Section 1259 CTA 2009: Notional Company Must Inherit LLP Ownership/Control for Part 8 “Related Party” Gateway (and FA 2016 s 52 Applies by Accounting Period, with Drafting Error Curable under Inco Europe)

Introduction

In Muller UK and Ireland Group LLP & Ors v Commissioners for His Majesty's Revenue and Customs [2026] EWCA Civ 248 (11 March 2026), the Court of Appeal considered how corporation tax rules apply where a UK limited liability partnership (“LLP”) is “looked through” and treated as a partnership, and all of its members are UK-resident companies.

The appellants were (i) the LLP and (ii) three UK corporate members (“the Corporate Members”) in the Muller group. In July 2013 the Corporate Members transferred their individual dairy trades and certain intangible fixed assets (“IFAs”)—brands, licences, software, and goodwill—to the LLP. The LLP’s accounts (GAAP-compliant) recognised the transferred assets at fair value and amortised them over five years. The LLP’s taxable profits were computed with deductions for amortisation (tax “debits”) which were allocated to the Corporate Members.

HMRC denied the deductions on the basis that the Part 8 CTA 2009 IFA regime was not available because the assets were acquired from “related parties”, so the statutory “gateway” in section 882 was closed. This produced a central interpretive dispute about the scope of the statutory hypothesis in section 1259(3)(a) CTA 2009: when computing the partnership’s profits for a corporate partner, one must compute what the profits would be “if a UK resident company carried on the trade”.

Two further issues arose for later periods after amendments made by section 52 Finance Act 2016: (i) whether the new “participation condition” extension to “related party” applies where the relevant acquisition occurred before commencement; and (ii) whether an accepted drafting error in new section 882(5B) can be corrected by the court under Inco Europe Ltd v First Choice Distribution.

Summary of the Judgment

The Court of Appeal unanimously dismissed the appeal (Henderson LJ, with Asplin LJ and Lewison LJ agreeing).

  1. Main issue (section 1259 / section 882): The court held that the notional UK resident company assumed by section 1259(3)(a) must be attributed the LLP’s ownership and control characteristics at least for the purpose of applying the Part 8 section 882 “related party” gateway. On that basis, the Corporate Members were related parties, the gateway was closed, and amortisation debits were not available.
  2. FA 2016 temporal issue: The court held that the FA 2016 amendments apply by reference to accounting periods beginning on or after 25 November 2015, and therefore govern entitlement to debits in those later periods even though the assets were acquired in 2013.
  3. Drafting error / Inco Europe issue: The court agreed that the drafting defect in section 882(5B) could be cured by applying the principles in Inco Europe.

Analysis

Precedents Cited

1. Interpretation of deeming provisions

  • Fowler v Revenue and Customs Commissioners [2020] UKSC 22, [2020] 1 WLR 2227 (“Fowler”): The governing authority on statutory “deeming” (legal fictions). The Court of Appeal treated Fowler as the starting point: (i) the extent of the fiction is a matter of construction; (ii) apply it to achieve its purpose, but not beyond; yet (iii) do not “boggle” at inevitable corollaries. This directly underpinned the court’s conclusion that the section 1259 hypothesis cannot be applied in a way that strips away real-world ownership/control facts that are necessary to compute profits under the corporation tax code (including the Part 8 gateway).
  • DCC Holdings (UK) Ltd v Revenue and Customs Comrs [2011] 1 WLR 44: Cited (via Fowler) for Lord Walker’s collation of prior deeming-provision dicta. It framed the court’s methodology rather than deciding the outcome.
  • Inland Revenue Comrs v Metrolands (Property Finance) Ltd [1981] 1 WLR 637; Marshall v Kerr [1995] 1 AC 148; Jenks v Dickinson [1997] STC 853: All cited (again via Fowler) as part of the longstanding jurisprudence on how far statutory fictions extend.
  • East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109: Used (through Fowler) for Lord Asquith’s “inevitable corollaries” principle. The Court of Appeal treated the attribution of ownership/control characteristics as an inevitable corollary necessary to make the section 1259 computation work coherently.

2. General statutory construction (contextual, purpose-led, but text-anchored)

  • Rossendale Borough Council v Hurstwood Properties (A) Limited [2021] UKSC 16, [2022] AC 690: Cited for the centrality of legislative purpose when construing provisions, reinforcing HMRC’s approach.
  • R(O) v Secretary of State for the Home Department [2022] UKSC 3, [2023] AC 255 and For Women Scotland Ltd v Scottish Ministers [2025] UKSC 16, [2025] 2 WLR 879: Relied on by the appellants to emphasise fidelity to enacted text and avoidance of judicial rewriting. The court accepted the principle, but held that attributing LLP ownership/control to the notional company was not “legislation”; it was construction necessary to give the hypothesis functional effect within the computation Parliament mandated.

