Case report: No double tax on partnership profits paid to corporate members
In Investec Asset Finance plc & Anor v R & C Commrs  BTC 12, the Court of Appeal upheld the decision of the Upper Tribunal that the ‘no double taxation’ principle applied with regard to profits paid by the partnerships to their corporate members.
Investec Asset Finance plc and Investec Bank plc (the ‘Companies’), being financial dealers in the Investec group, became partners in a number of partnerships each of which carried on a leasing business. The Companies incurred costs (the ‘Disputed Expenditure’) in respect of the partnerships. The partnerships were profitable and most of those profits were paid over to the Companies.
A company is chargeable to corporation tax in respect of its own trade (here, the ‘solo financial trade’) and, where it is a member of a partnership, on the company’s share of the profit or loss of the partnership as if that share derived from a trade carried on by the company itself (the ‘114(2) trade’) (ICTA 1998, s. 114(2)).
Following an enquiry, HMRC issued closure notices amending the Companies’ corporation tax returns on the basis that the income received, and expenses incurred in respect of the partnerships were on capital account. In the covering letter to the closure notices, HMRC raised alternative arguments as to the possible tax consequences of the transactions.
The Companies appealed to the First-tier Tribunal (FTT) (Investec Asset Finance plc  TC 05111) and subsequently, appeals were made by the Companies and by HMRC to the Upper Tribunal (UT) (Revenue and Customs Commissioners v Investec Asset Finance plc; Investec Bank plc  BTC 510 (the ‘first decision’); Revenue and Customs Commissioners v Investec Asset Finance plc; Investec Bank plc  BTC 535 (the ‘second decision’)).
The issues considered by the FTT and the UT are set out below:
•Issue 1: Was the Disputed Expenditure revenue or capital? The FTT found in favour of the Companies that the Disputed Expenditure was revenue in nature. The FTT’s decision was upheld by the UT. This issue was not contested before the Court of Appeal.
•Issue 2: Was the Disputed Expenditure deducible in calculating trade profits? The FTT found in favour of the Companies that the Disputed Expenditure was wholly and exclusively incurred for the purposes of the solo financial trades. The UT allowed in part HMRC’s appeal against the decision of the FTT, finding that some of the capital contributions made to the partnerships were made for the purposes of the Companies’ 114(2) trades.
•Issue 3: Could HMRC put forward alternative adjustments to the figures with regard to the double taxation issue (issue 4)? The FTT found in favour of HMRC that it was able to consider an alternative conclusion and an alternative adjustment. The FTT’s decision was upheld by the UT.
•Issue 4: Does the ‘no double taxation principle’ apply in this instance? The FTT found in favour of the Companies that, when computing the profits of the solo financial trades for corporation tax purposes, the ‘no double taxation principle’ applied to leave out some or all of the money that the solo financial trades derived from the 114(2) trades. In its first decision, the UT, having broadly agreed with the analysis of the FTT, identified two problems which prevented them from dismissing HMRC’s appeal. In its second decision, the UT found against HMRC except with regard to one of the partnerships where the appeal was remitted to the FTT to make further findings of fact.
•Issues 5 and 6: Was there a restriction on the foreign tax credits available to the Companies? Issue 5 was similar to issue 3 in that HMRC sought to rely on an analysis which was different from that set out in the closure notices. With regard to issue 5, the FTT found that HMRC were not precluded from the analysis and with regard to issue 6, the FTT found that there was no limitation on the foreign tax credits. Neither HMRC nor the Companies appealed issues 5 or 6 to the UT.
It fell to the Court of Appeal to determine issues 2, 3 and 4.
With regard to issue 2, the Court of Appeal dismissed the Companies’ appeal against the decision of the Upper Tribunal, finding that the capital contributions in question were not incurred wholly and exclusively for the purposes of the solo financial trades. For the most part, the partnerships used the funds they received from the Companies in connection with the purchase of assets used in their leasing businesses. It followed that the capital contributions were made at least partly to benefit the businesses carried on by the partnerships.
The Court of Appeal dismissed the Companies’ appeal with regard to issue 3, finding that it was for the FTT “to decide whether the context of the closure notice and the surrounding circumstances demonstrate that the subject matter is broader than the particular conclusion and adjustments addressed in the closure notice”.
Neither of the parties were happy with the decision of the UT with regard to issue 4: for the companies, the UT had erred in law by widening the scope of the issue to cover additional matters not argued by HMRC before the FTT; and for HMRC, the UT should have remitted issue 4 to the FTT in relation to all of the partnerships. The situation was complicated by HMRC’s decision to ‘reformulate’ issue 4.
The Court of Appeal found in favour of the Companies: although the UT had been correct to comment on the lack of detail around how the statutory accounts had been drawn up, the proper response was to proceed on the basis of the case that had been presented to the FTT and the UT - not to remit the matter to the FTT.
In summary, the Court of Appeal dismissed the Companies’ appeals on issues 2 and 3, allowed the Companies’ appeal on issue 4 and dismissed HMRC’s appeal on issue 4.
This judgment, which is the latest instalment in a complicated and long-running case, raises a number of technical and procedural issues. The technical issues relate to the taxation of corporate members of partnerships and in particular, to the ‘no double taxation principle’. The procedural issues concern whether HMRC can advance an argument that was not set out in the closure notice.
Comment by Stephen Relf, Croner-i tax writer.
 EWCA Civ 579