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England and Wales Court of Appeal (Civil Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> BCM Cayman LP & Anor v Commissioners for His Majesty's Revenue and Customs [2023] EWCA Civ 1179 (12 October 2023) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2023/1179.html Cite as: [2023] STC 1738, [2024] 1 WLR 1980, [2023] STI 1356, [2023] BTC 24, [2023] EWCA Civ 1179, [2024] WLR 1980 |
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ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Leech and Upper Tribunal Judge Thomas Scott
[2022] UKUT 00198 (TCC)
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE NUGEE
and
LADY JUSTICE WHIPPLE
____________________
(1) BCM Cayman LP (2) BlueCrest Capital Management Cayman Limited |
Appellants |
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- and - |
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The Commissioners for His Majesty's Revenue and Customs |
Respondent |
____________________
Rupert Baldry KC, Thomas Chacko and James Kirby (instructed by the Solicitor for HMRC) for the Respondents
Hearing dates : 25 & 26 July 2023
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Crown Copyright ©
LADY JUSTICE WHIPPLE:
INTRODUCTION
BACKGROUND
Facts
Superprofits
"New partners may in future be introduced to [Cayman LP]. [Cayman LP] will operate as a 'second tier' partnership, giving individuals the ability to share in group profits and to potentially benefit from capital appreciation without being introduced directly into [UK LP]".
Documents
ISSUES
a. Profit allocation: was Cayman Ltd liable to corporation tax in relation to Superprofits allocated by UK LP under the UK Partnership Deed?
b. Interest deductibility: was Cayman Ltd entitled to relief on the interest on its $365 million of borrowings on the basis that the interest related to trading loan relationships?
a. The UT erred in law in concluding that Cayman Ltd was the only partner in Cayman LP which was also admitted as a partner in UK LP; rather, all the partners in Cayman LP including the Corporate Limited Partner were partners in UK LP so that distributions of Superprofits by UK LP went to Fyled qua partner in UK LP. This was referred to at the appeal hearing as Issue 1(a) but I shall refer to it as the "Partnership issue".
b. Even if only Cayman Ltd was a partner in the UK LP, the UT erred in law in concluding that Cayman Ltd (as general partner of Cayman LP) should be charged to corporation tax on the Superprofits allocated to it, given that Cayman Ltd did not receive that money in its own right but rather as fiduciary or representative for the Corporate Limited Partner (Fyled). This was referred to at the appeal hearing as Issue 1(b) but I shall refer to it as the "Fiduciary issue".
PROFIT ALLOCATION
The Partnership Issue
The First-tier and Upper Tribunal
" In determining whether or not a statutory partnership exists, it is important to look at the substance of the relationship, not the words used by the parties to describe it (see Mann v D'Arcy [1968] 1 WLR 893 at 899; Protectacoat Firthglow Ltd v Szilagyi [2009] IRLR 365 at [61]). "
"Subject to any agreement express or implied between the partners, no person may be introduced as a partner without the consent of all existing partners. An attempt by one partner to introduce a new partner without consent amounts only to an assignment of part of his share in the partnership. It may create a sub-partnership between the newcomer and the person who introduced him, but it does not confer on the newcomer the rights of a partner "
(see UT [31]). The UT noted that the UK LP and the Cayman LP were limited partnerships in which the limited partners had no rights or obligations to participate in management of partnership assets beyond their liability to contribute capital and held that the FTT had adopted a legitimate approach by looking at whether there was a sub-partnership (UT [35]). The UT's own approach was put in this way:
"37. In order to establish that the Cayman Partnership was more than a sub-partnership and the partners also became limited partners in the UK Partnership it was necessary, in our judgment, for the Appellants to satisfy the test in Halsbury's Laws (above) and to prove by admissible evidence on a balance of probabilities that Fyled intended to become a member of the UK Partnership and was admitted to the partnership with the consent of the other partners in the UK Partnership. We accept that it would have been possible to prove these facts by showing that [Cayman Ltd] had Fyled's authority to perform whatever acts were necessary to make Fyled a member of the UK Partnership and carried out these acts. We also accept that it would have been possible for the limited partners in the UK Partnership to authorise [the UK LP General Partner] to admit Fyled to the UK Partnership on the same basis."
Submissions
"Since under English law a firm does not have separate legal personality, it cannot, as such, be a member of another firm.
Thus, where a firm purports to become a partner, this will, as a matter of law, constitute each of the members of that firm as a partner in his own right "
That passage has been updated in the 21st edition of the same publication - see para 4-42 of that edition - to include a reference to the UT's decision in this case and, in consequence, to add a qualification to the statement of principle set out above. Mr Peacock said that qualification was incorrect, in line with his wider arguments on appeal. Mr Peacock also relied on this passage from The Law of Partnership in Scotland by J B Miller (2nd ed, 1994) at p 38:
"Therefore, under English law, where the partners of one firm enter collectively into a partnership with others in another business or venture the partners as individuals and natural persons are entering into that relationship and not the firm itself."
