The Upper Tribunal (‘UT’) have upheld in Walewski v HMRC  UKUT 0133 (TCC) the First-tier Tribunal (‘FTT’) decision of last year. In doing so, the UT have confirmed what is on the face of it an unsatisfactory effect of the law which should be noted by all partnerships with corporate members.
The case was about the ‘mixed member partnership’ rules. Broadly, these are anti-avoidance provisions which permit (or rather, as the Tribunal pointed put, require) all or part of the partnership profit share allocated to a corporate partner to be re-allocated for tax purposes to any individual partner who has ‘power to enjoy’ the profit share where the relevant conditions are fulfilled.
In Walewski, the FTT’s decision that re-allocation was in principle required was not disputed before the UT. The appeal was on two grounds, the more interesting of which was that, since the individual in question was a member of the partnership for only half of the period in question, it surely followed that only half of the company’s profit share was susceptible to re-allocation. As the appellant put it, the legislation ‘envisages cases where individual partners divert their share of profits arising from an LLP [or a partnership] to a partner that is a company, and this is relevant because an individual cannot divert that which he does not have to divert in the first place.’
Not so, said the UT. The legislation applies ‘for a period of account’ and applies ‘if the various conditions are met at any time in the period of account. As a matter of construction, there is no requirement that [the individual] be a partner for more than a moment of time within the relevant period of account.’ It is not even necessary that there should be any overlap between the period during which the individual is a member and the period when the company is a member; all that is required is that each should have been a member at some point in the relevant period of account.
The further argument made on behalf of Mr Walewski was that even if the legislation did apply for the whole of the period, any re-allocation had by law to be made on a ‘just and reasonable basis’; and that it was neither just nor reasonable to re-allocate to him a share of partnership profits that were referable to a period when he had not been a partner. Again, the UT was having none of it: this was ‘an impermissible attempt to argue primary points of discretion’ – it was for the FTT to decide what was ‘just and reasonable’ and the UT could not interfere.
Finally, it’s worth pointing out that there are provisions under which a company’s share of partnership profit may in some limited circumstances be re-allocated for tax purposes to an individual who is not and never has been a partner, which might have been relevant here. But those provisions were not being invoked by HMRC: reliance was instead placed on the basic rules with the rather surprising result described above.
The amounts are large – some £22m of profit – so the case may yet go further. Meanwhile, we have clarity on the (rather unsatisfactory) state of the law.
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This article has been republished in the August 2021 issue of ICAEW TAXline and is available to subscribers here on the ICAEW website.