First-tier Tribunal (Tax)

abbreviations

(1)     ABM Avon Limited (“Avon”);

(2)     Assets under management (“AUM”);

(3)     BC Purpose Trust (“BCPT”);

(4)     BlueCrest Capital Management (UK) LLP (“BCM UK LLP”);

(5)     BlueCrest Capital Management Cayman Holdings Limited (“BCMCHL”):

(6)     BlueCrest Capital Management Cayman Limited (“BCMCL”);

(7)     BCM Cayman Limited Partnership (“BCMC LP”);

(8)     BlueCrest Capital Management Limited (“BCML”);

(9)     BlueCrest Capital Management Limited Partnership (“BCM LP”);

(10)  BlueCrest Capital Management LLP (“BCM LLP”);

(11)  BlueCrest Capital Management Services Limited (formerly, until 1 December 2008, BCML) (“BCMSL”);

(12)  Capital Allowances Act 2001 (“CAA”);

(13)  Corporation Tax Act 2009 (“CTA”);

(14)  Corporation Tax Act 2010 (“CTA 2010”);

(15)  Ernst & Young LLP (“EY”);

(16)  Finance Act 1993 (“FA 1993”);

(17)  Finance Act 1994 (“FA 1994”);

(18)  Finance Act 1996 (“FA 1996”);

(19)  Finance Act 1998 (“FA 1998”);

(20)  Fyled Energy Limited (“Fyled”);

(21)  HM Revenue and Customs (“HMRC”)

(22)  Income and Corporation Taxes Act 1997 (“ICTA”);

(23)  Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”);

(24)  Income Tax Act 2007 (“ITA”);

(25)  Limited Partnership Act 1907 (“LPA”);

(26)  Michael Platt (“MP”);

(27)  Partnership Act 1890 (“PA”);

(28)  Permanent Establishment (“PE”)

(29)  Special Capital Limited (“SCL”);

(30)  Special Purpose Vehicle (“SPV”);

(31)  Sugarquay Limited (“Sugarquay”);

(32)  Taxation (International and Other Provisions) Act 2010 (“TIOPA”);

(33)  Taxation of Chargeable Gains Act 1992 (“TCGA”);

(34)  Taxes Management Act 1970 (“TMA”);

(35)  the “Partnership” (meaning any or all of BCM LP, BCM LLP and/or BCM (IK) LLP, as the context requires, where it is unnecessary to distinguish between them);

(36)  the Partner Incentivisation Plan (the “PIP”);

(37)  the Royal Bank of Scotland (“RBS”);

(38)  Total Return Swap (“TRS”); and

(39)  William Reeves (“WR”).

Cayman appeals

Facts

AGREED FACTS

(1)     This is the statement of facts as agreed by the parties.

Background

Development and operation of relevant BlueCrest structure

UK Partnership

(2)     On 4 August 2000 a limited partnership deed establishing BCM LP (the “BCM LP Deed”) was entered into by BCML, MP and WR. BCM LP was thereafter engaged in the trade of investment fund management.

(3)     In December 2000 the fund known as BlueCrest Capital International was launched and BCM LP was appointed as investment manager. This fund was managed by the two founder partners (WR and MP) on behalf of BCM LP on a discretionary basis.

(4)     In 2003, Sugarquay, a company incorporated in England and Wales, acquired a 25 per cent interest in BCM LP from WR and MP. Sugarquay was the corporate vehicle through which Man Group plc (a third-party investor) acquired and held its investment.

Transactions entered into in June and July 2007

(5)     Over the period 2006 and 2007, three of the limited partners (Sugarquay, MP and WR) wished to sell a proportion of their interests in BCM LP, amounting to 19% of the total equity of the partnership. A structure was established in the Cayman Islands to acquire that share.

(6)     On 14 June 2007, BCMCL was incorporated as a Cayman Islands limited liability company. On 20 June 2007 BCMCHL, a Cayman Islands limited liability company, was incorporated, and on 4 July 2007 BCMCL became a wholly owned subsidiary. On 22 June 2007, BCMCL (as general partner) and Andrew Dodd (as the “initial limited partner”) established BCMC LP through a limited partnership deed which took the form of a letter agreement.

(7)     Since July 2007, BCMCHL has held 100% of the issued share capital of BCMCL. Both BCMCHL and BCMCL are resident for tax purposes in the Cayman Islands.

(8)     On 5 July 2007 BCMCHL and RBS entered into a TRS, which provided for:

(a)BCMCHL to make an initial fixed payment of US$20,000 to RBS;

(b)               Thereafter:

(i)                 BCMCHL would make a subsequent fixed payment of US$500,000 to its counterparty, namely RBS (provided the rights and obligations of the TRS had not been assigned, terminated or novated) on the earlier of six months from the date of the fixed payment of US$20,000 and five business days following the date on which a net profit was first received by RBS under the BCMC LP agreement.

(ii)               Subsequently, BCMCHL would make (in summary) monthly fixed payments of US$19,230.77 under the TRS to RBS whether or not RBS became obliged to make any payments to BCMCHL.

(c)RBS was to be a limited partner of BCMC LP and RBS's payment obligation under the TRS depended upon it being allocated profits under the relevant provisions of the BCMC LP Deed.

(d)               Pursuant to the terms of the “Subscription Deed”, BCMCHL would use such monies as it received from RBS to subscribe for capital in BCMCL.

(9)     On 6 July 2007, BCMCL, Mr Dodd and RBS entered into the BCMC LP Deed, a limited partnership deed relating to BCMC LP which replaced the letter agreement limited partnership deed dated 22 June 2007. The BCMC LP Deed included RBS as the “Corporate Limited Partner”, designated AD as “Original Limited Partner”, and, pursuant to clause 6.1, provided that the business of BCMC LP was to “invest in an investment management business through being a limited partner in [BCM LP]”. Letters of allocation, dated 6 July 2007, were sent by BCMCL (as general partner of BCMC LP) to RBS and AD, which noted that RBS and AD had each contributed US$100 to the capital of BCMC LP.

(10)  On 6 July 2007, the following further agreements were entered into to finance and implement the acquisition by B CMCL of the 19% interest in BCM LP (of which 13% was acquired from WR, 3% from MP and 3% from Sugarquay):

(a)the “Facility Agreement” pursuant to which RBS agreed to lend BCMCL US$200 million, for an original term of 3 years but extendable to 5 years (the “RBS Loan Facility”); pursuant to clause 3.1(a), this sum was to be used by BCMCL to acquire a 10.3% partnership interest in BCM LP from WR, MP and Sugarquay pursuant to the Deed of Assignment (see below), such partnership interest to be promptly contributed by way of capital to BCMC LP pursuant to the Deed of Contribution (see below);

(1)     Andrew Dodd, a limited partner of BlueCrest Capital Management LP (“BCM LP (Guernsey)”), a Guernsey limited partnership, and a director and the Chief Financial Officer (“CFO”) of its general partner, BlueCrest Capital Management Limited (“BCML (Jersey”)), a Jersey-incorporated company, and a member of the board of directors of various other affiliated entities. He also acts as a Non-Executive Director for AgFe Group Limited, a holding company (incorporated in England and Wales in December 2007) for a group of operating entities affiliated with the BlueCrest group which provide financial advisory and asset management services and has held that appointment since December 2007. He became a limited partner of BCM LP with effect from 1 January 2006 and has subsequently worked as BlueCrest’s CFO and has held directorship roles in a number of other BlueCrest management entities (often concurrently), as well as non-executive roles on the boards of many of the funds managed by BlueCrest from time to time.

(2)     Robin Aitchison, who is, since his appointment in 1999, an EY  tax partner. He has advised the Cayman Appellants since the commencement of their trade in 2000 and, more specifically, from 2003, in relation to their dealings with HMRC.

(3)     Carmel Coles, an Officer of HMRC who made the discovery amendment. The appeal against that assessment is Issue 6 of the agreed issues, and I consider the evidence of Mrs Coles below in relation to that issue.

(4)     Marcus Stanton, who was called by the Cayman Appellants to give expert evidence on transfer pricing, having produced a Report dated 3 May 2019. Mr Stanton is a banking consultant whose main area of expertise is structured finance, particularly structures involving complex funding methodology. He has undertaken research and investigatory work for various banks, companies and governmental agencies, both in the UK and overseas and has also given expert evidence in various Court proceedings (both in the UK and abroad). Mr Stanton also acts as a chairman and non-executive director of a number of companies, quoted on the London Stock Exchange, with specific responsibility for banking and financial matters, typically as Chairman of the Audit Committee, and continues to be involved in all aspects of corporate finance, particularly those relating to the equity and debt markets. He was, from 1993 to 2001, a Director at the investment bank Robert Fleming & Co where he was Chief Operating Officer, Global Capital Markets and Head of Structured Finance. Previously (1982- 1993), he was a Director, Corporate Finance, at the merchant bank Hill Samuel & Co, having qualified as a Chartered Accountant at Arthur Anderson. He is a Fellow of the Chartered Institute of Chartered Accountants of England and Wales and a Chartered Fellow of the Chartered Institute for Securities and Investments.

(5)     Philip Maggs,  who was called as a transfer pricing expert by HMRC, is a director of Frontier Economics Limited, a consultancy firm specialising in applied economics with a staff of about 250 professional economists. He produced a Report, dated 3 May 2019. Mr Maggs leads Frontier's work in the area of business strategy and regularly advises clients on matters relating to competition law and other commercial disputes. He has previously advised HMRC and other tax authorities on transfer pricing cases. His work for clients in the fields of business strategy and competition policy is not confined to specific industrial sectors and he has worked with clients in a variety of industries including retail, consumer products and financial services. As part of his role in advising on business strategy Mr Maggs has supported clients through a wide range of issues including the assessment and completion of mergers and acquisitions, investment appraisal, new market entry strategies, assessment of the cost of capital, financial risk management, contract design and negotiation, internal transfer pricing (for commercial rather than tax purposes) and assessing the drivers of credit risk. Mr Maggs is not a banker and approached his report very much from an economics perspective, which is where his expertise lies.

