First judicial consideration of the Mixed Member Partnership Rules - Nicolas Walewski v HMRC [2019] UKFTT 0058

The Proceedings

The Appellant is and was at all relevant times a successful investment adviser in London. His services were provided through two LLPs, one which provided investment advice to third party clients (senior LLP)  and the other (junior LLP) which provided support services to the senior LLP and execution services to the clients of the senior LLP. Mr Walewski was a member of both LLPs. Another member of the LLPs was a corporate entity (W Ltd) wholly owned by an offshore trust whose class of beneficiaries included members of Mr Walewski’s immediate family. Mr Walewski was the generator of the profits earned by the LLPs. However, the lion’s share of the profits generated were allocated to W Ltd. HMRC challenged the arrangements under s850C Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) on the basis that the share so allocated exceeded the appropriate notional profit (as defined in s850C(10)-(17) ITTOIA) and that the excess should be reallocated to Mr Walewski.


Statutory Background

The Mixed Membership Rules were introduced by FA 2014 as part of an anti-avoidance package of measures relating to partnerships/ LLPs. The Hansard debates on the Finance (No 2) Bill 13 May 2014 discussing the introduction of the mixed partnership rules stated (inter alia):

“Various structures have been used to allocate profits to a low-tax entity, such as a company, while losses were allocated to individual partners, who could make more tax- efficient use of the losses. The new measures aim to prevent these types of arrangements”.

Section 850C ITTOIA identifies the “appropriate notional profit” allocated to the non-individual member as being an amount in excess of “the appropriate notional return on capital” and the “appropriate notional consideration for services”. Both concepts are statutorily defined. Where an allocation of profits exceeds the “appropriate notional profit” and it is reasonable to suppose that the excess allocation is attributable to the individual member’s power to enjoy the amount allocated to the non-individual member, the excess profits allocated to the non-individual member are reallocated to the individual member.


FTT Decision

The FTT held that, on the facts, the profits allocated to W Ltd exceeded the appropriate notional profit such that the excess should be re-allocated to Mr Walewski.

Aparna Nathan QC appeared for the successful Respondents.

For a full copy of the judgment click here.

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