Purchase and sale of partnership interests

Mon 16 Apr 2018

The UT has issued its decision in the Investec case concerning purchase and sale of interests in leasing partnerships.  It has revised one aspect of the First tier Tribunal (FTT) decision, and left one matter open for further appeal.

In summary the UT agreed with the FTT that there were two trades, a financial trade dealing in partnership interests and the separate leasing business of the partnerships. They also considered the costs of purchasing the partnership interests to be revenue costs.

In contrast to the FTT, they considered the capital contributions to be amounts relevant to the partnerships to enable them to purchase the leasing businesses, rather than revenue costs of the financial trade. Whether the leasing businesses taxed profits needed to be brought into account for tax again in the financial trade was left open for further submissions.

How this final point is resolved could be of interest to corporate businesses involved in partnership activity and to partners in nesting partnerships (partnerships with partnership interests).

Background

Investec were involved purchasing seven leasing partnerships between 2006 and 2007 that were either wound up or sold shortly after acquisition. They accounted for the activity of these partnerships and the purchase and sale of partnership interests as one trading activity.  HMRC considered there were two activities (the partnership leasing, and financial trading in partnership interests) and that some of the costs were capital costs not deductible in computing financial trading profits. There was also a question of whether credit was available for Hong Kong taxes suffered on one of the partnerships.

Three of the partnerships were considered for the purpose of the case, one of them being the Hong Kong leasing partnership. The other two partnerships considered were:

• LAGP was a partnership for the leasing of two ships.  It involved the purchase of interests in the partnership shortly before the ship lease arrangements were due to terminate.  The partnership was protected from any loss arising from the termination of the leases as these were bought from the partnership for amounts which had been guaranteed.  The Investec entities purchased their interest for £8.8m and made capital contributions of £226.2m.  The capital contributions were used to repay loans the partnership had taken out to buy the leasing business.  At the termination of the leases, the amount recovered by the partnership was £248m, £42m of which was treated as a disposal for capital allowance purposes.  The amount recovered was distributed to the partners on receipt.  In the tax computation of the Investec partners, the profits arising from their involvement in LAGP were brought into account on a ‘look through’ basis.
• Garrard was a partnership leasing business originally bought for around £5m.  Further capital of £72.8m was introduced to purchase further leasing business. Part of this business was then sold to Lombard for £63.5m.  The partnership interests were then sold on to another leasing company for £18.5m.  An Investec entity was appointed the manager of the leased plant.  In the tax computation of the Investec partners, the distributions and sale proceeds arising from their involvement in Garrard were brought into account on a ‘non-look through’ basis.

FTT decision

The FTT held there were two trades, (i) the financial trade of buying and selling partnership interests (it was considered the buying of the partnership interests was not the acquisition of receivables) and (ii) the leasing businesses of the partnerships.  However they held that all costs of purchasing the partnership interests and contributing capital to the partnerships were revenue costs deductible against proceeds of the financial trade. It was recognised that the purchase of partnership interests by Investec was crucial to the tax planning of Investec’s counterparties, but nothing further is said on this point. The FTT also considered that lease business proceeds (the portion representing taxed profits arising from lease terminations and lease rentals) were not to be taken into account in the computation of the profits of the financial trade.  With respect to the Hong Kong partnership, the FTT held that there was no limit on the availability of foreign tax credits.  As there was no appeal against the FTT’s decision on the Hong Kong partnership, the details of that partnership are not covered here.

UT decision

The UT has held that the FTT was wrong to determine that the partnership capital contributions were revenue costs of trading in partnership interests.  The UT considered the contributions were required to purchase lease assets for the businesses and to repay outstanding obligations of the partnerships and were thus to be considered as part of the leasing business, not the financial trade in partnership interests.

The remaining point was whether income taxed in the partnership needed to again be taxed when received as part of the business of trading partnership interests. The UT agreed with the FTT that profits taxed in the partnership should not again be taxed in the business of trading partnership interests.  The UT were unsure, however how this applied to the facts and whether there was a difference due to the different methods of tax accounting (look through and non-look through).  HMRC only advanced their argument that the distributions and proceeds should be taken into account for the financial trade where their argument on the capital treatment of the costs failed and considered one needed to look at the source doctrine of each business separately.  The UT found it odd that this argument (which would result in more tax for HMRC) was only their alternative argument and were unsure whether the matter was significant or not bearing in mind their decisions on other issues. It appears HMRC considered it was significant, so the UT invited further submissions to clarify the matter.

Comment

The amounts involved in this case are significant and although we do not have all the details on the tax matters in dispute, it does seem as though the Courts are leaning towards taxation broadly aligning with economic profit as adjusted by tax matters such as capital allowances. If the remaining point is appealed it will be interesting to see the arguments put forward on this, and whether the case is taken further.

For a further discussion of the tax implications of partnerships for incorporated or unincorporated partners, please get in touch with a member of the Mazars corporate tax or personal tax teams.