Further findings of fact

“Background

(A)    The General Partner and the Founder Limited Partners desire to form a limited partnership (the “Partnership”) to carry on the business of managing on a discretionary basis the trading and investment of assets belonging to third parties and associated activities (the “Business”)  

(B)    Each of the parties hereto hereby agrees to establish and operate the Partnership from the date hereof and to carry on the Business in accordance with the terms and conditions of this Agreement.”

“12.1 The profits or losses of the Partnership arising from the Business shall be allocated to the General Partner, and the Founder Limited Partners in the Proportion 2:49:49.

12.2   Without prejudice to the generality of the foregoing, the General Partner shall have discretion to vary the proportional allocation of profits due to the Partners pursuant to Clause 12.1 provided that the proportional allocation of profits to the Further Limited Partners.”   

“12.1 Subject to Clause 12.4, in respect of each financial year of the Partnership (commencing with the financial year of the Partnership beginning on 1 December 2003) the profits of the Partnership as shown by the accounts of the Partnership prepared in accordance with Clause 17 (and after the deduction of any sums payable to an Outgoing Partner pursuant to the provisions of Clause 22 (other than such Outgoing Partner's capital contribution)) shall firstly be adjusted by adding thereto an amount equal to any sums paid by the Partnership to J.P. Morgan Alternative Asset Management Inc (or its affiliates) pursuant to the JPM Agreement in the relevant financial year of the Partnership (the “JPM Payment”) and such profits as adjusted shall then be allocated amongst the partners as follows:-

(A)    firstly, there shall be allocated to the General Partner such amount of profits as shall in the good faith opinion of the General Partner be required to be retained in the Partnership (i) as working capital to meet anticipated, current or foreseen liabilities and expenditure of the Partnership, (ii) to cover other contingencies in accordance with general principles of prudent management and (iii) to satisfy any obligation imposed on the General Partner by the Financial Services Authority to maintain a minimum level of financial resources; and

(B)     the remainder of the profits shall be allocated to the Partners in the proportions set out opposite their respective name in the third column of Schedule 3 (subject to amendment in accordance with Clause 12.5 on the admission of Further Limited Partners or otherwise) provided that the amount allocated to each of the Founder Limited Partners shall be reduced in the case of each Founder Limited Partner by an amount equal to a proportion of the JPM Payment being a proportion equal to the proportion that the interest of such Founder Limited Partner in the capital profits of the Partnership (in accordance with Clause 12.4 and as set out from time to time in Schedule 3) bears to the interest of all the Founder Limited Partners in the capital profits of the Partnership (in accordance with Clause 12.4 and as set out from time to time in Schedule 3) provided that the foregoing reductions may be reduced in relation to any Founder Limited Partner with the prior approval of the Corporate Limited Partner [Sugarquay],

provided that the Corporate Limited Partner shall only be entitled to participate in the performance fees (if any) receivable by the Partnership in respect of the calendar year ending on 31 December 2003 (the “Performance Fees”) in accordance with the following provision.

The Corporate Limited Partner shall only participate in the Performance Fees in relation to the month of December 2003 (the “Month”) and provided that in relation to the performance fees which shall be earned in the Month the Corporate Limited Partners' entitlement shall be calculated as follows:

25% x (A-8)

where:

A = the positive change in cumulative performance fees during the Month (in each case as certified by the administrator of each relevant fund that is obliged to pay such fees); and

B = the positive change in cumulative trader bonuses during the Month (in each case as certified by the administrator of each relevant fund).

In addition, for the avoidance of doubt, in calculating Man’s entitlement to be allocated profits in accordance with this clause 12, Man’s share of non-trader bonuses which become payable by the Partnership in December 2003 shall be 25% of one twelfth of the non-trader bonuses payable by the Partnership in December 2003.

“13.1        Each Partner shall have, inter alia, a Capital Contribution Account and a Distribution Account which shall be operated in accordance with the provisions of Clauses 13.2 to 13.4. In addition, the General Partner shall have a Retention Account which the General Partner shall operate in accordance with the provisions of Clause 12.3.

13.2 The capital contribution of each Partner shall be credited to that Partner's Capital Contribution Account.

13.3 The profits allocated to the Partners in respect of each financial year of the Partnership pursuant to Clause 12 shall be credited to the Distribution Accounts of the Partners as to 70 per cent within 30 days of the end of the relevant financial year and as to the balance within 30 days of the completion of the preparation of the accounts of the Partnership for the relevant financial year in accordance with Clause 17. Each Partner shall be permitted to withdraw amounts standing to the credit of its Distribution Account from the date that such amounts are so credited.”

“20. New Partners

20.1 The General Partner may at any time admit any person to the Partnership as a Further Limited Partner provided that such person executes a Deed of Adherence and the General Partner notifies the other Partners of the proposed admission of such Further Limited Partner at least 10 Business Days prior to such admission. In addition any third party purchaser that shall acquire any interest in the Partnership pursuant to Clause 19 shall execute a Deed of Adherence at the time that he completes (but as a pre-condition to) such acquisition.

21. Removal of Limited Partners

21.1 The General Partner shall have the absolute right to serve a Notice of Removal on any Individual Limited Partner (other than either of the Founder Limited Partners) at any time, substantially in the form set out in Schedule 2 hereto, (i) in the event that the General Partner in its absolute discretion considers the service of such notice to be in the best interests of the Partnership or (ii) in the event that such Individual Limited Partner at any time:-

(A)    is guilty of any serious misconduct or serious neglect in the discharge of his duties as an officer or employee of the General Partner; or

(B)     is convicted of any criminal offence other than a road traffic offence (including any criminal offence under any present or future statutory enactment or regulation relating to insider dealing); or

(C)     fails to comply with the rules or regulations of any appropriate regulatory organisation (including what limitation the principles and code of practice for approved persons published by the Financial Services Authority) to whose rules, regulations or equivalent the Partnership or the General Partner is for the time being subject;

(D)    ceases to be approved by the Financial Services Authority as a person who can undertake any controlled function or is censured by, or has any licence or authorisation revoked by, a regulatory body;

(E)     misuses any Confidential Information (as defined in Clause 26) relating to the General Partner or the Partnership or any customer or client thereof;

(F)     by his actions or omissions brings the name or reputation of the General Partner or the Partnership into serious disrepute or prejudices the interests of the business of the General Partner or the Partnership; or

(G)    is penalised for abusing the market under any present or future statutory enactment or regulation or otherwise acts in contravention of any enactment or regulation relating to the conduct by the General Partner or the Partnership of the Business, which has a materially adverse or prejudicial impact on the affairs or prospects of the Business or the reputation of the Partnership.”

(1)     giving limited partners of BCM LP the prospect of greater financial reward by giving them a prospect of being allocated an income and capital interest in the business, which would act as an incentive for them to remain with the business rather than moving to a competitor (in particular, allowing top performers, particularly in the Systematic team and the senior non-investment individuals, who only held a small interest in BCM LP, to receive a greater level of financial reward linked to the overall business); and

(2)     facilitating the distribution of these interests in the equity pool without diluting MP’s or Sugarquay’s respective shares in BCM LP any further.

“3             POWERS OF APPOINTMENT AND DISTRIBUTION

Until the termination Date, the Trustees shall have the following powers exercisable from time to time:

3.1      power to appoint by deed or deeds revocable or irrevocable that whole or any part or parts of the Trust Fund and income thereof shall thenceforth be held upon trust for the benefit of such one or more Qualified Charites at such times and in such shares as the Trustees shall think fit;

3.2      power to pay, transfer of apply the whole or any parts of the capital of the Trust Fund to or for the benefit in any manner of such one or more Qualified Charities as the Trustees shall think fit; in particular, and without prejudice to the generality of the foregoing, the Trustees shall have power in their discretion to grant security in or over the Shares, in favour or for the benefit of any creditor of the Company;

3.3      power by deed or deeds to extinguish (or restrict the future exercise of) either or both of the foregoing powers or any other power or powers conferred on the Trustees by this Deed; and

3.4      subject to and pending any and every exercise of the powers contained in sub-clauses 3.1, 3.2 and 3.3 the Trustees may pay or apply the whole or such part or parts of the income of the Trust Fund (if any) as the Trustees shall from time to time think fit to or for the benefit of all such one or more Qualified Charities as the Trustees shall, think fit.

4   CONCERNING THE SHARES OF THE COMPANY

Subject to any and every exercise of the powers contained in sub-clauses 3.1, 3.2 and 3.3 the Trustees may:

4.1     not propose or pass any resolution to wind up the Company unless the Directors have confirmed that the Company intends to cease to carry on business;

4.2     act generally in relation to the Shares and the affairs of the Company as they may in their absolute discretion think fit, and so that the Trustees in the absence of their own actual fraud or wilful default shall not be liable for any act taken or omission made; and

4.3     may in their discretion without assigning any reason therefor, exercise their voting rights with respect to the Shares to remove or appoint any Director provided they may not do so without the prior written consent of a majority of the Directors.

5   ULTIMATE TRUSTS

On and from the Termination Date, the Trustees shall hold the Trust Fund as to capital and income upon trust as follows:

5.1     the Trustees shall have power at any time before the expiration of the period of twelve months commencing on the Termination Date in their absolute discretion to appoint, revocably or irrevocably, the whole or any part of the trust fund to or for the benefit of such Qualified Charity or Qualified Charities in such amounts and proportions as they may from time to time decide, provided that any such revocable appointment shall (to the extent not previously revoked) become irrevocable at the expiration of such period; and

5.2     subject thereto and in default of such appointment for such exclusively charitable purposes as the Trustees shall decide.”

“Dear Mr Dodd

Re: BlueCrest Capital Management Cayman L.P.

