Tax

Assessment - Appeal - Revenue and Customs Commissioners re-assessing taxpayer

Revenue and Customs Commissioners v Lansdowne Partners Ltd Partnership: Court of Appeal, Civil Division (Sir Andrew Morritt, Lord Justices Moses and Patten): 20 December 2011

Lansdowne Partners International Ltd (LPIL) was an investment fund manager. The taxpayer Lansdowne Partners Limited Partnership (LPLP) was a subsidiary of LPIL. Lansdowne European Equity Fund Ltd (LEEF) was an open ended investment company. By an agreement between LEEF, LPIL and LPLP, LPLP was appointed to be the investment manager of LEEF. From time to time thereafter LEEF invited investment in various funds by means of the issue of redeemable shares.

In the course of the accounting year to 31 March 2005 LPLP received from LPIL £92,232,571 in management and performance fees. It 'rebated' to third parties the sum of £4,696,133 of which a sum in excess of £2m was 'rebated' to its limited partners, their families and trusts. The latter sum was equal to the aggregate of the performance and management fees attributable to the investments in the funds under management representing the money invested by them in the shares in LEEF and in other funds. In the partnership tax return of LPLP for the year ended 5 April 2005 the taxable income or profit of LPLP was stated to be £67,123,805. That amount did not include the sum repaid to the limited partners and their associates.

Section 18 of the Income and Corporation Taxes Act 1988 (the 1988 act), provided for the taxation under schedule D of the annual profits or gains arising to any person resident in the United Kingdom from any trade, profession or vocation wherever carried out. In August 2008, the appellant Revenue and Customs Commissioners (the Revenue) purported to amend the tax return of LPLP for the year ended 5 April 2005 by increasing the income or profit by £2,194,696 being the Revenue's estimate at the time of the aggregate of the 'rebates' to the limited partners, their families and associates.

The Revenue contended that on the authority of Mackinlay v Arthur Young McLelland Moores ([1990] 1 All ER 45) (Arthur Young), the deduction of that sum had been precluded by the terms of section 74(1)(a) of the 1988 act as not being wholly and exclusively laid out or expended for the purposes of the trade or business of LPLP. LPLP appealed to the General Commissioners for Income Tax (the General Commissioners).

LPLP contended that the amendment should not have been made on three grounds: (i) the sum had not been part of the income or profits of LPLP liable to tax, alternatively, if it had been; (ii) such sum had been deductible when computing the income or profits of LPLP for tax purposes, alternatively, if it had not been; (iii) the Revenue had not been entitled to make the amendment to the partnership tax return of LPLP because it had not satisfied the condition specified in section 30B(6) of the Taxes Management Act 1970 (the 1970 act) in that the relevant officer of the Revenue could not have been reasonably expected, on the basis of information described in s 29(6) of the 1970 act, to have been aware on or before 31 January 2007 that such sum ought to have been included in the partnership statement as profits or income for the year ended 5 April 2005.

The General Commissioners considered that the sums so 'rebated' had been part of the income or profits for tax purposes but were deductible for those purposes because they complied with the conditions imposed by section 74(1)(a) of the 1988 act. In addition they concluded that the Revenue had not been entitled to amend the tax return as it had been out of time. The Revenue appealed. The judge agreed with the General Commissioners in respect of grounds one and three. The Revenue appealed on ground three. LPLP cross-appealed on grounds one and two.

The issues that fell to be determined were: (i) whether the sums, described as 'rebates', were correctly excluded from LPLP's statement of income or profits; (ii) if not, whether they were deductible from those profits; and (iii) if not, whether the Revenue had been entitled to amend LPLP's partnership tax return. The appeals would be dismissed.

(1) It was established law that a man could not trade with himself (the principle of mutuality). In some cases there might be in some sense a trading activity, but the objective, or the outcome, was not profit, it was merely to cover expenditure and to return any surplus, directly or indirectly, sooner or later, to the members of the group (see [14]-[15], [72] of the judgment).

In the instant case, the rebates paid to the limited partners of LPLP were plainly a distribution out of the profits of LPLP and ought not to have been excluded from its statement of income. There was no 'mutuality' between what the investor/limited partner paid and received; the activities of LPLP were not divisible between investing on behalf of limited partners and others; there was no surplus or common fund remaining after expenditure of contributions on the activity for which they were paid. The fees received by LPLP from LPIL as consideration for its services had been income or profits arising to LPLP from its trade as an investment manager and were taxable under schedule D of the 1988 act (see [20], [60], [72] of the judgment). Fletcher v Income Tax Comr [1971] 3 All ER 1185 applied.

(2) Applying established law, the sums repaid were not deductible for tax purposes. What a limited partner paid as an investor was paid to LEEF in subscription for shares. He had not paid the performance or management fees to either LPIL or LPLP. They were paid respectively by LEEF and LPIL. What he had received had not been entirely collateral to his position as a partner and had not been applied wholly and exclusively for the purposes of the trade of the partnership (see [33]-[34], [59], [72] of the judgment). MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1989] STC 898 applied.

(3) Applying established principles, a hypothetical inspector would have been aware of 'an actual insufficiency' in the declared profit. On the evidence he could have seen that: the income of LPLP consisted of management and performance fees; there had been deducted from that income what was described as 'rebates'; 'rebates' had been paid to limited partners; Arthur Young had established that all payments to partners should be included in gross income and were not, generally, deductible for tax purposes; there was nothing to suggest any special treatment of 'rebates' paid to limited partners either by omission from the gross income or in their deduction therefrom (see [56], [59], [72] of the judgment).

The taxable profits of LPLP for the year ended 5 April 2005 would be declared as £69,142,423 (see [57], [71]-[72] of the judgment). MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1989] STC 898 applied; Veltema v Langham (Inspector of Taxes) [2004] STC 544 applied. Decision of Lewison J [2011] STC 372 affirmed.

Richard Coleman (instructed by Revenue and Customs Commissioners) for the Revenue; John Gardiner QC and John Brinsmead-Stockham (instructed by Pricewaterhouse Coopers Legal LLP) for the taxpayer.