Upper Tribunal considers the interpretation of deeming provisions
Decision on the calculation of LLP profits illustrates importance of the correct interpretation of deeming provisions
Decision on the calculation of LLP profits illustrates importance of the correct interpre
The recent Upper Tribunal decision in Muller UK and Ireland Group LLP v HMRC [2024] UKUT 273 (TCC), principally concerned with the deductibility for its corporate partners of the amortisation of intangible assets held by a Limited Liability Partnership (LLP), provides a helpful illustration of how to interpret deeming provisions and the circumstances in which the courts will step in to correct apparent drafting errors in the legislation.
Background
Under UK legislation, the profits to be attributed to the corporate members of an LLP which carries on a trade with a view to a profit, are, like those of a partnership, initially identified by determining the profits of the trade which would be chargeable to corporation tax if a UK company (‘the notional company’) had carried on that trade.
The LLP had acquired intangible assets from its corporate members and the amortisation of those intangibles had been deducted in calculating the profits of the notional company.
It was common ground that if the LLP had actually been a company, then relief would have been denied because the intangibles had been acquired from related parties. The taxpayers argued, however, that there was no basis for assuming that the notional company had the same ownership as the LLP, and hence that it was not affected by the rules governing related party acquisitions.
The ’deeming provision’ issue
The legislation is silent as to the extent to which the notional company should be regarded as possessing the same attributes as the partnership whose trade it is deemed to carry on. The Tribunal approached the resulting short but difficult” point of interpretation in the light of three recent Supreme Court decisions:
- Fowler v HMRC [2020] UKSC 22 confirmed (at [27]) that “The extent of the fiction created by a deeming provision is primarily a matter of construction of the statute in which it appears” and required ascertaining “the purposes for which […] the statutory fiction is to be resorted to”;
- Hurstwood Properties (A) Ltd v Rossendale Borough Council [2021] UKSC 16 emphasised (at [10]) “the central importance in interpreting any legislation of identifying its purpose”; and
- R(O) v Home Secretary (SC(E)) [2022] UKSC 3 emphasised (at [29]) that provisions must be understood in their statutory context, which might include the statute as a whole.
The purpose of the deeming provision here was to calculate the profits of a partnership for corporation tax purposes using the rules given elsewhere in the statute. That included the rules governing the treatment of intangibles acquired from related parties, which clearly contemplated an enquiry into whether parties were related. On the taxpayer’s argument, “that aspect of the calculation would not be applied in a partnership context and a standard but crucial piece of the calculation process would be missing.”
It followed that it was necessary for the deeming rule to fulfil its statutory purpose that it was interpreted as attributing the ownership characteristics of the partnership to the ownership of the notional company. The Tribunal noted that this logic only extended to the characteristics necessary to calculate profits, and did not require assumptions about every conceivable feature of the notional company.
The Tribunal therefore agreed with HMRC that on the facts of the case, the amortisation deduction should be denied.
The ‘drafting defect’ issue
Parliament had in fact legislated in Finance Act 2016 to confirm that no relief should be available, but whilst the intention of the amendments was clear, it was common ground that a defect in the drafting made this ineffective.
Whilst not strictly necessary to decide the point (as the Tribunal had already concluded that the amortisation should be disallowed), the Tribunal commented briefly on whether it was entitled to look past this defect and so treat the amended rules as capable of denying relief.
In the Tribunal’s view, the circumstances satisfied the criteria identified by the House of Lords in Inco Europe Ltd v First Choice Distribution [2000] UKHL 15 for the correction of drafting errors: the intended purpose of the rule was clear, the drafting defect was inadvertent, and the Tribunal could be confident as to the substance of the provision Parliament would have made had the error been identified.
Final observations
Whilst most directly relevant to the question of what assumptions should be made about the notional company in calculating the profits of a partnership with corporate partners, the case is also valuable for its illustration of how to approach the perennial problem of determining the extent of a deeming provision. The Tribunal’s analysis of the weight to place on different indicators of the legislative purpose is worth reading in full, but it is worth noting that the Tribunal agreed with HMRC that it should disregard published guidance on an earlier version of the legislation – with HMRC arguing that with hindsight the guidance was simply wrong.
The case is also notable as a rare example of the tests for the correction of drafting errors being held to be met, providing a helpful reminder of the points to be considered in relation to this.