By this letter agreement, we hereby agree with you to form an exempted limited partnership, named as above (“the Partnership”), pursuant to the Exempted Limited Partnership Law (2003 Revision) of the Cayman Islands (“the Law”), on the following terms:

1.             The Partnership's sole general partner is BlueCrest Capital Management Cayman Limited, of the above address (“the general partner”);

2.             The Partnership's sole initial limited partner is Andrew Michael Dodd, of the above address (“the initial limited partner”);

3.             The Partnership's registered office is at the offices of [name and address] George Town, Grand Cayman;

4.             The Partnership's term shall commence on the date that it is registered as an exempted limited partnership under Section 9 of the Law and shall terminate on such date as the partners agree;

5.             The general partner and the initial limited partner hereby each contributes £1.00 capital contribution to the Partnership;

6.             The initial limited partner's liability for the Partnership's debts and obligations shall be limited to its capital contribution and all profits and income thereon, whether or not previously paid to it. Save to that extent, the general partner shall be liable for the Partnership's debts and obligations;

7.             The Partnership's business is to undertake such investments as the general partner in its absolute discretion thinks fit;

8.             The general partner shall exclusively undertake the business of the Partnership, which the limited partner is prohibited from undertaking save to the extent permitted by the Law;

9.             Upon dissolution of the Partnership, the general partner will be entitled to receive from the Partnership £5 on its capital contribution;

10.         No interest in the Partnership shall be assigned, nor shall any new partner, general or limited be admitted unless agreed to by both parties hereto.

This agreement may he executed in counterpart, and may be amended in whole or m part only by written agreement of the general partner and the initial limited partner.

This agreement is governed by and shall be construed in accordance with the laws of the Cayman Islands.

Please sign this letter in the space provided to establish the Partnership.”

As requested, Mr Dodd signed the letter on 22 June 2007 thus establishing BCMC LP.

Finance

(1)     consolidated profit and loss account figures for 2005 and 2006 (and forecasts for 2007) for BCML;

(2)     statutory accounts for BCM LP for 2004 and 2005;

(3)     consolidated statutory accounts for BCML for 2004 and 2005;

(4)     a management structure chart; and

(5)     a proposed structure including the new Cayman entities.

“Andrew,

Further to our conversation I attach a revised term sheet which includes a straight line amortisation over 24 months. Profits generated in excess of the repayment schedule are free to be taken as dividends. Other terms remain unchanged.

Our ability to deliver this solution is still dependent on bringing in a couple of other banks - given the holiday season it's unlikely we will receive feedback until early in the New Year. However the change in structure will clearly help discussions.

Once we receive your feedback we will seek formal approvals internally - again this will only be possible early in the New Year.

I'm back in the office on Dec 28th although available on the mobile before then if required.

Look forward to hearing from you.

“REPAYMENT:  Pre covenant trigger: facility will be repaid by 24 equal monthly payments of $7,083,333 plus due interest for the period.

Post covenant trigger: amortisation will 'step up' such that loan repayment ranks ahead of all dividends and distributions.

N.B. If the trigger is subsequently cured the amortisation will step down to the scheduled $7,083,333 per month.

PURPOSE:          To assist with the finance of the purchase of 19% income and capital entitlement in BCM LP.

MARGIN:            LIBOR + 3% plus associated costs calculated daily on the drawn facility.

INTEREST         

PERIODS:           Interest periods of 1 or 3 months will be available or such other periods as may be agreed between the Borrower and the Lender.

UPFRONT FEE: 1.25% of the Facility Amount.

DROP DEAD FEE: $500k payable if the transaction falls away but the Lender has obtained Credit Approval/Business Case approval broadly consistent with the Terms and Conditions detailed herein.

LEGAL FEES:    To be paid by the Borrower. Legal Fees are to be underwritten to the level of $[ ]k.

SECURITY:        -  Guarantee from BCM LP.

-  First ranking fixed & floating charge over all assets and  undertakings of the Borrower.

- Fixed Charge over 19% interest in BCM LP held in NewCo LP.

- Inter-Creditor Agreement postponing (post trigger), in favour of the Lender, sums due to the shareholders of BCM LP through dividend distributions.

“English law first fixed charge over all the Borrower’s rights (as general partner of the Limited Partner) to receive fees and other rights and interests from the Manager under the priority profit sharing agreement between the Borrower and the Manager (the PPSA) which in turn gives to the Borrower the right to receive all payments necessary for the Borrower to meet its repayment obligations under the Facility from time to time, and a floating charge over all other assets (including a floating charge over the cash account in the name of the Borrower (as general partner of the Limited Partner) into which all income shall be paid).

In addition the Manager, the Borrower and the Lender will enter into an agreement whereby the Manager assigns, as security for the Manager’s payment obligations under the PPSA, the Manager's rights to receive all fee income under the management agreements and secures its cash accounts in favour of the Borrower, as general partner of the Limited Partner, and the Borrower further assigns those rights and its security interest in those accounts to the Lender as security for the Facility.

In addition, security will be given over an agreed portion of the shares in AllBlue held by the investors in the Limited Partner provided that the Lender shall have recourse to those shares only where both (a) an Event of Default has occurred and (b) the AUM has declined below 50% of the AUM as at the date of the Facility.”

In addition Citibank required the following security covenants:

“Each Managed Fund will enter into a side letter with the Lender, the Manager and the Borrower confirming and acknowledging (a) the assignment to the Borrower, by way of security, of the Manager’s rights under the management agreements and the further assignment of those rights by the Borrower to the Lender (b) that the Manager is not entitled to terminate or agree to amend the management agreements except with the Lender’s consent and that any purported termination without the Lender's consent shall be ineffective (c) that the Manager is not entitled to waive its rights to receive fees or rebate any such fees without the prior consent of the Lender and (d) that any payment due to the Manager under the management agreements will be paid only into an account secured in favour of the Borrower (which is further secured in favour of the Lender).

The Manager will enter into a side letter with the Lender and the Borrower confirming that the PPSA will not be amended or terminated without the prior written consent of Citigroup and that all amounts due under the PPSA will be paid into an account secured in favour of the Lender.”

“As I mentioned the other day we are able to use the AUM trigger in the same way as the Debt:PBT [profits before tax] metric. However the reality of the maths is that this would need to be set as close to $11bn as possible to achieve a similar level of protection as the proposed 1.5 x Debt: PBT measure. We perhaps need to talk to you further about how you would manage your cost base in such a scenario before settling on a number but intuitively it is not going to be below $10bn.”

“ ... obviously the difference between $10bn and $11bn is very significant- one is a 5 per cent fall in assets from current levels and one is a 15 per cent fall; we would definitely not be comfortable with the former and the latter would be very much at the upper end of what we would find acceptable based on our current asset level. It would be very helpful to understand whether you could see a way to drop this to, say $9bn or $9.5bn.”

Later that same day Mr Peek replied, by email, stating that:

“…we have of course run some numbers on this ourselves which suggests going below $10bn is going to be quite difficult.”

“The Facility will be repaid in instalments equal to the amount received by NewLP and/or the Borrower under the Secondary Profit Share (as defined below)

Where the Wind-down Arrangements apply, the Facility shall be repayable in full at the earlier of (i) the date on which distributions under the Secondary Profit Share reach an amount equal to outstanding principal and interest amounts under the Facility, and (ii) 2 years from the date on which the Wind-down Arrangements became applicable.”

Under paragraph 5(e) of the section on Pre-payment and Cancellation, it stated that:

 “The Borrower must use any monies received from NewLP or the Fund Manager (after the deduction bon or any tax payable, as a result of the Secondary Profit share (as defined below) to prepay the Loan.”

The “General Undertakings”, in the Heads of Terms in respect of the Borrower, New LP and the Fund Manager as applicable (subject to agreed exceptions and carve-outs) included:

“The Fund Manager shall pay to the NewLP and/or the Borrower as a secondary profit share (to be documented in the Fund Manager's Limited Partnership Agreement and NewLP’s Limited Partnership Agreement as required) (the “Secondary Profit Share”), as soon as they are available, its full earnings ahead of any other partner distributions (other than certain permitted payments [to be defined] if either:

(i)      the Extension Option is not exercised with respect to either the third or the fourth anniversaries of the Agreement Date; or

(ii)     the Facility has not been repaid in full on or before the fifth anniversary of the Agreement Date; or

(iii)    Total Assets Under Management of the Fund Manager reported in the Monthly Report is less than US$9,500,000,000 (If a binding tax opinion confirming that application of the Wind-down Arrangements will not lead to a deduction of tax is not in place at any time), or US$8,250,000,000 (if a binding tax opinion confirming that application of the Wind-down Arrangements will not lead to a deduction of tax is in place), provided, however, that such Secondary Profit Share shall cease to apply in respect of any subsequent periods for which Total Assets Under Management is reported to be greater than US$11,000,000,000;

…

“Dear Sirs,

Re: Total Return Swap Transaction

The purpose of this letter agreement is to confirm the terms and conditions of the Swap Transaction entered into between us on the Trade Date specified below (the “Transaction”). This letter agreement constitutes a “Confirmation” as referred to in the Agreement (as defined below).

The definitions and provisions contained in Annexes 1 to 18 and Section 6 of the 2002 Master Agreement Protocol published by the International Swaps and Derivatives Association, Inc (“ISDA”) on 15 July 2003, the 2002 Equity Derivatives Definitions and the 2006 ISDA Definitions (the “Definitions”) are incorporated into this Confirmation. For these purposes, all references in the Definitions to a “Swap Transaction” shall be deemed to apply to the Transaction referred to herein. Terms used herein and not defined shall have the meanings given to them by the limited partnership agreement by which New LP [ie BCMC LP] was established, dated on or about 5 July 2007, as amended from time to time (the “New LP Limited Partnership Agreement”). In the event of any inconsistency between this Confirmation and either the Definitions or the New LP Limited Partnership Agreement, this Confirmation will govern.

This Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated on or about 5 July 2007, as amended and supplemented from time to time (the “Agreement”), between us. All provisions contained in the Agreement govern this Confirmation except as expressly modified below.

