The key issue for consideration is this case was the place of control and management of a partnership

This case concerned a partnership of two partners, which was established to exploit the rally driving skills of one of its partners, “Mr H”. HMRC contended that the partnership was controlled and managed partly inside the UK and therefore the taxpayer's share of the non-UK source profits of a partnership, should be taxed on him as they arise. The partnership contended that it was managed and controlled wholly outside the UK and appealed the income tax closure notices and discovery assessments for the years 98/99 to 04/05 inclusive.

Facts of the Case

There were two partners in the partnership and both partners were domiciled in the Isle of Man. One of the partners “Mr D” was also resident in the Isle of Man since the early nineties while the other partner “Mr H” resided in the UK. Most of the trading opportunities that arose came through personal contacts of Mr H in the rallying world while Mr D's expertise was in law.

Counsel for the partnership submitted that in determining where “the control and management of the trade, profession or business is situated” it is necessary to look to the place where the highest level of decision making takes place. In the case of a partnership this will generally be where the partners hold their partnership meetings.

It was further submitted that case law established a partnership could be controlled and managed outside the UK even though it engaged within the UK in any of four types of activities.

1. First, it was clear that carrying on the business in the UK had no effect on where the control and management of the business of the partnership was situated.
2. Second, business decisions which were “non-high level” could be carried on in the UK without impacting the place of control and management of the partnership. Only the highest level of decision-making was relevant.
3. Third, appointing agents, including one of the partners themselves, to carry out activities in the UK did not impact on the control and management test.
4. Fourth, even if some acts of high-level management were performed in the UK that did not affect the control and management of the partnership.

HMRC contended that it was not the case that control and management of the partnership was wholly outside the UK in the tax years under dispute. The business of the partnership was the exploitation of Mr H's skills as a professional rally driver, he was the heartbeat of the business and it was his activities that generated all the profits. The involvement of Mr D was confined to his legal experience. HMRC did not accept the fact that various contracts were usually signed outside the UK was determinative of control and management.

The partnership never kept notes of any partnership meetings; had these been available HMRC submitted they would merely confirm that certain agreements were signed. What was more important is what occurred between those meetings. Mr H would consider opportunities, discuss them with his immediate family, and all this was done from his base in the UK.

The view of HMRC was that the aim of Mr D from the outset was to create an artificial structure designed to achieve a tax advantage. The idea that the Isle of Man is the centre of control of the partnership was just to create the required picture and was not in fact the case.

Consideration

The issue for the Tribunal to determine was who was managing the partnership by making high level decisions and where did that take place. Although HMRC's enquiry was entirely reasonable and was conducted properly and fairly, the Tribunal found that there was no support for the suggestion that the partnership was an artificial structure motivated by tax planning concerns.

The Tribunal considered that the place where certain contracts were signed is not in itself a determining factor. It is evidence towards where decisions were being made but it is the location of the decision-making, rather than where the contracts were signed, which is important.

The high level decisions of the partnership were made outside the UK, because those were determined by the views of Mr D, as the commercial brains of the partnership. Mr H was happy to defer to Mr D in all business matters, so that he could concentrate on driving rally cars in competition and for training and testing purposes.

From findings of fact the Tribunal concluded that Mr D was managing the partnership by making high level decisions and that took place in the Isle of Man. Accordingly, the control and management of the partnership in the relevant years was situated wholly outside the UK. The taxpayers' appeal was therefore allowed.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=5568