The First-tier Tribunal has judged that an LLP may be treated as a notional company for the purpose of determining whether its corporate partners were related parties thus denying them relief for intangible assets transferred to it (Muller UK & Ireland Group and Anor v HMRC  UKFTT 221 (TC)).
The companies Muller Diary UK Ltd, Robert Wiseman & Sons Ltd and TM UK Production Ltd (“the corporate members”) transferred certain intangible assets (“material assets”) to an LLP, Muller UK & Ireland Group LLP (the LLP), controlled by them.
Under CTA 2009, s. 1259, UK corporate partners are taxed on their share of the profits of an LLP determined on the basis of “what would be the amount of the profits of the trade chargeable to corporation tax for that period if a UK resident company carried on the trade”. The corporate partners therefore claimed for their share of the relief on the material assets the LLP would have been entitled to if it had been a company.
However, relief for assets is generally excluded from the corporation tax intangible assets regime where these assets are acquired from “related parties”. The corporate members argued that this restriction did not apply to them as while there was legislation in force to treat the LLP as a notional company for the purposes of calculating profits generally this treatment did not extend:
- firstly, to determining whether the restriction on relief at s. 882 should apply to the LLP; and
- secondly, if the restriction did apply, as an LLP rather than a company it was impossible for it to have “related parties” under the terms of s. 835.
The FTT dismissed the appellant’s appeal upholding HMRC’s (the respondents) contrary position arguing:
“we do not agree with the submission made on behalf of the Appellants to the effect that, in agreeing with the Respondents in relation to the two propositions, we are deeming the notional company to have an existence which extends beyond the computational (see paragraph 58(2) above). On the contrary, we think that, contrary to that submission, it is impossible fully to carry out the notional company computation in the context of intangible fixed assets and goodwill, as Section 1259 directs, without taking into account both the identities of the disponors to the notional company and the ownership characteristics of the notional company. That is exactly what the language in Section 882 requires.”
Although now academic the tribunal also considered the matter of whether, if the corporate partners’ relief had not been prevented by the above, the claims would have been blocked by the later amendments made to s. 882 by FA 2016. The appellants argued that:
- any extension to the definition of the term “related party” made after the material assets had been acquired could not change the fact that, at the time when the material assets had been acquired, the corporate members were not “related parties”; and
- even if the extension could, in principle, have had that retrospective effect, the relevant provisions had been drafted deficiently and could not properly be construed as having had that effect.
The FTT dismissed these arguments, judging that in respect of the first:
“The starting point is to recognise that corporation tax is an annual tax and that it is necessary to consider afresh in respect of the debits arising in each accounting period whether Section 882(1)(b) is satisfied in respect of the assets which have given rise to those debits. … in applying the legislation in the later accounting period and thus considering whether the disponor was a ‘related party’ at the ‘time of the acquisition’, it is necessary to apply the law as it stands in the later accounting period and not simply the law as it stood at the ‘time of the acquisition’. Thus, in this case, once the new provisions took effect, they were required to be taken into account in accounting periods commencing (or deemed to commence) on or after the Effective Date in determining whether each Corporate Member was a ‘related party’ at the ‘time of the acquisition’.”
and with regards to the second:
“We are confronted with operative provisions which, on the basis of the hypothesis on which we are construing them, make no sense in and of themselves and therefore it is necessary apply the principle set out in Inco HL and Pollen to remedy that deficiency. This is permissible because, even though, on the basis of that hypothesis, the drafting is a nonsense, its intention is perfectly clear on the face of the provisions and the substance of the provisions which Parliament would have enacted in the absence of that error was readily apparent. There is no need to have recourse to the explanatory notes.”