The terms of the particular Transaction to which this Confirmation relates are as follows:

GENERAL TERMS

Trade Date:                                             5 July 2007  

Effective Date:                                         5 July 2007

Termination Date:                                   5 July 2017

Party A:                                                   The Royal Bank of Scotland plc

Party B:                                                   BlueCrest Capital Management Holdings Limited, a limited liability company incorporated in the Cayman Islands …

Calculation Agent:                                  The Royal Bank of Scotland plc

Business Day:                                          London, Cayman Islands, New York

Business Day Convention:                       Following Business Day Convention

FIXED AMOUNT (I):

Fixed Rate (I) Payer:                              Party A

Fixed Amount (I):                                    Amounts 1n USD equal to the net profit received under the New LP Limited Partnership Agreement by Party A, less an amount (the "Retention Amount") set out in the fee letter between Party A and Party B dated on or about the date of this confirmation (the "TRS Fee Letter")

Fixed Rate (I) Payment Dates:                2 Business Days following receipt of each amount received by Party A under and in accordance with the New LP Limited Partnership Agreement

FIXED AMOUNTS (II)                          

Fixed Rate (II) Payer:                             Party B

Fixed Amounts (II):                                 In USD, as set out in the TRS Fee Letter

Fixed Rate (III) Payment Date:              In USD, as set out in the TRS Fee Letter

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“Fee Letter

We refer to the swap confirmation dated on or about 5 July 2007 between Party A [RBS] and Party B [BCMCHL] (the “Swap Confirmation”). Terms defined the Swap Confirmation (including by incorporation) shall have the same meaning in this letter, unless the contrary intention appears.

This letter is the TRS Fee Letter referred to in the Swap Confirmation and shall be read together with and comprise part of same.

We agree and confirm that, for the purposes of the Swap Confirmation:

1.      The Retention Amount In relation to each Fixed Amount (I) shall be equal to the product of 0.125 and the net profit received under the New LP Limited Partnership Agreement by Party A in relation to such Fixed Amount (I);

2.      The following Fixed Amounts (II) shall be payable by Party B:

(A)   US$20,000;

(B)   US$500,000;

(C)   US$19,230.77.

3.      The following Fixed Rate (II) Payment Dates shall apply to Party B:

(A)    in respect of paragraph 2(A) above, the Effective Date;

(B)     in respect of paragraph 2(8) above, and provided that the rights and obligations of Party A under the Total Return Swap have not been assigned, terminated or novated to another party in accordance therewith, on the earlier of (i) 6 months from and including the Effective Date and (ii) 5 Business Days following the date on which a net profit is first received under the New LP Limited Partnership Agreement by Party A;

(C)     in respect of paragraph 2(C) above, commencing on the earlier of (i) 6 months from and including the Effective Date and (ii) the date on which a net profit is first received under the New LP Limited Partnership Agreement by Party A, and thereafter on each monthly anniversary thereof (such Fixed Amount (II) having accrued on a daily basis), until assignment, termination or novation of the Total Return Swap in accordance with the terms thereof.

Please countersign  and return the enclosed copy of this letter of acknowledgement and acceptance of your agreement to pay the fees detailed above.”

BCMCL LP

“6. Business

6.1    The Partnership’s [ie BCMC LP’s] business shall be to invest in an investment management business through being a limited partner In BCM LP and “the Business” shall be construed accordingly.

6.2    The Partnership may execute, deliver and perform all contracts and other undertakings and engage in all activities and transactions as may in the sole and absolute discretion of the General Partner be necessary or advisable in order to carry on the Business (including, in particular but without prejudice to the generality of the foregoing, the provision of security over any of the assets of the Partnership).

6.3    For the avoidance of doubt, the Business shall not extend to the management of the investment or trading of the contributions made by the Partners to the Partnership pursuant to Clause 9 below.

7. Name

7.1    The Business shall be earned on under the name and style or firm name of BlueCrest Capital Management Cayman LP or such other name as the General Partner shall from time to time determine.

7.2    Each of the Partners acknowledges that all proprietary and other rights In the Partnership name are vested exclusively in the General Partner.

8. Term

8.1    Each of the Partners acknowledges and agrees that the Partnership commenced on 22 June 2007 and shall continue unless and until terminated in accordance with the provisions set out in Clause 23.

9. Capital and Loan Contributions

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12. Allocations

12.1

(A)    Subject to the further provisions of this Clause 12.1 and to Clause 12.4, in respect of each financial year of the Partnership the profits (before tax) of the Partnership as shown by the accounts of the Partnership prepared in accordance with Clause 17 (and after the deduction of any sums payable to an Outgoing Partner pursuant to the provisions of Clause 22 (other than such Outgoing Partner's capital contribution)) shall be allocated amongst the Partners as follows:-

(1)     firstly, there shall be allocated to the General Partner such amount of profits as shall in the good faith opinion of the General Partner be required to be retained in the Partnership (i) as working capital to meet anticipated, current or foreseen liabilities and expenditure of the Partnership and (ii) to cover other contingencies in accordance with general principles of prudent management;

(2)     secondly, there shall be allocated to the General Partner such amount of profits as is equal to the aggregate Advance Drawings during such financial year of the Partnership;

(3)     thirdly, there shall be allocated to the General Partner such amount of profits as is equal to the aggregate of the interest payable by the General Partner on the Notes during such financial year and any accrued but unpaid interest on the Notes in respect of any previous financial year;

(4)     fourthly, there shall be allocated to the General Partner (or as the General Partner may m its absolute discretion direct) such amount of the remaining profits as the General Partner shall decide which amount shall be utilised by the General Partner in redeeming the Notes, and

(5)     the remainder of the profits (if any) shall be allocated to the Limited Partners (other than the Corporate Limited Partner) in accordance with the Agreed Proportions.

(B)     The provisions of Clauses 12.1(A)(3), 12.1(A)(4) and 12.1(A)(5) shall cease to apply

(1)     if a Trigger Event occurs, in which case during the related Facility Trigger Period the Remaining Profits shall be allocated to the Corporate Limited Partner provided that in the event that the Corporate Limited Partner shall no longer be a Partner or if the TRS shall have been terminated then the Remaining Profits shall be allocated to the General Partner, or

(2)     following the Repayment Start Date until after the Facility Repayment Date (a “Facility Repayment Period”) when in such period the Remaining Profits shall be allocated to the General Partner; and

(3)     during any Note Repayment Period, when in such period the Remaining Profits shall be allocated (a) if a Note Trigger Event has occurred such that a Note Repayment Period within paragraph (a) of the definition of such term is ongoing, to (at the discretion of the General Partner) either the General Partner or the Corporate Limited Partner or (b) otherwise to the General Partner.

To determine the allocation pursuant to this Clause 12.1(B) in any relevant financial year of the Partnership, the General Partner shall prepare Management Accounts (i) for each Facility Trigger Period, (ii) for each Note Repayment Period and (iii) for each period that is neither a Facility Trigger Period nor a Note Repayment Period (each one a “Remaining Period”). Following the preparation of such Management Accounts (which shall be prepared within 30 days of the end of the relevant financial year) the General Partner shall deduct from the profits shown by such Management Accounts an amount equal to the allocation of profits pursuant to Clauses 12.1(A)(1) and (A)(2) for the relevant financial year (such deduction to be applied as between each Facility Trigger Period, Note Repayment Period and Remaining Period pro rata to their respective durations) and will calculate the Remaining Profits for each Facility Trigger Period, Note Repayment Period and each Remaining Period. The General Partner will, on request, provide copies of such Management Accounts and such calculations to the other parties to this Agreement and without prejudice to the foregoing will provide copies of such Management Accounts and calculations to the Corporate Limited Partner as soon as is reasonably practicable after the same have been prepared.

Following the completion of such calculations.

(a)     a sum equal to the Remaining Profits for any Facility Trigger Period and any Note Repayment Period shall be allocated to the Corporate Limited Partner or, as the case may be, the General Partner in accordance with sub-clauses (1 ), (2) and (3) of this Clause 12.1 (B), and

(b)     a sum equal to the Remaining Profits for any Remaining Period shall be allocated amongst the Partners in accordance with the provisions of Clauses 12 1(A)(3), 12.1(A)(4) and 12 1(A)(5).

(C)    If the profits of BCM LP in respect of the six months ending 31 December 2007 or in respect of any of the calendar years ending on 31 December 2008, 2009, 2010 or 2011 (as shown in each case by management accounts of BCM LP in respect of such six month period or calendar years prepared (in US$) applying the Accounting Principles (as defined in the BCM LP Deed) and after the deduction of the amounts, based on practices previously adopted by BCM LP, that are to be allocated from such profits pursuant to Clauses 12 1(A)(1) and 12 1(A)(2) of the BCM LP Deed) exceed the Benchmark Profits for such six month period or relevant calendar year then no profit shall be allocated in accordance with Clauses 12.1(A)(4) or 12 1 (A)(5) until an amount of profit of the Partnership for the financial year of the Partnership in which the relevant calendar year ended equal to 19 per cent of the profits of BCM LP in such six month period or calendar year (as shown by the relevant management accounts of BCM LP) in excess of the Benchmark Profit for that six month period or calendar year (“Superprofits”) has been allocated to the Corporate Limited Partner (provided that in the event that the Corporate Limited Partner shall no longer be a Partner or if the TRS shall have been terminated then such amount shall be allocated to the General Partner) save that following the Facility Repayment Date any Superprofits shall be allocated to the General Partner.

(D)      …

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13. Partner’s Accounts and Distributions

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13.4

(A)    Subject in all respects to the General Partner being satisfied as to the level of profits anticipated in respect of any financial year, the General Partner shall have the discretion to allow Partners to make drawings (“Discretionary Drawings”) in advance of the end of a financial year in anticipation of their profit entitlement for such financial year provided that (i) in the case of any drawings m anticipation of profit entitlements under Clause 12.1(A)(5), all Limited Partners shall be entitled to participate in such drawings and the aggregate amount that the General Partner shall decide may be drawn in anticipation of such profit entitlements shall be drawn as between the Limited Partners in the Agreed Proportions, and (ii) no Discretionary Drawings shall be allowed during a Facility Trigger Period or a Note Repayment Period.

