“The Remuneration Committee shall have regard to the global compensation policies and procedures of BCG, Inc. as such are in force from time to time in exercising discretion and making determinations within its mandate. Subject to the foregoing, the Remuneration Committee shall have full and exclusive authority, power and responsibility to make decisions on behalf of the Partnership in respect of the matters set out in clause 3 (Interests in capital, Profits of the Partnership and Partnership Loans) and other ancillary matters.”
“The extent of each Member's interest in the capital of the Partnership shall be determined and notified to each Member by the Remuneration Committee in its discretion from time to time. On each occasion on which a Member is notified of the granting of a new interest in the capital of the Partnership, such Member shall also be notified of the number of units in the capital of the Partnership that are being granted. No financial contribution shall be required to be made by a Member in order to acquire an interest in the capital of the Partnership.”
“If a Member shall die or become bankrupt, he shall forthwith, without notice, cease to be a Member notwithstanding any other provision of this Agreement.”
“6 Optional Purchase of Sale Interests by BCG Ltd or its Designee 6.1 The Partnership shall be entitled to redeem (and BCG Ltd shall be entitled to purchase) any or all interests in the capital of the Partnership from any or all of the Members upon at least ten days' prior written notice at the Purchase Price calculated as of an Effective Date specified in that written notice… 6.2 The Partnership shall not exercise any right to redeem (and no other Purchaser shall have the right to purchase) any Sale Interests pursuant to the provisions of this paragraph 6 without a specific approval by BCG Ltd.”
“the right to commit to or effect any purchase of Sale Interests on the assumption, and without specifically determining that it has sufficient funds legally available to discharge its liabilities on the assumption, and without specifically determining, that on or after the Effective Date of such purchase, the Purchaser will have sufficient funds legally available to discharge its liabilities other than the Sale Interests to be so purchased”. (3) In paragraph 7.1(c) that on the Effective Date for a purchase: “… all rights of a Member (and his successors and assigns) in relation to the capital of the Partnership comprised in the Sale Interest shall thereupon immediately and automatically terminate without further notice or other action by the Partnership or others, and thereafter such Seller (and his successors and assigns) shall have no right with respect to such capital. All rights in the Sale Interest shall automatically be assigned to and transfer to the Purchaser on the Effective Date.”
“In the event of the winding up of the Partnership, (a) all loans made by Members to the Partnership shall automatically be converted into and be treated as capital of the Partnership and each Member's Loan Account and Capital Contribution Account shall be debited or credited accordingly and (b) any surplus of assets of the Partnership over its liabilities remaining at the conclusion of the winding up after payment of all monies due to the creditors of the Partnership and all expenses of the winding up (the Remaining Assets) shall be payable by the liquidator to the Members in the following order of application: (a) first, in paying to the Members the amounts (if any) standing to the credit of the Members' respective Distribution Accounts on the day before the commencement of the winding up (or, if there are insufficient Remaining Assets to pay such amounts in full, pro rata having regard to the amounts standing to the credit of each Member's Distribution Accounts); (b) next, if there remain any Remaining Assets, the amount standing to the credit of the Capital Contribution Account of BCG Ltd to the extent of the purchase price for the transfer of the Business and assets of BCG Ltd to the Partnership under the Business Transfer Agreement dated21 December 2010 between BCG Ltd and the Partnership for the transfer of the Business and assets of BCG Ltd; (c) next, if there remain any Remaining Assets, in paying to each Member (other than BCG Ltd and BCG UK1 [the other corporate partner with only a nominal holding]) the Purchase Price (as defined in Schedule 3) to which each Member would be entitled if his interest in the capital of the Partnership was purchased pursuant to paragraph 6 of Schedule 3 with the date of the commencement of winding up being the Effective Date for the purposes of Schedule 3 (and if the Remaining Assets are insufficient to discharge all such sums, the Remaining Assets shall be allocated and paid to Members on a pro rata basis); (d) next, if there remain any Remaining Assets, in paying to the Members the amount standing to the credit of the Members' respective Capital Contribution Accounts following the conversion referred to above (or, if there are insufficient Remaining Assets to pay such amounts in full, pro rata having regard to the amounts standing to the credit of each Members' Capital Contribution Account); and (e) all Remaining Assets shall be paid to BCG Ltd.”
“Unless agreed by the Managing Partner with the relevant Member and except as provided in Schedule 3, no Member shall: (a) transfer, sell or assign (whether in whole or in part) his interest in the capital of the Partnership in any way; or (b) grant security over, charge or encumber in any way his interest in the capital of the Partnership.”
"Given our findings we conclude that the Capital Interests were not interests in the capital of the UK LLP or a share in its assets. Indeed, the Capital Interest holders had no right as Capital Interest holders as against the UK LLP itself ...Their rights were against BCG Ltd to be paid an amount at a future date calculated by reference to the increase (if any) in the value of BCG Inc" and (2) at [139] that: "
“a fact that the distinction between capital and income receipts is sometimes easier to recognise than to define, and that in reaching a conclusion there is a place for the intuitive common sense of judges or tribunals well versed in tax law.”
“Although goodwill may be referred to as if it is a single asset, it may also be considered as a parcel of factors which could increase the opportunities of a successor to the business to enjoy the benefits that Lord Lindley referred to and so persuade him to pay more to become such a successor. The ‘right’ to use the name of the business is obviously one important factor, although as the author notes (para 10-195) it is doubtful whether that right is capable of being transferred independently of other elements going to make up goodwill. Other factors may consist of the ownership of assets associated in the minds of customers with the business itself, such as premises, registered trademarks or other intellectual property rights, even if those assets could be sold independently of any sale of the business. Others may relate to the involvement of particular individuals with the business, either in a positive sense in that they continue to work in the business under the ownership of the successor, or in the negative sense that they are prevented from offering services in competition with him.”
"While goodwill may be not difficult to recognise, it is difficult to define, at least in an exhaustive way. As an economic concept it may be seen as the difference in value between the tangible assets of a business and the value of the business if sold as a going concern. It is in this sense that it is often referred to as representing an ‘added value'."
"The term goodwill can hardly be said to have any precise signification. It is generally used to denote the benefit arising from connection and reputation; and its value is what can be got for the chance of being able to keep that connection and improve it. Upon the sale of an established business its goodwill may have a marketable value, whether the business is that of a professional man or of any other person. But it is plain that goodwill has no meaning except in connection with a continuing business… the value of the goodwill of any business to a purchaser depends, in some cases entirely, and in all very much, on the absence of competition on the part of those by whom the business has been previously carried on."
