THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS v BLUECREST CAPITAL MANAGEMENT LP & Ors

“Unless otherwise indicated (whether expressly or by implication), a firm is not to be regarded for income tax purposes as an entity separate and distinct from the partners.”

“(1) If –

(a) a firm carries on a trade, and

(b) any partner in the firm is chargeable to income tax,

the profits or losses of the trade are calculated on the basis set out in subsection (2) or (3), as the case may require.

(2) For any period of account in which the partner is a UK resident individual, the profits or losses of the trade are calculated as if the firm were a UK resident individual.

(3) For any period of account in which the partner is non-UK resident, the profits or losses of the trade are calculated as if the firm were a non-UK resident individual.

…”

“(1) For income tax purposes, if a limited liability partnership carries on a trade, profession or business with a view to profit–

(a) all the activities of the limited liability partnership are treated as carried on in partnership by its members (and not by the limited liability partnership as such),

(b) anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and

(c) the property of the limited liability partnership is treated as held by the members as partnership property.

References in this subsection to the activities of the limited liability partnership are to anything that it does, whether or not in the course of carrying on a trade, profession or business with a view to profit.

(2) For all purposes, except as otherwise provided, in the Income Tax Acts–

(a)  references to a firm or partnership include a limited liability partnership in relation to which subsection (1) applies,

(b)  references to members or partners of a firm or partnership include members of such a limited liability partnership,

(c) references to a company do not include such a limited liability partnership, and

(d) references to members of a company do not include members of such a limited liability partnership.”

“(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.

[…]

(6) In this section—

“profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.”

“(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.

(2) In this section and sections 850A and 850B “profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.”

“(1) So long as a trade, profession or business is carried on by persons in partnership, and any of those persons is a company, the profits and losses (including terminal losses) of the trade, profession or business shall be computed for the purposes of corporation tax in like manner, and by reference to the like accounting periods, as if the partnership were a company and, subject to section 115(4), as if that company were resident in the United Kingdom, and without regard to any change in the persons carrying on the trade, profession or business, except that—

(a) references to distributions shall not apply; and

(b) subject to section 116(5), no deduction or addition shall be made for charges on income, or for capital allowances and charges, nor in any accounting period for losses incurred in any other period nor for any expenditure to which section 401(1) applies; and

(c) a change in the persons engaged in carrying on the trade, profession or business shall be treated as the transfer of the trade, profession or business to a different company if there continues to be a company so engaged after the change, but not a company that was so engaged before the change.

(2) A company's share in the profits or loss of any accounting period of the partnership, or in any matter excluded from the computation by subsection (1)(b) above, shall be determined according to the interests of the partners during that period, and corporation tax shall be chargeable as if that share derived from a trade, profession or business carried on by the company alone in its corresponding accounting period or periods; and the company shall be assessed and charged to tax for its corresponding accounting period or periods accordingly. In this subsection “corresponding accounting period or periods” means the accounting period or periods of the company comprising or together comprising the accounting period of the partnership, and any necessary apportionment shall be made between corresponding accounting periods if more than one.”

“(1) 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. This is subject to sections 1263 and 1264.

(2) If a firm pays charges on income, a partner’s share of the charges is determined for corporation tax purposes in accordance with the firm's profit-sharing arrangements during the accounting period of the firm in which the charges are paid.

(3) For the purposes of subsection (2) a charge on income which arises from a disposal such as is mentioned in section 587B (1) of ICTA (gifts of shares, securities and real property to charities etc) is taken to be paid when the disposal is made.

(4) In this section and sections 1263 and 1264 “profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.”

“(1) For corporation tax purposes, if a limited liability partnership carries on a trade or business with a view to profit—

(a) all the activities of the limited liability partnership are treated as carried on in partnership by its members (and not by the limited liability partnership as such),

(b) anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and

(c) the property of the limited liability partnership is treated as held by the members as partnership property.

References in this subsection to the activities of the limited liability partnership are to anything that it does, whether or not in the course of carrying on a trade or business with a view to profit.

(2) For all purposes, except as otherwise provided, in the Corporation Tax Acts—

(a) references to a firm include a limited liability partnership in relation to which subsection (1) applies,

(b) references to members of a firm include members of such a limited liability partnership,

(c) references to a company do not include such a limited liability partnership, and

(d) references to members of a company do not include members of such a limited liability partnership.

[…]”

(i) On 10 May 2010 Avon increased the amount of a final award over the recommended amount pointing out to the Partnership that the recommended award was less than the indicative award and clarified that this was not for a good reason.

(ii) On 11 October 2011 Avon pointed out to the Partnership that it was minded not to accept a recommendation to make an award to a person who was no longer a partner and that recommendation was accepted.

(iii)  On 1 September 2011 Avon noticed inconsistencies in the proposed forfeiture conditions between the letter of recommendation to Avon and in the draft indicative award letter to the participant. These inconsistencies were resolved satisfactorily and an award was made.

(i) Assessment of performance for calendar year ended 31 December 2012 of each discretionary trader partner and submission of proposed provisional total rewards to the PRSC.

(ii) Decision by the PRSC as to how each individual partner's provisional total reward should be split as between the amount to be (a) made available to the individual partner by way of discretionary drawing in anticipation of a discretionary profit allocation and (b) the subject of a recommendation made by the PRSC to the Corporate Partner to make a provisional indicative award of Special Capital to the relevant individual partner.

(iii) PRSC made recommendations to the Corporate Partner regarding the quantum of provisional indicative awards of Special Capital to individual partners and the “deferral period” which had to elapse before they could be made final.

(iv)  The Corporate Partner considered the recommendations of the PRSC and, at its discretion, issued provisional indicative award letters to the relevant individual partners stating that those partners would be considered for an award, or series of awards, of Special Capital on a specific date or series of dates in the future, after the specified deferral period (ranging from 6 months to 3 years), subject to the fulfilment of specified eligibility conditions.

(v) The Partnership confirmed to the individual partners and the Corporate Partner the amounts available to take as discretionary drawings on account of their anticipated profit allocations.

(vi)  Individual partners all took their discretionary drawings and the Corporate Partner, to the extent required, took a discretionary drawing such as to cover the proposed awards of Special Capital, in each case in anticipation of their discretionary profit allocation for the financial year ended 31 December 2012.

(vii) The Corporate Partner requested the Partnership to direct the entire amount of its discretionary drawing to its Special Capital Account as a contribution of Special Capital.

(viii) The Partnership invested the amounts contributed as Special Capital in underlying investment assets, following (non-binding) consultation as to the selection of appropriate investments with the partners who had received indicative award letters.

The FTT then recorded the commercial benefits of the PIP arrangements at [305] to [307]. In summary:

Individual partners were incentivised to remain with the Partnership on an ongoing cycle and to continue to deliver returns for investors.

The Partnership was now protected to some extent against downside risk from an individual trader’s negative P&L in the next year because it was now possible for potential awards of Special Capital to be adjusted (or, indeed, not be made at all) in the light of subsequent performance, with the Special Capital remaining in the Partnership instead.

This conditionality and adjustability also meant that: (a) the Partnership was protected against “netting risk” since it was now possible to adjust downwards the potential award of Special Capital to one trader (who had made losses) in order to free up Special Capital which could be used to reward a second trader (who had made back those losses but in circumstances where no performances fees would be earned); and (b) traders who had received provisional indications of PIP Awards, but who subsequently had a negative P&L, were no longer incentivised to take risky bets to try to make back the losses.

The fact that the Special Capital associated with future PIP Awards was generally invested in BlueCrest-managed funds created alignment between the interests of individual partners (who would want the funds in which the Special Capital was invested to perform well) and investors in BlueCrest-managed funds (and it also increased the AUM of the Partnership and therefore the management fees earned). This alignment was attractive to potential investors.

The PIP gave the Partnership additional bargaining power when it came to negotiating the departure terms of partners who had given, or were considering giving, notice to leave the business (since the possibility of receiving the potential award would be forfeited), and encouraged them to leave on good terms, due to the prospect of a severance payment.

F. The Decision

The FTT identified three agreed issues: see [253]. The first issue (which the FTT called the “PIP Issue”) is the subject matter of the PIP Appeals. The second and third issues were the subject matter of the “Profit Allocation Issue” which is the subject matter of a separate decision to be handed down by a different constitution of the Upper Tribunal. The parties agreed the following formulation of the PIP Issue:

The FTT determined this issue in favour of the Partnership. It accepted the Partnership’s submission that there was an analogy between the present case and the decision of the Court of Appeal in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2019] 1 WLR 4567: see [319]. The FTT issued the Decision in the present case, however, before the Supreme Court had handed down judgment reversing the decision of the Court of Appeal. It is necessary, therefore, for us to reconsider the Decision in the light of that development.

In Rossendale the issue was whether an avoidance scheme involving the owner of a property granting a lease to a special purpose vehicle (“SPV”) to avoid liability for non-domestic rates was successful. That issue was to be determined by considering whether the lease could be disregarded either as a sham or by application of the Ramsay principle or if the SPV could be disregarded by piercing the corporate veil. The Court of Appeal decided that the lease validly conveyed a legal estate in land to the SPV and in those circumstances the tax avoidance motivation of the parties and the artificiality of the arrangements were irrelevant. As a consequence, the provisions imposing a charge to non-domestic rates applied to the person entitled to possession of the land and pursuant to the terms of the lease, that person was the SPV. The FTT accepted that the same principle applied to the Partnership Deed and held that HMRC were not entitled to substitute some different agreement to that agreed by the parties to achieve a commercial purpose.

The FTT also rejected HMRC’s argument that the Supreme Court’s reasoning in Rangers was applicable in relation to the transfers of Special Capital made to partners in the Partnership. In Rangers the Supreme Court held that bonuses paid to employees, made available through a trust mechanism and to which the employees all had no contractual entitlement, were to be regarded as emoluments of employment subject to income tax because they were paid in respect of the employee’s work as an employee. The FTT concluded as follows at [333] to [335]:

G. Grounds of Appeal

In relation to the PIP Appeals HMRC advanced two Grounds of Appeal. First, HMRC contended that the FTT failed to apply section 850 of ITTOIA 2005 to the facts viewed realistically because it wrongly interpreted the “profit-sharing arrangements” in section 850(2) as a fixed legal concept analogous to the property rights in Rossendale (“Ground 1”). Secondly, HMRC contends that the FTT wrongly distinguished Rangers (“Ground 2”).

In support of Ground 1 HMRC submitted that the FTT erred as a matter of law by taking too narrow a view of the profit-sharing arrangements in the present case by limiting the scope of its enquiry to the formal allocation of profits made by the PRSC rather than looking at it in its proper context. HMRC argued that we should not necessarily adopt the way the Partnership described those arrangements in the Partnership Deed if the label or description which the partners placed on those arrangements did not reflect the reality of the situation. In particular, HMRC argued that the “rights to share in the profits” for any accounting year were not limited to the allocation of profits in the Partnership Deed but included their rights under the PIP arrangements by which they ultimately received a further allocation of profits.

HMRC also contended that the FTT failed to consider (at [334]) the possibility that the later allocations of Special Capital were simply the delayed distribution of profits which had been allocated to that member in respect of the year in which they arose. The FTT failed to engage with this exercise because (following Rossendale) it wrongly took the view that it could not go beyond the terms adopted by the parties in the Partnership Deed. But as the Supreme Court has since made clear when overturning the Court of Appeal in Rossendale, the FTT was wrong to do so. The Ramsay approach requires a realistic view not only of a series of transactions but also of legal rights including not only the right to possession of land but also the right to share in the profits of a partnership.