3. Partnership deeming and analogies

  • BCM Cayman LP and another v Revenue and Customs Commissioners [2022] UKUT 198 (TCC), [2022] STC 1586 (“BCM Cayman”): The appellants relied on UT observations about section 1259(4). The Court of Appeal considered it of limited assistance because it addressed a different issue (loan relationship code consequences), not the content of the profit computation (and in any event was not binding).
  • [2023] EWCA Civ 1179, [2023] STC 1738 (the Court of Appeal decision in BCM Cayman): Noted for context: the court upheld the UT result but did not address section 1259, so it did not control the present question.

4. Construction of amended statutes / commencement

  • GDF Suez Teesside Ltd v Revenue and Customs Commissioners [2018] EWCA Civ 2075, [2019] 1 All ER 528, [2018] STC 2113: Cited for the principle that, generally, one construes the amended statute as a whole, though sometimes the amending Act matters. This supported the court’s approach to treating amended section 882 as the operative text for accounting periods after commencement.

5. Correcting drafting errors (Inco Europe line)

  • Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586: The controlling authority on when courts may correct obvious drafting mistakes. The court applied the three conditions (purpose, inadvertence, and clear gist of the correction) and held they were satisfied for section 882(5B).
  • Jones v Wrotham Park Settled Estates [1980] A.C. 74 and Western Bank Ltd v Schindler [1977] Ch 1: Referenced within Inco Europe as guardrails: corrections must not cross into legislation; insertions must not be too big or too alien to the enacted language.
  • Pollen Estate Trustee Co Limited v Revenue and Customs Commissioners [2013] EWCA Civ 753, [2013] 1 WLR 3785 (“Pollen Estate”): Cited as a tax example where Inco Europe correction was appropriate. The court used it to rebut the appellants’ submission that fiscal complexity should deter the court from making a targeted correction where the statutory purpose is clear.

Legal Reasoning

A. The statutory architecture: LLP transparency + corporate partner computation

The court began with the interaction of two deeming layers:

  • Section 1273 CTA 2009: for corporation tax purposes, an LLP’s activities are treated as carried on in partnership by its members, and LLP property is treated as partnership property held by the members. This “looks through” the LLP’s separate legal personality.
  • Section 1259 CTA 2009: where any partner is a company within the charge to corporation tax, the “amount of the firm’s profits” is taken to be what the profits would be “if a UK resident company carried on the trade” (for UK-resident corporate partners). This requires a counterfactual computation, performed “in relation to” each corporate partner.

Part 8 CTA 2009 (IFAs) is generally a company regime; but it becomes relevant here because section 1259 forces the partnership trade to be computed as if carried on by a company, and Part 8 is part of that computational code.

B. The Part 8 gateway issue: why “related party” cannot be avoided by anonymity

The appellants’ central contention was that the “notional company” in section 1259(3)(a) is an unspecified “a UK resident company” with no ownership/control attributes. If so, the appellants argued, the section 882(1)(b) gateway (“acquired from a person who…is not a related party”) would always be satisfied, because no one could be shown to be “related” to an anonymous, attribute-less company.

The Court of Appeal rejected that construction for functional and purposive reasons anchored in Fowler: the statutory hypothesis exists to produce a coherent corporation-tax computation of the partnership trade’s profits. That computation necessarily imports the real-world incidents of the trade as far as possible, and does not license selective unreality that neutralises integral computational rules (here, the section 882 gateway).

The court held it was “necessary” that the notional company inherits the LLP’s ownership/control characteristics at least for applying section 882, because:

  • the trade being computed is the LLP’s real trade, carried on through the agency of the members who own/control it;
  • section 882 is part of the computational machinery that determines whether Part 8 debits are available at all;
  • without attributing ownership/control to the notional company, section 882 becomes effectively inoperable (or always satisfied), producing an illogical result inconsistent with the gateway’s anti-manipulation role.

In adopting that approach, the court endorsed the Upper Tribunal’s view that “calculation” includes not only arithmetic but also the statutory rules determining whether amounts may enter the computation (e.g., whether amortisation debits are deductible at all).

C. FA 2016: why “not retrospective” does not mean “irrelevant to old acquisitions”

For accounting periods beginning on or after 25 November 2015, section 52 FA 2016 inserted section 882(5A)–(5D), broadening “related party” for section 882 to include cases where the “participation condition” (borrowed from TIOPA 2010 transfer pricing concepts) is met.

