The Upper Tribunal decision in Walewski v HMRC [2021] UKUT 133 (TCC) (reported in Tax Journal, 25 June 2021) is the first binding authority on the mixed partnership income tax provisions and despite limited grounds of appeal it repays careful reading.
The taxpayer appealed against the imposition of income tax under ITTOIA 2005 s 850C, which is the charging section under the rules introduced in 2014 and intended to prevent tax planning by a form of profit shifting which involves attributing partnership profit shares to corporate partners when they can be enjoyed by individual partners in a personal capacity.
The taxpayer was the sole director and employee of a company (‘W’). He and W were partners in two asset management LLPs. HMRC charged him to tax for 2014/15 on the basis that his profit share from the LLPs should be increased by reference to the profit shares allocated to W. The First-tier Tribunal (FTT) found for HMRC.
The taxpayer appealed to the Upper Tribunal (UT) on just two grounds. The first was that, on a proper analysis of s 850C, the power to reallocate profit share to the appellant could only arise in respect of a time period during which he and W were both partners in the underlying partnership. The UT disagreed, saying this ‘represents both a misunderstanding and misinterpretation of section 850C, is contrary to the clear language of the provision, not supported by any authority and inconsistent with the statutory scheme under section 850C.’
These are strong words but essentially the UT’s view can be summarised as hinging on the fact that s 850C applies for ‘a period of account’ and the UT’s judgment is that it is sufficient for the partners in question to have been a partner at any time during that period. As the UT put it, ‘there is no requirement that A be a partner for more than a moment of time within the relevant period of account.’
The UT added that its construction was ‘consistent with the scheme’ of s 850C. This is an interesting approach to statutory analysis by a court of record. It effectively applies an approach to construction (or at least a test of the construction already applied) that sits somewhere between classic purposive statutory analysis and a more nebulous ‘smell test’. This will be familiar to advisers seeking to determine levels of client risk. It is noteworthy (and potentially helpful in a wide variety of other cases) to see it adopted by the UT. The UT also appears to have been swayed by a concern that, if they were wrong, the anti-avoidance provisions could be navigated by ‘appropriately timing the entry and exit of partners’. While it is possible to see the basis of such a concern as well-founded, the development of any such principle more widely would lead almost immediately to confusion. It might be best to see this fundamentally as the UT’s firm approach to upholding the purpose of anti-avoidance provisions. If that is what is in evidence in this decision, then prudent advisers will continue to approach any arrangements intended to navigate such statutory provisions with caution. For the taxpayer in this case, and others similarly dealing with the first tax year during which new rules apply, the position may be more nuanced than the UT judgment allows.
The second ground of appeal was that the FTT had accepted as a matter of fact that the partner in question had divided his time working also for the corporate partner and therefore had erred in law in attributing all the partnership profits to the individual in his personal capacity rather than allowing for a reflective apportionment. The UT held there was no such error of law and that the FTT had merely found that the corporate partner was the individual’s alter ego.
The second ground is unlikely, in my view, to get very far on further appeal. The statutory construction of s 850C does not seem as clear cut as the UT found it to be on the first ground of appeal. I suspect it will not be the last we hear of these arguments, whether in this case or future litigation on the mixed partnership rules.
The Upper Tribunal decision in Walewski v HMRC [2021] UKUT 133 (TCC) (reported in Tax Journal, 25 June 2021) is the first binding authority on the mixed partnership income tax provisions and despite limited grounds of appeal it repays careful reading.
The taxpayer appealed against the imposition of income tax under ITTOIA 2005 s 850C, which is the charging section under the rules introduced in 2014 and intended to prevent tax planning by a form of profit shifting which involves attributing partnership profit shares to corporate partners when they can be enjoyed by individual partners in a personal capacity.
The taxpayer was the sole director and employee of a company (‘W’). He and W were partners in two asset management LLPs. HMRC charged him to tax for 2014/15 on the basis that his profit share from the LLPs should be increased by reference to the profit shares allocated to W. The First-tier Tribunal (FTT) found for HMRC.
The taxpayer appealed to the Upper Tribunal (UT) on just two grounds. The first was that, on a proper analysis of s 850C, the power to reallocate profit share to the appellant could only arise in respect of a time period during which he and W were both partners in the underlying partnership. The UT disagreed, saying this ‘represents both a misunderstanding and misinterpretation of section 850C, is contrary to the clear language of the provision, not supported by any authority and inconsistent with the statutory scheme under section 850C.’
These are strong words but essentially the UT’s view can be summarised as hinging on the fact that s 850C applies for ‘a period of account’ and the UT’s judgment is that it is sufficient for the partners in question to have been a partner at any time during that period. As the UT put it, ‘there is no requirement that A be a partner for more than a moment of time within the relevant period of account.’
The UT added that its construction was ‘consistent with the scheme’ of s 850C. This is an interesting approach to statutory analysis by a court of record. It effectively applies an approach to construction (or at least a test of the construction already applied) that sits somewhere between classic purposive statutory analysis and a more nebulous ‘smell test’. This will be familiar to advisers seeking to determine levels of client risk. It is noteworthy (and potentially helpful in a wide variety of other cases) to see it adopted by the UT. The UT also appears to have been swayed by a concern that, if they were wrong, the anti-avoidance provisions could be navigated by ‘appropriately timing the entry and exit of partners’. While it is possible to see the basis of such a concern as well-founded, the development of any such principle more widely would lead almost immediately to confusion. It might be best to see this fundamentally as the UT’s firm approach to upholding the purpose of anti-avoidance provisions. If that is what is in evidence in this decision, then prudent advisers will continue to approach any arrangements intended to navigate such statutory provisions with caution. For the taxpayer in this case, and others similarly dealing with the first tax year during which new rules apply, the position may be more nuanced than the UT judgment allows.
The second ground of appeal was that the FTT had accepted as a matter of fact that the partner in question had divided his time working also for the corporate partner and therefore had erred in law in attributing all the partnership profits to the individual in his personal capacity rather than allowing for a reflective apportionment. The UT held there was no such error of law and that the FTT had merely found that the corporate partner was the individual’s alter ego.
The second ground is unlikely, in my view, to get very far on further appeal. The statutory construction of s 850C does not seem as clear cut as the UT found it to be on the first ground of appeal. I suspect it will not be the last we hear of these arguments, whether in this case or future litigation on the mixed partnership rules.