In support of Ground 2 HMRC contended that in the same way that an emolument from employment can still be an individual’s emolument even if he or she has agreed or acquiesced in it being redirected to a third party, an individual partner’s right to share in the profits of the Partnership for a particular accounting year can include those profits which he or she has agreed or acquiesced in being redirected to a third party, namely, the Corporate Partner. HMRC contended that while some rights to share in partnership profits are not based on personal activities, the awards made to individual partners under the PIP formed part of the reward for their valuable services and were in reality rewards for their work. HMRC submitted, therefore, that the principle in Rangers applied in both the employment context and the UK partnership context.

We summarise the Partnership’s response to HMRC’s case on both Ground 1 and Ground 2 in the following steps:

For each accounting period in question the individual partners and the Corporate Partner shared the annual profits of their business on the basis they had agreed under their Partnership Deed.

No part of the annual profits went untaxed.

Partners, unlike employees, are the proprietors of the business and in that capacity are entitled to: (a) their agreed share of the annual profits of the business, and (b) their agreed entitlement to the partnership property, which includes assets representing post-tax retained profits.

Accordingly, the “reward” which an individual partner may receive may comprise a combination of his or her agreed share of the annual profits and his or her entitlement to the partnership property.

Partners, unlike employees, are not (and never have been) taxed by reference to what they take out of the business (whether this takes the form of drawings, withdrawals of capital or partnership assets or otherwise) derived from their acting as or being or remaining a partner.

The PIP was introduced on a worldwide basis for entirely commercial reasons related to the nature of the Partnership’s business and the critical need to encourage both partner retention and to discourage individual partners generally from engaging in forms of trading activity which could prove detrimental to the Partnership’s business.

To secure those objectives, the PIP provided individual partners with the prospect (but no right or entitlement) of obtaining a share in the Partnership property represented by the Corporate Partner’s Special Capital which was derived from its post-tax share of the annual profits.

Although the Corporate Partner ordinarily acted on the Partnership’s recommendation, this does not lead to the conclusion that individual partners had a right or entitlement to receive Special Capital. The PIP always operated (and was understood by partners to operate) on the basis that they had no such right or entitlement. Individual partners had no right to Special Capital at any time before it was reallocated to them by the Corporate Partner and at that point (and only at that point) they acquired the right to Special Capital under the Partnership Deed and generally exercised those rights to withdraw it in full.

However, even if individual partners had a right or entitlement to Special Capital, that would not fall to be taxed as income as part of their share of the annual profits. Transfers of partnership property between partners, even when they occur as part of an agreed arrangement (e.g. to reflect increasing seniority, phased retirement or to recognise the importance of an individual to the partnership business) are capital transactions and are not taxed as income.

In seeking to tax the PIP Awards as they do, HMRC are seeking to substitute a different agreement for sharing the annual profits of the Partnership’s business for the agreement which the partners themselves had actually reached and a different way of sharing the annual profits from the way in the partners had actually agreed to share them.

Alternatively, HMRC seek to tax the individual partners on their “reward” as if they were to be taxed as employees under the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”) rather than as partners under Parts 2 and 9 of ITTOIA 2005 and without regard to the fact that partners (but not employees) are the proprietors of the business and, as such, are entitled both to share in the annual profits and to the partnership property.

For both Ground 1 and Ground 2 HMRC appeared to be relying on some form of extended Ramsay doctrine. That is not something that it is open to them (or to the courts) to do. Only legislative change by Parliament could achieve the result for which HMRC contend, which is what occurred (prospectively only) in 2014.

H. Discussion

(1) Ground 1

The three stage process for the assessment of partnership profits was explained by Vinelott J in a frequently cited passage from MacKinlay v Arthur Young McClelland Moores & Co  [1986] 1 WLR 1468 at 1474:

After the introduction of self-assessment it was no longer possible to require a joint assessment to be made in the partnership name after calculating the amounts of tax payable by each of the individual partners separately. In HMRC v Vaines [2018] EWCA Civ 45 at [22] Henderson LJ adopted the following observations of the Upper Tribunal describing how the third stage operates after the introduction of self-assessment:

It is important to bear in mind that since 1 April 2010 the trade of the Partnership has been carried on by BCM UK LLP which is a limited liability partnership and although it has a separate corporate existence from its members, it is treated for income tax purposes in the same way as an ordinary English partnership: see section 863 of ITTOIA 2005 (above). Accordingly, the trade of BCM UK LLP is, for income tax purposes, to be treated as though it is carried on by its members (including the Corporate Partner).

It is also important to note, as Mr Gammie observed, that under the system of partnership taxation the question how much a particular partner contributes to the partnership in terms of work or expertise in any given period, is strictly speaking irrelevant. The division of the profits at the second stage is purely a matter of agreement between the partners. This is important when considering the position of the Corporate Partner as a member of BCM UK LLP. The fact that its only business was to administer the PIP and that it made no contribution to the running of the business of the Partnership makes no difference. HMRC do not contend that the Partnership was not a genuine partnership or that the Corporate Partner was not entitled to share in the profits and the effect of section 863 of ITTOIA 2005 is that the business of the limited liability partnership is to be treated as carried on in partnership by all of its members without distinguishing between them.

(b) The Ramsay approach

We have briefly referred to the decision of the Supreme Court in Rossendale (above). It is reported at [2021] 2 WLR 1125 and we return to the facts in more detail. In that case non-domestic rates were payable by the “owner of the hereditament” which was defined as “the person entitled to possession”. The defendants sought to avoid liability for rates by leasing the hereditaments to SPVs which were either wound up to trigger an exemption or allowed to be struck off the register and dissolved so that the leases vested in the Crown as bona vacantia. The leases were not sham devices and genuinely conferred an entitlement to possession. Nevertheless, the claimant local authorities brought claims to recover non-domestic rates contending that a purposive construction should be placed on the rating provisions and that the term “owner” should be treated as someone with a “real entitlement to possession”. The Supreme Court reversed the decision of the Court of Appeal and held that the defendants were the “owners” of the hereditaments for the purposes of the rating legislation.

Lord Briggs and Lord Leggatt JJSC (with whom the other members of the Court agreed) described the Ramsay doctrine or principle as based on the modern purposive approach to the interpretation of all legislation. They also stated that it may now be said to have reached “a state of well-settled maturity”: see [9]. They set out the general principles to be applied in approaching the construction of both taxing statutes and legislation more generally at [10] to [18] and it is helpful for us to set out that passage in full:

The Supreme Court then applied this approach to the rating legislation. The Court considered that the central purpose of the legislation was to provide an incentive to bring unoccupied property back into use by focusing the burden of the rates on the person who had the ability, in the real world, to achieve that objective: see [30]. The Court observed on the facts that all of the elements of the schemes (and, in particular, the formation of the SPVs and the grant of the leases), were pre-planned and designed purely for the avoidance of rates without any other commercial or business purpose: see [36].

Applying the legislation to the facts, the Court held that the definition of the “owner” of a hereditament as “the person entitled to possession of it” was to be interpreted as denoting in a normal case the person who as a matter of the law of real property had the immediate legal right to actual physical possession of the relevant property: see [47]. Lord Briggs and Lord Leggatt then continued at [48] to [50]:

The Court rejected the reasoning of Henderson LJ in the Court of Appeal that the concept of entitlement to possession in the rating legislation was an intrinsically legal one and observed that his judgment seemed to hark back to a distinction drawn by Lord Hoffmann in MacNiven between commercial concepts and legal concepts which had been heavily qualified in Barclays Mercantile : see [52] to [58]. Instead, it held that the words “entitled to possession” was “the badge of ownership triggering liability for business rates” and that it should be properly construed as meaning “being concerned with a real and practical entitlement which carries with it in particular the ability either to occupy the property in question, or to confer a right to its occupation on someone else, and thereby to decide whether or not to bring it back into occupation”: see [59]. The Court concluded, therefore, that the relevant defendant remained at all times “the person entitled to possession” of each property: see [62].

HMRC submitted that this Tribunal should adopt a similar approach to the statutory provisions for the allocation of a firm’s profits to its partners in section 850(1) of ITTOIA 2005 and that the term “profit-sharing arrangements” had to be construed purposively. Mr Baldry submitted that the purpose of section 850(1) was to tax those who in the real world have the right to share in those profits and that the individual partners to whom provisional and final PIP Awards were made had the right to share – and then shared – in those profits to the exclusion of the Corporate Partner in the same way as they had the right to share in the profits allocated to them directly.

HMRC’s case rests on the proposition that the Partnership’s profit sharing arrangements were a means by which the profits of the Partnership were channelled to the individual partners who had earned those profits. Mr Baldry submitted that in identifying the profit-sharing arrangements of the Partnership, the Tribunal should treat the intermediate steps by which profits were allocated to the Corporate Partner, it subscribed for Special Capital and it then distributed that Special Capital to individual partners, as a means by which those partners were able to share in the profits of the Partnership. By contrast, the Partnership submitted that the Tribunal should take the profit-sharing agreements agreed between the individual partners and the Corporate Partner in the Partnership Deed at face value and conclude that the Corporate Partner was entitled to the share of the profits allocated to it and on which it paid tax in accordance with the principles applicable to the taxation of partnership profits.

(c) Does Ramsay apply?

The FTT did not consider that there was any scope for the application of the Ramsay principle in the present case because it applied the reasoning of Henderson LJ in Rossendale by analogy: see [319]. It held that although the present case was not concerned with a fundamental principle of land law it did involve a fundamental principle of partnership law, and, as such, HMRC were not entitled to substitute some different agreement to that arrived at by the parties concerned which was clearly a commercial agreement entered into to achieve a commercial purpose. That conclusion cannot stand in the light of the Supreme Court’s decision in Rossendale and, in particular, its rejection of the approach adopted by Henderson LJ and in our judgment the FTT fell into error by construing the phrase “the rights of the partners to share in the profits of the trade” narrowly and by reference only to the contractual rights conferred on partners under the Partnership Deed. A broader inquiry was required.

We are satisfied, therefore, that the FTT made an error of law by failing to consider the proper application of the Ramsay principle to the construction and application of section 850 of ITTOIA 2005. That error of law is clearly material and we must exercise our powers under section 12 of the Tribunals, Courts and Enforcement Act 2007 to set aside the conclusions of the FTT in the Decision in relation to the PIP Issue. However, because none of the evidence before the FTT was in dispute and there were sufficient facts agreed between the parties or found by the FTT, we have decided that we should remake the Decision on the basis of those facts.

We are also satisfied that for each period of account we must construe the ambit or scope of the term “the firm’s profit-sharing arrangements” in section 850(1) and (6) of ITTOIA 2005 by ascertaining the purpose of that provision and then applying it realistically to the facts as agreed between the parties and found by the FTT. Mr Baldry submitted that the purpose of section 850 was to ensure that the profits of a partnership (as calculated in accordance with s 849 of ITTOIA 2005) were allocated to those partners who in real terms had the right to share in those profits for the period in question. He also submitted that to give effect to the proper purpose of section 850 it was necessary to examine all of the arrangements between the individual partners and the Partnership including the PIP. Subject to one point, we accept both of these submissions.

