“Other front office members of the [Respondent] who do not have their own discretionary portfolios are very experienced researchers or technologists responsible for managing teams such as quant research teams and computer modellers.”
“In dealing with discretionary allocations, the [Respondent] undertook arrangements known as a partner incentivisation plan or “PIP”, under which, very broadly, amounts were allocated to a corporate member as a discretionary allocation and then ended up in the hands of individual members at a later date… For the purposes of this appeal, it is agreed that the amounts paid to the individual members, either directly or via the PIP Facilitators, together comprise discretionary allocations.”
“…. Discretionary Drawings made by any member shall be debited on each occasion they are made to the Distribution Account of such member. In the case of any individual member, the Board shall have the discretion to require the relevant member to immediately repay any Discretionary Drawings that have been so debited to the Distribution Account of such individual member to the extent they have not been reduced by any subsequent profit allocation. In the event that the amount of any Discretionary Drawings made by any member in any financial year of the Partnership shall exceed the amount of profits allocated to the relevant member pursuant to this clause 10, or if the Partnership has incurred losses (other than capital losses) in respect of such financial year, so that there is a negative balance on his Distribution Account following such allocation of profits or any allocation of losses then the Board shall have discretion to require the relevant member to immediately repay the excess amount of such Discretionary Drawings over the profits so allocated or, in the case of a loss, the whole amount of such Discretionary Drawings or to allow such negative balance to be carried forward to be set off against profits allocated to the relevant member in respect of future financial years of the Partnership…….”
“We have been advised that this requirement should be met if after calculating all of the partners’ discretionary profit allocation, using the methods that have historically been used, the total of all of these allocations is compared against the profits of [the Respondent] to determine whether there is sufficient profit to fund the aggregate of all of the discretionary allocations. It is therefore recommended that the ExCo confirm that its policy is that future profit allocations will be referenced to the total profits of [the Respondent] and if there is a year when the total profits of [the Respondent] were not sufficient to fund the discretionary profit allocations these allocations would be reduced accordingly. It would be preferable for this reduction to be effected pro rata across all discretionary allocations, rather than by reduction of some partners’ discretionary allocations in priority to others. In such a case the profits should not be increased through an amendment to the transfer pricing policy or through some other means to ensure that there are sufficient profits to fund the profit allocations.”
“…by way of a written resolution dated3 April 2014 : (1) Noted, inter alia, that pursuant to the LLP agreement the Board is entitled to allocate income profits in any year as it may in its absolute discretion determine; that in certain circumstances it is possible for the Board to make allocations which might in aggregate exceed the total amount of profit available in a given year; and that the availability of unallocated profits is taken into account by the Board when determining potential allocations. (2) Resolved that future discretionary allocation of income profits in accordance with the LLP Agreement dated22 March 2011 should not exceed in aggregate total profits available for that purpose for a given year; in the event that the proposed allocations exceed those total profits, the Board shall reduce the amount of such allocations accordingly; and the appellant should not seek to enter into any arrangement with the express purpose of increasing the profits available for the preceding purpose.”
“These terms of reference are, broadly speaking, in a common form and many include, under the heading “purpose” the following: “[UK Exco] and [Group Exco] (together “the Exco’s”) are responsible for the systems of internal controls and for managing the risks associated with the business and markets within which each entity operates. [The lead investment manager] has outsourced to [the appellant] the following support services: operations, product control, risk management, position valuing, legal, compliance, investor relations and human resources services.”
“The minutes of the UK ExCo which dealt, specifically, with profit allocation, are also in reasonably standard form. In each case it appears that a schedule of proposed allocations to each member was tabled. In each case it was noted that the calculations had been carried out in accordance with clause 10.3 of the LLP Agreement and following discussion it was resolved that the final allocations should be in accordance with the provisional allocations set out in the schedule.”
“…to set the overall investment strategy for the Group; ensure that the Fund maintains appropriate cash and liquidity levels; recommend cash should be invested or divested from the Fund; take decisive actions and provide clear direction to help mitigate macro economic events which will affect the return of the Fund; identify risk areas and decide on the Fund’s investment strategies.”
“Essentially we have one client, which is Mike. So he is the CEO… but he is also the client. And ultimately if his objectives change, and the things that he thinks we should be focusing on …and the way in which we should be trying to ultimately service his money…we're providing…a service for his investments -- he's able to move the goalposts…he's the top of the organisation. But that doesn't mean -- you know, the head of the Civil Service doesn't sort out my local parking permit. He doesn't make every decision but ultimately of course he can veto a decision if he chooses to get involved.”
“… there are many combinations of circumstances in which it could not be said to be wrong to arrive at a conclusion one way or the other. If the facts of any particular case are fairly capable of being so described, it seems to me that it necessarily follows that the determination of the Commissioners, Special or General, to the effect that a trade does or does not exist is not “erroneous in point of law”; and, if a determination cannot be shown to be erroneous in point of law, the statute does not admit of its being upset by the court of appeal. I except the occasions when the commissioners, although dealing with a set of facts which would warrant a decision either way, show by some reason they give or statement they make in the body of the case that they have misunderstood the law in some relevant particular.”
