The Upper Tribunal (UT) considered three key issues in the BCG Partnership case:
HMRC were successful at the First-tier Tribunal (FTT) in establishing that the proceeds of the sale of ‘capital interests’ were taxable as miscellaneous income.
The UT held that the FTT was correct to have placed little weight on the terminology used. Relying on the Court of Appeal’s judgment in BlueCrest, the UT held that the correct approach is to “identify what rights are granted to the members that are being sold”. Having considered the wording of the relevant limited liability partnership agreements (LLPAs), it found that the MDPs did not own any ‘identifiable capital interest’ that is capable of being sold. Consequently, the payments received for sale of those interests were taxable as income and not capital.
The FTT had held that the incentive structure did not meet the criteria for the MMR to apply. The UT considered in detail the meaning of the words used in the legislation such as ‘deferred profit’, ‘included in profit share’ and ‘power to enjoy’.
On Condition X (in s850C(2) of ITTOIA 2005), the UT held that the ‘capital interests’ were deferred profits of the MDPs that had been included in BCG Ltd’s profit share and that the relevant tax amount was lower than it would have been as a result of this.
Disagreeing with the FTT’s reasoning, the UT determined that the requirement was whether it was ‘reasonable to assume’ that the MDP’s profit share was lower than it would have been, and there was no need to speculate on the outcome of a different approach.
A similar conclusion was reached on Condition Y (s850C(3)); the UT held that it was ‘reasonable to suppose’ that part of BCG Ltd’s profit share was attributable to the MDP’s power to enjoy.
Consequently, Conditions X and Y were met, such that profits were to be reallocated from the corporate member to the MDPs.
This was considered primarily in the context of the extended time limits in s36 TMA 1994. BCG argued that UK LLP had not been careless, having sought advice from reasonably qualified professionals. The UT held that the FTT, relying on oral evidence and contemporaneous documentation, was correct to have held that the UK LLP was careless when it decided that the payments received on the sale of the Capital Interests were capital in nature.
Relying on other well established case law such as Hicks and Mainpay, the UT further held that UK LLP, in taking advice about the arrangements, was acting “on its own behalf and on behalf of the MDPs” and its carelessness had brought about a loss of tax.
It is worth noting here that in proving causation, HMRC only had to make out a prima facie case that UK LLP had been careless, and this had caused a loss of tax. The evidential burden then shifts to BCG to show that it had taken reasonable care and/or any lack of care did not bring about a loss of tax.
The UT’s decision in this case follows other cases like BlueCrest and HFFX where the courts have looked beyond labels to consider the economic reality of arrangements in determining the tax treatment. It is to be expected that BCG will look to appeal, at least on the MMR Issue. HFFX (which considers the Capital Issue, albeit on different facts) was heard by the Supreme Court in June 2025 and the judgment is awaited. Firms should continue to monitor these cases and review their arrangements, in particular the application of the MMR to their circumstances.
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