The FTT found that the Partnership entered into the PIP for commercial reasons and not only for tax avoidance purposes: see [267] and [268]. But we also accept Mr Gammie’s submission that we cannot disregard the arrangements under which the Corporate Partner became a partner in the Partnership and was allocated a profit share. Likewise, we cannot ignore the conditions which typically had to be satisfied before a provisional award became a final award or treat them as window-dressing. The evidence before the FTT showed that 16% of provisional awards (representing 3% of awards made by value) were in fact forfeited because the conditions which the partners were required to meet were not satisfied.

In our view, therefore, this is not the type of case which Lords Briggs and Leggatt described in Rossendale at [11] where it is open to the Tribunal to disregard transactions or elements of a transaction which have no business purpose and have as their sole aim the avoidance of tax. On the other hand, however, this does not mean that the Ramsay principle has no application in this case. If we were to take the view that the Corporate Partner was no more than a conduit and that either as a matter of contractual construction or because of the way in which the Partnership operated the PIP in practice (or both), the right to share in the profits of the Partnership remained in the hands of individual partners, it would be open to us to conclude that their PIP Awards formed part of the profit-sharing arrangements of the Partnership. Having decided that the Ramsay approach applies, therefore, we now consider the profit-sharing arrangements of the Partnership (including the PIP) realistically and as a whole.

(d) Application

Mr Baldry submitted that there was no realistic possibility that the Corporate Partner (whether SCL or Avon) would have acted otherwise than as directed by the Partnership for the following reasons:

SCL was held by a purpose trust whose purpose was the advancement of the BlueCrest business.

The purposes of SCL included: “to participate in incentivisation and retention strategies for the partners of BlueCrest”.

When the Corporate Partner took drawings which were invested in Special Capital, the funds did not move from the Partnership to the Corporate Partner but remained invested in the Partnership or in the underlying investment management business.

Drawings were only taken by Avon on terms that they would be used to acquire Special Capital in the Partnership.

Mr Beverley gave evidence on behalf of the Partnership which demonstrates that Avon was “fundamentally providing an administrative kind of function”, and that the correspondence which it sent out was dictated by the Partnership and that Avon carried out a “word processing job from BlueCrest”.

Mr Baldry also made a number of submissions about the contractual rights of the Corporate Partner under the Partnership Deed and the way in which they were put into operation:

Clause 7.4(C) of the Partnership Deed provided that the Corporate Partner could only reallocate Special Capital following a prior recommendation by the Board of the Partnership or their delegate.

Avon had no right to withdraw Special Capital for its own benefit. At best, it could frustrate the purposes of the PIP by refusing to reallocate Special Capital and leaving it invested in BlueCrest funds indefinitely.

There was no prospect that SCL could obtain a benefit for itself or for a shareholder from allocations made to it because it would not spend the money and it would not declare dividends.

Avon was never in a position to make a profit allocation which it could withdraw from the Partnership (as opposed to investing in Special Capital): see the timeline at [301]. This was because it would take drawings to invest in Special Capital and only after it had made that investment would the corresponding profit allocation be made to it by the Board.

The only function of the Corporate Partner was to operate the PIP. Yet the Board of the Partnership made enormous awards in its favour. It was obvious that this was not because of its contribution to the business but because it was intended to operate the PIP.

The individual partners were at no material risk of losing their awards except in circumstances of which they were fully aware, namely, that they left the Partnership or were guilty of misconduct. They accepted these risks but no others and the Tribunal should approach the PIP on the basis that the arrangements worked as they had been intended.

The Partnership was not free to depart from the assurances which it gave to individual Partners who fulfilled all of the conditions attached to their deferred awards when it exercised its discretion to make recommendations to the Corporate Partner.

The Corporate Partner was required as a matter of contract to exercise the discretion conferred by clause 7.4(C) of the Partnership Deed in good faith and not arbitrarily, capriciously or irrationally. It could not have exercised the discretion other than to reallocate Special Capital to individual partners in accordance with the Board’s recommendations (unless the forfeiture conditions applied). Any other exercise of the discretion would have been arbitrary, capricious or irrational.

Mr Baldry also relied on the understanding of individual partners that the Special Capital held by the Corporate Partner was their own investment in BlueCrest even before they had met the conditions for any award becoming final. In particular, he relied on the following:

Partners would generally choose how the money would be invested.

Allocations to the Corporate Partner were described by the Partnership’s management to the participating partners as a sum put into the PIP “on your behalf ”.

Investments were held according to the names of the individual partners and treated as belonging to those partners or being their money.

The PIP was described as a way of sheltering income. In an email dated 19 January 2009 Ms Braga explained to an individual partner that the award did not reduce their income and was: “Just a timing difference.”

The PIP was described as a way of delivering a profit allocation to a partner. For example the following question was put to an individual partner:

The FTT recorded that a new recruit described the PIP to Mr Dodd as “the tax scheme used for bonuses”: see [350].

Mr Dodd confirmed in his evidence that although individual partners accepted that they could lose their awards if they did not comply with the terms of forfeiture, their understanding was that an award would not be taken away in any other case. This was made clear to the partners and they were given reassurances to that effect.

We accept many of these submissions. In particular, we accept that the Corporate Partner had no function other than to distribute Special Capital to individual partners, that individual partners had an expectation that they would receive their final PIP Awards and that the Corporate Partner had in most cases a contractual obligation to give effect to those expectations unless the forfeiture conditions were satisfied. We say this for the following reasons:

We accept that the Corporate Partner was introduced into the Partnership for the sole purpose of administering the PIP and that the Corporate Partner had no other business purpose and made no other commercial contribution.

We are also satisfied that the evidence before the FTT established that individual partners had an expectation that they would receive a final award unless the forfeiture conditions were satisfied. Moreover, as Mr Dodd’s evidence demonstrated, there was a clear understanding that although in theory both the PRSC and the Corporate Partner had discretion, a provisional PIP Award would always be made final unless the forfeiture conditions were satisfied.

Where a contract confers a discretion on one party the exercise of which may adversely affect the interests of another party, it will generally be an implied term that the discretion may only be exercised in good faith and not arbitrarily, capriciously, or irrationally: see Braganza v BP Shipping Ltd [2015] 1 WLR 1661. We therefore accept that it was an implied term of the Partnership Deed that the Corporate Partner would not exercise the discretion in clause 7.4(C) except in good faith and not arbitrarily, capriciously or irrationally.

We also accept that a failure by the Corporate Partner to exercise the relevant discretion at all would have been capricious and that an exercise of discretion to reject the recommendations of the Board without good reason or to reallocate Special Capital to those partners who had not received a provisional award or to reallocate it to itself would have been arbitrary, irrational or capricious.

We therefore accept that in practice the Corporate Partner was bound to exercise its discretion to give effect to the PIP Awards unless the forfeiture conditions were satisfied. Moreover, the evidence before the FTT established that in practice reallocations were made in accordance with recommendations made to the Corporate Partner, except in a few cases (where a mistake had been made or there was a good reason for departing from the recommendation).

Finally, we accept that when the Corporate Partner drew monies on account of profits prior to an allocation of a profit share in accordance with clause 7.4(C), the amounts drawn were earmarked for payments to be made in respect of awards to individual partners in due course.

However, although we are satisfied that individual partners had an expectation of receiving their final PIP Awards and that the Special Partner generally had a contractual obligation to give effect to those expectations unless the forfeiture conditions were met, we are not satisfied that we should treat the rights of individual Partners under the PIP as rights to share in the profits of the Partnership for a number of reasons which we now explain.

First, although SCL and Avon were introduced to the Partnership to administer or give effect to the PIP and they had no other commercial function, the FTT found that the PIP was intended to solve a business issue: see [267]. Moreover, we agree with Mr Gammie that the scheme of partnership taxation takes no account of how much an individual partner has contributed to the success of the business of the partnership. Section 850 of ITTOIA 2005 simply allocates the profits of the partnership for tax purposes to the partners in accordance with the terms of the agreement under which they have agreed to share the profits. In our judgment, therefore, the fact that the Corporate Partner made no commercial or business contribution to the Partnership’s profits is of no consequence. The Corporate Partner performs a different but nevertheless commercially important role.

Secondly, there was no suggestion that the Corporate Partner was not intended to be a genuine partner and that it was not intended to enjoy the rights or be bound by the obligations contained in the Partnership Deed. Mr Baldry did not suggest that the relationship between the Corporate Partner and the other partners was a sham and the FTT made no finding to that effect. Furthermore, there was no suggestion that profit allocations made to the Corporate Partner were held in any way by the Corporate Partner on trust for individual partners or in a fiduciary capacity (and this issue is the subject of detailed consideration in the separate decision referred to at [44] above.). We are satisfied, therefore, that until the Corporate Partner exercised its discretion to make a final PIP Award to a partner, that partner did not have a right or entitlement to it.

Thirdly, it does not follow that all of the amounts allocated as a profit share to the Corporate Partner in respect of a particular accounting period were used to fund awards to individual partners in respect of the accounting period in which the profits in question were earned. If a provisional PIP Award did not become final because the eligibility conditions were not met, the relevant assets would be retained by the Corporate Partner and became available to satisfy future awards made in future accounting periods. This raised the most difficult question for HMRC’s case. If the Corporate Partner had no right to share in the profits and the individual partner had forfeited his or her rights to receive them, who was entitled to share them and on what basis?

HMRC’s primary case was that profits which a partner had forfeited should be treated as allocated between the other partners in proportion to their awards. HMRC’s alternative case was that the Corporate Partner would be taxed on any excess allocation. We find neither of those arguments compelling. Neither outcome arises out of the contractual arrangements which only contemplated the allocation of Special Capital to those partners who had received a final PIP Award reflecting their individual contributions. There was no contractual entitlement to an additional bonus simply because other partners had forfeited their PIP Awards. We, therefore, agree with Mr Gammie and the FTT that to allocate forfeited profits in the way suggested by HMRC would involve rewriting the contractual arrangements between the parties.

There are limits to the application of the Ramsay doctrine. As Patten LJ stated in Brain Disorders Research Limited Partnership v. HMRC [2018] STC 2382 at [32]:

We consider that to bring the PIP within the profit-sharing arrangements of the Partnership would go beyond those limits in the present case. It would be necessary to fix the taxpayer, in this case the Partnership, with a contract to which its members did not agree. In our view, the correct contractual analysis is that the individual partner has no right to share in the profits of the Partnership at the time when allocations were made to the Corporate Partner and that the terms of the Partnership Deed which allocated those profits to the Corporate Partner must be respected. It is also our view that the contractual effect of the PIP and the way in which it was operated in practice do not change that position. When profits were allocated between the partners under the Partnership Deed, each individual partner had a legitimate expectation that his or her provisional PIP Award would be made final unless they failed to meet the eligibility conditions. Individual partners only had a right or entitlement to receive their PIP Awards once they were entitled to withdraw the Special Capital. Even adopting a purposive construction of section 850 of ITTOIA 2005, the PIP did not form part of the profit-sharing arrangements of the Partnership. We therefore dismiss Ground 1 of the PIP Appeals.