Discussion
Legal Principle
"Suppose that A and B were the partners in partnership X, an English partnership. Suppose further that an agreement was entered into between (1) partnership X and (2) C to form another partnership, partnership Y. It was submitted that the analysis under English Law would be that partnership Y had three members, A, B and C, not two. I am willing to assume that that is right. However, A and B would be partners in partnership with Y in their capacity as members of partnership X. "
"Partnership, although often called a contract, is more accurately described as a relationship resulting from a contract. This was made clear in the original statutory de?nition introduced into the House of Lords but not, ultimately, in the Act itself. Nevertheless, the origin of the relationship in an agreement, whether express or implied, was clearly established before the Act and may legitimately be inferred from its provisions "
Substance and Reality
" (i) Where an issue arises as to the identity of a party referred to in a deed or contract, extrinsic evidence is admissible to assist the resolution of that issue. (ii) In determining the identity of the contracting party, the court's approach is objective, not subjective. The question is what a reasonable person, furnished with the relevant information, would conclude. The private thoughts of the protagonists concerning who was contracting with whom are irrelevant and inadmissible. (iii) If the extrinsic evidence establishes that a party has been misdescribed in the document, the court may correct that error as a matter of construction without any need for formal rectification. (iv) Where the issue is whether a party signed a document as principal or as agent for someone else, there is no automatic relaxation of the parol evidence rule. The person who signed is the contracting party unless (a) the document makes clear that he signed as agent for a sufficiently identified principal or as the officer of a sufficiently identified company, or (b) extrinsic evidence establishes that both parties knew he was signing as agent or company officer."
"62. It is also necessary to consider the substance of the relationship between the various parties once Fyled became a partner in the Cayman Partnership. In our judgment, the position in relation to Fyled is even more clearcut. Whatever the position may have been in relation to RBS, the FTT was right in our judgment to find that Fyled did not become a partner in the UK Partnership. We have reached this conclusion for the following reasons:
(1) There was no evidence before the FTT (and no evidence before us) that Fyled intended to become a member of the UK Partnership at any time after 11 June 2008: see [112]. No officer or employee of Fyled gave evidence that it had such an intention and we were not taken to any documents which provided evidence to support such a finding.
(2) Even if [Cayman Ltd] intended to enter into the amended and restated UK Partnership Deed on behalf of both the existing and future members of the Cayman Partnership on 6 July 2007, it had no authority to do so on Fyled's behalf at that date. Some action was required either to ratify or approve that decision on Fyled's behalf after it became a Cayman partner. However, there was no evidence that [Cayman Ltd] considered it necessary or advisable for Fyled to become a partner of the UK Partnership or that it took any steps to make Fyled a partner after 11 June 2008.
(3) Indeed, if it had been [Cayman Ltd's] intention that Fyled should join the UK Partnership on or before 11 June 2008, there is no reason why it could not have required Fyled to execute a Deed of Adherence and contribute £100 under clause 9.2 or even made the contribution and executed the Deed of Adherence itself. However, Fyled did not execute such a deed or make such a contribution.
(4) There was no evidence before the FTT (and no evidence before us) that any of the partners in the UK Partnership intended to admit Fyled as a partner or consented to its admission. There was no evidence either that [UK LP General Partner] considered it necessary or advisable to admit Fyled as a partner in the UK Partnership in order to carry on its Business.
(5) But, as we have stated, [UK LP General Partner] had no authority to admit Fyled as a Further Limited Partner unless it complied with clause 9.2 and clause 20 and entered into a Deed of Adherence. Moreover, if it had been [UK LP General Partner's] intention to admit Fyled as a party, there is no reason why it could not have required Fyled to execute a Deed of Adherence and contribute £100 pursuant to clause 9.2 or, indeed, required [Cayman Ltd] to take those steps on Fyled's behalf.
(6) [UK LP General Partner] did not comply with the obligation under clause 4.2 to ensure compliance with section 9(1) of the Limited Partnership Act 1907. If it had been the intention of the parties that Fyled would become a member of the UK Partnership, it would have complied with this duty.
(7) It is no answer to suggest that RBS had already acquired a partnership interest in the UK Partnership and then assigned it to Fyled. For the reasons which we have set out above, the FTT was correct to find that RBS did not become a partner of the UK Partnership. But even if it had, RBS only assigned a partnership interest in the UK Partnership to Fyled and no more: see clause 2 of the deed of assignment. Moreover, even if RBS had assigned a partnership interest in the UK Partnership to Fyled, there was no evidence before the FTT (or before us) that it had complied with clause 19.2 of the UK Partnership Deed (above)."
Conclusion on the Partnership Issue
The Fiduciary Issue
Legislation
"6 Profits accruing in fiduciary or representative capacity
(1) 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.
(2) The exception under subsection (1) from chargeability does not apply to profits arising in the winding up of a company."
