Court of Appeal upholds tribunal decision on the taxation of limited partnership transactions
In BCM Cayman LP and BlueCrest Capital Management Cayman Ltd v HMRC  EWCA Civ 1179, the Court of Appeal (CA) upheld a decision of the Upper Tribunal (UT) to the effect that a corporate general partner was taxable on profits received through a partnership structure where it retained a beneficial interest in the profits notwithstanding a requirement to pass the profits to a different partner; it also denied a deduction from UK tax in respect of interest incurred to fund investment in a UK partnership.
The BlueCrest group carried out investment management activities. Part of the trade was carried on by BlueCrest Capital Management LP (UK LP). In 2007, some members of UK LP wished to sell their interests, amounting to 19% of the equity. The remaining members agreed to provide those interests, and BCM Cayman LP (Cayman LP) was formed to hold the buyers' interests. BlueCrest Capital Management Cayman Ltd (Cayman Ltd), wholly owned by BlueCrest Capital Management Cayman Holdings Ltd (Cayman Holdings), was the general partner of Cayman LP (which, under Cayman law, did not have separate legal personality).
The sellers assigned their interests in UK LP to Cayman Ltd, which in turn contributed the interest to Cayman LP as a capital contribution. Cayman LP became party to UK LP's amended and restated limited partnership deed.
In order to fund the acquisition, Cayman Ltd borrowed $200m from RBS (the Loan) and issued $165m of loan notes (the Notes) to the sellers. RBS became a member of Cayman LP as the Corporate Limited Partner. It entered into a total return swap with Cayman Holdings. In 2008, RBS assigned its interest in Cayman LP to Fyled Energy Ltd (Fyled); the total return swap was also novated in favour of Fyled. Cayman Holdings entered into further arrangements, effectively replacing the total return swap, with Morgan Stanley Cooper Ltd (all referred to as the TRS Arrangements).
The partnership deed for Cayman LP provided for superprofits to be allocated to the Corporate Limited Partner if UK LP made profits above a specified level. If this occurred, the superprofits would be paid to Cayman Ltd as general partner of Cayman LP. Cayman Ltd as general partner would allocate them to the Corporate Limited Partner and this would trigger a payment to Cayman Holdings (or its associate) under the TRS Arrangements. On the facts, no superprofits were allocated while RBS was the Corporate Limited Partner, but aggregate superprofits in excess of £47m were allocated to Fyled as Corporate Limited Partner. The purpose of the allocation of superprofits to the Corporate Limited Partner was to prepay part of the Loan and the debt due under the Notes.
A number of issues were raised on appeal to the First-tier Tribunal (FTT), which found in favour of HMRC. The appellants appealed to the UT, which considered the following two issues:
1. whether Cayman Ltd was liable to UK corporation tax in relation to superprofits allocated by UK LP under the UK LP limited partnership deed (the profit allocation issue); and
2. whether Cayman Ltd was entitled to relief on the interest on its borrowings (under the Loan and the Notes) on the basis that that interest related to trading loan relationships (the interest deductibility issue).
The UT held in favour of HMRC on both issues, and the appellants appealed to the CA.
Section 6(1), Corporation Tax Act 2009 (CTA 2009), provides that '[a] company is not chargeable to corporation tax on profits which accrue to it in a fiduciary or representative capacity except as respects its own beneficial interest (if any) in the profits.'
The appeals were dismissed.
1. The profit allocation issue
The CA noted that the limited partners of Cayman LP were unable, under Cayman law, to take part in Cayman LP's business, which was carried on by Cayman Ltd as its general partner. Cayman LP , lacking legal personality, could not be a member of UK LP. Fyled could have been, but was not, a member of UK LP. The superprofits allocated were therefore allocated to Cayman LP acting by its general partner, and not to Fyled.
The CA also noted that although the general rule was that corporation tax was due on profits, section 6(1), CTA 2009, created an exception to this. The aim behind the regime was for the corporation tax net to be cast wide, subject to 'specific and limited' exceptions. The CA considered that the fiduciary exemption set out in section 6(1) did not apply to the extent that a company itself had a beneficial interest in the profits accruing to it as fiduciary or representative. In considering whether this was the case, the CA had regard to the totality of the transactions, including the TRS Arrangements. In the view of the CA, it would be 'absurd' not to look at the arrangements as a whole. Adopting a realistic view, and taking the TRS Arrangements into account, it was clear that superprofits paid to Cayman Ltd were to be returned to it by a series of pre-ordained transactions in the form of a capital contribution from Cayman Holdings and that, in light of the approach to interpretation set out in WT Ramsay Ltd v IRC  STC 174 and BMBF v Mawson  STC 1, Cayman Ltd was the ultimate beneficiary of the profit share. It did not therefore act in a fiduciary capacity when obtaining the superprofits and accordingly the exception in section 6(1) did not apply.
2. The interest deductibility issue
With regard to the second issue, the CA held that the FTT had been entitled to hold that there was a distinction between, on the one hand, borrowing to acquire an interest in UK LP and, on the other, borrowing for the purposes of UK LP's trade. The CA considered that Cayman Ltd had borrowed for the purposes of enabling it to invest in UK LP and these borrowings had no impact on the trade carried out by UK LP and were not therefore for the purposes of that trade. Accordingly, interest paid on the Loan was not for the purpose of UK LP's trade and therefore did not fall to be deductible by Cayman Ltd.
This decision demonstrates that the Ramsay approach is still very much alive and well in the senior appellate courts. While it may appear initially inconsistent that Cayman Ltd should suffer a UK corporation tax liability while being unable to deduct interest on its borrowings, the CA was very clear that it saw no contradiction in this situation in light of the fact that there were two partnerships each with a different business activity.
The judgment can be viewed here.