Intangible fixed assets transferred to an LLP

The FTT has considered the interaction of the provisions for calculating the profits of UK corporate members of an LLP, which require calculation as if the LLP’s trade is carried on by a UK company, with the intangible fixed asset regime rules. The FTT held that, despite difficulties in reconciling parts of the legislation with the deeming provisions, the statutory fiction should be applied throughout the process involving calculation of profits, including when determining which assets fell within the intangible fixed assets regime: Muller UK and Ireland Group LLP v HMRC [2023] UKFTT 221.

In particular, the FTT has held the statutory fiction applied to treat the corporate members of the LLP as “related parties” on the transfer of intangible fixed assets and goodwill such that the post 2002 tax regime for such assets, which would have permitted those assets and goodwill to be amortised, did not apply. This was despite the fact that the relevant definition could not, at the time, strictly be applied to a partnership scenario.

Background

The case concerns arrangements put in place by the Muller group in 2013. Three UK companies, all under the common ownership, transferred their trades to a limited liability partnership incorporated under the Limited Liability Partnerships Act 2000. The assets of the trades included intangible fixed assets and goodwill. As a result of the transfers, each UK company (Corporate Member) received a membership share in the LLP.

A valuation of the intangible fixed assets was made at the time of the transfer and those assets were subsequently amortised over a five year period. In computing the profits of the LLP, to be included in each Corporate Member’s company tax return for the relevant accounting periods, a deduction was taken for the amortisation of the intangibles and goodwill on the basis that they fell within the post 2002 intangible fixed assets regime.

HMRC rejected the claims on the basis that the intangibles and goodwill did not fall within the intangible fixed assets regime introduced in 2002. For an intangible or goodwill to fall within this regime it must either have been created on or after 1 April 2002 or have been acquired by the company on or after that date from a person who at the time of the acquisition is not a related party in relation to the company (FA 2002 s. 882). In this case, HMRC argued that the relevant assets had been acquired from a “related party” and so did not fall within the post-2002 regime.

Taxpayers’ contentions

The taxpayers argued that the restrictions on the scope of the post 2002 regime did not apply in their case. They pointed out that CTA 2009 s. 1273 provides that a UK limited liability partnership which is carrying on a trade with a view to profit, and the members of that limited liability partnership, are to be treated for UK corporation tax purposes as if the limited liability partnership were a partnership. CTA 2009 s.1259 then deals with the UK corporation tax treatment of a partnership and its members. It provides that where a partnership carries on a trade and any partner is a company within the charge to CT, then if the partner is UK resident, it is necessary to “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… take that to be the amount of the firm's profits”.

On the basis of these statutory provisions, the taxpayers contended that:

• The “related party” requirement in s 882 was simply incapable of applying. This was because the notional company in s.1259 was no more than a statutory construct for the purpose of computing the taxable profits to be allocated to the relevant Corporate Member. It was not an actual or deemed company. As such, the very concept of a “related party” had no meaning in the context of the relevant calculation.
• Even if the concept of a “related party” did have relevance in the context of the notional company calculation, the terms of the “related party” definition meant that none of the Corporate Members could be said to be a “related party” of the notional company. In particular, they could not be said to have the necessary control or interest in the notional company.

FTT decision

The FTT noted that in applying a deeming provision such as s.1259, it is necessary to carry the relevant hypothesis as far as necessary to achieve the legislative purpose, but no further. On this point, HMRC did not argue that the notional company should be deemed to have an existence beyond that needed for the purpose of computation, but simply argued that the statutory fiction needed to encompass the whole of the computation process and not just part of it.

On this basis, the FTT rejected the taxpayers’ first argument. The FTT agreed with HMRC that in a case where a partnership holds intangible fixed assets or goodwill, it is impossible to carry out the notional company computation which is required by s.1259 without asking whether, in relation to the intangible fixed assets or goodwill in question, the notional company which has to be assumed in order to carry out the computation required by s.1259 created or acquired the relevant intangible fixed assets or goodwill in one of the scenarios described in s.882.

