This appeal concerned the assignment by the taxpayer of his rights to the income from two film trading partnerships to an LLP of which he and his company were members. The company became entitled to the income which arose from the assignments, after the loan obligations taken out by the taxpayer to invest in the film partnerships had been satisfied under the security arrangements governing those loans.
The point of the assignment was that the film partnerships had unexpectedly become profit making and so assigning the income to the company would result in a lower rate of tax in the hands of the company than would have applied in the hands of the taxpayer. There is much of interest in the decision about equitable assignments but in a nutshell, the decision revolved around whether the taxpayer remained entitled to the income under section 8 ITTOIA 2005, which provides:
“8 Person liable
The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.”
The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits.”
If the taxpayer remained entitled to the income, then he remained taxable in full on the income despite the fact that the company member of the LLP had returned and paid the tax on the income. Incidentally, during the hearing, HMRC had declined to give any assurance that if they won, they would credit the tax already paid by the company against tax payable by the taxpayer, thus signalling that their long-standing aversion to double taxation may be ending.
In the result, the FTT decided that the taxpayer had remained entitled to the income for the purposes of section 8 “because the income was applied for his benefit, and his benefit only; it is his income on which he is fully chargeable to income tax.” [paragraph 91]. The reference to the income being applied for the benefit of the taxpayer was to the fact that the film partnership profits were applied first under the security arrangements to reduce the taxpayer’s liabilities under the borrowing/security arrangements governing the funding of those partnerships.
What is surprising about this decision is the eliding by the FTT of “benefit” and “entitlement.” Simply because someone enjoys the benefit of something does that also automatically mean that they are entitled to that something for tax purposes?
Had the FTT held that the taxpayer was merely in receipt of the film partnership income for the LLP but not entitled to it then the taxpayer’s tax liability would at most have been at basic rate only (section 11 ITA 2007) and HMRC practice is not to tax the person in receipt in a representative capacity when the person entitled to the income has paid the tax.
You can read the full decision here.