Odey Asset Management LLP v HMRC

An important decision for the asset management industry from the FTT: Odey Asset Management LLP v HMRC [2021] UKFTT 31 (TC) (4 February 2021).

The decision concerns the tax treatment of a Partner Incentivisation Plan (PIP) under which awards of special capital were made to a corporate member (SPV).

The FTT held:

(1) Applying a purposive construction (under the Ramsay/UBS doctrine) and realistically construing the LLP members' rights under the LLP agreement, HMRC were wrong to seek to treat payments to the SPV as payments to the individual LLP members under ss 847-850 ITTOIA when they were allocated to the SPV.

In my view, this was the right decision. It is an essential part of any realistic factual analysis of contractual arrangements to ask what the real-world entitlements of a party are under the relevant contract. Where, as here, the tax provisions require that analysis before they can be applied, it would be wrong to ignore the relevant rules, as set out in the binding authorities on contractual interpretation, for the purposes of imposing a tax charge.

(2) When the SPV profit shares were later allocated to the individual members of the LLP, then a charge to income tax arose under "deliberately widely-drawn" s 687 ITTOA (the miscellaneous income sweep up) because

(a) the sums are the individuals' income and "analogous" to employment income; and

(b) the source of the payments is the individuals' work for the LLP because there was "sufficient connection".

The FTT reached this decision notwithstanding the fact that the individuals had no contractual right to the payments.

In my view, the "sufficient connection" as applied is - to say the least - controversial. The FTT relies, in part, on drawing parallels with trust cases, which might be said to be of a very different nature. This aspect of the decision is vulnerable to challenge and, if the taxpayer succeeds, HMRC would lose the case. But the FTT's comments on the width of s 687 ITTOIA serve as a reminder that the provision should never be overlooked when instituting remuneration arrangements, and Spritebeam does provide authority for the proposition that there is not always a need for contractual entitlement to taxable income.

(3) There was no application of the sales of occupational income provisions in ss 773-778 ITA, principally because the individual members had no entitlement to profits under the LLP agreement, so they had nothing of to divest themselves.

HMRC have started using these provisions more aggressively in recent times. Odey challenged their application for other reasons, too, but the FTT declined to give detailed judgment on them because it decided (rightly, in my view) very swiftly that they were of no application.

(4) One HMRC officer cannot "discover" for the purposes of a discovery assessment an insufficiency of tax for the same reason another officer has already discovered. Carrying out the process of assessment is not a discovery. Reasons can, and do, go "stale". And lack of good reason for a delay on HMRC's part, even a short delay, are relevant.

The rule set out by the Court of Appeal in Tooth holds firm. (It is, today, being considered by the Supreme Court on HMRC's appeal.) A litigation strategy point arises here too: procedural/discovery points should never be overlooked however involved and wide-ranging might be the substantive tax law questions.

(5) HMRC can open an enquiry into an LLP’s partnership tax return under the income tax self-assessment provisions in section 12AC TMA where the LLP is carrying on a business with a view to profit.

This was not strictly a new point as it was decided last year in HMRC v Inverclyde Property Renovation LLP [2020] UKUT 161 (TCC).

It is interesting to note also that the FTT held:

(1) Investment management was held to count as a profession/vocation in the modern world.

This seems inevitable. It may have an interesting impact on the question of whether investment managers are trading for other tax purposes.

(2) Good commercial reasons (accepted on the evidence) for a transaction did not mean that the occupational income provisions motive defence applies if the arrangements also had as a main purpose the reduction of tax liabilities.

This dual purpose analysis is certainly not surprising and is in line with the clear wording of the statute and the case law on motive defences. The relevant question will continue to be whether or not there was a tax purpose which was itself a main purpose, regardless of whether or not there were other main purposes. Sometimes the answer (e.g. Fisher in the Upper Tribunal) will be that the tax saving was not a main purpose because the commercial purpose was key and any tax saving was merely ancillary. This is a matter for evidence. The FTT did not, however, consider the distinction between tax mitigation and tax avoidance, or whether it is a relevant distinction in the context of the occupational income provisions. Given HMRC's assertion to the FTT here that the occupational income provisions are intended "to catch schemes", it might be thought that the point will need to be decided in a case where the result will turn on it.

The decision is almost certain to be appealed by both sides!