“Limited liability partnerships (1) For income tax purposes, if a limited liability partnership carries on a trade, profession or business with a view to profit - (a) all the activities of the limited liability partnership are treated as carried on in partnership by its members as partners, and (b) anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and (c) the property of the limited liability partnership is treated as held by the members as partnership property. References in this subsection to the activities of the limited liability partnership are to anything that it does, whether or not in the course of carrying on a trade, profession or business with a view to profit. (2) For all purposes, except as otherwise provided, in the Income Tax Acts– (a) references to a firm or partnership include a limited liability partnership in relation to which subsection (1) applies, (b) references to members or partners of a firm or partnership include members of such a limited liability partnership, (c) references to a company do not include such a limited liability partnership, and (d) references to members of a company do not include members of such a limited liability partnership.” (a) all the activities of the limited liability partnership are treated as carried on in partnership by its members as partners, and (b) anything done by, to or in relation to the limited liability partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to the members as partners, and (c) the property of the limited liability partnership is treated as held by the members as partnership property. (a) references to a firm or partnership include a limited liability partnership in relation to which subsection (1) applies, (b) references to members or partners of a firm or partnership include members of such a limited liability partnership, (c) references to a company do not include such a limited liability partnership, and (d) references to members of a company do not include members of such a limited liability partnership.”
"All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act “partnership property”, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement."
“the winding up provisions in the 2014 LLPA aim to make clear that they had no rights on the winding up of the UK LLP and given that we were consistently told that the agreements were to be construed as not giving rise to changes of substance we must therefore conclude that the original LLPA did not provide any real rights on a winding up.”
“I add the obvious point that it is important not to be mesmerised by the word ‘capital’ in the phrase ‘special capital’. The phrase is no more than a label, no doubt deliberately chosen to give the impression that a partner’s special capital, and in particular the special capital of the corporate partner, was a form of partnership capital, and that its transfer would be analogous to a transfer of partnership capital or assets properly so-called.”
“105. … “what is clear is that whatever scenario was envisaged, the Capital Interest holders would receive an amount calculated on a basis which had no direct relationship with the value of the UK LLP as again the amount is to be determined by applying the formula in the disposal provisions addressing the change in value of BCG Inc”; (2) at [116]: “116. However, in our view the way in which payments were calculated when paid to MDPs for their Capital Interests raises real questions as to the nature of those interests. It is clearly unusual to say the least for a departing partner to be paid for their share of the partnership on a basis which bears no direct relationship to the value of their stated rights in the partnership. It was possible for the value of the UK LLP to fall and the value of the BCG Inc shares to rise such that an MDP would be able to realise value relating to the worldwide group even when the UK business was struggling. The opposite was also possible – the value calculated by reference to the value of the global business could be less than the value of the UK business alone. The UK business only reflected about 5% of the value of the global business and therefore there was ample opportunity for a disparity to arise. Yet the Appellants argue that the rights were shares in the goodwill of the UK LLP. It is clearly unusual to say the least for a departing partner to be paid for their share of the partnership on a basis which bears no direct relationship to the value of their stated rights in the partnership”; (3) and at [133]: “133. Clearly arrangements under which a formula price is paid on disposal of members interests where that formula is not linked to the value of the business itself is unusual. The fact that the interest has no value on grant would tend to lead us away from the conclusion that the Capital Interests were in fact interests in the partnership itself.”
“All capital profits shall belong to and be allocated to BCG Ltd.”
“Notional Number means a number of Series D.2 Shares (as defined in Schedule 3) as determined in accordance with the global policies of BCG Inc. Regarding the scope and extent of mandatory holdings of long-term capital in BCG (LTCV) by individuals who are both on the board of BCG Inc and members of The Boston Consulting Group, LLP. The Notional Number cannot be less than or equal to zero.”
“The extent of each Member’s Capital Interests shall be determined solely by the board of BCG, Inc [sic] or the executive committee of that Board in accordance with BCG, Inc’s global policies from time to time and the extent of such interest as so determined shall be notified to each Member by the Profit Allocation Committee. On each occasion on which a Member is notified of the granting of an additional Capital Interest, such Member shall also be notified of the Notional Number associated with such grant. No financial contribution shall be required to be made by a Member in order to acquire a Capital Interest. The value of the Capital Interest and the Notional Number shall not affect the level or amount of Profit which may (or may not) be allocated to the Member under this Agreement, and the Profit Allocation Committee shall not take into account the amount or value of Capital Interest held by any Member in determining the amount of Profit allocated to that (or any other) Member under clause 3.1 hereof.”
“the assets of the UK LLP primarily comprise goodwill, so it was unlikely that Capital Interest holders would receive any value on an insolvent winding up.”
“not consistent with the current position of the Appellants that the Capital Interests were very clearly interests in the goodwill of the UK LLP”
“the changes meant that the value of those Capital Interests would be frozen until the disposal provisions applied on retirement. In the meantime the MDP received an additional amount by way of additional allocation of UK LLP profit”
“Unless otherwise indicated (whether expressly or by implication), a firm is not to be regarded for income tax purposes as an entity separate and distinct from the partners.”
“For any period of account a partner's share of a profit or loss of a trade carried on by a firm is determined for income tax purposes in accordance with the firm's profit-sharing arrangements during that period. This is subject to sections 850A and 850B.”
“The purpose of the rule is to prevent individual partners making arrangements which seek to accumulate profits in a corporate partner at a lower tax rate – for example, benefitting from the rate of corporation tax which is lower than the higher or additional rate of income tax.”
“Benefiting from a lower corporation tax rate is only one example of the type of arrangements which Walewski describes as being the target of s850C. However the core element of the purpose of the rule is to prevent individual partners making arrangements which seek to accumulate profits in a corporate partner.”
“Condition X is that it is reasonable to suppose that— (a) amounts representing A's deferred profit (see subsection (8)) are included in B's profit share, and (b) in consequence, both A's profit share and the relevant tax amount (see subsection (9)) are lower than they would otherwise have been.”
“‘A’s deferred profit’— (a) is any remuneration or other benefits or returns the provision of which to A has been deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise), and (b) includes A's share (as determined on a just and reasonable basis) of any remuneration or other benefits or returns the provision of which to A and one or more other persons, taken together, has been deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise).”
