waldegrave accepts the taxpayers have choices about how they organise their affairs, but those choices must be realistic, effective ones. This was not a real choice with any real effect.

We turn now to address the two questions which confront us, the partnership law question whether Mr Burley’s assignment of his rights to receive income from the Partnerships had been validly effected, and the tax law question whether, assuming the assignment had been validly effected, Mr Burley remained the person who received or was entitled to the income of the Partnerships. Because, perhaps unusually for tax questions, we can answer this question in a clearer and more definitive way, we will deal first with the tax question.

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. 

Given our answer to the first question, our answer to this question will have no impact on the outcome of this appeal, and so (mindful of the Senior President’s Practice Direction on Reasons for Decisions in the FTT) we will summarise our conclusions in relatively short order.

The answer to this question is bound up with a number of partnership law questions, not all of which are at all straightforward. In that context we note the relief Whipple LJ expressed (in BCM Cayman at [84]) at not needing to decide some potentially significant issues of partnership law, and we consider ourselves (if we might presume to say so) to be in good company in preferring to leave troublesome issues of partnership law for someone else on another day.

As we have seen, the Minute says that “Craig Burley will hold his rights to income from investment in film partnerships for the LLP absolutely with effect from 6 April 2009 in respect of all such partnerships held on that date.” It is common ground that, as no notice of this transaction was given to the Partnerships, this was not a legal assignment effective under section 136 of the Law of Property Act 1925.

Although this transaction did not fulfil the requirements to be an assignment at law, it is perfectly possible for an assignment to take effect in equity. It has been observed (Guest on the Law of Assignment, 5^th ed, para 2-03) that, except for the procedural advantages which attach to the statutory assignee’s legal title to sue and the absence of any requirement of consideration for a statutory assignment, there is little difference between an equitable assignment and a statutory assignment.

The first question we need to answer to decide whether the Minute operated as an assignment is whether Mr Burley’s “rights to income from investment in film partnerships” constitute an existing or a future chose in action. This distinction has been described by Professor Goode (op cit para 1-03) as “not easy to draw” and by the authors of Snell (at 3-031) as “difficult”. The importance for us of the distinction is that a future chose cannot be assigned (ex hypothesi, because nothing currently exists that can be assigned), but the assignment of a future chose can have effect in equity as an agreement to assign. In effect, such an agreement works like an assignment because, as soon as the assignor become possessed of the property, the beneficial interest in the property passes to the assignee immediately and, even before the assignor obtains the property, the assignee appears to have more than a mere contractual right to the property. We agree with Mr Cannon that none of the examples discussed in Snell is in point, but we consider that a right to future profits from a partnership is a future chose. The distinction is more extensively discussed by Professor Goode and in the New Zealand case Kelly v Commissioner of Inland Revenue, [1970] NZLR 161, it was held that the voluntary assignment by one partner to another of such income as from time to time would be earned from his interest in the partnership business was an assignment of a future chose and ineffective on the ground that it was uncertain which profits could or would be made or even whether the partnership would continue.

We can see two potential issues when it comes to concluding that the Minute is effective in equity as an agreement to assign. The first lies in the assignment being treated as an agreement to assign. The Minute is clearly a contract and an attempt by Mr Burley to assign his rights to the LLP, but the putative assignee (the LLP) is not a party to that contract. This point was briefly raised with Mr Pink in cross-examination, and he said that this was not an issue which concerned him. We were not addressed on the question whether, to have an effective assignment in a case like this, there needs to be a promise to assign made with (or a purported assignment of the future chose made as part of an agreement with) the putative assignee or whether it is enough to have a promise supported by consideration that someone (not necessarily the putative assignee) can enforce. If the former were required, it is (of course) possible that the LLP might be able to enforce the terms of the contract under the Contracts (Rights of Third Parties) Act 1999 and that might suffice, but this was not an issue canvassed before us.

The next issue is the need for consideration. One of the reasons we spent some time looking at the LLP’s accounts was in the hope that through that discussion we might learn what was given in return for Mr Burley’s agreement to hold his rights to income from the film partnerships for the LLP.

