Income tax

Appeal dismissed 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 of HMRC v HFFX LLP. 

The judgement concerns the income tax treatment of a deferred remuneration plan put in place by the limited liability partnership (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 s850, Income Tax (Trading and Other Income) Act (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 judgement in the case of BlueCrest Capital Management LP and others (BlueCrest CA), which concerned a similar partnership plan. On the application of s850, 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 s687, ITTOIA 2005. The Court declined to opine on whether the separate ‘sales of occupation income’ rules could have also applied.

HMRC v HFFX LLP [2024] EWCA Civ 813

From the Business Tax Briefing dated 26 July 2024, published by Deloitte

Property tax

Woodland not part of grounds

The First-tier Tribunal (FTT) has accepted a taxpayer’s appeal on mixed-use stamp duty land tax (SDLT) treatment, finding that woodland bought with a property was non-residential.

The taxpayer bought a large home set in 16.6 acres, of which 12 acres were woodland. After initially declaring a residential transaction for SDLT, she submitted a claim for a partial refund on the grounds that mixed-use treatment should apply as the woodland was non-residential property. It was contiguous with woodland not owned by her and all the woodland was used by the general public for walking. She put effort into their upkeep, but they were not fenced off in any way, access was open despite a ‘private’ sign. The garden was fenced off from the woods, as it had been when she bought the property, so there was no view of the woods from the house. The position was the same for her neighbours who owned other parts of the surrounding woodland, and they were all signed up to a scheme for landowners owning part of the wood. It is a requirement for purchasers of these properties to sign up to it.

HMRC argued that the woodland was part of the garden or grounds of the property. It had been sold with the property and enhanced its rural character.

The FTT found for the taxpayer. On the facts, and in the unusual arrangements set out in the landowners’ scheme, the woods did not have a function connected to the home. They did not provide privacy or security due to the public use.

Guerlain-Desai v HMRC [2024] UKFTT 515 (TC)

From Tax Update July 2024, published by Evelyn Partners LLP