(B)     Notwithstanding the discretion referred to in Clause 13.4(A), in each financial year of the Partnership distributions (“Advance Drawings”) shall be made at the end of each month to the General Partner in an amount equal to an amount (if any) sufficient for the General Partner to pay or payable under the Facility Agreement during the following month provided that, pursuant to Clauses 12.1 (D), no distributions shall be made pursuant to this Clause 13.4(B) after the Facility Repayment Date.

(C)     Notwithstanding the discretion referred to in Clause 13.4(A) but subject to clauses 13.4(D) and (E), distributions (“Sweep Drawings”) shall be made at the end of each month in each financial year of the Partnership by the General Partner in the amounts calculated in accordance with the following provisions of this Clause 13.4(C). The General Partner will prepare Management Accounts for each month during such financial year of the Partnership within 30 days of the end of such month. Following the preparation of such Management Accounts, in respect of each month the General Partner shall deduct from the profits (if any) shown by such Management Accounts an amount equal to any Discretionary Drawings made during that month and an amount equal to the aggregate of the Advance Drawings and the Further Drawings for that month and the balance of the profits (if any) shown by such Management Accounts shall be distributed to the General Partner and shall firstly be applied by the General Partner in paying interest (including deferred interest as described in Condition 2.4 of the Note Instrument) on the Notes, such distribution to take place as soon as reasonably practicable following the completion by the General Partner of the preparation of such Management Accounts provided that no Sweep Drawings shall be made during a Facility Trigger Period or a Note Repayment Period.

(D)    …

…

29. Miscellaneous

29.1   This Deed (together with the letters of allocation) constitutes the entire agreement between the Partners and there are no other written or verbal agreements or representations with respect to the subject matter hereof.

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30. Governing Law

This Agreement and the rights of the Partners shall be governed by and construed in accordance with Cayman Islands law and the Partners hereby submit to the non-exclusive Jurisdiction of the Cayman Islands Courts.”

(1)     the Facility Agreement:

(2)     the Deed of Assignment;

(3)     the Deed of Adherence;

(4)     the Deed of Subordination;

(5)     the Deed of Contribution; and

(6)     the Subscription Deed.

Each of these deeds references the others which, as Mr Gammie put it in opening, was because “all of the pieces of the jigsaw have to fit together, otherwise something will clearly have gone wrong in implementing the transaction agreed with all the parties.”

Facility Agreement

“3.1 Purpose

The proceeds of the Loan shall be applied:

(a)     in and towards the acquisition by the Borrower of a partnership interest in BCM LP pursuant to the Deed of Assignment, such partnership interest to be promptly contributed by way of capital to New LP [ie BCMC LP] pursuant to the Deed of Contribution;

(b)     in and towards the intra Group loan to be made by the Borrower to Parent as set out in the Funds Flow Statement and pursuant to the Upstream lntercompany Loan Agreement, which loan shall not exceed US$ 2,000,000 in principal amount (excluding any capitalised interest from time to time); and

(c)     in and towards the payment of related transaction costs as set out in the Funds Flow Statement.”    

“1. DEFINITIONS AND INTERPRETATION

1.1 Definitions

…

Loan Extension Conditions means

(a)     the aggregate AUM (as reported in the information most recently delivered to the Agent pursuant to Clause 7.4 (Reports of BCM LP) of the Subordination Deed) shall not be less than US$ 11,000,000,000; and

(b)     the aggregate outstanding Financial Indebtedness of the Group (excluding any such Financial Indebtedness of the Borrower arising under the Seller Notes and the Parent arising under the Upstream lntercompany Loan Agreement) as determined by reference to the latest audited consolidated financial statements delivered pursuant to Clause 7.1 (Financial statements) of the Subordination Deed does not exceed BCM LP Profit Before Tax.

Mandatory Cost means the percentage rate per annum calculated by the Agent in accordance with Schedule 4 (Mandatory Cost formula).

Margin means 2.50 (two and one half) per cent. per annum.

…

Termination Date means  subject to Clause 6.1 (Repayment of Loan) the third anniversary of  Utilisation.

…

Trigger Event means any of the following events or occurrences:

(a)     subject to Clause 10 (Reset of Trigger Event AUM Threshold) of the Subordination Deed, the aggregate AUM for any month as reported pursuant to Clause 7.4 (Reports of BCM LP) of the Subordination Deed is less than US$ 8,250,000,000;

(b)     the ratio of the aggregate Financial Indebtedness of the Borrower (excluding any such Financial Indebtedness arising under the Seller Notes) as determined by reference to the last audited consolidated financial statements of the Borrower, to the BCM LP Profit Before Tax exceeds 2.5: 1;

(c)     where the aggregate AUM in any month as reported pursuant to Clause 7.4 (Reports of BCM LP) of the Subordination Deed (the Reference Month) is:

(i)      less than US$16,000,000,000, the AUM as at that Reference Month has declined by more than thirty percent (30%) when compared to the AUM as at the month end falling 12 months prior to that Reference Month; or

(ii)     greater than US $16,000,000,000, the AUM as at that Reference Month has declined by the greater of:

(A)    thirty percent (30%) when compared to the AUM as at the month end falling 12 months prior to that Reference Month, and

(B)     the figure produced by taking whichever is the lesser of. (i) the maximum AUM as at any month end in the 12 month period prior to that Reference Month and subtracting from that figure US $16,000,000,000; or (ii) fifty percent (50%) of the maximum AUM as at any month end in the 12 month period prior to that Reference Month,

(as depicted in the worked example contained in Schedule 8), and in each case, the Agent (acting with the consent of each Lender, and after consultation with the Borrower for a period of twenty (20) Business Days) does not, acting reasonably, agree to waive such trigger and the application of the Loan Wind Down procedure that would otherwise commence pursuant to Clause 22 (Occurrence of Trigger Event);

(d)     WAIP [weighted average investment performance] in any 12 month period is worse than minus 25% (that is, a negative percentage the modulus of which is greater than 25);

(e)     Michael Platt dies, is declared incompetent by a court or authority (howsoever described) of competent jurisdiction, or otherwise ceases to be employed by or act on behalf of BCM LP in broadly the same capacity as he acts as at the date of this Agreement, and is not replaced in his role (whether on a temporary or permanent basis) within 30 days by another person approved by the Agent (such approval not to be unreasonably withheld or delayed); or

(f)     an Event of Default occurs and is continuing.

…

6. REPAYMENT

6.1 Repayment of Loan

(a)     Provided that each of the Loan Extension Conditions are satisfied (and an authorised signatory of the Borrower certifies to the Agent not more than 60 days and not less than 30 days prior to the Termination Date that such conditions have been satisfied), the Termination Date shall be automatically extended for one calendar year (which revised date shall be the fourth anniversary of Utilisation (the First Revised Termination Date)). If the Termination Date has been extended in accordance with the foregoing sentence, provided that each of the Loan Extension Conditions are satisfied (and an authorised signatory of the Borrower certifies to the Agent not more than 60 days and not less than 30 days prior to the First Revised Termination Date that such conditions have been satisfied), the First Revised Termination Date shall be automatically extended by one further calendar year (which second revised date shall be the fifth anniversary of Utilisation (the Second Revised Termination Date)).

(b)     If the Borrower has not repaid the Loan m full on the Termination Date, or (if the Termination Date is extended pursuant to Clause 6.l(a)) the First Revised Termination Date or the Second Revised Termination Date, as the case may be, then the Borrower shall commence repayment of the Loan and all other amounts payable under the Finance Documents monthly from all amounts received by the Borrower under the Transaction Documents (Loan Wind Down) from such date (Repayment Start Date). All amounts received by the Borrower under the Transaction Documents from the Repayment Start Date until the Loan and all other amounts payable under the Finance Documents have been repaid in full shall (after the deduction of reasonable operating costs of the Borrower as set out in the budget provided pursuant to Clause l0.3 of the New LP Limited Partnership Agreement) be applied by the Borrower in repayment of the Loan including interest due under clause 8 (Interest) (and all other amounts payable under the Finance Documents). Any amounts which remain outstanding on the second anniversary of the Repayment Start Date shall become immediately due and payable by the Borrower to the Finance Parties without further demand on such second anniversary of the Repayment Start Date.

62. …

7. PREPAYMENT AND CANCELLATION

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7.6 Mandatory prepayment

If the Borrower wishes to repay any principal amount under the Seller Note Instrument from Excess Benchmark Profits, the Borrower must use at least 33% of the Excess Benchmark Profits to prepay principal under the Loan.

…

8. INTEREST

8.1 Calculation of interest

The rate of interest on the Loan for the Interest Period is the percentage rate per annum which is the aggregate of the applicable·

(a)     Margin;

(b)     LIBOR; and

(c)     Mandatory Cost, if any.

…

22. OCCURRENCE OF TRIGGER EVENT

22.1 Trigger Event

If a Trigger Event occurs, the Loan Wind Down as described in Clause 6.l(b) will commence such that the Borrower shall repay the Loan (and all amounts payable under the Finance Documents) from all amounts received by the Borrower under the Transaction Documents (less an amount equal to the reasonable operating costs of the Borrower as set out in the budget provided pursuant to Clause 10.3 of the New LP Limited Partnership [ie BCMC LP] Agreement) in monthly instalments within two calendar years of the date on which that Loan Wind Down commences, provided that:

(i)      If the Loan Wind Down commences solely as a result of the occurrence of an event specified in paragraph (a) of the definition of Trigger Event, repayment in accordance with the Loan Wind Down shall cease if the AUM subsequently increases to above US$11,000,000,000,

(ii)     If the Loan Wind Down commences solely as a result of the occurrence of an event specified in paragraph (c) of the definition of Trigger Event, repayment in accordance with the Loan Wind Down shall cease if (and for so long as) the AUM subsequently increases by 10% above the level that existed when the Loan Wind Down commenced; and

(iii)    if the Loan Wind Down commences solely as a result of the occurrence of an Event of Default, repayment in accordance with the Loan Wind Down shall cease if (and so long as) the Event of Default is remedied (if capable of remedy) or waived (with the consent of the Majority Lenders).”

