Weekly Tax Update 3 March 2021

Losses of approximately £36m have been disallowed after the FTT found that a partnership was not trading. The partnership was held to have been established to generate tax losses for its investors.

The partnership was established, ostensibly, to build a hotel and apartment complex in Montenegro. The arrangements were, however, found to be entirely uncommercial and artificial. The FTT held that the partnership could only have entered into the agreements that it did for the purpose of generating tax losses for its partners. In addition, the contract agreements were accelerated to ensure that the losses would be available for the 2008/09 tax year and not delayed until the following year. The partners also undertook contrived ‘make-work’: artificial activities intended to avoid limits on tax relief for partners who did not spend at least ten hours per week working in the business. Even if the partnership had been trading, the FTT made several other findings that would also have denied the loss relief.

www.bailii.org/uk/cases/UKFTT/TC/2021/TC08005.html

In an LLP with complex remuneration arrangements, amounts received by the members under a deferred payment scheme were found to be miscellaneous income, not partnership profits.

A group of employees were entitled to deferred remuneration. An organisational restructuring resulted in some of them becoming members of a new LLP, though they were seconded to the company that they had been working for as employees, and continued to undertake the same work for it. The LLP was entitled to a share of the business profits, including the amount earmarked as deferred remuneration. Under the remuneration arrangements, the deferred remuneration was paid to a corporate member of the LLP, which invested the amount and contributed it back to the LLP as special capital in tranches at later dates. The individual members could then withdraw the amounts on demand, if they had not left on bad terms.

HMRC assessed the partners to tax on the grounds that the amounts were part of their profit shares. The FTT found that this was not so, as the individual members had no rights to the amounts allocated to the corporate member, merely a right to be considered for future distribution. The FTT found that the amounts were instead miscellaneous income, dismissing the members’ contention that the income lacked a source, so did not fall strictly within the wording of the miscellaneous income provision. The reallocation to the members under the arrangements by the LLP was not entirely voluntary, so a source existed.

www.bailii.org/uk/cases/UKFTT/TC/2021/TC08023.html

In an investment management LLP, amounts received by the members under a deferred payment scheme were found to be miscellaneous income, not partnership profits. The deferral scheme had routed the amounts through a corporate member of the LLP, and as the individual members had no strict entitlement to the amounts this was not part of the ‘profit-sharing arrangements’.

Each year, the LLP retained part of the profit shares that would otherwise have been due to its members, and paid them out to those members in later years if set conditions were met. These withheld amounts were paid to a corporate member of the LLP. It had discretion to contribute the amounts back to the LLP as special capital, to then be invested in the fund managed by each member due to receive deferred remuneration. The members could withdraw the amounts from the fund later if they met the conditions.

The FTT found for the taxpayer that the members were not subject to income tax on the amounts that they would have received if not for the deferral arrangement in the year they arose, as the members were not entitled to receive those amounts. They were instead taxable as miscellaneous income at the point when the members withdrew the special capital.

www.bailii.org/uk/cases/UKFTT/TC/2021/TC08018.html