The appellants argued the amendment could not affect assets acquired in 2013 because section 882 looks at relatedness “at the time of acquisition” and FA 2016 did not change the acquisition date and was not retrospective.

The court held that this missed the operational context: corporation tax is annual, and entitlement to Part 8 debits is tested by the law applicable to the accounting period in which the debit is claimed. After 25 November 2015, the applicable law is the amended section 882 read as a whole. Accordingly, the amended related-party test governs whether amortisation debits can be relieved in later accounting periods, even for assets acquired earlier.

D. Correcting section 882(5B) under Inco Europe

It was common ground that new section 882(5B) was defectively drafted (misdescribing the interaction with section 1259). The Court of Appeal agreed with the Upper Tribunal that the Inco Europe conditions were met:

  • Purpose: to apply the widened “participation condition” concept in section 882(5A) in cases involving firms/partnerships where section 1259 computations are required;
  • Inadvertence: the defect was obvious and accidental (an “airshot”);
  • Clear gist: the court could state the substance of the fix—treating references so that the participation-condition extension sensibly bites in the section 1259 partnership computation context—without engaging in open-ended rewriting.

Impact

1. Preventing “gateway neutralisation” in partnership-to-company computational fictions

The principal practical effect is to prevent corporate groups from accessing Part 8 amortisation debits by routing transfers of IFAs into an LLP and then arguing that the section 1259 notional company is ownership-neutral. Where the LLP is controlled by the corporate members transferring the assets, the “related party” restriction can bite in the section 1259 computation.

2. Broader relevance beyond Part 8

Although the court decided only what was necessary (“at least” for section 882), the reasoning is likely to influence other areas where partnership profits must be computed “as if” carried on by a company. Whenever eligibility for a relief/deduction depends on relational concepts (control, group membership, connection, participation), this judgment supports attributing the partnership’s relevant ownership/control facts to the notional company to make the computation workable.

3. Commencement and annuality: amended gateway tests apply to future-period debits

The FA 2016 holding underlines a recurring tax-law theme: even where a gateway test references historic acquisition conditions, Parliament may (and often does) change the legal consequences for future-year deductions by changing the gateway rules prospectively by accounting period. Taxpayers cannot assume that “not retrospective” means “frozen by acquisition date” for all later relief claims.

4. Judicial correction of fiscal drafting errors remains available (cautiously)

The Inco Europe holding reaffirms that obvious drafting mistakes in tax statutes can be corrected where the purpose, inadvertence, and gist of correction are clear. However, the judgment also reflects the constitutional limits: the correction must be targeted and demonstrably within the interpretive function.

Complex Concepts Simplified

  • LLP “transparency” (section 1273): For corporation tax, the LLP is ignored as a separate taxpayer; its activities and property are treated as those of its members acting as partners.
  • Section 1259 “notional company” computation: When a company is a partner, the partnership’s trade profits (for that partner’s corporation tax) are computed as if the trade were carried on by a company. This is not a real company; it is a statutory hypothetical used to run the corporation tax computation rules.
  • Part 8 IFAs and “amortisation debits”: If accounts recognise amortisation (writing down) of qualifying intangibles, Part 8 may allow corresponding tax deductions (“debits”).
  • Section 882 “gateway”: Part 8 generally applies only if the IFA was acquired from a non-related party (unless specific exceptions apply). It is a threshold rule: if you fail it, the Part 8 debits are not available.
  • “Related party” and “control”: Relatedness includes control relationships. “Control” is broadly about the power to secure how a company’s affairs are conducted.
  • “Participation condition” (FA 2016 / TIOPA 2010): A broader connection test (participation in management, control, or capital) used in transfer pricing, imported into section 882 to catch partnership/LLP structures.
  • Annuality of corporation tax: The deductibility of amounts is tested period-by-period under the law in force for that accounting period, even if the underlying asset was acquired earlier.
  • Correcting drafting errors (Inco Europe): Courts may correct obvious mistakes only when they are sure of (i) the purpose, (ii) the inadvertence, and (iii) the substance of the fix, and only where the change is not too radical.

Conclusion

This decision establishes that, when section 1259 CTA 2009 requires partnership trade profits to be computed “as if” carried on by a UK resident company, the notional company must (where necessary to make the computation work) be treated as inheriting the partnership/LLP’s ownership and control characteristics— at least so that Part 8 CTA 2009’s section 882 “related party” gateway operates as intended.

It also confirms that FA 2016’s extension of the related-party concept applies to accounting periods from its commencement date for the purpose of determining entitlement to debits in those periods, and that an obvious drafting defect in the FA 2016 insertion can be cured under Inco Europe. The combined effect is to close off a structurally tempting route to Part 8 relief via LLP interposition where economic ownership has not meaningfully changed.