“I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court, it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination. So there, too, there has been error in point of law. I do not think that it much matters whether the state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test. For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur.”
“It is right, in my judgment, to strike two cautionary notes at this stage. There is a well-recognised need for caution in permitting challenges to findings of fact on the ground that they raise this kind of question of law. That is well seen in arbitration cases and in many others. It is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts. As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be misused in this way. Secondly, the nature of the factual inquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact. The question is not, has the party upon whom rests the burden of proof established on the balance of probabilities the facts upon which he relies, but, was there evidence before the tribunal which was sufficient to support the finding which it made? In other words, was the finding one which the tribunal was entitled to make? Clearly, if there was no evidence, or the evidence was to the contrary effect, the tribunal was not so entitled. It follows, in my judgment, that for a question of law to arise in the circumstances, the appellant must first identify the finding which is challenged; secondly, show that it is significant in relation to the conclusion; thirdly, identify the evidence, if any, which was relevant to the finding; and, fourthly, show that that finding, on the basis of that evidence, was one which the tribunal was not entitled to make. What is not permitted, in my view, is a roving selection of evidence coupled with a general assertation that the tribunal’s conclusion was against weight of the evidence and was therefore wrong.”
“…As an ordinary word in the English language "trade" has or has had a variety of meanings or shades of meaning. Its meaning in tax legislation is a matter of law. Whether or not a particular activity is a trade, within the meaning of the tax legislation, depends on the evaluation of the activity by the tribunal of fact. These propositions can be broken down into the following components. It is a matter of law whether some particular factual characteristic is capable of being an indication of trading activity. It is a matter of law whether a particular activity is capable of constituting a trade. Whether or not the particular activity in question constitutes a trade depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles. To that extent the conclusion is one of fact, or, more accurately, it is an inference of fact from the primary facts found by the fact-finding tribunal. It follows that the conclusion of the tribunal of fact as to whether the activity is or is not a trade can only be successfully challenged as a matter of law if the tribunal made an error of principle or if the only reasonable conclusion on the primary facts found is inconsistent with the tribunal's conclusion. These propositions are well established in the case law: Edwards v Bairstow[1956] AC 14 , 29-32 (Viscount Simonds), 33, 36, 38-39 (Lord Radcliffe); Ransom v Higgs[1974] 3 All ER 949 , 955 (Lord Reid), 964 (Lord Wilberforce), 970-971 (Lord Simon); Marson v Morton[1986] 1 WLR 1343 , 1348 (Sir Nicholas Browne-Wilkinson V-C). An appeal from the FTT is on a point of law only:Tribunals, Courts and Enforcement Act 2007 s.11 .”
“Appellate courts have been repeatedly warned, by recent cases at the highest level, not to interfere with findings of fact by trial judges, unless compelled to do so. This applies not only to findings of primary fact, but also to the evaluation of those facts and to inferences to be drawn from them…The reasons for this approach are many. They include: i) The expertise of a trial judge is in determining what facts are relevant to the legal issues to be decided, and what those facts are if they are disputed. ii) The trial is not a dress rehearsal. It is the first and last night of the show. iii) Duplication of the trial judge's role on appeal is a disproportionate use of the limited resources of an appellate court, and will seldom lead to a different outcome in an individual case. iv) In making his decisions the trial judge will have regard to the whole of the sea of evidence presented to him, whereas an appellate court will only be island hopping. v) The atmosphere of the courtroom cannot, in any event, be recreated by reference to documents (including transcripts of evidence). vi) Thus even if it were possible to duplicate the role of the trial judge, it cannot in practice be done.”
“…The very concept of employment presupposes as a matter of sociological fact a hierarchical relationship whereby the worker is to some extent at least subordinate to the employer. This is the characteristic which underpins the general understanding of what constitutes the essence of an employment relationship. Where the relationship is one of partners in a joint venture, that characteristic is absent. Each partner is agent for the other and is bound by the acts of the other and each partner is both severally and jointly liable for the liabilities of the partners. There is lacking the relationship of service and control which is inherent in both concepts of employee and [worker]. The partnership concept is the antithesis of subordination.”
“There can be no substitute for applying the words of the statute to the facts of the individual case. There will be cases where that is not easy to do. But in my view they are not solved by adding some mystery ingredient of “subordination” to the concept of employee and worker. The experienced employment judges who have considered this problem have all recognised that there is no magic test other than the words of the statute themselves… While subordination may sometimes be an aid to distinguishing workers from other self-employed people, it is not a freestanding and universal characteristic of being a worker.”