Deed of Assignment

“Deed of Adherence” means a deed of adherence to be entered into on the date hereof whereby BCMCL adheres to the terms of the Limited Partnership;

…

“Facility Agreement” means the facility agreement entered into between BCMCL, RBS and others on or around the date hereof, pursuant to which a facility of US$200,000,000 will be made available to BCMCL;

…

“Instrument” means the loan note instrument to be executed by BCMCL on or around the date hereof in the form set out in schedule 2;

“… with full title guarantee, free from all Encumbrances and together with all rights attaching thereto, such part of their current interests In the Partnership carrying the right to participate after the Effective Date in the future income and capital profits and income and capital losses of the Partnership as is set out opposite each of the Assignor’s respective names in schedule 1 to this Deed (excluding for the avoidance of doubt any amounts standing to the credit of any of the Assignor’s respective Capital Contribution Accounts and Distribution Accounts (as defined in the Limited Partnership Deed) immediately prior to the Effective Date) (the “Partnership Interests”).”

The interests set out in schedule 1 are the 13% interest of WR and the 3% interests of MP and Sugarquay.

“3.1   The consideration for the assignment in clause 2 shall be satisfied within one calendar month from the date hereof (or as the parties may otherwise agree in writing) as follows:

(A)    In respect of WR:

(1)     BCMCL shall pay to WR the sum of US$192,000,000, such payment to be made by electronic transfer of funds for same day value to WR's bank account [account details], and

(2)     BCMCL shall issue at par to WR a Note for the aggregate principal amount of US$55,000,000,

(B)   In respect of MP

(1)     BCMCL shall pay to MP the sum of US$2,000,000, such payment to be made by electronic transfer of funds for same day value to MP's bank account [account details], and

(2)     BCMCL shall issue at par to MP a Note for the aggregate principal amount of US$55,000,000; and

(C)   In respect of Sugarquay

(1)     BCMCL shall pay to Sugarquay the sum of US$2,000,000, such payment to be made by electronic transfer of funds for same day value to Sugarquay's bank account [account details], and

(2)     BCMCL shall issue at par to Sugarquay a Note for the aggregate principal amount of US$55,000,000”  

Deed of Adherence

2.  Adherence to the Partnership

2.1    The Further Limited Partner covenants with the Partners for the time being to observe and perform the terms and conditions of the Agreement on terms that the Further Limited Partner becomes a Further Limited Partner under the Agreement with effect from the date hereof.

2.2    At the request of the Assignors (as defined in a Deed of Assignment entered into between the Further Limited Partner, [WR], [MP] and Sugarquay on the date hereof (the "Deed of Assignment"), £100, being part of the capital contributed in aggregate by the Assignors to the Partnership, is to be credited to the Further Limited Partner's Capital Contribution Account on execution of this Deed which amount shall be deemed to have been contributed by the Further Limited Partner in accordance with clause 9.2 of the Agreement.

2.3    This Deed shall be supplemental to and read together with the Agreement.”

The reduction of WR’s, MP’s and Sugarquay’s respective interests is shown in Schedule 1 to the Deed as is the 19% interest of BCMCL.

Subordination Deed

“2.  SUBORDINATION

2.1    In consideration of the Senior Creditors acting under or in connection with the Finance Documents and making the Facility available to the Company pursuant to the Credit Agreement and the other Finance Documents, and acting otherwise pursuant to the Transaction Documents, the Subordinated Creditors each agree that until all moneys and liabilities whatsoever which now are or at any time hereafter may become due, owing or payable to the Senior Creditors in respect of the Senior Liabilities have been irrevocably repaid in full and the Senior Creditors shall be owed no further liability (actual or contingent) in respect of the Senior Liabilities:

(a)     the Subordinated Liabilities are subordinated to the Senior Liabilities;

(b)     any payment of principal or interest or any other amount that would otherwise be due in respect of the Subordinated Liabilities shall be postponed and shall not become due and payable; and

(c)     the Company’s or, as the case may be, the Parent’s, obligation to make any payment of principal or interest or any other amount that would otherwise be due in respect of the Subordinated Liabilities shall be conditional upon the irrevocable payment in full of all amounts owing (including the satisfaction of contingent liabilities) to the Senior Creditors m respect of the Senior Liabilities.

2.2  Clause 2.1 does not apply to any Permitted Payment.

…

A “Permitted Payment” is defined in Clause 5, as follows:

5 PERMITTED PAYMENTS

5.1 Upstream Intercompany Loan Agreement

(a)     The Company may advance $2,000,000 under the Upstream Intercompany Loan Agreement to the Parent on the date of Utilisation under the Facility Agreement, or a later date, such amount to be paid, upon advance, into the TRS Fee Account or otherwise in accordance with the Funds Flow Statement.

(b)     The Parent may repay to the Company principal and/or interest outstanding under the Upstream Intercompany Loan Agreement from surplus amounts standing to the credit of the TRS Fee Account once the TRS Fee has been paid in full.

5.2 Seller Notes/Credit Agreement

Notwithstanding any other Clause of this Deed, provided that:

(a)     no Trigger Event has occurred and is continuing, and

(b)     no Loan Wind Down has commenced and is continuing,

the Company may make the following payments in respect of the Seller Notes, and the Seller Note Holders may receive in respect of the Seller Notes and retain such payments, namely:

(i)      interest at the rate of 15% per annum, but only after and to the extent that the Company has paid all amounts of interest then due and payable under the Finance Documents; and

(ii)     principal owing under the Seller Notes, PROVIDED ALWAYS THAT if a Permitted Payment is a repayment of any amount of principal owing under the Seller Notes and is to be made from Excess Benchmark Profits, then the Company must first use at least 33% of the Excess Benchmark Profits to prepay principal under the Credit Agreement.

5.3 Distributions to Parent shareholder

(a)     The Parent may use interest accruing on amounts standing to the credit of the TRS Fee Account to pay US$5,000 per annum in respect of distributions to its shareholder pursuant to Clause 8 14(f) hereof.”

“Each Obligor agrees with each other party to this Agreement to be bound by the covenants set out in this clause relating to it. The undertakings in this Clause 8 remain in force from the date of this Agreement for so long as any amount is outstanding under the Finance Documents or the Seller Note Instrument or any Commitment is in force.

…

8.12 The Company

Notwithstanding any other provision of this Deed, the Company will not carry on any business other than being a general partner of New LP or incur or permit to subsist any indebtedness or other liability, make any loan or guarantee, own any asset (including, without limitation, any bank account), make or receive any payment or enter into any other transaction, in each case except to the extent arising solely from:

(a)     entering into and exercising its rights and performing its obligations under the Transaction Document to which it is party,

(b)     the ownership of partnership interests in New LP and the ownership of cash balances in the Borrower Bank Account;

(c)     the ownership of the Borrower Bank Account;

(d)     the receipt of any payment, allocation, subscription amount or any other amount under the Transaction Documents (provided such payment, allocation or subscription is permitted by this Deed and/or the Transaction Documents and paid into the Borrower Bank Account) and the making of a payment to:

(i)    the Finance Parties pursuant to the Finance Documents; and

(ii)   the Parent under the Upstream Intercompany Loan Agreement and, subject to the terms of this Deed. the Seller Note Holders pursuant to the Seller Note

(e)     liabilities in respect of its share capital and reasonable professional fees, employee costs, administration costs and taxes m each case incurred m the ordinary course of its business…

8.13 New LP [BCMC LP] as limited partner

Notwithstanding any other provision of this Deed, New LP will not carry on any business other than being a limited partner in BCM LP or incur or permit to subsist any indebtedness or other liability, make any loan or guarantee, own any asset (including, without limitation, any bank account), make or receive any payment or enter into any other transaction, in each case except to the extent arising solely from:

(a)     entering into and exercising its rights and performing its obligations under the Transaction Documents to which it is party;

(b)     the ownership of partnership interests in BCM LP and the ownership of cash balances in the New LP Bank Account,

(c)     the ownership of the New LP Bank Account;

(d)     the receipt of any payment, allocation or any other amount from BCM LP pursuant to the BCM LP Limited Partnership Agreement (provided such payment or allocation is paid into the New LP Bank Account) and the making of a payment to its partners in accordance with the terms of the New LP Limited Partnership Agreement (provided that m the case of any payment to the Company, such payments are made to the Borrower Bank Account), or

(e)     liabilities m respect of reasonable professional fees, employee costs, administration costs and taxes in each case incurred in the ordinary course of its business as a limited partner.

8.14 Parent

Notwithstanding any other provision of this Deed, Parent will not carry on any business other than being the holding company of the Company or incur or permit to subsist any indebtedness or other liability, make any loan or guarantee, own any asset (including, without limitation, any bank account), make or receive any payment or enter into any other transaction, in each case except to the extent arising solely from.

(a)     entering into and exercising its rights and performing its obligations under the Transaction Documents to which it is party;

(b)     the ownership of shares in the Company and the ownership of cash balances in the Parent Bank Account and the TRS Fee Account;

(c)     the ownership of the Parent Bank Account and the TRS Fee Account; or

(d)     the receipt of any payment, allocation or any other amount under the Transaction Documents (provided such payment is made into the Parent Bank Account (except for the Upstream Intercompany Loan Agreement, the proceeds of which will be paid directly by the Company (as lender) into the TRS Fee Account or otherwise in accordance with the Funds Flow Statement) and the making of any payment, subscription or allocation to any party under the Transaction Documents, and further provided such payments or subscriptions amounts paid to the Company are paid into the Borrower Bank Account,

(e)     liabilities in respect of its share capital and reasonable professional fees, employee costs, administration costs and taxes in each case incurred m the ordinary course of its business as a holding company; and

(f)     distributions to its shareholder m an amount not exceeding $5,000 per annum.”