“…because the decision involves the application of a not altogether precise legal standard to a combination of features of varying importance, I think that this falls within the class of case in which an appellate court should not reverse a judge's decision unless he has erred in principle.”
“18% of the group’s ‘adjusted margin’ on a global basis is retained within the BCG group in order to fund the LTCVs. Quite how the adjusted margin precisely relates to the accounting profit is not addressed in the evidence but that does not matter. The important fact is that that a portion [sic] of the UK LLP’s profits are set aside and are not available to be allocated by the Remuneration Committee. For tax purposes all of the profits are allocated each year under s850 and this amount is therefore allocated for those purposes to BCG Ltd. Therefore the 18% which is considered to provide for the liabilities arising on the “sale” of the Capital Interests is included in BCG Ltd’s profit share for tax purposes. The fact that BCG Ltd does not then warehouse the 18% does not affect the underlying point that an amount which is seen to represent the potential liability under the terms of the Capital Interests is allocated to BCG Ltd.”
“This cannot be the way that s 850C is intended to operate: the question is whether it is reasonable to suppose that the shares for the individuals would be higher if profit was not being deferred (and that deferred profit being represented in the corporate member’s share). This cannot be answered by saying that there would be a different system for conferring later benefits on partners (i.e. deferring profit) which would also be represented in the corporate member’s share, with the certain consequence that there would be no change in the individuals’ shares. This would make it impossible to satisfy Condition X: it amounts to saying that if this system of deferring profit did not exist there must be some sort of alternative that would also defer profit, but somehow escape Condition X. The correct counterfactual has to ask whether the individuals would be allocated more profit if there was no system of deferred profit being used.”
“Condition Y is that— (a) B's profit share exceeds the appropriate notional profit (see subsections (10) to (17)), (b) A has the power to enjoy B's profit share ("A's power to enjoy") (see subsections (18) to (21)), and (c) it is reasonable to suppose that (i) the whole or any part of B's profit share is attributable to A's power to enjoy, and (ii) both A's profit share and the relevant tax amount (see subsection (9)) are lower than they would have been in the absence of A's power to enjoy.” (i) the whole or any part of B's profit share is attributable to A's power to enjoy, and (ii) both A's profit share and the relevant tax amount (see subsection (9)) are lower than they would have been in the absence of A's power to enjoy.”
“‘the appropriate notional return on capital’ is — (a) the return which B would receive for the relevant period of account in respect of B's contribution to the firm were the return to be calculated on the basis mentioned in subsection (12), less (b) any return actually received for the relevant period of account in respect of B's contribution to the firm which is not included in B's profit share.” (a) the return which B would receive for the relevant period of account in respect of B's contribution to the firm were the return to be calculated on the basis mentioned in subsection (12), less (b) any return actually received for the relevant period of account in respect of B's contribution to the firm which is not included in B's profit share.”
“…because the BCG Parties recognise that the FTT’s reasoning was largely based on the decision in Kinneil (a decision of the UT, Warren J), the BCG Parties do not repeat their detailed legal arguments on this point made below and do not invite the UT to determine the point in their favour at this level. Instead, they respectfully seek to preserve their right to argue the point, should the case proceed further, where BCG would (in so far as necessary) argue that the decision in Kinneil was distinguishable and/or wrong in law, and that the FTT’s Decision on this issue was also wrong.”
“…given how many other issues there are for the Tribunal to decide, and given that there would be no need to ever get to this complicated bit of statutoryinterpretation if we win on the last limb of condition Y, as we won on the last limb of condition X, we took the view that it would be better not to spend the time necessary to properly argue this point and to preserve our position on the question of statutory construction should, perish the thought, this case ever reach the Court of Appeal.”
“(3) In determining whether an individual has power to enjoy income for the purposes of section 721, regard must be had to the substantial result and effect of all the relevant transactions. (4) In making that determination all benefits which may at any time accrue to the individual as a result of the transfer and any associated operations must be taken into account, irrespective of– (a) the nature or form of the benefits, or (b) whether the individual has legal or equitable rights in respect of the benefits.” (a) the nature or form of the benefits, or (b) whether the individual has legal or equitable rights in respect of the benefits.”
“For tax purposes all of the profits are allocated each year under s850 and this amount is therefore allocated for those purposes to BCG Ltd. Therefore the 18% which is considered to provide for the liabilities arising on the “sale” of the Capital Interests is included in BCG Ltd’s profit share for tax purposes. The fact that BCG Ltd does not then warehouse the 18% does not affect the underlying point that an amount which is seen to represent the potential liability under the terms of the Capital Interests is allocated to BCG Ltd.”
“For the same reasons as we have found in considering the application of s850C(2)(b) above [in relation to Condition X] we conclude that in the context of Condition Y the MDP’s profit share and the relevant tax amount are not lower than they would have been in the absence of the MDP’s power to enjoy.”
“A’s profit share is increased by so much of the amount of B’s profit share as it is reasonable to suppose is attributable to - (a) A’s deferred profit; or (b) A’s power to enjoy, as determined on a just and reasonable basis.” as determined on a just and reasonable basis.”
“Income tax is charged…on income from any source that is not charged income tax under or as a result of any other provision of this Act or any other Act.”
“On retiring an MDP would be required to sell their entire LTCV holding to an entity within the BCG group. On reaching 20 years of service as an MDP, that individual would be required to start selling down their LTCV interest in 10 annual tranches equal to 10% of that MDP’s pre sell-down LTCV holding. Prior to 2014 an MDP going through the sell down process was also able to sell up to an additional 10% as part of each annual tranche. Also prior to 2014 an MDP who reached five years of service as an MDP and was at least 45 years of age would be entitled to sell up to 10% of their pre sell-down LTCV holding each year until they had sold a total of 50% of their presell down LTCV holding.”
“We have therefore concluded that considering the evidence overall and, in particular, the factors identified above, the Capital Interests should be found to have been part of the overall package of remuneration provided to senior personnel for the services they provided to the organisation.”
“(1) they are awarded in recognition of a person’s seniority as well as length of service; (2) they are designed to align the interests of the individuals with that of the business and consequently incentivise them; (3) they are in substance analogous to a pre-determined retirement/departure payment; and (4) in the accounts the UK LLP is treated as having the benefit of the services provided by the MDP with the [Capital Interests] being treated as connected to the provision of those services.”
