The UK Supreme Court has clarified the tax treatment of deferred remuneration arrangements in Limited Liability Partnerships (LLPs) in HMRC v HFFX LLP [2026] EWCA Civ 813, confirming the analysis of the lower Courts. The Court rejected HMRC’s argument under section 850 ITTOIA 2005 (allocation of partnership profits) but held that payments to members were taxable when received under section 687 ITTOIA 2005 as ‘income not otherwise charged’.
The case concerned a foreign exchange trading LLP that implemented a capital allocation plan to enable deferred remuneration to be paid in subsequent periods to individual members, subject to performance and good/bad leaver conditions. Profts were paid to a corporate member that later contributed proceeds back to the LLP as ‘special capital’ which was then reallocated to the individual members. The intended effect was that those profits would be taxed at corporation tax rates in the corporate member, with later payments to individual members treated as capital rather than income. Our earlier article discussed the prior Court of Appeal decision.
Profit allocation: contractual rights remain key
As discussed in our prior article on the BCG Partnership case, a central issue was whether profits allocated to the corporate member should, in substance, be treated as allocated to individual members under section 850 ITTOIA 2005.
The Supreme Court rejected HMRC’s argument and confirmed that:
- Section 850 ITTOIA 2005 operates by reference to the members’ contractual rights to profits in the relevant accounting period;
- There must be a definitive entitlement to a share of profits during that period; and
- A mere expectation of future receipt is insufficient.
On the facts, the corporate member had actually utilised its discretion in the allocation of ‘special capital’ and the individual members had no contractual entitlement to the deferred amounts at the time profits were allocated. The allocation to the corporate member was therefore respected.
This reinforced a key principle at the time: partnership profit shares for tax purposes follow legal entitlement of the partners in the respective accounting period. Since 2014 the mixed member rules in sections 850C and 850D ITTOIA should also be considered (they do not rely on contractual entitlement) which can reallocate profits attributed to non-individual partners in specified circumstances involving deferred profit or power to enjoy.
Deferred remuneration: still taxable on receipt
The Court nevertheless held that when payments were later made to individual members, they were taxable under section 687 ITTOIA. This provision acts as a residual charge on income ‘from any source’ not otherwise taxed.
It was common ground at the Supreme Court that the payments were income in nature. The point at issue was whether there was a source for those payments. It was confirmed that:
- The payments were made under a contractual discretionary power which are governed by legal constraints (the ‘Braganza principle’);
- A ‘source’ of income can arise from this exercise of a structured discretion under a legal framework; and
- Payments made pursuant to such arrangements are not ‘voluntary’ in a tax sense, even where discretion exists.
In this case, the combination of the members’ rights under the LLP agreement, the capital allocation plan, and the decision-making framework governing allocations was sufficient to create a taxable source of income when payments were made.
The Supreme Court, like the Court of Appeal before it, did not comment on the Chapter 4 Part 13 ITA 2007 ‘sales of occupation income’ provisions, because section 687 already applied.
Practical implications
The judgment provides several important takeaways for LLPs and advisers:
- Confirmation that the allocation of profits from a partnership is governed by the contractual entitlement of the parties in the relevant accounting period;
- A charge to tax under the miscellaneous income provisions requires an underlying source of that income. However, there is a broad understanding of what could constitute a source; and
- A deferred remuneration receipt can still be taxable under section 687 where it arises under a structured legal framework and a discretionary decision in the member’s favour.
For modern LLP structures, section 850 analysis must be read alongside the mixed member rules in sections 850C and 850D.
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