(2) Ground 2

HMRC also contended that even if we took the view that the profit allocations were made to the Corporate Partner (rather than to individual partners) under the profit-sharing arrangements of the Partnership, those allocations must be treated as if they were made to the individual partners. In support of this argument they relied on Hadlee and Rangers. We begin with the decision of the Privy Council in Hadlee.

In Hadlee the taxpayer was a partner in a firm of chartered accountants. Under New Zealand law a partnership is not a separate tax entity and partners made returns of partnership income only for information purposes so that their separate incomes could be calculated. The taxpayer executed a deed of trust under which he assigned 40% of his share in the partnership to the trustees and they had the power to pay the income to the taxpayer’s wife and child. The Commissioner of Inland Revenue took the view that a taxpayer could not escape assessment for tax on income resulting from his personal services or exertions by assigning the income and assessed the taxpayer to income tax on the basis that the assignment had been ineffective to shift liability to income tax in respect of partnership income from the taxpayer to the trustees. They appealed to the Privy Council contending that the right to income was derived not only from his personal services or exertions but also from his rights under the partnership agreement, that those rights amounted to a proprietary interest in the partnership and that the trustees’ right to income came from their ownership of a proprietary interest in a capital asset, namely, the partnership.

Lord Jauncey gave the judgment of the Privy Council. He quoted the judgment of the New Zealand Court of Appeal describing the relevant provisions of the taxation system in New Zealand at 296E:

He also approved a number of statements made in the lower courts that no taxpayer could escape assessment for tax on income resulting from his personal activities by assignment and then approved the following statement of Richardson J at 298H:

For this reason, therefore, the Privy Council dismissed the appeal. The Supreme Court adopted the same reasoning in Rangers. In that case footballers were paid wages or a salary through the club’s payroll but their employer made additional payments to an employee benefit trust with a recommendation that the trustee company exercise its discretion to resettle the sum paid on a sub- trust for the benefit of the individual footballers. The trust arrangements also contemplated that the footballer would be able to seek unsecured loans of the amount of the funds settled on a sub-trust repayable on his death. The question was whether the payments in advance by way of loan were assessable to taxes being emoluments of employment.

The Supreme Court held that the footballers were liable for income tax on the additional payments. The decision establishes a principle that income tax on earnings is primarily a tax on the payment of money by an employer to an employee as a reward for the work as an employee. Lord Hodge, who gave the judgment of the Court, stated that there was no requirement that an employee should receive the remuneration for it to be taxable. The employee whose work gives rise to the remuneration is taxed not the recipient: see [36] and [37]. Lord Hodge went on to say that there was nothing in the legislation which excludes from the tax charge a payment to a third party to which the employer and employee have agreed as part of the employee’s contract of employment. Both sums involve the payment of remuneration for the employee’s work as an employee: see [39] to [41].

Lord Hodge observed that the relevant statutory provision which was section 62(2)(c) of ITEPA 2003 brought into charge as earnings “anything that constitutes an emolument of the employment” and he discussed Hadlee in that context at [50]:

He then considered a number of authorities dealing with PAYE before concluding that it was not necessary for payment to be made to the employee before it could be taxed as a reward or remuneration. He then concluded at [59]:

Relying on both Hadlee and Rangers, Mr Baldry made the following submissions on behalf of HMRC in support of Ground 2:

Hadlee (which was a partnership case although the rules in question were not precisely the same) establishes a general principle that no taxpayer can escape assessment from tax on income resulting from his personal activities by assignment to a third party which also applies in the UK partnership context and was found to apply in Rangers.

It follows that an emolument awarded to an employee as part of the reward for their services or efforts remains an emolument of the employee even if he or she has agreed to it being redirected to a third party. In the same way, an individual partner’s right to share in the profits as a reward for his or her services to the partnership remains the right of the partner even if he or she has agreed to it be redirected to a third party.

While some rights to share in partnership profits are not based on a reward for personal activities or services, PIP Awards were. They were in substance and reality a reward for work or for personal exertion.

The individual partners accepted the risk that they might not receive final PIP Awards from the Corporate Partner (e.g. if they left the Partnership) or, in certain circumstances, as much money as they would have done if they had been paid immediately. But this was a risk which they were prepared to take in order to reduce the amount of tax which they were required to pay and to receive higher sums as a reward overall.

Profits which were allocated to the Corporate Partner were in substance rewards for individual partners redirected to a third party and applying the general principle in Hadlee those individuals should be taxed on those sums.

We reject those submissions for the reasons submitted by Mr Gammie. We find that Rangers is of no assistance in the present case because earnings from employment are taxed in a fundamentally different manner from the taxation of partnership profits. In particular, the earnings of an employee are taxed on receipt whereas partners are taxed on their shares of the profits of the partnership for a particular accounting period and a partner’s drawings (either in anticipation of, or on account of annual profits) or the withdrawal of partnership capital or property are not taxable income in his or her hands.

Furthermore, we agree with the conclusion of the FTT at [326]. The structure of the New Zealand income tax legislation did not isolate partnership income as a separate source of income. It is clear from both Hadlee and the observations of Lord Hodge in Rangers that in New Zealand income tax (including tax on partnership income) is a tax on the product of the taxpayer’s personal exertion. The position is quite different from the UK system of partnership taxation under which a partner is taxed by reference to his right to share in the profits of the partnership for the accounting period in question regardless of whether that income has been generated by personal exertion or not.

Finally, we do not consider Rangers to be authority for the wide proposition that an individual cannot escape tax on the income which they derive from their personal exertion by having it paid to another person. The case is authority for the narrower proposition that an employee cannot escape tax on his employment income by having it paid to another person. But in any event, PIP Awards were not made solely to reward the personal exertions of the individual partners. The PIP was intended to reward individual partners. But it was also intended to facilitate the Partnership’s commercial purpose of ensuring the retention and incentivisation of individual partners by discouraging them from leaving to join competitor firms or engaging in inappropriately risky investment behaviour and aligning the Partnership’s interests with those of the funds it managed. We therefore reject Ground 2 of HMRC’s appeal.

(3) Conclusion

We therefore determine the PIP Issue in favour of the Partnership but for reasons which are different to those given by the FTT. We re-make the Decision but with the same outcome. We dismiss the PIP Appeals.

III. The IP Appeals

I. The Relevant Legislation

In relation to the Miscellaneous Income Issue the applicable legislation is section 687 and section 689 of ITTOIA 2005 which provide as follows:

In relation to the Sale of Occupational Income Issue the applicable legislation is now contained in Chapter 4 of the ITA 2007 which (so far as relevant) provides as follows:

J. The Facts

The FTT’s findings of fact in relation to the PIP Appeals (which we have summarised above) are also relevant to the IP Appeals. But the FTT made further findings of fact which were relevant to the IP Appeals. We observe that on some occasions the FTT did no more than summarise the evidence rather than make express findings of fact. But where the FTT set out that evidence without disapproval or comment, we have assumed that the FTT accepted that evidence and neither of the parties took issue with that approach.

The FTT referred to Mr Platt’s evidence that the original PIP scheme was closely modelled on the JP Morgan Group bonus deferral program under which a percentage of pay was deferred and which was “extremely effective” in ensuring people did not leave the business. The FTT appeared to accept Mr Platt’s explanation that the PIP was a way to “lock my people in”: see [343]. The FTT also recorded that Mr Platt, Mr Dodd and Mr Dannatt gave evidence to the effect that they were happy that there was a tax benefit attaching to the PIP and that the PIP operated to shelter some of their profit shares from tax. The FTT also recorded that the tax implications of the PIP were explained to new recruits and it was described as a “tax scheme used for bonuses”: see [343] to [350].

The FTT also recorded that the IP Appellants gave evidence about their roles in the Partnership, how they acquired their knowledge and experience of the business and how they acquired the skill of trading investments and portfolio management more generally: see [353] to [399]. That evidence was relevant to the Sale of Occupational Income Issue and, in particular, to the question whether the IP Appellants carried on a “profession or vocation”. In summary:

Each of the IP Appellants was university educated but not necessarily in subjects which were directly relevant to the carrying out of investment business. Typically, BlueCrest looked for graduates with first or 2.1 class degrees in mathematics, physics or engineering.

The IP Appellants acquired their knowledge through their work with major financial institutions in a variety of roles including corporate finance, project management, developing personal relationships with senior management, trading securities, using technology and algorithms to develop systematic trading strategies, establishing processes to select assets for an investment portfolio, analysing and carrying out research on financial markets and individual companies, reviewing investment and market risk, including monitoring position limits, and developing pricing models.

Some of the IP Appellants referred to the fact that there was no clear training or clear discipline from which BlueCrest could hire individuals who would be successful at systematic trading and that there was no training specific to many of the skills which they had developed or professional bodies regulating or monitoring the various disciplines described (above). Their evidence was that skills were developed from on-the-job training and experience.

There was no university course to teach trading and when recruiting BlueCrest would look for recruits who had very good commercial sense and interest in the markets, interest in mathematical formulations and who had creative potential and the ability to think about the facts in a commercial manner.

Each of the IP Appellants had moved into senior management roles where responsibilities included developing the strategic direction of the business, managing the functional teams of the business and developing processes, controls and team structure.

At least some of the IP Appellants had to be approved by the Financial Conduct Authority in order to perform the roles which they undertook where those roles involved interaction with investors or the market or senior management roles.

K. The Decision

(1) The Miscellaneous Income Issue

The parties agreed that the Miscellaneous Income Issue required the FTT to address the following two questions:

The FTT determined this issue in favour of HMRC. After reviewing the relevant authorities, it set out its reasoning briefly at [416] and [424] to [427]. The FTT held that there was no difficulty in identifying the source of income in this case, namely, the decision of the Corporate Partner to pay the awards: see [416]. The FTT rejected the IP Appellants’ submission that if section 687 of ITTOIA 2005 were to be applied, then the same income would be charged to tax twice and made the following finding at [424]:

The FTT dealt next with the question whether the payments could be characterised as income at all and, if so, whether it could be characterised as income analogous to profits or gains charged elsewhere at [425] to [427]:

(2) The Sale of Occupation Issue

The parties also agreed that the Sale of Occupation Issue required the FTT to address the following two questions (the second consisting of a number of different elements):

The FTT also determined this issue in favour of HMRC. In relation to the first question, it held that although the PIP had a commercial purpose, namely, the retention and incentivisation of partners, it also had as a main object the avoidance or reduction of liability to income tax. In particular, the FTT found that the PIP was a bespoke piece of tax planning developed by EY and it also relied on the evidence which the IP Appellants gave about the tax benefits of the scheme: see [272] and [344] to [350]. The FTT also held that the object of tax avoidance was not incidental but that the Partnership was able to achieve the retention and incentivisation of staff by the avoidance or reduction of tax: see [437].

In relation to the second question, the FTT held that the activities of the IP Appellants were of a kind undertaken in a “profession or vocation”. It rejected the IP Appellants’ submissions that although the IP Appellants did a very professional job this was not the sense in which the term “profession” was used in the legislation and having reviewed the authorities, the FTT set out its reasoning at [452] to [455]:

The FTT did not address Condition B or Condition C (for the imposition of a charge under section 776 of ITA 2007) in terms. Those conditions are set out in section 777 (above). But we draw the inference that the FTT considered that those conditions were met from its conclusion that the PIP Awards were chargeable under section 776.

