26 July 2024
Court of Appeal dismisses appeal on treatment of partnership deferred incentive plan
The Court of Appeal has dismissed the appeals and cross-appeals of HMRC and the taxpayers in the partnership remuneration case HMRC v HFFX LLP. The judgment concerns the income tax treatment of a deferred remuneration plan put in place by the LLP in 2010 under which, following a restructuring, certain amounts that a team of individuals would previously have received from the LLP out of its profits, were instead allocated each year to a corporate member of the LLP. Over the subsequent three years, the corporate member contributed special capital (net of corporation tax suffered) into the LLP that the corporate member then decided to reallocate to individual members. The Upper Tribunal (UT) decided in 2023, in favour of the taxpayers, that the LLP’s initial allocations to the corporate partner should not be considered immediately taxable allocations of profits to the individuals under the partnership profit allocation rules in section 850 ITTOIA 2005. The UT however agreed with HMRC’s alternative argument that the individuals should be subject to income tax in subsequent years when the reallocations took place.
The Court of Appeal could not materially distinguish the case from its December 2023 judgment in BlueCrest Capital Management LP and others (BlueCrest CA) which concerned a similar partnership plan. On the application of section 850, HMRC accepted that BlueCrest CA was determinative of the matter, but reserved the right to apply for permission to appeal to the Supreme Court. On the income tax treatment of the subsequent reallocations, after applying BlueCrest CA and considering the nature of the discretion exercised under the plan, the Court of Appeal agreed that the individuals had received amounts within the scope of income tax under the ‘miscellaneous income’ rule in section 687 ITTOIA 2005. The Court declined to opine on whether the separate ‘sales of occupation income’ rules could have also applied.
CCLA Investment Management: VAT exemption for management of SIFs – First-tier Tribunal
Under the EU Principal VAT Directive (PVD), the management of Special Investment Funds (SIFs) is VAT exempt. In CCLA Investment Management Limited v HMRC, the First-tier Tribunal (FTT) has considered whether the exemption applied to fund management services provided by CCLA Investment Management Limited to charitable, Church of England, and local authority investment funds. (The periods in question pre-dated the end of the Brexit implementation period on 31 December 2020, and accordingly the PVD applied.) Investment funds that are constituted as ‘Undertakings for Collective Investment in Transferable Securities’ (UCITS) qualify as SIFs. A fund that is not a UCITS may benefit from the SIF exemption if it is equivalent to a UCITS, or sufficiently comparable so as to be in competition with a UCITS. In this respect, the EU VAT Committee (Working Paper 936) considered that funds are sufficiently comparable if, inter alia, they are subject to “specific state supervision”, and are subject to the same conditions of competition and appeal to the same investors who would invest in a UCITS.
The FTT has held that state supervision could be indirect, so being supervised via the fund manager was sufficient, but the supervision must be financial in nature; in the UK this would require regulation by the Financial Conduct Authority (FCA). Whether funds were subject to the same conditions of competition and appeal to the same investors must be determined on a case-by-case basis. The FTT considered each of the funds, and held that in some cases, although not all, there was the requisite state supervision and the funds were subject to the same conditions of competition and appealed to the same investors who would use UCITS. Accordingly, the VAT exemption would apply to some of the management services under consideration. The FTT noted that the decision did not cover the input tax position, so the quantum of the refund to which CCLA would be entitled remained to be determined. (Contact: Nicole Faith)
Publication of permission to appeal refusal decisions by the Upper Tribunal
On 22 July 2024, the President of the Tax and Chancery Chamber of the Upper Tribunal (The Hon. Mrs Justice Bacon DBE) published an update to the Upper Tribunal’s guidance on the publication of permission decisions. In a change to current practice, where the Upper Tribunal has held an oral hearing on whether to grant permission for an appeal of a decision of the tax chamber of the First-tier Tribunal, and it decides to refuse permission on some or all of the grounds put forward, the Upper Tribunal will now publish its decision to refuse permission. This is intended to address a current imbalance arising from public authority bodies (usually HMRC) having knowledge of a wider body of the Tax and Chancery Chamber’s permission to appeal decisions compared to other parties.
EMEA Dbriefs webcast
The next EMEA Dbriefs tax webcast will be Mandatory payrolling all benefits in kind – the end of P11Ds on Tuesday 30 July 2024 at 12:00 BST/13:00 CEST. Hosted by Michael Nicolaides, our presenters will be examining HMRC’s January 2024 announcement that employers will be required to report and account for income tax and national insurance on all taxable benefits in kind through the payroll from April 2026. Our panel will discuss practical considerations for payrolling benefits and the changes that businesses may need to make to their systems to facilitate reporting through payroll in real-time.