“10. RESET OF TRIGGER EVENT AUM THRESHOLD

10.1 Upon the occurrence of Reset Event:

(a)     the Agent, BCM LP, and the [borrowing] Company shall enter into good faith negotiation for 20 Business Days to determine an appropriate level for the AUM threshold in paragraph (a) of the definition of Trigger Event, which currently stands at US$ 8,250,000,000, to be reset upward to a more appropriate level. If good faith negotiations fail to reach a result within 20 Business Days, the AUM threshold level in paragraph (a) of the definition of Trigger Event shall automatically be reset to US$ 9,500,000,000; and

(b)     each obliger agrees that all reasonably necessary consequential amendments will be made to the Transaction Documents.”      

A “Reset Event” is defined in the Deed (clause 1.1) as being, where RBS is a limited partner in the new LP (ie BCMC LP), an “Initial Corporate Limited Partner Resignation Event”.

“… any change, after the accession of the Corporate Limited Partner [RBS] to the Partnership, in (or in the interpretation, administration or application of) any law or treaty (including the publication of any decision in any case), in each case relating to tax, or any published practice or concession of any relevant tax authority (other than a change in tax rates) (each, a “Change of Law”) or any communication from any relevant tax authority (a “Communication”), which gives rise to, creates a material probability of, or materially increases the probability of, a material adverse impact on the after-tax economic return to the Corporate Limited Partner from the interest which it holds in the Partnership and any transactions undertaken by it relating or by reference to its share in the profits of the Partnership (including, without limitation, the TRS) (as compared with the after-tax economic return expected by the Corporate Limited Partner at the date of the accession of the Corporate Limited Partner to the Partnership) as against the position if the Change of Law or Communication had not occurred, but for the avoidance of doubt the resignation or removal of the Corporate Limited Partner not in connection with a Change of Law or Communication but in connection with the assignment, novation or other transfer of the TRS shall not be an Initial Corporate Limited Partner Resignation Event. …”

Contribution Deed

“2. Contribution of the BCM LP Interests

2.1    BCMCL (on its own account) hereby makes a capital contribution to the Partnership [ie BCMC LP] of the BCM LP Interests (the “Contribution”) in consideration of the Partnership, acting through its general partner, granting to BCMCL certain partnership interests in the Partnership, as set out in the revised limited partnership agreement relating to the Partnership to be entered into on or around the date hereof.

2.2    On receiving the Contribution, the Partnership, acting through BCMCL as its general partner, will become a limited partner of BCM LP and its capital contribution account with BCM LP will be credited to the value set out in clause 2.2 of the Deed of Adherence.

2.3    The value of the Contribution is equivalent to US$361,000,000 (the “Contribution Value”) and BCMCL's capital account with the Partnership will be credited with an amount equal to the Contribution Value.”

“3. Assignment of BCM LP Interests

3.1    The Partnership agrees that, following the irrecoverable satisfaction in full of all amounts owing by BCMCL under the Facility Agreement or by any Obligor under the Finance Documents to which it is party, in the event that the Partnership receives a Loan Note Conversion Request from the Issuer the Partnership will, acting through BCMCL as its general partner, assign to the Noteholders such proportion of the BCM LP Interests set out in the Loan Note Conversion Request to satisfy the obligation of the Issuer under the Loan Notes.

3.2    The consideration in respect of any assignment pursuant to clause 3.1 shall be an amount equal to the value of the BCM LP Interests so assigned, as determined In accordance with the definition of “Value” in the Instrument. Where BCMCL remains a partner in the Partnership at such times, such consideration shall be satisfied by way of a reduction of the amount standing to the credit of the capital contribution account of BCMCL in the Partnership.”

Subscription Deed

“RECITALS

(A)    The Subscriber entered into a total return swap agreement with Financial Trader [RBS] on or around the date hereof (the “TRS”).

(B)    The effect of the TRS is that an amount equal to any profits in BlueCrest Capital Management Cayman LP allocated to Financial Trader shall, less a margin, be paid to the Subscriber, in consideration for which swap fees will be due from the Subscriber to RBS In accordance with the terms of the TRS

(C)    The Subscriber and the Company wish to enter into an agreement whereby the Subscriber agrees to subscribe, and the Company agrees to allot, shares in the Company on the terms set out herein.”

“2.  Subscription 

2.1    The Subscriber agrees that in the event it receives any monies from Financial Trader pursuant to the TRS (“Swap Proceeds”), the Subscriber will apply an amount equal to all such Swap Proceeds to subscribe for Shares without due delay.

2.2    The Company agrees that upon any application by the Subscriber to the Company to subscribe for Shares pursuant to the Subscriber's obligation in clause 2.1, the Company shall, subject to any legal or regulatory prohibition, accept such subscription and allot the requisite number of Shares to the Subscriber upon receipt of payment from the Subscriber without undue delay.

…

5. Governing Law

5.1    The governing law of this agreement shall be that of the Cayman Islands. …”

Loan Notes

9. Substitution of another debtor for the Company

9.1 Right to substitute

The Company may with the consent of the Noteholders (such consent not to be unreasonably withheld or delayed), substitute any member or members of the Group (the “Substituted Debtor”') in place of the Company (or of any previous Substituted Debtor under this clause 9.1) as the principal debtor or debtors under this Instrument and the Loan Notes by means of an instrument (the “Supplemental Instrument”) executed by the Company (or any previous Substituted Debtor under this clause 9.1), and the Substituted Debtor in such form as they may agree, a copy of which shall be made available for inspection by Noteholders.

9.2 Release

Compliance with the provisions of clause 9.1 shall operate to release the Company (or any such previous Substituted Debtor) from all of its obligations under this Instrument and the Loan Notes. Not later than 14 days after the execution of the Supplemental Instrument, and after compliance with all such requirements as are set out in clause 9 1, notice of the substitution will be given to the Noteholders. Such notice shall also give details of where copies of the Supplemental Instrument may be inspected The non-receipt of notice by, or the accidental omission to give notice to, any Noteholder shall not invalidate any substitution and release pursuant to this clause 9.

9.3 Substitution of new debtor

Upon the execution of the Supplemental Instrument and compliance with the other provisions of clause 9.1, the Substituted Debtor will be deemed to be named in this Instrument and on the Loan Notes as the principal debtor m place of the Company (or any previous Substituted Debtor) as provided m the Supplemental Instrument and shall be liable to the Noteholders accordingly The existing Loan Note certificates held by the Noteholders (including the Conditions endorsed upon them) shall not be cancelled but shall remain valid In relation to the Substituted Debtor as aforesaid. Every reference in this Instrument to the Company shall henceforth have effect as if it were a reference to the Substituted Debtor.

…

11. Covenants

The Company covenants and undertakes to each of the Noteholders to procure that save as otherwise authorised by an Extraordinary Resolution of the Noteholders:

11.1 Restrictions on disposals of assets

The Company shall not sell, lease, transfer or otherwise dispose of any of its partnership interest in New LP [BCMC LP], unless it is to be substituted as debtor under clause 9.3 or otherwise in accordance with the Security Documents (as defined in the Facility Agreement).

…

11.4 Payments to Corporate Limited Partner

The Company shall use reasonable endeavours to procure that any payment to the Corporate Limited Partner pursuant to Clause 12.1 (8)(3) or Clause 13.4(E) of the New LP [BCMC LP] Limited Partnership Agreement shall be made only after the Company is satisfied that after the Parent receives the corresponding payment from the Corporate Limited Partner under the TRS, shares in the Company may be issued to the Parent In accordance with the Deed of Subscription.

…

SCHEDULE 2: THE CONDITIONS

…

2.  Interest

2.1 Interest calculation and payment dates

Interest on the Loan Notes will accrue on a daily basis, be calculated by the Company on the basis of the number of days elapsed and a 360 day year and will be payable (subject to any requirement of law to deduct tax therefrom) monthly in arrear, on the last day of each month (the “Interest Payment Date”), to the holders of the Loan Notes (“Noteholders”) whose names appear on the Register on the fifth day before the relevant Interest Payment Date In respect of the Interest Period (as defined below) ending on the day immediately before such dates at the rate specified in Condition 2 2, except that the first payment of interest on the Loan Notes, which will be made on 31 July 2007, will be in respect of the period from and including the first date of issue of any of the Loan Notes to (but excluding) 31 July 2007. The period from and including the first date of issue of any of the Loan Notes to (but excluding) 31 July 2007, and the period from (and including) 31 July 2007, or any subsequent interest Payment Date to (but excluding) the next following interest Payment Date is referred to as an “Interest Period”.

2.2 Interest Amount payable for each Interest Period

The amount of interest payable on each Loan Note for each Interest Period shall be the lower of

(A)    the product of 15 per cent. per annum and the principal amount outstanding of the relevant Loan Note in the relevant Interest Period (calculated as the weighted average of the principal amount outstanding of such Loan Note during such Interest Period); and

(B)    the product of the funds distributed under clause 13.4 of the New LP Limited [ie BCMC LP] Partnership Agreement to be applied by the Company for such purpose and a fraction, the denominator of which is the aggregate principal amount outstanding of all Loan Notes and the numerator of which Is the principal amount outstanding of such Loan Note.

2.3 Interest Amount payable on Redemption

The amount of interest payable on each Loan Note in respect of a redemption of such Loan Note on a Business Day under these Conditions shall be the lower of:

(A)    the sum of (i) the product of 15 per cent per annum for the period from and including the immediately preceding Interest Payment Date to and excluding the date of redemption and the principal amount outstanding of the relevant Loan Note in the relevant Interest Period (calculated as the weighted average of the principal amount outstanding of such Loan Note during such Interest Period) and (ii) any interest deferred in respect of such Loan Note in accordance with Condition 2.4,

(B)    the product of the funds distributed under clause 13.4 of the New LP [BCMC LP] Limited Partnership Agreement to be applied by the Company for such purpose and a fraction, the denominator of which is the aggregate principal amount outstanding of all Loan Notes and the numerator of which is the principal amount outstanding of such Loan Note.