L. Grounds of Appeal

(1) The Miscellaneous Income Issue

The IP Appellants appeal on the grounds that the FTT made an error of law in its findings on both the Miscellaneous Income Issue and the Sale of Occupation Issue. In relation to the Miscellaneous Income Issue, the IP Appellants appeal on the following grounds:

The PIP Awards made to them were capital not income in nature and do not, therefore, fall within the scope of the charge to income tax under section 687(1) of ITTOIA 2005 (“Ground 1”).

Even if it could be said that the PIP Awards have an income character, there is no relevant source by reference to which they can be brought into charge to income tax (“Ground 2”).

Even if it might be said that the IP Appellants’ continued participation as partners in the Partnership was a relevant source, it would amount to taxing the same profits twice to charge to income tax on the transfer of Special Capital to them by the Corporate Partner out of its post-tax profit allocations (“Ground 3”).

HMRC invited us to reject all three Grounds of Appeal and to dismiss the appeal on the Miscellaneous Income Issue for the following reasons:

What confers the character of income on a receipt is the source of the payment together with the circumstances in which it was made. In the present case, the FTT was justified in finding on the evidence that the reallocation and transfer of Special Capital to individual partners was a reward for performance spread over time and analogous to the payment of a discretionary bonus or to the payment of the deferred element of a deferred bonus.

The FTT’s conclusion that the source of the payment was the decision of the Corporate Partner to distribute what was in substance a reward for performance spread over a period of time was a conclusion which the FTT was entitled to reach on the facts that it found.

There is no double taxation because the profits of the Partnership are not being taxed twice because the Corporate Partner is taxed on the profits allocated to it in one accounting period and the IP Appellants are separately taxed on the new income which they receive as and when the Corporate Partner takes the decision to make a final award under the PIP.

(2) The Sale of Occupation Issue

In relation to the Sale of Occupation Issue the IP Appellants appeal on the following grounds:

The PIP was an arrangement designed to incentivise and retain partners and is not an arrangement of the type contemplated by the relevant legislation (“Ground 1”)

Even if the PIP is an arrangement of the type contemplated by the legislation, the only conclusion which the FTT could have reached on the basis of the evidence which it heard and accepted in relation to the PIP was that tax avoidance was not a main object of the arrangements (“Ground 2”).

Even if the PIP is an arrangement of a type contemplated by the legislation and tax avoidance was a main object of that arrangement, none of the IP Appellants was in an occupation within the meaning of Condition A in section 777 of the ITA 2007.

Again, HMRC invite us to reject all three Grounds and to dismiss the appeal on the Sale of Occupation Issue for the following reasons:

The PIP does fall within the scope of the legislation because the Corporate Partner had been put in a position to enjoy the IP Appellant’s potential allocation of profit and on the reallocation of Special Capital the IP Appellant was entitled to withdraw it and turn it into cash.

The question whether the PIP had as one of its main objects the avoidance or reduction of a liability to tax was an issue of fact for the FTT, which made no error of approach and reached a conclusion which it was entitled to do on the basis of the evidence.

The FTT was correct to hold that the IP Appellants were engaged in the kind of activities undertaken in a profession or vocation and the overall characterisation of their activities based on the evidence did not involve any error of law.

M. Discussion

(1) The Miscellaneous Income Issue

Before ITTOIA 2005 came into force, a residual charge to income tax arose under Schedule D Case VI on any annual profits or gains not falling under any other Case of Schedule D and not charged to tax under Schedules A, E and F. This residual charge to income tax is now found in section 687(1) of ITTOIA 2005 which was enacted as part of HMRC’s Tax Law Rewrite Project. It is common ground that section 687(1) was intended to have the same scope as the earlier legislation and that the authorities relating to Schedule D Case VI (which go back many years) remain relevant to its interpretation. The principles to be derived from those earlier authorities were summarised in Kerrison v HMRC [2019] 4 WLR 8 at [68] where the Upper Tribunal stated that the receipt must meet the following requirements:

The receipts must have the nature of “annual profits”. But that simply means that they must be capable of being “calculated in any one year”. It does not mean that the income must recur every year.

The receipts must be of an income nature.

They must be analogous to some other head of charge under what was previously Schedule D. This is the eiusdem generis principle.

They must be the recipient’s income.

They must involve a sufficient link between the source and the recipient.

The Upper Tribunal also considered the question whether it is necessary to identify a source before a Case VI liability arose. Whilst the tribunal did not decide that point because it was not necessary to do so, it made the following observations at [70]:

The IP Appellants’ appeal on the Miscellaneous Income Issue engages the second, third and fifth principles set out above. Both parties made submissions on the basis that it is necessary to identify the source of the payment, and, in particular, whether that source is of an income rather than a capital nature. We therefore proceed on that basis (as did the FTT).

(a) Ground 1: income

In Leeming v Jones [1930] AC 415 the House of Lords had to decide whether a transaction was taxable under Case VI and emphasised the requirement that the receipt must be in the nature of income. Lord Dunedin stated as follows at 422:

In that case the profits sought to be taxed were derived from an isolated property transaction. But in the present case there is no doubt that the receipts in question were annual profits and Mr Gammie did not seek to argue otherwise. Mr Gammie did not really dispute either that the fourth principle was satisfied and that if they were income rather than capital receipts, then they were the IP Appellants’ income and taxable in their hands. We are satisfied that the FTT was right to find that the receipts were of an income nature in the hands of the IP Appellants.

The real issue between the parties was whether the PIP Awards made to individual partners were the kind of annual receipts which fell within Case VI. The FTT found that they were and placed particular reliance on the evidence which showed that the decision to introduce the PIP was to implement a type of deferred bonus scheme similar to that of the JP Morgan scheme: see [425] to [427]. The JP Morgan scheme was a scheme to reward employees and payments under that scheme would have been taxable as employment income. In the present case, however, the IP Appellants were not taxed as employees. The issue for us is whether this was a relevant distinction for tax purposes and that the FTT made an error of law by applying this analogy to the PIP Awards made to the IP Appellants.

In our judgment, the FTT was entitled to find that the PIP Awards fell within Case VI and were analogous to the other cases in Schedule D. That conclusion is supported by the decision of Rose J (as she then was) sitting in the Upper Tribunal in Manduca v HMRC [2015] STC 2002. In that case the taxpayer and a colleague set up a hedge fund. They transferred the fund to a new fund manager and the taxpayer and his colleague became its employees. They entered into a separate bonus agreement under which they were paid a bonus for the transfer of their fund. They were then made redundant and brought a claim against their new employer. They settled the claim on terms that they received compensation for the failure to pay the bonus. An issue arose as to the correct tax treatment of the compensation to be paid under the settlement. It was common ground that the compensation should have the same tax treatment as the bonus. But HMRC also took the view that the payments fell within Case VI of Schedule D whereas the taxpayer contended that the bonus was in the nature of the capital sum subject to capital gains tax.

Rose J held that the bonus was remuneration for services provided to the new fund manager by the taxpayer and that those services fell within Case VI. She cited Brocklesby v Merricks (1934) 18 TC 576 and Bradbury v Arnold (1957) 37 TC 665 which establish the principle that a contract for services should be assessed under Case VI even though the income arose out of a single transaction. She relied on those authorities for the proposition that once it is established that a payment is an income receipt and that it was paid pursuant to a binding contract in return for some kind of service, then there is no need to go further to enquire into the extent of the services in fact provided: see [35]. She held that the bonus was to pay for a service and that this service was eiusdem generis with the services listed within the other Cases in Schedule D: see [36] to [38].

Manduca shows that if a payment is made to an employee as a reward for services it is taxable under Case VI even if it is not paid pursuant to a contract for employment. In the present case the payment was a reward for services. Although we have found that individual partners did not have the right to receive PIP Awards as part of the profit-sharing arrangements of the Partnership, this does not prevent those awards falling within Case VI. The FTT found that the PIP was intended to reward individual partners for their contribution to the success of the Partnership, because of the services they provided and to incentivise them for the future. In our judgment, the FTT was also entitled to find that these services were eiusdem generis with the services listed within the other Cases in Schedule D.

(b) Ground 2: source

The principal ground upon which Mr Gammie challenged the Decision related to the source of the PIP Awards. He submitted that their source was the distribution of partnership property and that partners are not taxed on the way in which they choose to distribute partnership property between themselves. He argued that profits allocated to the Corporate Partner were taxed on the usual principles of partnership taxation and that once the Corporate Partner had re-invested those profits in the Partnership by subscribing for Special Capital, they became capital assets and part of the property of the Partnership which the Corporate Partner then transferred to individual partners in accordance with their final PIP Awards. He also submitted that when individual partners withdraw their Special Capital from the Partnership, those withdrawals were not liable to tax. He drew an analogy with partners retiring from a solicitors firm withdrawing their capital from the partnership (which had never been taxed).

Mr Gammie relied on the decision of the Supreme Court in Shop Direct Group v HMRC [2016] STC 747. In that case Lord Hodge (with whom the other members of the Court agreed) rejected an argument that VAT repayments did not have the former trade as their source and that their source was the intra-group arrangement under which the right to receive payment was assigned to another group entity. He held that arrangements within the VAT group did not alter the original source of the receipt. He stated as follows at [24]:

Mr Gammie submitted that in the present case the relevant source was the partnership trade which generated the profits which were converted into partnership property rather than any later decision made by the Corporate Partner. He also relied on two earlier authorities: Purchase v Stainer’s Executors [1952] AC 280 and Carson v Cheyney’s Executor [1958] 3 WLR 740. In the first case, the House of Lords held that sums received by the executors of Leslie Howard, the actor and director, after his death were not chargeable to income tax under Schedule D Case II because at that time post-cessation receipts were not brought within the charge to tax. In considering whether the receipts could be charged to tax under Case VI, Lord Simmonds LC identified the source of the income as Mr Howard’s professional activity and rejected an argument that the individual contracts under which he was to receive the profits from individual films were themselves income-producing assets: see 289. Accordingly, there could be no claim for tax under Case VI.

The second case involved similar facts. Royalties paid to an author during his lifetime were assessed to income under Schedule D Case II. It was held that payments made to his executors after his death were the fruits of his professional activity and that their character did not alter when the profession was discontinued. The House of Lords followed Stainer and rejected the argument that the royalties could be treated after his death as consideration for the grant of a licence to use the copyright in his works.

Mr Baldry submitted that the FTT was correct to find that the source of the PIP Awards made by the Corporate Partner was its decision to pay the awards (or, more properly, reallocate or transfer Special Capital to them on the recommendation of the Partnership). He relied on Spritebeam Ltd v HMRC [2015] STC 1222. That case concerned a tax avoidance scheme which was intended to avoid tax credits arising under a loan relationship. Company A lent money to Company B but instead of Company B paying interest to Company A, Company B issued irredeemable preference shares equal in value to a commercial rate of interest on the loan to Company C. The Upper Tribunal considered a number of authorities in which discretionary payments were treated as the source of income including Cunard’s Trustee v IRC [1946] 1 All ER 159 and drew the following conclusion at [68]:

The Tribunal held that the value of the shares fell within the scope of taxation under Case VI and that the source of the share recipient’s income was the obligations contained in the relevant loan agreement. The Tribunal stated as follows at [82] to [84]:

The principal issue in Spritebeam was whether the receipts by Company C were taxable at all, given that it had no enforceable right to receive payment under the loan arrangements. But it provides clear authority for the proposition that the source of a particular payment may be a decision taken by a party on whom a discretion has been conferred by trust or contract. Spritebeam is also authority for the proposition that the required connection between the taxpayer and the source need not be limited to legal rights provided that there is a legal obligation to make the payment.