“The role of a partner in a traditional partnership is to “find, mind and grind”
“$300 million over 10 years is, to my mind, significant. It is significant in absolute terms. It certainly cannot be said to be insignificant” indicates that it considered the test to mean “not insignificant”
“In my judgment, each individual portfolio manager with a capital allocation of$100 million does have significant influence over the affairs of the partnership. I say this from both a quantitative and qualitative perspective. As regards the former, and taking Mr Moore as an example,$300 million over 10 years is, to my mind, significant. It is significant in absolute terms. It certainly cannot be said to be insignificant. I think the same sort of level of overall returns will have been demonstrated by those portfolio managers with capital allocations of$100 million . They will have made a significant impact on the financial performance of the appellant. From a qualitative point of view, as I have already said, those portfolio managers who were made up to be members of the LLP, and thus in the same position as a partner in a traditional partnership, would have already demonstrated the personal managerial and operational qualities to justify that elevation, and that they were capable of performing the tripartite role of a partner, namely generating work, doing the work, and, if necessary, supervising work. These roles are absolutely fundamental to the core activity of the subinvestment manager, namely to maximise its sub-investment fees, and the evidence shows that these individual portfolio managers demonstrated “managerial clout” in the discussions with other portfolio managers concerning managerial and operational issues which, if necessary, were then ratified by the Board or UK ExCo. Each such individual’s view was of significance, as was their influence.”
“Both parties accept that significant influence does not need to be exercised through a formal constitutional procedure, but requires a realistic examination of the facts. In the context of this appellant, the investment and operational decisions made by the portfolio managers demonstrate that they have influence over the affairs of the partnership notwithstanding that the portfolio managers themselves may not sit on any of the UK committees, the members of the Board, or are members of UK ExCo.”
“Mr Vallat suggests that in undertaking the operational activities mentioned above, they were doing no more than what was required of them in their role as portfolio managers, and to demonstrate significant influence, they need to do more. I can see no principled justification for this submission. I bear in mind that it is HMRC’s view that the salaried member rules are intended to apply to members who are more like employees than partners in a traditional partnership. And to my mind the activities undertaken by the portfolio managers are directly analogous to those activities carried out by partners in a traditional partnership. They cultivate existing client relationships with their counterparties; they generate new work either by new product lines or tinkering with existing product lines; they undertake investment activities themselves; and, for those where there is a joint book, they actually conduct joint investment activities with junior members of staff. The evidence also shows that they disseminate their experience to junior members of staff, something which is fundamental to the role of a partner in a traditional partnership. So by undertaking their core role, they are acting as a partner would in a traditional partnership.”
“The level of capital allocation does not demonstrate that the individual has influence (significant or otherwise) akin to that of a typical partner in a traditional partnership, nor is it apparent why being on one side or the other of the$100m capital allocation ‘threshold’ should demarcate significant influence, rather than demonstrating the level of skill at investment management.”
“I agree with Mrs Hardy when she says that there is no need for the individual members’ remuneration to “track” the appellant’s overall profits and losses. By this I think she means that there is no need for the profits of the remuneration of the individual members to increase if the overall profits and losses of the partnership increase. One of Mr Vallat’s points was that the evidence clearly shows (which it does) that the individual portfolio managers might make losses on their individual profit and loss accounts even if the appellant made an overall profit and even if other portfolio managers made a profit on their individual profit and loss accounts. But having agreed with her on this point, I also agree with Mr Vallat that the appellant must show that there is a link between an individual’s remuneration on the one hand and the overall profits and losses on the other. And that link cannot simply be that if there were fewer profits available for distribution, an individual member would receive a lesser amount. … But the difficulty faced by Mrs Hardy is that, whilst it is clear that the bonus of the portfolio managers varies, it varies by reference to their own personal performance. And although the initial bonus might then abate when the profits of the appellant are finally determined, and the overall total of those initial allocations is found to be equal to or greater than the accounting profit, she has not made out that the allocations are, essentially, variable and are computed by reference to, that overall profit. They are computed by reference to individual performance. There is no evidence that I have seen that the mechanism of computing the portfolio manager’s bonus is intended to establish the share of the overall profits of the partnership to which the individual is entitled any more than computing an employee’s bonus. Clearly there must be accounting profits to distribute, and equally clearly, if there are insufficient accounting profits to satisfy the bonuses, they will be abated in some way. But the mechanism does not, in terms, entitle a portfolio manager to share in a proportion of the overall partnership profits. On the one hand, there is the individual’s profit and loss account. On the other, there are the accounting profits of the partnership. But it seems to me that the first is calculated without reference to the variability of the second for the reasons I have given above.”
“…. It goes to the point made above, namely that if there are insufficient profits to fulfil the portfolio managers’ preliminary allocations, then those allocations must reduce. You cannot dish out more than the accounting profits dictate.”
“not, in practice, affected by”
“As I have set out above, it is my view that financial contribution is a factor in wielding significant influence, and that is the submission made by Mrs Hardy. And whilst it is possible in empirical terms to identify the financial contributions made by the portfolio managers, I am not in the position to come to a conclusion regarding the financial contributions of those supplying the back-office services, since I simply have no evidence before me of those financial contributions. I do not know, for example, the amount generated by the head of legal, or the legal team. Nor by the tax department, nor by the IT department. My understanding is that, for transfer pricing purposes, they were cross charged on an arm’s length basis using an appropriate transfer pricing methodology. But I have no evidence of the precise amounts of cross charges which are attributable to the individuals or departments. I am therefore unable to determine what financial or other contributions were made by the non-portfolio managers to the provision of the external services provided by the appellant to other members of the Group and which comprise a significant element of its overall activities. I am therefore forced to the conclusion that no non-portfolio manager exercised significant influence over those affairs of the appellant.”