A special commissioner decided that a taxpayer was not entitled to claim double tax relief in respect of Slovak income where the foreign operation was something akin to a silent partnership, under which a company carried on the business in question but was contractually bound to pay the taxpayer 50 per cent of the adjusted profits.

Facts

In 1992 the taxpayer, a chartered accountant, set up an accountancy training consultancy as a sole trader. He operated in Eastern Europe and his clients included the major accountancy firms. He had a team of freelance tutors and purchased study texts and revisions kits from a major financial training company, X, and also had an arrangement to purchase their lecture notes and revision notes.

His method of providing training in Eastern Europe was that tutors would fly in and out and teach in a local hotel without any local administration. He carried out all the administration in the UK with the help of an employee. He made a profit by charging out tutors at a higher rate than he paid them and also by charging materials and flights at the full price while obtaining a discount on them. Initially he had no competition in Central and Eastern Europe as two potential competitors were inactive and the third, X, only undertook work at the request of clients. His work in Slovakia was successful providing the ACCA exam training programme to an accountancy firm, by whom he had earlier been employed as a consultant and training manager. He had 35 per cent of the local market.

In 1998 an X group company set up a local operation in Slovakia. The taxpayer set up a joint venture with that company under the name X Slovakia (‘the Slovak operation’). The Slovak operation was registered in the commercial register and with the Slovak tax authority and paid tax as a branch of X. In 2000 the taxpayer agreed with a third party to merge his business, including his share of the Slovak operation, into a newly formed company, Accountancy Ltd. The taxpayer terminated his arrangement with Accountancy Ltd in June 2003. It was agreed that on termination of the arrangement the taxpayer would keep his share of the Slovak operation. The arrangement with X was terminated at the beginning of 2004.

The taxpayer appealed against an assessment to tax of £6,814.12 for 2001–02, and amendments to his self-assessments for 2002–03 and 2003–04. The issue was the legal nature of the Slovak operation. The taxpayer contended that it was akin to an English partnership, under which both he and X were both carrying on business jointly, in which case he was entitled to credit relief for the Slovakian tax even though charged on the branch. The Revenue contended that X carried on the whole business but contractually paid the taxpayer 50 per cent of the adjusted profits, with the result that the taxpayer was not entitled to credit relief for the Slovakian tax.

Issue

Whether the taxpayer was entitled to double taxation relief for Slovak tax charged on the Slovak operation.

Decision

The special commissioner (Dr John Avery Jones) (dismissing the appeal in principle) said that weighing up the factors for the period starting 1 September 2000 the Revenue's contention was right. The Slovak operation appeared to third parties to be X's business: it was in X's name, used X's materials, the staff were employed by X, the lease of the premises was taken by X, the taxpayer could not operate the bank account, the letter heading was X's, and by the end of the period clients would not have been aware of the taxpayer. The most significant factor was that it was registered as a branch of X with the Slovak tax authority and in the commercial register. The taxpayer had not made any investment in the operation. Following the transfer of the taxpayer's business to Accountancy Ltd, if there were something akin to a partnership it would, in any case, have been carried on by Accountancy Ltd, which received the profit on charging out the tutors, and not the taxpayer. Moreover, the taxpayer in his statement of case stated that he did not contend that the operation amounted to a partnership under the Partnership Act 1890. The Slovak operation was conducted as a branch of X and the taxpayer had a difficult evidential problem to show that his oral arrangement was something different. There were many pointers to the X branch being the reality with the taxpayer having a contractual profit share. X financed the operation and took the commercial risk in employing staff and taking a lease. Since the people involved in the operation were all accountants, the form of the management accounts was important. Those provided for the ‘Calculation [taxpayer's] profit share’, by making some notional adjustments to the total result to reflect X's financing of the capital assets and charging out tutors in a different way from the taxpayer (and in one case the taxpayer not charging out tutors in his normal way), but they did not show a split of profit including X's profit share, which reflected the reality of the situation with X carrying on the whole business and paying a profit share to the taxpayer.

There was from the beginning a commercial reason for X to pay the taxpayer a profit share as he held a significant share of the market and had better access to tutors. It was natural for those conducting the local operations to consult the taxpayer as he started by having more knowledge of the local market than X had and throughout he was affected by the result because of his profit share. The taxpayer's input was that of being consulted rather than having an equal say in how the operation was run, although in practice X seemed to have followed his advice. Accordingly, the operation was akin to a silent partnership, as the Revenue contended.

(2007) Sp C 584.
Decision released 15 January 2007.