We have found that that the Corporate Partner had a contractual obligation to give effect to the expectations of the IP Appellants that they would receive a final award of Special Capital unless they failed to meet the eligibility criteria. The decision of the Corporate Partner to reallocate or transfer Special Capital to the IP Appellants was, therefore, capable of being the source of the PIP Awards made to them (as the FTT found). Moreover, the fact that the IP Appellants did not have a contractual right to payment but only to ensure that the Corporate Partner exercised its discretion fairly and without acting arbitrarily or capriciously did not, in our judgment, prevent the FTT from finding that there was a sufficient connection between each PIP award and the Corporate Partner’s decision.

However, the real issue is whether there was “no need to enquire further” for the source of the payments: see [82] (above). In Spritebeam Company C provided no underlying services because the relevant payments represented interest or the time value of money. By contrast, in Shop Direct the Supreme Court held that the contractual arrangements between group companies were not the source of the payments but rather the underlying trade (and both Stainer’s Executors and Cheney’s Executors support that analysis).

In our judgment, the FTT was right to identify the source of each PIP Awards as the decision of the Corporate Partner rather than the underlying trade of the Partnership. Moreover, we consider Shop Direct (and both Stainer’s Executors and Cheney’s Executors) to be distinguishable for the following reasons:

(1) We have found that the profit-sharing arrangements of the Partnership did not include the PIP and that the terms of the Partnership Deed which allocated profits to the Corporate Partner must be respected. It follows that each PIP Award of Special Capital which the Corporate Partner re-allocated or transferred to the IP Appellants did not represent profits from the trade of the Partnership but represented awards made to them at the discretion of the Corporate Partner. Mr Gammie cannot have it both ways.

(2) One of the principal reasons why we rejected HMRC’s case on the application of the Ramsay doctrine was that it was impossible to say for certain that individual partners had a right to share between them all of the profits allocated to the Corporate Partner. This analysis also served to break the connection between the trade of the partnership and the source of the payments.

(3) The analogy which Mr Gammie drew between the PIP and a partner who makes withdrawals of capital from the partnership is not exact and may be apt to mislead. Where a partner who re-invested his or her profit allocation back into the partnership and then later withdrew it as capital, we might well accept that the ultimate source was the partnership trade. But in the present case the profits were allocated to the Corporate Partner who re-invested those profits. It then exercised a discretion to transfer those profits to the IP Appellants. There was, therefore, a second and entirely separate stage before the IP Appellants withdrew their capital. Unlike Mr Gammie’s partner in the solicitor’s firm the IP Appellants had no right to withdraw their Special Capital unless the Corporate Partner made a decision to re-allocate it to them and made their PIP Awards final.

(4) Further, each PIP Award did not involve the withdrawal by partners of retained profits reinvested as capital but the transfer of a partnership interest by one partner (the Corporate Partner) to another partner. Mr Gammie attempted to meet this argument by relying on the fact that the members of the partnership hold the assets on trust for the partnership as a whole and, in the present case, this must include the Special Capital. In our judgment, this is not an answer (or at least a complete answer). Even though the Partnership holds funds in its bank account on trust for the partnership as a whole, this would not prevent one partner from assigning to another his or her rights to the funds in that bank account. Likewise, where partner A sells his partnership interest to partner B, the source of the payment by partner B is not the underlying trade of the partnership but the transfer of the partnership interest.

(c) Ground 3: double taxation

There is a presumption that Parliament does not intend to tax the same person on the same income twice unless it clearly and expressly legislates to the contrary. This is the principle of double taxation and Lord Macmillan explained the principle in Canadian Eagle Oil Company Limited v R (1945) 27 TC 205 (which was concerned with the rules for taxing foreign companies on income with a UK source) at 257:

In our judgment, the FTT’s conclusion that the present case did not involve double taxation (in the sense described by Lord Macmillan in Canadian Oil) was correct. The Corporate Partner and the IP Appellants were not the same person and they were not taxed on the same income. They were being taxed on income from separate sources. The Corporate Partner has been taxed on its profit allocation and the IP Appellants were chargeable to tax under Case VI on the receipts derived from the final PIP Awards based on the decisions made by the Corporate Partner. For these reasons we dismiss the IP Appellants’ appeal on the Miscellaneous Income Issue.

(2) Sale of Occupational Income Issue

That is sufficient for us to dismiss the IP Appeals. Nevertheless, because the issue was fully argued, we address the Sale of Occupation Income Issue. For the PIP Awards to be taxable it was necessary for HMRC to satisfy three conditions in section 777 of ITA 2007. It was also necessary for HMRC to persuade the FTT that the main object (or one of the main objects of the PIP) was the avoidance or reduction of liability to income tax: see s 773 (2) (b) ITA 2007. The three conditions in section 777 were as follows:

Condition A: The IP Appellants carried on any activities of a kind undertaken in a profession or vocation wholly or partly in the UK.

Condition B: The PIP arrangements were made to exploit their earning capacity by putting another person in a position to enjoy all or part of the income or receipts derived from those activities (or anything derived directly or indirectly from such income or receipts).

Condition C: As part of or in connection with the PIP arrangements the IP Appellants obtained an amount of money or money’s worth which is not otherwise taxed as income for themselves or another person.

These provisions are anti-avoidance measures designed to prevent individuals avoid income tax by selling their earning potential in exchange for capital payments. We deal first with each of the requirements of Condition A, B and C before turning to the IP Appellants’ challenge to the finding that one of the main objects of the arrangements was the avoidance or reduction of liability to income tax.

(a) Condition A

The word “profession” is an ordinary English word and the meaning of an ordinary word is not a question of law (unless it is used in a special or unusual sense). In Brutus v Cozens [1973] AC 854 Lord Reid stated as follows at 861D-E:

The FTT referred to a number of authorities and directed itself both that the question whether the taxpayer was carrying on activities of a kind undertaken in a profession or vocation was a question of fact and that it was not appropriate to define a profession or vocation or to fix the boundaries of a profession or vocation. There is no suggestion that the FTT misdirected itself in this way and, in our judgment, it was entitled to find that Condition A was satisfied on the basis that a reasonable person would have understood the term “profession” to include the activities of the IP Appellants: see [454].

(b) Condition B

Mr Gammie submitted that Condition B did not apply to the IP Appellants because the Partnership’s profits were derived from the collective efforts of the partners in general and it was impossible to identify those profits which were derived exclusively from the earning capacity of each one of them. In his Skeleton Argument he developed this argument at length but the substance is reflected in the following paragraphs:

We have no hesitation in rejecting this argument. The FTT accepted the evidence of Mr Dodd that the PIP replaced the profit allocations which were made to individual partners to reward their performance: see [260] to [264]. The FTT also accepted Ms Kerridge’s evidence in the timeline at [301] which described the provisional PIP Awards as “provisional total rewards” and confirmed that PIP Awards were made to discretionary traders on the basis of their performance (and, in particular, their P&L statements). Finally, Mr Baldry took us to the underlying documents which confirmed that PIP Awards were made on the basis of individual rather than collective performance. We therefore accept that the PIP was designed to put the Corporate Partner in a position to enjoy all or part of the income or receipts derived from each IP Appellant’s activities or anything derived directly or indirectly from those income or receipts.

Furthermore, we see nothing in the wording of the legislation to preclude its application because the activities of the IP Appellants were carried on in partnership with each other (and with others). Section 782 of ITA 2007 provides that all partners in a partnership may be regarded as a person or persons distinct from the individuals or other persons who are for the time being partners. The legislation was drafted very widely and was intended to extend to any arrangements made to exploit an individual’s earning capacity where the main object (or one of the main objects) was to avoid or reduce liability to income tax. For example, if the other person referred to in Condition B is another partner or partners in the partnership, there is no reason in our judgment why collective earnings from a partnership would not be caught by the section.

(c) Condition C

Section 777(7) provides that “capital amount” means an amount in money or money's worth which does not fall to be included in a calculation of income for income tax purposes apart from under Chapter 4. Given the expansive nature of the definition it is unnecessary to decide whether the relevant payment or payments were of an income or capital nature. Because of the way in which “capital amount” is defined, Mr Baldry also recognised that Chapter 4 was a “long stop” which was only available where all other potential options to tax the sums concerned had been exhausted.

Mr Gammie submitted that Condition C was not satisfied because the Corporate Partner’s profit allocation was included in the Partnership’s calculation of income for the purposes of the income tax legislation and did not represent a capital amount for these purposes. We reject that argument for the reasons which we have given in relation to the Miscellaneous Income Issue. The PIP Awards made to the IP Appellants were not included in the Corporate Partner’s profit allocation or calculation of income for income tax purposes because the source of the income was not the underlying trade of the Partnership but the discretionary awards made by the Corporate Partner.

(d) Main object

The IP Appellants do not challenge the findings of fact upon which the FTT based its conclusion that one of the main objects of the PIP was to avoid liability to income tax: see [344] to [350]. Mr Gammie submitted, however, that this conclusion was wrong in law because the FTT failed to consider whether or not avoidance of tax was a main object of the arrangement or whether it was one of the means by which the Partnership achieved its commercial object. He also submitted that having reached the conclusion that the PIP had a commercial object, the FTT ought to have gone on to consider this question and if it had done so, it would have reached the conclusion that the PIP was no more than a means by which the Partnership achieved its commercial object.

Mr Gammie relied on IRC v Brebner [1967] 2 AC 18 in which the House of Lords upheld the decision of the Special Commissioners that the anti-avoidance provision contained in section 28 of the Finance 1960 did not apply because the subject transactions had been carried out for bona fide commercial reasons and did not have tax as their main (or one of their main) objects. The House of Lords held that this was a question of pure fact. But Lord Upjohn who gave the majority speech also made the following observations at 30D to G:

In our view there was ample evidence before the FTT that the avoidance or reduction of tax was a main object of the PIP and not just a means by which the Partnership achieved its commercial objective or a consequence of putting that objective into effect or simply a by-product of the PIP (which became apparent after the PIP had been put in place). We say this for the following reasons:

Section 773(2)(b) contemplates that the relevant transactions or arrangements may have more than one main object. There was ample evidence from which the FTT could conclude that tax avoidance was one of the main objects of the plan proposed by EY: see [269] to [272]. It placed particular reliance on the statement by EY that the proposed scheme was “a bespoke piece of planning”: see [437].

The FTT recorded Mr Dodd’s evidence that the tax saving which the implementation of the PIP would achieve would help the Partnership in selling the proposal to the partners: see [273]. It also recorded his evidence that that one could reasonably conclude that sheltering income from tax was a benefit of the scheme: see [348]. Finally, it recorded that new partners wrote to Mr Dodd describing the PIP as “the tax scheme used for bonuses”: see [350].

The FTT also recorded the evidence of Mr Platt that he did not “deny that getting a tax saving” was a “good thing” and that the Partnership was happy to get a tax benefit and the evidence of Mr Dannatt that it was good for the Partnership that there was the potential for a lower tax level: see [344] and [349].

