No change in the Muller LLP tax case following the CoA decision

In this case, the LLP had acquired intangible assets directly from its corporate members in 2013. Over the next five years the amortisation of those intangibles had been deducted in calculating the profits of the notional company. This was on the basis that the related party provisions within the intangibles regime were considered by the taxpayer not to apply as, under the literal reading of the deeming provisions, there was no requirement to apply the LLP’s ownership and control attributes to the notional company. It was common ground that if the LLP had actually been a company, then relief would have been denied because the intangibles had been acquired from related parties.

Key legal principles

The main consideration of the decision was one of statutory interpretation and determining the “true scope of the deeming provision” imposed for the purposes of calculating the LLP’s profits in this case. Whilst it is true that the deeming provisions do not contain an explicit requirement to apply the LLP’s ownership or control attributes to the notional company, it was the judges’ opinion that there was “no principled basis for construing the scope of the deeming provisions so narrowly” as the literal reading put forward by the taxpayer would imply. They reiterated the Upper Tribunals’ position that “the extent of the deeming will be commensurate to the statutory purpose”, the purpose being the calculation of the profits via the application of the intangibles rule which required knowledge of the LLP’s ownership and control attributes to determine if the related party provisions were met or not.

The decision also upheld the previous sub-issues that:

• The application of amendments made in FA 2016 which extended the definition of related parties should apply for subsequent periods; and
• A drafting error in the intangibles regime bringing in the deeming provision for LLPs could be corrected based on the principles of Inco Europe Ltd and Others v. First Choice Distribution (A Firm) and Others [2000] UKHL 15; [2000] 1 WLR 586.

Whilst this case primarily concerns the calculation of the profits of LLPs with corporate members, the implications mean that there is likely to be broader interest for groups involving LLPs and limited companies.

Private equity houses are increasingly investing into the professional services sector, with LLPs typically being the key trading entity. Where the post-transaction intention is to, for instance, integrate the newly acquired business into an existing corporate group or for the business to be conducted through a limited company, this may involve the transfer of certain intangible assets, including valuable client contracts.

The transfer of ‘new’ intangibles (post 1 April 2002) between related parties may result in a corporation tax charge based on the market value of the assets. As briefly touched on within Muller, where such a transfer is between an LLP and a company, the provisions for a tax-neutral transfer may not be met. For both a group reorganisation and a M&A transaction, this may result in unexpected costs. Within the context of a deal, both buy and sell-side parties must consider how to manage this, even where the terms are at arm’s length.

Our professional services, shareholder advisory, deals and intangibles tax specialists can help with all aspects of group reorganisation and transactions. For further information please speak to the authors or your usual KPMG in the UK contact.

For further information please contact:

• Katie Illman
• Paul Harden