His Majesty's Revenue and Customs v BlueCrest Capital Management LP & Ors

Factual and Procedural Background

The case concerns BlueCrest Capital Management, a major investment management business operating in the United Kingdom through a series of partnerships from 2008 to 2014. BlueCrest introduced a Partner Incentivisation Plan ("PIP") in April 2008, initially on a voluntary basis for senior partners, which evolved through three phases involving different corporate partners: Special Capital Limited ("SCL") and later ABM Avon Limited ("Avon"). The PIP aimed to incentivise partners to remain with BlueCrest, discourage excessive risk-taking, and allow for performance-based deferred awards of "special capital" by the corporate partner to individual partners.

HM Revenue and Customs ("HMRC") challenged the tax treatment of these arrangements, asserting that the profit shares allocated to the corporate partners should be treated as income of the individual partners. HMRC advanced a primary case under section 850 of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA 2005") and an alternative case under section 687 of ITTOIA 2005 or the Sale of Occupational Income ("SOI") rules in the Income Tax Act 2007.

The First-tier Tribunal ("FTT") heard the appeals in 2019 and ruled against HMRC's primary case but upheld the alternative case, taxing the individual partners on their final PIP awards as miscellaneous income. The Upper Tribunal ("UT") upheld the FTT's overall conclusions but found that the FTT had erred in law on the primary issue and remade the decision. Both parties appealed to the Court of Appeal, which is the subject of this opinion.

Legal Issues Presented

1. Whether, for income tax purposes, the profit shares allocated to the corporate partners under the PIP arrangements should be treated as income of the individual partners pursuant to section 850 of ITTOIA 2005.
2. Whether, failing the primary case, the final awards of special capital to individual partners are taxable as miscellaneous income under section 687 of ITTOIA 2005.
3. Whether the Sale of Occupational Income ("SOI") rules in the Income Tax Act 2007 apply to the final PIP awards.
4. Subsidiary issues relating to the timing of profit allocations and the nature of the partners' rights under the PIP.

Arguments of the Parties

HMRC's Arguments

• The profit shares allocated to the corporate partners were, in substance, beneficially owned by the individual partners and should be treated as their income under a purposive and realistic construction of section 850 ITTOIA 2005.
• The PIP awards were effectively deferred remuneration for services rendered and should be taxable as income under section 687 or the SOI rules if the primary case fails.
• The initial phases of the PIP involved voluntary diversion of income, which remained the individual partners' profits despite routing through the corporate partner.
• The corporate partner was a mere conduit, and the arrangements should not be allowed to rewrite the profit-sharing arrangements agreed by the partners.

Partnerships' and Individual Partners' Arguments

• The profit shares allocated to the corporate partners were genuine allocations under the partnership agreements and were subject to corporation tax in the hands of the corporate partners.
• The special capital credited to corporate partners remained their separate beneficial property, and individual partners had no legal entitlement to these profits until discretionary awards were made.
• The PIP served a genuine commercial purpose to incentivise and retain partners, not solely tax avoidance.
• The final awards to individual partners were not part of the partnership's profit-sharing arrangements and thus not taxable under section 850.
• The alternative case under section 687 was wrongly decided because the awards represented a reallocation of partnership assets, not income from a taxable source.
• The SOI rules did not apply to the PIP awards.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed analysis of the PIP arrangements and the applicable tax legislation, focusing primarily on section 850 of ITTOIA 2005. It emphasised that the statutory scheme requires profits of a partnership to be allocated among partners according to their agreed rights for the relevant accounting period, regardless of whether the partners have actually received those profits.

The court found that the profit shares allocated to the corporate partners (SCL and Avon) were genuine and not a sham, and that the corporate partners were entitled to corporation tax on those profits. The subsequent discretionary awards of special capital by the corporate partner to individual partners did not constitute rights to share in the partnership profits for the purposes of section 850. The court rejected HMRC's attempt to treat the corporate partner's profits as effectively belonging to the individual partners for income tax purposes, concluding that such an approach would rewrite the parties' agreements and ignore the commercial substance of the PIP.

Regarding the alternative case under section 687, the court accepted that the final PIP awards to individual partners had the character of income and were analogous to deferred bonuses for services rendered. It held that the source of this income was the corporate partner's exercise of its contractual discretion to make the awards, which was sufficient to satisfy the source requirement for income tax. The court distinguished the partnership tax regime from employment income taxation, rejecting HMRC's reliance on employment tax authorities such as Rangers and Hadlee as inapplicable in this context.

The court also addressed subsidiary grounds relating to the timing of awards and the nature of partners' rights, dismissing arguments that early awards made before final profit allocations altered the tax characterisation. It upheld the findings that the corporate partner's discretion was subject to implied terms of good faith and rationality, but that individual partners did not have vested rights to awards until those were made final.

Finally, the court declined to consider the alternative ground relating to the Sale of Occupational Income rules, as it was unnecessary for the disposal of the appeals.

Holding and Implications

The court issued a DISPOSAL dismissing both HMRC's appeal and the partnerships' appeal.

The holding confirms that:

• The profit shares allocated to the corporate partners under the PIP arrangements are genuine allocations and subject to corporation tax, not to be re-characterised as income of the individual partners under section 850 ITTOIA 2005.
• The final awards of special capital made by the corporate partner to individual partners have the character of income taxable under section 687 as miscellaneous income, with the source of income being the corporate partner's decision to make the awards.
• Employment income authorities like Rangers and Hadlee do not apply to the UK partnership tax context in this case.

The direct effect is that individual partners are liable to income tax on their final PIP awards under section 687, while the corporate partners are liable to corporation tax on their allocated shares. No new precedent altering the fundamental principles of partnership taxation or income characterisation was established. The decision respects the contractual arrangements and commercial substance of the PIP, while ensuring appropriate tax treatment of deferred remuneration awards.