"1259 Calculation of firm's profits and losses
(1) This section applies if a firm carries on a trade and any partner in the firm ("the partner") is a company within the charge to corporation tax.
(2) For any accounting period of the firm, the amount of the profits of the trade ("the amount of the firm's profits") is taken to be the amount determined, in relation to the partner, in accordance with subsection (3) or (4).
(3) If the partner is a UK resident
a. Determine 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, and
b. Take that to be the amount of the firm's profits.
(4) If the partner is a non-UK resident
a. Determine what would be the amount of the profits of the trade chargeable to corporation tax for that period if a non-UK resident company carried on the trade, and
b. Take that to be the amount of the firm's profits.
(5) The amount of any losses of the trade for an accounting period of the firm is calculated, in relation to the partner, in the same way as the amount of any profits.
1262 Allocation of firm's profits or losses between partners
(1) For any accounting period of a firm a partner's share of a profit or loss of a trade carried on by the firm is determined for corporation tax purposes in accordance with the firm's profit-sharing arrangements during that period.
This is subject to sections 1263 and 1264.
(4) In this section and sections 1263 and 1264 "profit-sharing arrangements" means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade."
The First-tier and Upper Tribunal
Submissions
"135. As is clear from that Joint Report, dated 25 July 2019, the Cayman Island Law experts, Mr Goucke for the Cayman Appellants and Mr Said for HMRC, agree that under Cayman Islands law:
(4) [Cayman Ltd], as General Partner of [Cayman LP], holds the assets on trust for the partnership, [UK LP], in accordance with the terms of the applicable partnership agreement of [relevant Cayman LP], pursuant to s6(2) of the 2007 [Exempt Limited Partnership or "ELP"] Law and later amended to be s7(8) of the 2007 ELP Law;
136. Accordingly, as the experts agree, as a matter of Cayman Islands law, the profit sharing agreements were confined to the [Cayman LP Deed] under which [Cayman Ltd's] entitlement to profits of [Cayman LP] did not include those allocated to RBS and subsequently Fyled. "
" it appears to me that I should be straining the law if I were to hold that a partner receiving money on account of the partnership that is, on behalf of himself and his co-partners -received it in a fiduciary capacity towards the other partners. ".
Discussion
The Ramsay Approach
Submissions
Ramsay Authorities
"32. The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of the statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 320, para 8: "The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.""
"35. the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
" The point is that the facts must be analysed in the light of the statutory provision being applied. If a fact is of no relevance to the application of the statute, then it can be disregarded for that purpose. If, as in Ramsay, the relevant fact is the overall economic outcome of a series of commercially linked transactions, then that is the fact upon which it is necessary to focus. If, on the other hand, the legislation requires the court to focus on a specific transaction, as in MacNiven[1] and Barclays Mercantile, then other transactions, although related, are unlikely to have any bearing on its application."
"12. Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary to not just consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle. Although a statute must be applied to a state of affairs which exists, or to a transaction which occurs, at a particular point in time, the question whether the state of affairs or the transaction was part of a preconceived plan which included further steps may well be relevant to whether the state of affairs or transaction falls within the statutory description, construed in the light of its purpose.
15. In the task of ascertaining whether a particular statutory provision imposes a charge, or grants an exemption from a charge, the Ramsay approach is generally described - as it is in the statements quoted above - as involving two components or stages. The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they "answer to the statutory description" (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required."
Discussion
Conclusion on Ramsay in context of fiduciary issue
Conclusion on the Profit Allocation Issue
INTEREST DEDUCTION
Legislation
"297 Trading credits and debits to be brought into account under Part 3
(1) This section applies so far as in any accounting period a company is a party to a loan relationship for the purposes of a trade it carries on.
(2) The credits in respect of the relationship for the period are treated as receipts of the trade which are to be brought into account in calculating its profits for that period.
(3) The debits in respect of the relationship for the period are treated as expenses of the trade which are deductible in calculating those profits.
"
The First-tier and Upper Tribunal
Submissions
Discussion
"So the [loan] money which was contributed by Mr and Mrs Brodie to Skeldon Estates partnership is used wholly for the purposes of the trade of farmers carried on by Skeldon Estates partnership in common with Mr Henry Murdoch under the firm name of W Murdoch & Son. "
Conclusion on Interest Deduction Issue
SUMMARY AND DISPOSAL
a. There is no principle of law which would automatically make Fyled a partner in the UK LP or UK LLP. As a matter of substance and reality, Fyled was a partner only in the Cayman LP.
b. UK LP/LLP allocated Superprofits to Cayman Ltd, whose right to that allocation was not as fiduciary but, construing the statutory provisions purposively and considering the reality of the arrangements entered into including the TRS (pursuant to the Ramsay approach), as beneficial owner.
LORD JUSTICE NUGEE:
LORD JUSTICE LEWISON:
Note 1 MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6, [2003] 1 AC 311 [Back]