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Mixed membership partnerships – HMRC’s win at Tribunal, and the implications

10 March 2020

In the first case brought under the mixed membership partnership rules – Nicholas Walewski v HMRC - the First-tier Tax Tribunal (FTT) ruled in favour of HMRC, resulting in significant additional taxes for the taxpayer.


The mixed membership partnership rules, introduced in April 2014, are broadly designed to counteract arrangements which divert an individual’s partnership profit share to a corporate member in order to access the lower corporation tax rates.  The rules apply when the corporate member’s profit share exceeds a notional return, based on the value of services and the capital contribution provided by the company to the partnership, and an individual member has the ‘power to enjoy’ those profits.  Where the corporate member’s profit share is attributable to such a power to enjoy, profits exceeding the notional return may be reallocated to the individual for tax purposes.
It is important to note that the counteraction measures do not depend on the existence of a tax avoidance motive; many partnerships and their advisers mistakenly believe that their arrangements will not be challenged simply because a commercial reason can be advanced.
HMRC is actively targeting and investigating mixed membership partnerships, and the case demonstrates the approach that it will take in pursuing enquiries, and how the Tribunals will determine subsequent appeals.
BDO’s Partnership Tax experts have dealt with a significant number of HMRC enquiries in this area. The technical arguments are complex, and understanding these is important so as to be able to identify the relevant facts and the arguments which best support the client’s position. In responding to HMRC, it is too easy to miss the mark on these enquiries. Specialist advice is therefore highly recommended.
BDO can support advisers dealing with HMRC enquiries or assist with pre-emptively reviewing the client’s structure to reduce the risk of the mixed membership rules applying. Any businesses which have not yet critically reviewed their mixed partnership structure should do so now.

The Walewski case

Significant points to note include:

  • The key issue was whether the profit allocations to the corporate member were attributable to the individual member’s power to enjoy.  This is the most subjective test within the mixed membership rules and it seems likely that most disputes will centre on this point. In this case, the FTT concluded that it was reasonable to suppose that the profit allocations to the corporate partnership member were attributable to Mr Walewski’s power to enjoy.
  • The FTT will consider the facts fully in determining whether it is reasonable to suppose that the profit allocation to the corporate member is attributable to the power to enjoy.  No tax avoidance motive needs to be present for the test to be met.  Alternative reasons given for allocating profits to a corporate member where a power to enjoy exists will need to be supported by compelling evidence in order to convince the tribunal.  However, although the FTT found the arguments to be unconvincing in this case, it should not be assumed that every case will fail, and it will be important to draw distinctions from the fact pattern in this case to the commercial position.
  • The FTT considered in detail the argument around the multiple capacities through which Mr Walewski claimed to be providing his service.  The lack of any clear distinction between the different roles he purported to hold counted against him, and he was found to have a single fungible role instead.  This demonstrates the importance of clear documentation and record-keeping when multiple roles in a business or group are undertaken by one person, and the need to support factual assertions with robust corroborating evidence.
  • In determining the company’s capital contribution, the FTT followed the statutory definition closely, meaning unallocated and undrawn profits could not be taken into account.  This highlights the importance of the procedures set out in the LLP or partnership agreement for allocating profits, and the need to formally capitalise retained profits if the intention is for these to be treated as a member’s capital contribution.  Any amounts that do not meet the legislative definition will not give rise to a notional return.
  • The FTT concluded that the full amount of Walewski Ltd’s profit allocations, minus the agreed notional 5% return on capital actually contributed, could be reallocated to Mr Walewski himself.

For further information, or for assistance, please contact Chris Holmes, Jitendra Patel or Neil Williams.

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