“the FTT erred in relying on these factors (and/or in only taking account of these factors, and not taking account of relevant factors)”
“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.”
“must ask whether the decision of the judge was wrong by reason of an identifiable flaw in the judge’s treatment of the question to be decided, such as a gap in logic, a lack of consistency, or a failure to take into account some material factor, which undermines the cogency of the conclusion.”
“The question is not whether the finding was right or wrong, whether it was against the weight of the evidence, or whether the appeal court would itself have come to a different view. An error of law may be disclosed by a finding based upon no evidence at all, a finding which, on the evidence, is not capable of being rationally or reasonably justified, a finding which is contradicted by all the evidence, or an inference which is not capable of being reasonably drawn from the findings of primary fact.”
“76. …a tribunal may arrive at a finding of fact in a way which discloses an error of law in the following circumstances 77. First, we have power to set aside a decision of the FTT if the FTT took into account irrelevant considerations or failed to take into account relevant considerations. On this ground, it must further be shown that the considerations wrongly taken into or left out of account must be material in the sense that they might (not would) have affected the outcome: see Henderson LJ in Degorce v HMRC[2017] EWCA Civ 1427 at [95]. Where such a flaw in the fact-finding process is identified, there is no additional requirement to establish “perversity” (as described in paragraph 78 below): see WM Morrison Supermarkets PLC v HMRC[2023] UKUT 20 (TCC) at [58]… 78. Secondly, we have the power to set aside a decision of the FTT if the FTT’s overall conclusion on any issue if it was one that “no person acting judicially and properly instructed as to the relevant law could have come to” (or, as a shorthand, that it was “perverse”) because in those circumstances we would be bound to assume that there has been some misconception of the law and that this has been responsible for the determination (Edwards v Bairstow[1956] AC 14 per Lord Radcliffe at 36).”
“…standing back, if you look at the position overall , these [payments] are of a capital nature and that is a question of law for this Tribunal not dependent upon an Edwards v Bairstow challenge to the FTT's findings...”
“Before us, neither side displayed any enthusiasm for investigating the further question whether the issue of the proper characterisation of the final PIP awards as being of a capital or an income nature was one of law or of fact, or a mixture of the two… Nevertheless, it seems to me that the question cannot be ignored, however difficult it may be to answer. My own view, which has not been tested in argument and which I therefore state with some diffidence, is that the question is in principle one of law, to which there can be only one correct answer in any given factual situation. It is not a question of evaluation, or of mixed fact and law, for the tribunal of fact, whose decision could then only be challenged as erroneous in law on the limited grounds explained in Edwards v Bairstow[1956] AC 14 .”
“One of the classic types of income charged by section 687 and its predecessors is remuneration under a contract for work done or services rendered where that remuneration has not been otherwise charged to tax (e.g. as employment income or as part of the profits of a trade, profession or vocation): Scott v Ricketts at 831E; Manduca at [35]. HMRC’s case is that the individual members’ receipts when they “sold”
“The source of the payments is the terms on which the Capital Interests are allocated under the LLPAs. That is where the obligation to purchase the Capital Interests and make the payment is found. And there is a sufficient link between that source and the MDPs.”
“(1) This Chapter imposes a charge to income tax— (a) on individuals to whom income is treated as arising under section 778,… (2) Income is treated as arising under those sections only if— (a) transactions are effected or arrangements made to exploit the earning capacity of an individual in an occupation, and (b) the main object or one of the main objects of the transactions or arrangements is the avoidance or reduction of liability to income tax.” (a) on individuals to whom income is treated as arising under section 778,… (a) transactions are effected or arrangements made to exploit the earning capacity of an individual in an occupation, and (b) the main object or one of the main objects of the transactions or arrangements is the avoidance or reduction of liability to income tax.”
“transactions are effected or arrangements made to exploit the MDP’s earning capacity in the occupation by putting BCG Ltd in a position to enjoy all or part of the income or receipts derived from the MDP’s activities in the occupation, or anything derived directly or indirectly from such income or receipts.”
“(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment — (a) that any income…which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax have not been assessed… the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax. (2) … (3) Where the taxpayer has made and delivered a return under section 8…of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above… (a) in respect of the year of assessment mentioned in that subsection; and (b) in the same capacity as that in which he made and delivered the return, unless one of the two conditions mentioned below is fulfilled. (4) The first condition is that the situation mentioned in subsection (1) above was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf. (5) The second condition is that at the time when an officer of the Board— (a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8…of this Act in respect of the relevant year of assessment… the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above. (6) For the purposes of subsection (5) above, information is made available to an officer of the Board if— (a) it is contained in the taxpayer's return under section 8…of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return; (b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim; (c) it is contained in any documents, accounts or particulars which, for the purposes of any enquires into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer ; or (d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above— (i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or (ii) are notified in writing by the taxpayer to an officer of the Board.” (a) that any income…which ought to have been assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax have not been assessed… (a) in respect of the year of assessment mentioned in that subsection; and (b) in the same capacity as that in which he made and delivered the return, unless one of the two conditions mentioned below is fulfilled. (a) ceased to be entitled to give notice of his intention to enquire into the taxpayer's return under section 8…of this Act in respect of the relevant year of assessment… (a) it is contained in the taxpayer's return under section 8…of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return; (b) it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying any such claim; (c) it is contained in any documents, accounts or particulars which, for the purposes of any enquires into the return or any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer ; or (d) it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection (1) above— (i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or (ii) are notified in writing by the taxpayer to an officer of the Board.”
“An assessment on a person in a case involving a loss of income tax or capital gains tax brought about carelessly by the person may be made at any time not more than 6 years after the end of the year of assessment to which it relates (subject to subsection (1A) and any other provision of the Taxes Acts allowing a longer period.”
“In subsections (1) and (1A), references to a loss brought about by the person who is the subject of the assessment include a loss brought about by another person acting on behalf of that person.”
“(1) the structure PwC advised upon in March 2011 was notably different to that implemented. It involved BCG Ltd and the MDPs lending amounts interest free to the UK LLP to provide working capital to it in a way which meant that the loans could not be said to relate to the profit interest of the Capital Interest held by the MDPs. That step did not take place. Instead, BCG Ltd profits were retained by the UK LLP/BCG Ltd to fund working capital. In addition, it was assumed that the value of all outstanding Capital Interests would not exceed the value of the UK LLP and there would be a process in place to monitor this. That process was not put in place. (2) The chief financial officer at the time identified that the structure had the sense of being ‘too good to be true’. In that context our expectation is that those involved within BCG’s UK tax department would have wanted to make sure there was clear advice on file to support implementing what was seen as a surprising result. We would expect to see an opinion on file from a professional firm assessing the risk of challenge to the structure, or at the very least an internal paper produced by the BCG tax department assessing the same.”