Just as, in carrying out the corporation tax calculation, it is necessary to look at the actual transactions entered into by the partnership, equally it was necessary to look at the actual identities of the parties to the transactions. The FTT rejected the argument that, because the notional company is just that – a generic company which is assumed for computational purposes only and not an actual company – the identity of the person or persons from whom the partnership acquired the relevant assets was somehow irrelevant.

The FTT had more difficulty with the taxpayers’ second argument concerning the application of the “related party” definition as the definition was entirely focussed on corporate and not partnership scenarios. However, the FTT concluded that declining to treat the notional company as having any existence when reading the “related party” definition would create injustice and absurdity.

In addition, whilst the FTT agreed with the taxpayers that s.1259 requires a notional company to be assumed in the case of the computation in relation to each corporate member and not merely the assumption of only one notional company overall, the FTT did not agree that this somehow meant that each notional company should be regarded as being wholly-owned by the corporate member in relation to whom the notional company is being assumed as part of the computation process. Instead, the section is “merely saying that, in the case of each corporate member, the calculation of the taxable profits of the trade which are to be allocated to that corporate member must start with an assumption that the trade of the partnership is carried on by a notional company. That notional company, in each case, is a statutory fiction which represents the partnership as a whole. As such, in each case, the ownership characteristics of the notional company should be regarded as matching the ownership characteristics of the partnership. Putting it another way, just because the notional company is being assumed in order to carry out the calculation in relation to a single corporate member, that does not mean that the notional company in question is to be treated as being wholly-owned by that single corporate member”.

As a result, for each corporate member, the notional company was to be treated as having the ownership characteristics of the partnership whose existence had given rise to the operation of s.1259. It followed that each notional company would have the same ownership characteristics as the partnership as a whole. In this case that meant that each notional company was treated as having three owners, namely all three of the Corporate Members, who were “related parties”.

The FTT also rejected the argument that it was too difficult to apply the tests in s.882 to a partnership. The FTT did not consider why, as a matter of principle, voting or economic rights and powers in relation to a partnership under a partnership agreement are conceptually any different from voting or economic rights and powers in relation to a company under a company’s articles of association.

2016 changes

Although it was not strictly necessary to do so, the FTT also went on to consider changes introduced in 2016 to widen the definition of “related party”. It was accepted that this widened definition (which applied where a “participation condition” was met) would have applied to the Corporate Members. However, the taxpayers argued that the “related party” definition must be applied at the “time of the acquisition” of the relevant assets and so could have no effect on the debits in this case.

The FTT disagreed. The starting point was 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 s.882(1)(b) is satisfied in respect of the assets which have given rise to those debits.

That did not mean that whether or not the question whether there was a “related party” needs to be determined afresh in each accounting period by reference to the then-prevailing facts. The relevant time for determining whether a person is a “related party” is always the “time of the acquisition”. However, it did mean that, in applying the legislation in the later accounting period and thus considering whether there was a “related party” at the “time of the acquisition”, it was 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 on or after the effective date in determining whether each Corporate Member was a “related party” at the “time of the acquisition”.

Comment

The application of statutory fictions can, and does, give rise to difficulties in determining how far to apply the fiction and whether it should taken into account when applying other related provisions. The FTT in this case has taken a pragmatic approach to the particular circumstances of this case in determining that the corporate fiction required by the computational provisions should be applied throughout the process of determining which computation provisions apply – despite some difficulties and inconsistencies in the language of the related legislation. Given that the computation provisions also cover matters such as the tax neutral transfer rules, it would seem that the decision is support for the taking into account of those rules to the extent permitted by the statutory fiction, albeit that the decision suggests that the statutory deeming does not go so far as to treat the interests of corporate members/partners in an LLP or other partners as being “shares” for the purposes of these rules or to treat those corporate members/partners as shareholders.

Perhaps equally interesting is the FTT’s opinion (strictly unnecessary) that subsequent provisions amending the definition of related party would have required a change in tax treatment of the assets in any event for the later periods of account when the revised definition was in force. The annual nature of corporation tax would have meant that it was necessary to analyse whether the intangible fixed assets had been acquired from a related party, based on the later period’s definition of related party rather than the definition which applied in the period of acquisition of the intangible fixed assets. The amending provisions had, in effect, an element of retrospection.