A man who was not resident in the UK for tax purposes has failed to persuade the First-tier Tribunal (FTT) that he was not liable to pay Income Tax on the profits of three limited liability partnerships (LLPs) of which he was a member.
The LLPs would purchase films and lease them back to producers for a fixed period. The LLPs’ registered offices were in the UK, but all or most of their income came from overseas lessees. After the man omitted to include his share of the LLPs’ profits on his self-assessment tax returns, HM Revenue and Customs issued closure notices in respect of four tax years, charging him to Income Tax on the profits. He appealed to the FTT.
He argued that, under Section 849(3) of the Income Tax (Trading and Other Income) Act 2005, his share of the LLPs’ profits was not subject to Income Tax to the extent that those profits were derived from income from non-UK lessees. Section 849 stipulates that, where a partnership has a non-UK resident partner who is chargeable to Income Tax, the profits of the trade are calculated as if the partnership were a non-UK resident individual.
It was common ground that the man had, at all relevant times, been resident in Switzerland. It was also agreed that the LLPs’ trades were carried on wholly in the UK and that the revenue from the films was part of the trades.
The FTT found that Section 849(3) mandates two changes from the actuality: the partnership is replaced with an individual, and that hypothetical individual is assumed to be non-UK resident. No other changes are permitted, and the profits of the trade are to be calculated as the trade was actually carried on by the relevant partnership.
It followed that, for the purposes of calculating the man’s Income Tax liabilities, the profits of each of the LLPs were to be calculated as if its trade had been carried on exactly as it actually had been, but by a non-UK resident individual. As the LLPs had carried on their trades wholly in the UK, he was taxable on his share of the whole of their profits. The appeal was dismissed and the closure notices upheld.