“We do not consider that the evidence of obtaining advice by the business is sufficient to counter the evidence that the UK LLP was careless. The advice from PwC was predicated upon different structural elements to those involved with the actual operation of the Capital Interests. The advice obtained from …PwC…was lacking in depth and quality given the concerns raised by senior management in BCG and by the adviser, PwC, themselves. We conclude that the level of care taken in this respect was not in line with what would be expected of a prudent and reasonable taxpayer in the position of the UK LLP.”
“There should be no income tax when Capital Interests in BCG UK LLP are given to UK Partners as they are not acquiring the interest in their capacity as employees (it is acquired in their capacity as members of BCG LLP.”
“Any gain realized on a Capital Interest will be subject to 28 per cent capital gains tax rates and under current rules would be eligible for Entrepreneur’s Relief. The effect of Entrepreneur’s Relief is that the first GBP 5m of any gains should be subject to 10 per cent capital gains tax rates provided that the UK Partner has been a member of BCG UK LLP for at least one year. The GBP 5m relief is a lifetime limit and not an annual amount. The UK partners will not purchase their initial capital interest, and therefore there should be no income tax when the capital interests is awarded and no income tax when the capital interest is disposed of by a UK Partner. Under English law, the value of the capital interest may track to any index. When the UK Partner disposes of their capital interest, the sales proceeds should be subject to capital gains tax. The sale proceeds for the initial capital interest will equal the difference between the value of the Class D2 shares on the date of sale and the value of the Class D2 chares as marked on the date of grant. For the avoidance of doubt, any non-UK domiciled UK partners are subject to UK capital gains on the disposal of the capital interests as the capital interest is a UK situs asset.”
“Mr Holden: So, judge, what I am trying to explain is that we worked with PwC between August and March of the following year and through that process, we received advice, probably all, if not most of it, orally. And the March memo was intended to capture the advice we had been given during that process. Mr Baldry: So is the March advice the grand summary of all the advice that you had? Mr Holden: Judge, that’s right, yes. Mr Baldry: Nothing more? Mr Holden: That’s correct.”
“Mr Baldry: Ordinarily, if you were obtaining tax advice on a major transaction with major financial consequences, wouldn’t you expect to get advice which actually refers to the relevant statutory provisions and actually sets out what the risks are? Wouldn’t you expect to do that in a normal commercial situation of high value with high tax at stake? Mr Holden: So I understand why you are saying that. My recollection was at the time we received this memo, I was very happy, on the basis of the context leading up to it, that this was a very good piece of advice on which to rely upon. Mr Baldry: But this advice doesn’t - if this advice is the only advice that you will see because it summarises all the other advice, doesn’t it put you on alert that it’s totally superficial? Mr Holden: So that’s not the feeling I had.”
“…the arrangements involve very large sums of money, the UK LLP was aware that the structure was a means of saving very substantial income tax, the structure was perceived internally as a means of converting income to capital with serious tax risk and the arrangements involve the insertion of complicated HMRC’s summary included the words “and contrived” here, which we have ignored. … provisions into the LLPA. The analysis in the PwC reports As this passage refers to the implementation of the arrangements in 2011, we have understood this as a reference to the Feasibility Report and the PwC Letter. is high level without detailed consideration of whether, in light of the terms of the Capital Interests, they are actually capital assets. Neither report considers whether the Capital Interests should be viewed as a vehicle for income benefits.”
“for the individuals, the LLP instructed PwC on their behalf to advise them how to fill out their forms. Therefore carelessness by the LLP can be attributed to those individuals…”
“If you look at the Revenue’s skeleton, they are no longer putting in issue whether the MDPs received advice, they are no longer putting in issue whether they relied upon that advice, and they are no longer putting in issue whether it was reasonable for them to do so…[reads the passage from the skeleton]. That’s their case, and we don’t accept that is a good argument as a matter of principle.”
“…the evaluation of whether or not HMRC should be permitted to rely on their pleadings in relation to carelessness involved an exercise of judicial discretion by the FTT. This Tribunal should be slow to interfere with such a decision unless the FTT applied the wrong principles, took account of the wrong factors, or otherwise reached a decision so plainly wrong that it must be regarded as outside the generous ambit of the discretion available to the FTT.”
“As the Capital Interests are held by, and disposed of by, the individual UK MDPs, those UK MDPs, rather than BCG, have ultimate responsibility for determining whether (and, if so, how) any disposal of Capital Interests should be reported on their individual UK self-assessment tax returns. However, to assist the UK MDPs in meeting their own UK tax compliance obligations, each year, BCG instructs PwC to prepare a letter of advice for each UK MDP, advising them on how each item of value received by them in the relevant year, in their capacity as an MDP, should be reported in their UK self- assessment return for that year (the PwC Advice Letters). The PwC Advice Letters are typically prepared around October each year, in respect of the tax year ended 5 April of that year, and are provided to each individual who was a UK MDP at any point during that tax year (including individuals who ceased to be UK MDPs during that tax year. The advice in the PwC Advice Letters reflect PwC’s conclusions, as expressed in written advice to BCG, as to how those items of value should be treated for UK tax purposes (including as to how the holding and disposal of Capital Interests should be reflected in the UK MDPs’ self assessment returns). The provision of these letters to the UK MDPs therefore allows the UK MDPs to benefit from that advice, without requiring them to review and consider that advice directly, or to obtain their own professional advice as to how those items of value should be treated (although they are entitled to obtain such additional advice, at their own cost, should they wish to do so).”
“In the case of a person who carries on a trade, profession, or business in partnership with one or more other persons, a return under this section shall include each amount which, in any relevant statement, is stated to be equal to his share of any income, loss, tax, credit or charge for the period in respect of which the statement is made.”
“In subsection (1B) above “relevant statement” means a statement which, as respects the partnership, falls to be made under section 12AB of this Act for a period which includes, or includes any part of, the year of assessment or its basis period.”