The FTT had all of this evidence well in mind when it reached the conclusion that the avoidance or reduction of income tax was a main object of the PIP: see [437]. Moreover, it is clear that the FTT understood the distinction between purpose and effect because it found that the retention and incentivisation of staff was achieved as a result of the avoidance or reduction of tax which it was the aim of the PIP to achieve (and that this was not merely incidental): see [438]. In our judgment, the FTT made a clear finding of fact that the avoidance or reduction of tax was not just the means by which the Partnership implemented its commercial object or the effect of it or an incidental benefit but a main object in itself. Brebner is clear authority for the proposition that this was a question of pure fact for the FTT and for the reasons which we have stated that there was ample evidence upon which it was entitled to make that finding of fact.

(3) Conclusion

We therefore determine the Miscellaneous Income Issue and the Sale of Occupational Income Issue in favour of HMRC and we dismiss the IP Appeals.

IV. The Procedural Applications

N. Procedural Chronology

(1) The Closure Notices

After the introduction of the PIP and the making of PIP Awards to individual partners HMRC opened enquiries against the Partnership for the tax years ended 5 April 2009 to 5 April 2014. On 25 May 2017 and following a direction by the FTT, HMRC sent closure notices to the Partnership in respect of these enquiries in which they determined that the Partnership’s tax returns needed to be amended. On 16 June 2017 BCM LP, BCM LLP and BCM UK LLP wrote to HMRC to appeal against HMRC’s determination on the Profit-Sharing Issue. Closure notices for the year ended 5 April 2015 were also issued to BCM LLP and BCM UK LLP on 1 March 2018 and 25 January 2019 respectively. On 16 June 2017 the Partnership wrote to HMRC to appeal against their determination on the Profit-Sharing Issue and on 3 July 2017 the Partnership transmitted its appeals to the FTT.

By letter dated 25 May 2017 HMRC wrote to Ms Kerridge (as the nominated partner of the Partnership) setting out their supplementary analysis of the tax position. In that letter they raised the Miscellaneous Income Issue and the Sale of Occupation Issue as alternative arguments for the first time. By letter dated 27 February 2018 Slaughter and May, who were now acting for the Partnership, wrote to HMRC proposing as follows:

By letter dated 3 May 2018 HMRC replied stating that if the liability of the individual partners was going to be tested, it was necessary to have individual partners from a cross-section of roles and functions. By letter dated 31 May 2018 HMRC wrote to Slaughter and May again agreeing that it would be useful to have a sample of individual partner appeals considered at the same time as the PIP Appeals and that they intended to close enquiries of four additional partners whom they considered would constitute a representative sample. Those partners were Ms Braga, Mr Dannatt, Mr Platt and Mr Ward.

On 28, 30 and 31 August 2018 HMRC issued closure notices to the six representative partners in respect of tax years ranging from the year ended 5 April 2009 to the year ended 5 April 2015 (although Mr Benamer later agreed with HMRC to stay his appeal for personal reasons) and we will refer to them as the “Closure Notices”. They reflected HMRC’s case that the IP Appellants were liable to income tax in respect of their PIP Awards either as miscellaneous income under section 687 of ITTOIA 2005 or under section 776 of ITA 2007. For example, in the Closure Notice issued to Mr Dodd for the year ended 5 April 2011 HMRC contended that he had received the final PIP Awards as a reward for services to the Partnership, that the source was the Corporate Partner and that the awards were taxable as miscellaneous income. It was also clear from that statement that HMRC’s view was that this income came from a UK source.

(2) The IP Appeals

By letters dated 27 September 2018 the IP Appellants notified HMRC of their appeals against the Closure Notices in accordance with section 31A of the Taxes Management Act 1970 (the “TMA 1970”). This section requires that notice of an appeal against a Closure Notice must be given to HMRC rather than to the FTT. The notices of appeal asserted that HMRC’s position that the final PIP Awards were income not capital was incorrect. They also stated that even if HMRC was found to be correct, the taxpayers disagreed with the quantum of Special Capital assessed as income. The representative partners also disputed HMRC’s analysis of the Sale of Occupational Income Issue. The notices reserved the right of the representative partners to raise additional or alternative grounds if the appeals were referred to the FTT. But the notices of appeal contained no challenge to HMRC’s conclusion that the source of income was a UK source.

On 29 October the IP Appellants transmitted their appeals to the FTT in accordance with section 49D of the TMA 1970. They also filed Grounds of Appeal in accordance with Rule 20 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the “FTT Rules”). Those Grounds of Appeal contained the following statement:

On 8 February 2019 HMRC filed their Statement of Case. They set out the reasons why they considered the PIP Awards were income in the hands of the IP Appellants within the meaning of section 687 of ITTOIA 2005. They also pleaded that the PIP Awards were made to the IP Appellants by the Corporate Partners as a reward for their services to the Partnership and had the character of income. HMRC took issue with the Grounds of Appeal because they were “briefly stated notwithstanding that the burden is upon the Appellants to show that they have been overcharged to tax by the assessments.” They also took issue with the reservation on the basis that the IP Appellants could not unilaterally reserve the right to amend their case. Finally, they stated:

In their Reply the IP Appellants maintained their position that the source of the sums which HMRC were seeking to tax were the profits of the Partnership and that there could be no further charge to tax on the individual members of the Partnership by reference to their services. The parties agreed a statement of agreed facts and the issues to be determined. This statement recorded that the ultimate issue for the FTT was whether to set aside the amendments to the IP Appellants’ tax returns which HMRC had made in the Closure Notices. But there was no suggestion that the FTT would be asked to determine other issues relating to individual partners depending on the outcome of the IP Appeals and the IP Appellants did not apply for directions for any preliminary issues.

The transcript of the first day of the hearing of the IP Appeals records that Mr Gammie told the FTT that consequential issues relating to the source and residence of the IP Appellants would need to be addressed if it were to decide the Miscellaneous Income Issue on the basis that the IP Appellants were chargeable to income tax. The transcript does not contain any suggestion that Mr Baldry objected to this statement and the FTT made no mention of it in the Decision.

(3) The Decision

On 9 June 2020 the FTT circulated the Decision in draft. The draft recorded that the IP Appeals were dismissed. On 1 July 2020 the IP Appellants made an application for certain information to be redacted from the final version of the Decision. The application stated:

By email dated 6 July 2020 HMRC wrote to Slaughter and May asking for clarification of this statement and, in particular, whether they challenged the figures in the Closure Notices and, if so on what basis. By email dated 7 July 2020 Slaughter and May replied stating as follows:

On 8 July 2020 counsel for HMRC filed objections to the IP Appellants application for redaction expressing the view that the figures were final and that the FTT had indicated that it would dismiss the IP Appeals. He continued as follows:

By email dated 15 July 2020 Slaughter and May responded to these objections. They stated that HMRC were “opportunistically seeking to resile from their earlier assurance that they were merely seeking a decision in principle in the appeal, with the specific amounts of tax due to be calculated by the parties following the Tribunal’s decision”. They referred to HMRC’s Statement of Case and argued that it was improper and inconsistent to seek to resile from this assurance once the appeals had been heard and the FTT was on the point of issuing the Decision. They therefore asked that the FTT proceed on the basis envisaged at the hearing and requested by HMRC, namely, by issuing the Decision in principle.

On 17 July 2020 the FTT issued the Decision in final form. The FTT determined the redaction application but it did not deal in terms with the question whether it was an in principle decision or final. Nevertheless, it is clear that that the Decision was intended to be final and to resolve all of the issues on the IP Appeals. The formal sections setting out the summary of conclusions (which remained unchanged from the draft) and the right to apply for permission to appeal provided as follows:

(4) Permission to Appeal

On 10 August 2020 the IP Appellants applied to the FTT for permission to appeal against the Decision to the Upper Tribunal. Paragraph 8 of the application stated as follows:

It will be noted that the IP Appellants did not apply in the alternative for permission to appeal against the FTT’s determination that the Decision was a final decision rather than a decision in principle. Nor did they seek to raise any new grounds of appeal based on the individual circumstances of the IP Appellants. On 14 August 2020 Mr Baldry and Mr Chacko filed a note dealing with the scope of the Decision stating as follows:

The FTT did not revise the Decision itself. By a further decision dated 17 August 2020 the FTT granted permission to appeal on the grounds which have been argued before us in the IP Appeals. However, it made no mention of the dispute between the parties over the status of the Decision. On 17 September 2020 the IP Appellants each filed a Notice of Appeal. They were accompanied by Grounds of Appeal in which they identified a number of following consequential points which would arise if this Tribunal concluded (as it has done) that the PIP Awards of Special Capital are taxable as miscellaneous income or under the sale of occupational income provisions. The IP Appellants contended that these issues arise for the following reasons:

In paragraphs 71 to 77 the IP Appellants set out their case that, apart from Mr Dannatt, they had all been foreign-resident from 6 April 2010 or, in the case of Mr Dodd, since 20 April and that their PIP Awards of Special Capital were income from a foreign source. They also advanced the case that the tax treaty between the UK and Switzerland prevented the UK from imposing income tax on their PIP Awards because miscellaneous income ordinarily falls to be dealt with under the “Other Income” Article of the treaty (which conferred taxing rights only on the state of residence). In paragraph 78 the IP Appellants acknowledged that the foreign source issue might require further evidence and it would be for this Tribunal to decide whether to admit that evidence or remit the appeals to the FTT to decide the issue in the light of our conclusion on the issues of principle.

(5) The Procedural Applications

On 16 October 2020 HMRC applied to strike out paragraphs 70 to 77 of the Grounds of Appeal (which we have called the Disputed Paragraphs) because the arguments set out in those paragraphs did not form part of the grounds of their appeal against the Closure Notices before the FTT and were not agreed issues for decision. It was their case that permission to appeal was necessary and that the IP Appellants were required to surmount the high threshold for raising new matters on appeal and that the Upper Tribunal should strike out the Disputed Paragraphs or direct that the IP Appellants could not rely on them without permission.

On 3 November 2020 the IP Appellants filed submissions in answer to the Strike-Out Application arguing that this Tribunal had jurisdiction to deal with them and that they should not be struck out. The basis for this argument was that the IP Appellants were chosen as a representative sample of the individual partners, the Decision was a decision in principle and that the issues raised in the Disputed Paragraphs were consequential issues which arose out of the Decision. But in the alternative they applied for permission to appeal.

On 27 April 2022 the Upper Tribunal (Judge Scott) gave directions for the Procedural Applications to be listed before the Tribunal hearing the substantive PIP and IP Appeals and to determine them (if necessary). The Tribunal also gave detailed procedural directions for disclosure, evidence and Skeleton Arguments. We heard the Procedural Applications immediately after the PIP and IP Appeals and given our decision to dismiss the IP Appeals, it is necessary for us to determine the Procedural Applications.

O. The Strike-Out Application

(1) Jurisdiction

The Upper Tribunal’s appellate jurisdiction is a statutory one. Section 11 of the Tribunals, Courts and Enforcement Act 2007 (the “TCEA”) is headed “Right to appeal to Upper Tribunal” and the relevant parts of the section provide as follows:

Section 11 only confers a right to appeal on a point of law with permission of the FTT or the Upper Tribunal itself. We take the view that the Tribunal has jurisdiction to consider and decide the two additional issues raised in the Disputed Paragraphs if we take the view that they fall within the scope of the permission to appeal granted by the FTT either expressly or because they were a necessary consequence of the Decision and the FTT has in substance given permission to appeal.