To the extent that consideration needs to be provided by the putative assignee, it is not clear to us what consideration the LLP gave. Mr. Burley was already a member of the LLP and therefore must have had some membership rights (even if only the default provision in regulation 7 of the Limited Liability Partnerships Regulations 2001), but, in the absence of a copy of the constitutional document of the LLP, it is not possible to know what, if any, additional rights in the LLP he obtained in return for his contribution. We have seen that he was credited with £1.7 million in the accounts of the LLP, and Mr. Cannon said that this would have given him rights on the liquidation of the LLP, but there is no documentary evidence to support that statement. If a shareholder contributes an asset to a company in return for an issue of shares, rather than by way of capital contribution, then clearly the company gives consideration by issuing the consideration shares, but it is not clear to us that membership rights in a LLP are necessarily created in a way which involves the LLP creating “consideration interests” in quite the same way. We would then need to deal with the point that, because Mr Burley had little (if anything) of real value to assign, it is hard to detect any substance in any interest in the LLP created to reflect that contribution, which causes Mr Waldegrave to question whether such an interest could be consideration.

If it is sufficient (as Mr Cannon first said in reply to Mr Waldegrave, when he commented that there is no need for the LLP to give consideration; it is sufficient that there is a series of valuable promises given by the members to each other) for consideration to flow from a person other than the promisee/putative assignee, we would need to identify what that consideration might be. We saw that CDL agreed to bear the write-downs in value of the Florida properties, but Mr Waldegrave was sceptical about what that meant and whether/how it might constitute consideration for Mr Burley’s contribution.

As the far as the contractual fetters on assignment are concerned, we agree with Mr Cannon that these would not prevent Mr Burley assigning his interest in the Partnerships to the LLP, and by the end of the discussion in the hearing we rather felt that Mr Waldegrave’s heart had gone out of the points he was making on this issue. In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd, [1994] 1 AC 85, although the House of Lords held that an assignment in breach of a “no assignment” provision might be unenforceable against the original party to the contract (which might have a legitimate interest in only dealing with its counterparty), Lord Browne-Wilkinson, giving the leading judgment, observed (at [1994] 1 AC 85, 108D),:

“… a prohibition on assignment normally only invalidates the assignment as against the other party to the contract so as to prevent a transfer of the chose in action: in the absence of the clearest words it cannot operate to invalidate the contract as between the assignor and assignee and even then it may be ineffective on the grounds of public policy.”

Those comments are clearly addressing a situation where the intending assignor is a party to the same contract as the person to whom the “no assignment” promise has been given. We do not understand the distinction Mr Waldegrave drew between a situation where a lender was a party to the agreement the benefit of which Mr Burley purported to assign and one where it was not; regardless of whether the lender was a party to the agreement which created the rights Mr Burley purported to assign or not, as between Mr Burley and the LLP, Mr Burley could assign those rights to the LLP.

As far as the pre-existing security assignment (by the Partnerships) of the lease receivables is concerned, Mr Burley’s right to receive income from the Partnerships is a different right. The effect of the security assignment, as we have seen, is to deprive Mr Burley’s assignment to the LLP of most (if not all) value, but it did not prevent Mr Burley effecting the assignment.

The final question is exactly what it was that Mr Burley sought to assign when he used the words “his rights to income from investment in film partnerships”. This was a question we raised with Mr Cannon. Was Mr Burley just trying to assign his rights to receive income from his investment, in other words the (net) amounts he was entitled to under the agreements governing the Partnerships? If that is the correct reading of these words, the Minute did not seek to assign the amounts we are concerned with (the lease rental amounts paid by the Partnerships to Mr Burley’s lenders) at all. If the correct reading is that the Minute was trying to do more than that, it clearly could not confer a right on the LLP in priority to the lenders (if it tried to do that it would be trying to assign something the LLP could never be entitled to) but it might give the LLP a proprietary claim subject to the lender’s rights. However, the lender’s rights are over the lease rentals received by the Partnerships, not the income distributions they would otherwise make, which might suggest that those amounts were absorbed in calculating the (net) income Mr Burley was entitled to, which again might suggest that the Minute only “bites” on the net figure otherwise receivable by Mr Burley. If the claim made for the Minute is much bolder (as originally asserted by Mr Burley, that it was an assignment of his interest in the Partnerships), we would need to deal with HMRC’s point outlined at [46].

For all these reasons, we are far from satisfied that the Minute was effective to assign to the LLP the rights Mr Cannon says it did. However, these are not uncertainties we need to resolve. Should Mr Burley appeal our decision, a more august tribunal can address them in greater detail.

If, contrary to our tentative conclusions, the Minute did have the effect claimed for it, it could only alienate Mr Burley’s income from the date it came into effect (so not before 13 January 2011) and the accounting treatment adopted is nihil ad rem.

For the reasons set out above, we have decided that Mr Burley remained entitled to his share of the profits of the Partnerships for the purposes of section 8 ITTOIA throughout the periods we are concerned with, and accordingly that the Closure Notices are correct.

This appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.