“…in respect of each tax year within the Relevant Period, each UK [MDP] (including the individual Appellants) was provided with a letter of advice from PwC, setting out how PwC considered that that UK MDP should report the various amounts arising to that UK MDP out of his or her relationships with BCG in his or her UK self-assessment return for that year (the PwC Advice Letters). Where a UK MDP disposed of his or her Capital Interest in the year in question, the PwC Advice Letter sent to that UK MDP for the relevant year advised that UK MDP to report that disposal on the UK MDP’s self-assessment return as a disposal of a capital asset (and, for certain of those UK MDPs, to claim entrepreneurs’ relief in respect of that disposal, and to include a “white space” disclosure in their self-assessment return in respect of such claim). PwC was engaged to provide these letters by BCG and not by the individual UK MDPs themselves.”
“180. Each letter included an appendix which was said to detail instructions on how to enter the individual’s BCG income onto their tax return. The individuals were told that if they had a tax adviser they should pass those instructions onto them. Where Capital Interests were sold there was a section under the heading of “details of chargeable assets disposed of and gains and losses” which described the sale of a Capital Interest and the “disposal proceeds” resulting therefrom. 181. We find that the MDPs relied on the advice contained in the PwC letters in order to work out how to report their partnership income and the proceeds from “sale” of the Capital Interests.”
“These instructions are a guide to assist you in entering your BCG income on to your [year] UK tax return online using HM Revenue & Customs (HMRC) free online services. If you have a tax advisor who will prepare your UK tax return on your behalf, please pass these instructions on to them.”
“the final section to complete relating to capital gains is ‘Any other information’. Please enter the following”, being this text: ‘I hereby claim Entrepreneur’s Relief underSection 169 of Taxation of Chargeable Gains Act 1992 on the sale of my partnership capital on 30 October 213. On31 October 2012 I sold 3,508 Class D shares in the Boston Consulting Group LLP. These shares are not publicly traded and therefore a valuation was carried out by the LLP based on the net book value. This valuation has been independently reviewed. The value of the shares on the date of disposal was calculated to be USD 208.63 per share’.” ‘I hereby claim Entrepreneur’s Relief underSection 169 of Taxation of Chargeable Gains Act 1992 on the sale of my partnership capital on 30 October 213. On31 October 2012 I sold 3,508 Class D shares in the Boston Consulting Group LLP. These shares are not publicly traded and therefore a valuation was carried out by the LLP based on the net book value. This valuation has been independently reviewed. The value of the shares on the date of disposal was calculated to be USD 208.63 per share’.”
“…members of my team obtained confirmation from each of the relevant UK MDPs that (i) they relied upon the PwC Advice Letters sent to them each year, in determining how to report their relationships with BCG on their UK self-assessment returns for that year; and (ii) where they had engaged a personal advisor to assist them in the preparation of their UK self-assessment return, that personal advisor followed the position recommended by PwC in the relevant PwC Advice Letter.”
“The Partnership shall provide to each Member such information as he shall require to enable him to make to the relevant taxation authority any return or self -assessment relating to his share of the Profit of the partnership.”
“In discharging his duties, a Member who is an individual who does not haveknowledge that makes reliance unwarranted is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by (i)…(ii) legal counsel, chartered accountants or other persons retained by the Partnership, as to matters involving skills or expertise the Member reasonably believes are matters: (A) within the particular person’s professional or expert competence;…”
“The second particular of carelessness on the part of Montpelier relates to itsproviding entries to Mr Bevis to be inserted into the tax returns. As we understand it, the information provided by Montpelier was of particular relevance in relation to the 2008/09 return which established the loss which was carried forward in the two subsequent years. Although we are not entirely clear as to this, the information provided appeared to relate to the figures for the dividends received by Mr Hicks and, possibly, the dates of those dividends. Although the provision of that information for the purposes of the 2008/09 return, producing a loss which was carried forward for the two subsequent years, brings Montpelier closer to the position of someone actingon behalf of Mr Hicks in relation to the returns for the two subsequent years, we regard the question as to whether Montpelier did cross the line into acting on behalf of Mr Hicks in relation to the relevant assessments as a difficult one. However, if we are right as to the nature of the information provided by Montpelier and in view of the FTT’s finding that the transactions had taken place, it would seem to follow that the information provided by Montpelier was accurate and could not be said to have been carelessly provided. If the question as to the role of Montpelier were to be decisive of this case, we feel that we would need to investigate more thoroughly what preciselyMontpelier did in relation to the completion of the tax returns. We might also need to consider whether there could be circumstances in which a third party who carelessly provides inaccurate information to a taxpayer to be used in a return could be regarded as acting on behalf of the taxpayer for the purposes of section 29(4). In view of the fact that these points are not necessary for our decision, in the light of our earlier conclusions, we do not think it appropriate for us to go further.”
“The UK LLP obtained external advice from PwC as to the tax position of the individual Appellants. However, the UK LLP did not represent the individual Appellants. It merely arranged for advice to be provided to the taxpayers. We consider that this is too far removed to fall within the types of active engagement described in Hicks as falling within the term ‘acting on his behalf’. HMRC have not argued that PwC was careless.”
“156. What the Upper Tribunal was pointing out in Atherton was that the important word to focus on in section 118(5) was “avoid”
“…the FTT was entitled to conclude that it was Mainpay’s failure to take reasonable care in ensuring that the 2010 Contract was an overarching contract of employment which caused the loss of tax. On the facts found, what Mainpay ‘should have done differently’ was to have asked an appropriately qualified adviser whether the 2010 Contract as drafted (including a provision stating that it was not a contract of employment) was an overarching contract of employment, or otherwise effective to achieve the aim of the arrangements in relation to reimbursed expenses. In our view, the FTT was not required, by Bella Figura or otherwise, to put HMRC to proof of establishing what course of action Mainpay would have taken if that had been done, namely whether it would have amended the contract, introduced a retainer in an effort to create mutuality in the gaps, or decided not to claim the deductions which gave rise to the loss of tax.”