Rule 21(2) of the Tribunal Procedure (Upper Tribunal) Rules 2008 (the “Tribunal Procedure Rules”) provides that a person may apply for permission to appeal to the Upper Tribunal only if they have made an application to the FTT (which has been refused). In Whittalls Wines Ltd v HMRC [2019] UKUT 260 the Upper Tribunal held that Rule 21(2) permits a party to apply to amend the Grounds of Appeal to add new grounds even though no application had been made to the FTT and refused. Judge Thomas Scott stated this at [12]:

With respect, we agree. We consider that, as a matter of procedure, we have jurisdiction to grant permission to appeal in relation to the Disputed Paragraphs even if we were to take the view that FTT was not asked to decide and did not consider whether to grant permission on those issues. It makes no sense to require an appellant to apply for permission to amend to the FTT if there is an outstanding appeal to the Upper Tribunal.

Where the appellant wishes to raise a new challenge to the findings which the FTT has already made or a pure point of law, we consider that we have jurisdiction to permit an appellant to apply for permission to amend the Grounds of Appeal and to argue the point on appeal even though it was never taken before the FTT. Whether the Upper Tribunal will grant permission will depend on the kind of considerations set out by Snowden J (as he then was) in Notting Hill Finance Ltd v Sheikh [2019] EWCA Civ 1337 at [26] to [28] (which was cited by the Upper Tribunal in Whittalls at [22]):

The position is more problematic, however, where an appellant seeks permission to amend the Grounds of Appeal to raise new issues of fact and law which were not determined by the FTT and which are not consequential upon the FTT being found to have made an error of law. Section 12 of TCEA is headed “Proceedings on appeal to Upper Tribunal” and it sets out the powers of the Upper Tribunal to make findings of fact:

Section 12(4) only permits the Upper Tribunal to make any decision which the FTT could have made if it is satisfied that the FTT has made an error of law and it has decided to re-make the decision. The TCEA contains no corresponding power to make findings of fact and to act, as it were, as a tribunal of first instance where the Upper Tribunal has not found that the FTT made an error of law. However, we have decided that the FTT made no error of law and we have dismissed the IP Appeals. Mr Gammie did not refer us to any statutory provision or authority which suggests that we have the power to decide new issues and find facts in those circumstances and we do not consider that the jurisdiction of the Upper Tribunal extends that far. Section 11(1) confers a statutory right of appeal from the FTT on a point of law and section 12(4) gives the Upper Tribunal power to make findings of fact in re-making the decision but not otherwise.

(2) Is permission required?

Accordingly, Mr Gammie has to satisfy us that the FTT reserved the Disputed Paragraphs for further consideration and that they fall within the ambit of the IP Appeals. There is nothing on the face of the Decision to suggest that the FTT reserved them for further consideration. But Mr Gammie submitted that we should interpret the Decision in that way for the following reasons:

Tax appeals are entirely different to civil litigation. A direct tax appeal is commenced by an appeal to HMRC under section 31A of the TMA 1970 and the scope of such an appeal is determined by the grounds which were originally advanced to HMRC under that section. In the present case, those grounds were expressed in very wide terms. In particular, the notices of appeal stated that even if the position put forward by HMRC was found to be correct, the taxpayer disagreed with the quantum of Special Capital assessed as income.

The authorities on the TMA 1970 establish that the grounds addressed to HMRC can be expressed in very wide terms (as they were in the present case) and that the Disputed Paragraphs fell within the scope of the appeal to HMRC because they fell within the notification that HMRC’s figures were disputed (even if they were right as a matter of principle).

Although section 50(10) of the TMA 1970 provides that when an appeal is notified to the FTT, the decision of the FTT on the appeal is final and conclusive, that provision is not yet applicable to the IP Appeals because there has been no final computation of the amount for which the individual IP Appellants are liable.

The issues identified in the Disputed Paragraphs are legal issues which arise out of the Decision and are consequential upon the findings of the FTT (and our dismissal of the IP Appeals). They are not new grounds of appeal but additional reasons why the IP Appellants are not liable to tax. The Upper Tribunal can deal with them because it is seized of the Miscellaneous Income Issue generally.

We reject those submissions. In our judgment, the Decision was a final decision in which the FTT determined all relevant issues relating to the IP Appeals. We have reached this conclusion for the following reasons:

(1) Section 31(1)(b) of the TMA 1970 governed the notices of appeal against the Closure Notices. The effect of section 31A(1) and 31A(3) of the TMA 1970 is that a notice of appeal under section 31 against a closure notice must be given in writing to the relevant officer of HMRC within 30 days after the date on which the closure notice was issued. Section 31A provided as follows in relation to the notices of appeal:

(c) to the relevant officer of the Board.

(2) Section 54 makes provision for appeals to be settled by agreement and (as Mr Gammie told us) many appeals are settled in this way. However, where there is no settlement section 49D of the TMA 1970 provided for an appeal to the FTT:

(3) Section 50 provides for the consequences of the FTT deciding the matter in question and the relevant parts provide as follows:

(4) We accept (without deciding) that the position before the General Commissioners and the Special Commissioners might well have been different. However, in our judgment, the position changed fundamentally following the reform of the Tribunal structure. The FTT is a judicial body with exclusive jurisdiction to determine tax appeals. Once an appellant has notified an appeal to the FTT, HMRC no longer has jurisdiction to act as an appellate body (and, indeed, becomes a party to the appeal). Rule 20 of the FTT Rules governed the commencement of an appeal and the relevant parts of it provide as follows:

(5) In our judgment, the scope of the appeal to the FTT was governed exclusively by the Grounds of Appeal which the IP Appellants sent or delivered to the FTT. It is common ground that the IP Appellants did not identify either of the additional points in the Disputed Paragraphs. We accept that the IP Appellants attempted to reserve their position to add “such further grounds as the Appellants may identify in due course in response to HMRC’s case”. But in their Statement of Case HMRC gave fair warning that they did not accept that reservation and that the IP Appellants could not unilaterally reserve the right to amend their case.

(6) In our judgment, the burden was on the IP Appellants to identify any further grounds on which they intended to rely before the FTT and to make an application to amend their Grounds of Appeal. Moreover, although they attempted to reserve the right to amend the Grounds of Appeal, the IP Appellants never did so (despite HMRC’s challenge). Indeed, the reservation itself shows that the IP Appellants considered it necessary to apply to amend the Grounds of Appeal and tried to buy time to do so.

(7) Finally, it is clear from Rules 35(2) and (3) of the FTT Rules that the effect of the Decision was final and binding on the parties:

(8) As Mr Baldry pointed out and Rule 35(2) clearly contemplates, the IP Appellants could have asked the FTT to exercise its case management powers under Rule 5(3)(e) to deal with the Miscellaneous Income Issue and the Sale of Occupation Issue as preliminary issues. But they did not do so and in the absence of such an application, we consider that the Decision finally disposed of all the issues in the IP Appeals.

If the parties had reached a clear agreement that the Decision would not be final and that the FTT would decide the Miscellaneous Income Issue and the Sale of Occupational Income as a matter of principle only, it is possible that we might have reached the conclusion that HMRC were estopped from arguing the contrary and that the FTT made an error of law in failing to reserve the Disputed Paragraphs for further decision. However, the IP Appellants did not argue that the conduct of HMRC gave rise to an estoppel or that they had waived compliance with Rule 5(3)(e) of the Tribunal Procedure Rules or that they had made a binding election to proceed on the basis that the Decision was not final and dealt with matters of principle only.

Indeed, we are satisfied that there was no binding agreement that the IP Appeals would proceed on the assumption that the FTT would determine preliminary issues which were common to all of the partners by reference to a representative sample and we found nothing in the correspondence which ought to prevent HMRC from relying on the Decision as final before us now. We accept that HMRC’s Statement of Case referred to a “decision in principle”. But we also accept Mr Baldry’s submission that all that was meant by this was that the FTT would not be asked to deal with issues of calculation. Moreover, when HMRC served their Statement of Case the IP Appellants had already filed their Grounds of Appeal to the FTT and they made no reference to the issues raised in the Disputed Paragraphs. If they had wanted the FTT to decide those issues on a representative basis, they could and should have identified which issues of principle the FTT would be asked to decide and which left over for later determination and then sought to agree them with HMRC before asking the FTT to make a direction under Rule 5(3)(e).

Finally, we attach little or no weight to Mr Gammie’s statement on the first day of the hearing of the IP Appeals. It was no more than a passing reference to the additional issues which at that time had not formed any part of the proceedings before the FTT or had appeared on the agreed list of issues to be determined by the FTT. We do not consider that the fact that neither HMRC nor its Counsel responded to this point is of any significance. This was clearly not a point which was relevant to the issues which were before the FTT at that time and cannot be taken to be any kind of acceptance by HMRC that the FTT would determine those issues in due course.

P. The Permission Application

We consider that we have no jurisdiction to grant permission to the IP Appellants to amend the Grounds of Appeal in the IP Appeals to add the two additional issues in the Disputed Paragraphs. We have not found that the FTT made an error of law either in relation to the Miscellaneous Income Issue or in relation to the Sale of Occupational Income Issue and we have not found that the FTT made an error of law in reaching a Final Decision. In those circumstances we do not have the power to make findings of fact to decide the additional issues. For the same reasons, we do not have power to remit those issues to the FTT.

But even if we are wrong and there is jurisdiction either to hear and determine the grounds set out in the Disputed Paragraphs ourselves (or to remit them to the FTT), we do not consider that this is a case in which it is appropriate to exercise that discretion applying the principles set out by Snowden J in Notting Hill Finance Ltd v Sheikh (above). We have reached that conclusion for the following reasons:

(1) For the reasons which we have set out above, we do not consider that there was any agreement between the parties that the FTT would make a decision in principle and decide the Disputed Paragraphs. In our judgment, the IP Appellants could and should have applied for permission to amend their Grounds of Appeal (in the FTT) to raise any additional issues and, if necessary, applied to the FTT for a direction for preliminary issues under Rule 5(3)(e).

(2) HMRC will suffer prejudice if we permitted the IP Appellants to amend their Grounds of Appeal (before us) to plead the Disputed Paragraphs and either determine those issues or remit them to the FTT for further hearing. There is little doubt that it will be necessary for the parties to call further evidence of fact and it may also be necessary to call expert evidence. The further delay in time and costs may well be significant.

(3) There is a strong policy in favour of the finality of litigation. This is particularly so where in our view there is no good reason why the IP Appellants could not have raised the additional points at an early stage and in response to HMRC’s Statement of Case so that they were properly before the FTT.

Q. Relief

For these reasons we grant the Strike-Out Application and order that the Disputed Paragraphs be struck out. We also refuse the Permission Application and do not allow the IP Appellants permission to amend the Grounds of Appeal to rely on the Disputed Paragraphs. In the circumstances, it is unnecessary for us to consider HMRC’s alternative application for a direction in relation to those paragraphs.

V. Disposal

The PIP Appeals and the IP Appeals are dismissed. The Strike-Out Application is allowed, the Permission Application is refused, and the Disputed Paragraphs will be struck out of the Grounds of Appeal.

Signed on Original

MR JUSTICE LEECH

JUDGE TIMOTHY HERRINGTON

UPPER TRIBUNAL JUDGES

RELEASE DATE: 22 July 2022