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Fears for tiers: BCM Cayman LP

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Partnerships which have other partnerships as partners (‘tiered partnerships’) may sound like something that is unlikely to arise in everyday commercial life, but in some corners of the UK economy, most prominently its lucrative private fund management industry, the situation is fairly common. As a result it was concerning to hear the arguments of HMRC’s counsel in the Court of Appeal recently in relation to a tiered partnership structure where an upper tier partnership (‘UTP) joined a lower tier partnership (‘LTP’) by means of one of the partners of the UTP (‘nominated partner’) becoming a partner in the LTP expressly in its capacity as a partner of, and on behalf of, the partners of the UTP. HMRC argued that in such circumstances the nominated partner itself was solely liable for UK tax arising on all of the UTP’s share of profits of the LTP, not just the nominated partner’s share of those profits under the terms of the UTP’s profit sharing arrangements (BCM Cayman LP and another v HMRC [2023] EWCA Civ 1179 (‘BCM Cayman LP’)).

The actual decision in BCM Cayman LP rested on acceptance of a ‘realistic’ Ramsay interpretation of the facts, suggested by HMRC in the context of an arrangement which was disclosed under DOTAS, under which the particular nominated partner was seen to be entitled for tax purposes to all the relevant UTP share in LTP profit regardless of the fact that the purported UTP profit sharing arrangements differed. This largely limits the immediate precedent impact of the decision to the relevant fact pattern. Nevertheless, more fundamental alternative arguments made by HMRC in their enthusiasm to seek this result were not fully dealt with by the court even in obiter, leaving practitioners with concerns about HMRC’s approach to multi-tiered partnership structures. How worried should we be that HMRC appeared happy to make an argument denying that the profits chargeable on the nominated partner should be limited to its own share of the UTP’s share of LTP profits only, under CTA 2009 s 6(1)?

It is clearly unfortunate that HMRC have made these arguments in public without them then being addressed by the court. The approach argued is not in the author’s experience that typically followed in relation to multi-tiered partnership structures, and it is notable that if the arguments are valid they also to some extent call into question the relevant charging provisions’ coherence with the administrative rules on partnership tax returns introduced relatively recently by FA 2018 at TMA 1970 s 12AA(1B) and (1C).  (These are based on an apparent assumption that all partners in an UTP are relevant to the taxation of profits of a LTP by being so-called ‘indirect partners’.)

In my view, it’s difficult to see how the attribution to a nominated partner of all profit allocated to an UTP can be compatible with the requirements of CTA 2009 s 1262, at least where those arrangements don’t also have that effect. Section 1262 requires UTP partners’ shares in UTP profit to be determined by the UTP’s profit sharing arrangements. It seems to me convincing that, after the allocation of LTP profit to a nominated partner, s 1262 must apply to allocate that profit (which is now UTP profit) between the UTP partners according to the UTP profit sharing arrangements.

There is a presumption in the interpretation of statue, forming part of a wider presumption that Parliament intends to act reasonably, against the same income being taxed twice (see, for example, the judicial commentary in R (on the application of Edison First Power Ltd) v Central Valuation Officer and another [2003] UKHL 20). In that context, whether or not s 6(1) limits the extent of LTP profit taxable on the nominated partner, the application of s 1262 allocates some of that profit to other UTP partners under the UTP profit sharing arrangements. Parliament can surely not have intended the same profit to be taxed twice, so s 1262 must surely be seen as overriding any allocation by the LTP solely to the nominated partner, to give a reasonable outcome. The comments of the court in BCM Cayman LP tolerating the possibility of effective multiple tax charges on LTP profits must be seen in the context of the Ramsay finding in that case restoring to the nominated partner LTP profit apparently allocated elsewhere through the UTP.

Reliance on s 1262 at the UTP level in this way can avoid an absurd outcome, and also avoids the need to potentially directly confront the position taken by HMRC on s 6(1) in BCM Cayman LP, offering a practical way forward. The alternative may be... a very, very mad world.