“116. On the F-tT’s findings, it is obvious that had Mainpay taken reasonable care, the contracts would have been overarching contracts of employment. If they had been overarching contracts, the reimbursement of those expenses would not have been liable to tax... Mainpay did not take reasonable care to ensure that the contracts were overarching contracts. Mainpay nevertheless reimbursed the expenses free of tax, as if the contracts were overarching contracts, when, in law, those payments were liable to tax. Had Mainpay taken reasonable care, therefore, on the FtT’s findings, that loss of tax would have been avoided. 117. On these particular facts, HMRC had, in the words of Mr Firth [counsel for Mainpay], ‘done enough’. I do not consider that it was necessary for the F-tT to make any more findings about what would have happened if Mainpay had taken reasonable care. The F-tT nevertheless considered what would have happened if Mainpay had asked for specific advice…,even though that was not necessary on these facts. I do not consider that the F-tT was required to speculate about what might have happened if further advice had been sought, all the more so because a taxpayer cannot be required to waive legal advice privilege, so that the F-tT would not necessarily have and in this case did not have all the relevant evidence. I agree with the UT’s analysis in paragraphs 159 and 161.”
“It is not in dispute that HMRC has the burden of proving that section 36(1) applies…On the facts of this case HMRC had made out a prima facie case that Mainpay had been careless, and that that carelessness had brought about a loss of tax. There was then an evidential burden on Mainpay, if it wished to contradict that prima facie case, to adduce evidence to show, on the balance of probabilities, that it had taken reasonable care, and/or that any lack of care did not bring about the loss of tax. Mainpay did not do that.”
“…the FTT made no finding to the effect that any asserted carelessness on the part of UK LLP “brought about” the loss of tax in the UK MDPs’ tax returns, and HMRC have not challenged the FTT’s failure to make a finding to that effect. Accordingly, even if the UT were to hold that the UK LLP was acting on behalf of the UK MDPs and, even if the UT were to find that UK LLP had been careless for the reasons given by the FTT at [411], it is not open to the UT to find that such brought about the relevant loss of tax, i.e. the loss of tax in each of the UK MDPs tax returns.”
“Given that the FTT had concluded, correctly, that the UK LLP was careless the FTT should therefore have further concluded this was carelessness of a person “acting on…behalf of” the individual MDPs within the meaning of section 29(4) TMA such that HMRC were entitled to raise the discovery assessments against the individuals to make good to the Crown the seriousloss of tax which, as the FTT has found, has arisen in this case.”
“An assessment on any person (in this section referred to as "the person in default") for the purpose of making good to the Crown a loss of income tax or capital gains tax attributable to his fraudulent or negligent conduct or the fraudulent or negligent conduct of a person acting on his behalf may be made at any time not later than 20 years after the 31st January next following the year of assessment to which it relates.”
“167…To establish liability in tort, it is necessary to prove the chain of causation whereby a duty of care existed between the parties, there was a breach of that duty (by omission or commission of a certain action), and that breach of duty is the proximate cause of the damage or injury sustained. The most important element of proof is the casual link between the breach and the injury, and causation in tort is often cast in terms of ‘but for’ the defendant’s actions/omissions, the plaintiff’s injury would not have occurred. 168. The ‘but for’ type of causation in tort requires specificity in order to establish the breach of a particular duty of care is the cause of injury. Specificity for each element of proof requires the pinpointing of an action or omission to establish the breach, and that it is a specific breach that is the immediate cause of the injury. Each element of proof in tort is primarily objective, and the causal link required to be established for each element needs to be tight to prove proximity whereby the breach in question is the immediate cause of the injury in question.”
“brings together a single penalty framework for a number of different taxes where there were previously different ones. It makes explicit that the penalty is behaviour related and uses new terms to describe behaviour.”
“These definitions of behaviour are designed to replace the current concepts of misdeclaration, repeated misdeclaration, dishonest conduct and reasonable excuse (in relation to inaccuracies) for VAT, and for direct taxes they replacefraudulent and negligent conduct. They provide a uniform language for behaviours, using more accessible language across the taxes covered.”
“In particular, in relation to carelessness said to result from deficient advice, it does not require HMRC to establish to the balance of probabilities what the result of remedying the deficiency would have been…the FTT should not be placed in the position of having to speculate as to a taxpayer’s precise response to advice to a standard of reasonable care.”
“PwC believe that the proposed changes to the LTCV will segregate the profits that are subject to tax on the partners and any gain realised on the growth in value of the LTCV; however to gain further comfort on the likely interpretation of the tax tribunals and courts would apply [sic] the ‘reasonable to suppose’ test we would recommend that BCG seek specialist counsel’s opinion before implementing the new LTCV in the UK.”
“We believe that under the new LTCV there will be a power to enjoy. It will then come down to a question of fact as to whether it is reasonable to suppose that the individual partners' profit shares would be lower than they would be absent the new LTCV. The clear policy of not giving an additional profit share to individual partners who do not participate in the LTCV should put the matter beyond doubt. But the possibility that the tax tribunal would take a different view of what is reasonable to suppose cannot be eliminated. Therefore, there remains a risk that Condition Y would be satisfied. In such circumstances, we would recommend for further comfort that tax counsel's opinion is sought on the likely interpretation by the tribunals and courts on the 'reasonable to suppose' [test ].”
“178. In mid to late 2014 EY were engaged by BCG to consider options for re-introducing the LTCV for MDPs including the Capital Interests. EY provided a note of advice in draft form. A finalised version of that note has not been provided and given the fact that Mr Holden told us that BCG relied on the EY note as well as the PwC advice it is somewhat surprising that a final version was not obtained. Furthermore, the advice obtained was limited to a few briefly stated conclusions with little underling analysis. Without any explanation of the factors considered in relation to the Capital Interests EY simply state that as the UK LLP is transparent, they would argue that the LTCV is treated as a disposal of goodwill on sale. The tax risks associated with the MMRs are dealt with in one short paragraph concluding that EY would “argue” that the rules would not apply primarily because of the “defence” that the LTCV is mandatory and has no effect on the level of the UK LLP partnership profits which accrue to the partners. 179. In using the words “argue” and “defence” the reader is put on notice that this is a potentially contentious area. Yet EY were not asked to provide a fuller analysis of the risks or even to finalise the draft.”
“There is also reference in the evidence to the business also working with multiple external advisers to analyse the draft MMR rules. However, there is little evidence beyond that, showing what those multiple external advisers said, save for the evidence of advice from PWC and a very generalised level of evidence from Mr Holden.”
“(3) In 2014 the potential for challenge increased as the MMRs were drafted and then implemented. There had been sufficient concern for BCG to decide that the MDPs should all sell their Capital Interests. Before reintroducing the structure advice was obtained from PwC which clearly indicated a risk of challenge under the new s850C and which recommended that BCG obtained tax counsel’s opinion, but that step was not taken. In that context we consider it would be entirely reasonable to expect a large corporate with a large amount at stake and clear advice to obtain a specialist opinion, to do just that; (4) The advice received from EY in 2014 was very high level with minimal analysis of the tax position or risks and was never finalised. Its wording, using terms such as “argue” and “defence” made clear, however, that the treatment of the Capital Interests was potentially contentious.”
“Had it considered the right question, the FTT should have concluded that UK LLP’s tax returns were indeed filed consistently with the ‘implicit reassurance’ provided by PwC that the profit allocations made in each of the tax returns were correct, (i.e. including the profit allocation made each year to BCG Ltd after the MMRs came into force).”
“…should have gone on to consider…whether even in the absence of specific advice, BFL obtained implicit reassurance that the loans would qualify which was enough to amount to the taking of reasonable care. By analogy, a person who instructs a lawyer to act on the purchase of a house might be said to obtain implicit advice to the effect that the documents will operate to convey title simply from the fact that the lawyer prepares those documents and identifies no problem with them.”
“Having found that the UK LLP had implemented arrangements of this complexity without proper advice supporting their tax analysis, and that this fed into how they filed their returns, there was a prima facie case that any errors in those returns were brought about by that failure to take advice. It was, as the Court of Appeal has made clear [in Mainpay], for the BCG Parties to prove, if they sought to do so, that their failure made no difference to theway they chose to return the tax consequences.”
“evaluative judgments in respect of which there was no case law guidance [and] is (almost par excellence) an issue in respect of which different experts might reasonably come to different conclusions.”
“an officer of the Board or the Board discover, as regards a partnership statement made by any person (the representative partner) in respect of any period— (a) any profits which ought to have been included in the statement have not been so included, or (b) an amount of profits so included is or has become insufficient…”
“at the time when an officer of the Board (a) ceased to be entitled to give notice of his intention to enquire into the representative partner's partnership return (b) … the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above…”
“…it is plain from the wording of the statutory test in s 29(5) that it is concerned, not with what an Inspector could reasonably have been expected to do, but with what he could have been reasonably expected to be aware of. It speaks of an Inspector's objective awareness, from the information made available to him by the taxpayer, of ‘the situation’ mentioned in s 29(1), namely an actual insufficiency in the assessment,not an objective awareness that he should do something to check whether there is such an insufficiency.”
“I do not suggest that the hypothetical inspector is required to resolve points of law. Nor need he forecast and discount what the response of the taxpayer may be. It is enough that the information made available to him justifies the amendment to the tax return he then seeks to make. Any disputes of fact or law can then be resolved by the usual processes.”
“But even if the information had been obtained shortly before the time for enquiry expired, I would have taken the view that an officer could have reasonably been expected to be aware that the profits stated were insufficient. The legal points were not complex or difficult. As the Chancellor points out (at [56]), awareness of an insufficiency does not require resolution of any potential dispute. After all, once an amendment is made, it may turn out after complex debate in a succession of appeals as to the facts or law, that the profits stated were not insufficient. I have dwelt on this point because I wish to leave open the possibility that, even where the taxpayer has disclosed enough factual information, there may be circumstances in which an officer could not reasonably be expected to be aware of an insufficiency by reason of the complexity of the relevant law.”
“Our conclusion on this point, therefore, is that s 29(5) does not require thehypothetical officer to be given the characteristics of an officer of generalcompetence, knowledge or skill only. The officer must be assumed to have such level of knowledge and understanding that would reasonably be expected in an officer considering the particular information provided by the taxpayer. Whilst leaving open the exceptional case where the complexity of the law itself might lead to a conclusion that an officer could not reasonably be expected to be aware of an insufficiency, the test should not be constrained by reference to any perceived lack of specialist knowledge in any section of HMRC officers. What is reasonable for an officer to be aware of will depend on a range of factors affecting the adequacy of the information made available, including complexity. But reasonableness falls to be tested, not by reference to a living embodiment of the hypothetical officer, with assumed characteristics at a typical or average level, but by reference to the circumstances of the particular case.”
“It is clear as a matter of authority: (1) that the officer is not the actual officer who made the assessment…but a hypothetical officer; (2) that the officer has the characteristics of an officer of general competence, knowledge or skill which include a reasonable knowledge and understanding of the law: see Revenue and Customs Comrs v Lansdowne Partners LP[2012] STC 544 The reference should be to Charlton ; (3) that where the law is complex even adequate disclosure by the taxpayer may not make it reasonable for the officer to have discovered the insufficiency on the basis of the information disclosed at the time: see Lansdowne at para 69; (4) that what the hypothetical officer must have been reasonably expected to be aware of is an actual insufficiency: see Langham v Veltema[2004] STC 544 per Auld LJ, at paras 33–34.”
“I do not accept that sections 29(1) and (5) import the same test and that the Revenue’s power to raise an assessment is therefore directly dependent on the level of awareness which the notional officer would have based on the section 29(6) information. The exercise of the section 29(1) power is made by a real officer who is required to come to a conclusion about a possible insufficiency based on all the available information at the time when the discovery assessment is made. Section 29(5) operates to place a restriction on the exercise of that power by reference to a hypothetical officer who is required to carry out an evaluation of the adequacy of the return at a fixed and different point in time on the basis of a fixed and limited class of information. The purpose of the condition is to test the adequacy of the taxpayer’s disclosure, not to prescribe the circumstances which would justify the real officer in exercising the section 29(1) power. Although there will inevitably be points of contact between the real and the hypothetical exercises which sections 29(1) and (5) involve, the tests are not the same.”
“Our decision about the hypothetical officer test turns on what the hypothetical officer needed to know in order to make the assessment… we agree with Mr Baldry that the hypothetical officer could not have reasonably been expected on the basis of the information made available to him before January 2019 to have been aware of the way in which sums were put aside to fund future purchases of the Capital Interests. That would be a key element of any charge under the profit sharing rules and the MMRs. Consequently, the hypothetical officer test would have been met.”
“Under the Capital Interests Scheme arrangements, profits allocated to the corporate member (which are then subsequently paid to the UK individual members under the Capital Interests Scheme arrangements) would give rise to a significant tax advantage (both in timing and amount) for the UK individual members, by virtue of an increase in the D2 share value within BCG Inc (broadly commensurate to the profits allocated to and retained in BCG Ltd)”