…

3. Redemption

3.1 Redemption by the Company

(A)    The Company shall, without the need for consent from any Noteholder or other person, be entitled to require all Noteholders to redeem the whole (whatever the amount) or a specified percentage of their respective holdings of Loan Notes at par, together with accrued interest and any deferred interest payable under Condition 2.4 (subject to any requirement to deduct tax therefrom) up to (but excluding) the date of payment, on any Business Day by giving not less than 30 days' notice in writing. Every such notice of redemption shall be irrevocable.

(B)    The Company shall, with the consent of each Noteholder and the New LP [BCMC LP], be entitled to require one or more (but not all) Noteholders to redeem the whole (whatever the amount) or any part of their holding of Loan Notes at par, together with accrued interest and any deferred interest payable under Condition 2.4 (subject to any requirement to deduct tax therefrom) up to (but excluding) the date of payment, on any Business Day by giving not less than 30 days' notice in writing Every such notice of redemption shall be irrevocable

3.2 Redemption on Final Maturity Date

Any Loan Notes not previously redeemed or purchased will be redeemed in full on the Final Maturity Date together with accrued interest and any deferred interest payable under Condition 2.4 (subject to any requirement to deduct tax therefrom). Such redemption will be effected

(A)    if and to the extent that funds are available for this purpose, at par, and/or

(B)    by issuing a Loan Note Conversion Request to New LP and transferring or procuring the transfer of a portion of New LP's partnership interests m BCM LP in accordance with clause 3.1 of the Deed of Contribution, the percentage of all of the outstanding partnership interests in BCM LP at that time transferred in respect of each relevant Loan Note being determined as follows:

(1)   If the Value at the Final Maturity Date is less than US$1,900,000,000, a percentage equal to the product of 165/1,900 x 100 and a fraction, the numerator of which is the principal amount outstanding of the relevant Loan Note and the denominator of which is the aggregate principal amount of all of the loan Notes outstanding as at the Final Maturity Date, and

(2)   if the Value at the Final Maturity Date is greater than US$1,900,000,000, a percentage equal to:

1,900,000,0 00/N x 165/1,900 x 100 x A/B

where

N is the Value as at the Final Maturity Date.

A is the principal amount outstanding of the relevant Loan Note as at the Final Maturity Date, and

B is the aggregate principal amount outstanding of all of the Loan Notes outstanding as at the Final Maturity Date.

3.3 Redemption on change of control

If the events set out In clause 7.2 of the Facility Agreement occur, each Loan Note shall be redeemed at par (together with accrued interest and any deferred interest payable under Condition 2.4 (subject to any requirement to deduct tax therefrom) by the Company on any Business Day by giving not less than 30 days notice in writing to the Noteholders.

3.4 Redemption on increase of profit

If at any time the profits of BCM LP are paid in accordance with clause 12.1(C) of the New LP Limited Partnership [BCMC LP] Agreement, then the Company shall, subject to clause 5(11) of the Subordination Deed, on 30 days notice, redeem at par the whole or any part of the Loan Notes on any Business Day together with accrued interest and any deferred interest payable under Condition 2.4 (subject to any requirement to deduct tax therefrom), for the time being outstanding and on the expiry of the notice the Loan Notes in respect of which it has been given shall be so redeemed.

If the Company redeems part only of the Loan Notes, there shall be redeemed out of the holding of each Noteholder that proportion (as near as may be without involving any fraction of £1) of his holding of Notes which the total amount of the Notes then being redeemed bears to the total amount of Notes then in issue.

3.5 Redemption on Note Trigger Event

…

3.6 Redemption on default

If any principal or interest due and payable on any of the Loan Notes is not paid in full within 7 Business Days following the due date for payment of the same, each Noteholder shall be entitled to serve written notice on the Company declaring all Loan Notes held by such Noteholder to be immediately repayable, and upon actual or deemed receipt pursuant to Clause 11.3 of such notice by the Company, all Loan Notes held by such Noteholder then outstanding shall become immediately repayable together with accrued interest and any deferred interest payable under Condition 2 4 (subject to Clause 7.1).”

BCM LP

“With effect from the date hereof the General Partner wishes to admit the Special Limited Partner to the Partnership as a Further Limited Partner and the General Partner and the Limited Partners wish to restate the Prior Deed and replace it in its entirety by this Agreement.”

“2. Original Agreements

2.1    This Deed shall take effect from the Effective Date in substitution for the Prior Deed which shall, without prejudice to any accrued rights of any of the parties, from such date, be of no further force and effect.

2.2    By way of reaffirmation, each of the General Partner, MP and WR acknowledges and agrees that by executing the Original Deed they agreed to form and to enter into the Partnership established and constituted under English Law and to register it under the Act [ie the Limited Partnerships Act 1907].

2.3    Each of the General Partner and the Limited Partners at the date hereof acknowledges and agrees that from the date hereof, and each Further Limited Partner agrees that from the date of its admission to the Partnership as determined under Clause 3, the Partnership shall continue to be established and constituted under English law and to be registered under the Act.”  

“6. Business

6.1 The Partnership's business shall be to carry on the business of (1) managing on a discretionary basis the investment or trading of assets belonging to other persons, (2) marketing shares or interests In such other persons, (3) activities associated therewith and (4) such other activities as may in the opinion of the General Partner be desirable (subject to prior notice of such other activities having been given to each of the limited Partners) and “the Business” shall be construed accordingly.

6.2    The Partnership may execute, deliver and perform all contracts and other undertakings and engage in all activities and transactions as may in the opinion of the General Partner be necessary or advisable in order to carry on the Business.

6.3    For the avoidance of doubt, the Business shall not extend to the management of the investment or trading of the contributions made by the Partners to the Partnership pursuant to Clause 9 below.”

Clause 9 concerned capital and loan contributions and provides:

“9. Capital and Loan Contributions

9.1    Each of the Partners acknowledges and agrees that the General Partner and each of the Limited Partners at the date hereof have contributed to the capital of the Partnership in the amounts set out in the letters of allocation between the General Partner and each of the Partners entered into on the date hereof.

9.2    Each Further Limited Partner shall contribute upon admission to the Partnership such sum not being less than £100 to the capital of the Partnership as shall be determined in the absolute discretion of the General Partner and specified in the Deed of Adherence executed by such Further Limited Partner.

9.3    The capital of the Partnership may be increased from time to time by such amount and in such proportions as between the Partners as may be agreed between the General Partner and the Partners proposing to make further capital contributions and the letter of allocation between the General Partner and each relevant Partner shall be amended to reflect any such further contribution (or in the case of a Further Limited Partner a letter of allocation shall be entered into between such Further Limited Partner and the General Partner by way of an amendment to this Deed of Adherence executed by such Further Limited Partner to reflect any such further contribution).

9.4    No Partner shall be entitled to interest on the amount of its capital contribution made pursuant to this Clause 9.

9.5    Loan contributions may also be made to the Partnership by any or all of the Partners from time to time on such terms as to repayment, interest and otherwise as may be agreed between the General Partner and the Partners so contributing or, if a loan contribution is to be made by a Further Limited Partner, between the General Partner and that Further Limited Partner.”

“12. Allocations

12.1

(A)    Subject to the further provisions of this Clause 12.1 and to Clause 12.4, in respect of each financial year of the Partnership the profits of the Partnership (before tax) as shown by the accounts of the Partnership prepared in accordance with Clause 17 (and after the deduction of any sums payable to an Outgoing Partner pursuant to the provisions of Clause 22 (other than such Outgoing Partner's capital contribution)) shall, subject as provided In this Clause, be allocated amongst the Partners as follows:-

(1)     firstly, there shall be allocated to the General Partner such amount of profits as shall in the good faith opinion of the General Partner be required to be retained in the Partnership (i) as working capital to meet anticipated, current or foreseen liabilities and expenditure of the Partnership, (ii) to cover other contingencies in accordance with general principles of prudent management and (iii) to satisfy any obligation imposed on the General Partner by the Financial Services Authority to maintain a minimum level of financial resources;

(2)     secondly, there should be allocated to such of the Partners (if any) as the General Partner shall in its absolute discretion determine (i) such amount of profits, in aggregate not exceeding the performance fees received by the Partnership in the relevant financial year (“Performance Fees”), as the General Partner shall in its absolute discretion by resolution of its board of directors determine, in order to recognise investment performance attributable to such Partners during the relevant financial year; and (ii) such amount of profits (in aggregate not exceeding 15 per cent. of the amount of the Performance Fees less any allocations to recognise investment performance (as set out in (i) above) as the General Partner shall in its absolute discretion by resolution of its board of directors determine, in order to recognise management performance during the relevant financial year;

(3)     thirdly, there shall be allocated to the Special Limited Partner such amount of profits (“SLP Profits”) as is equal to the aggregate Advance Drawings during such financial year;

(4)     the remainder of the profits, which for the purposes of the operation of this sub-clause shall be increased by adding thereto an amount equal to any SLP Profits in respect of the relevant financial year, shall then be allocated to the Partners in the Agreed Proportions provided that the amount allocated to the Special Limited Partner under this Clause 12.1 (A)(4) shall be reduced by an amount equal to any SLP Profits in respect of the relevant financial year.

(B)     The parties agree and acknowledge that in respect of the current financial year of the Partnership (being the period of 12 months ending on 30 November 2007, the “Current Financial Year”), the Special Limited Partner is entitled to participate in the profits and losses of the Partnership only for the Future Period and accordingly the parties have agreed that the profits and losses of the Partnership for the Current Financial Year shall be allocated between the parties in the following manner.

The General Partner will prepare Management Accounts (i) for the Prior Period and (ii) for the Future Period and will calculate the profits or losses of the Partnership for the Prior Period and for the Future Period based on such Management Accounts. The General Partner will prepare such Management Accounts and calculations within 30 days of the completion of the audit of the accounts of the Partnership for the relevant financial year pursuant to Clause 17 and will, on request, provide copies of such Management Accounts and such calculations to the other parties to this Agreement and without prejudice to the foregoing will provide copies of such Management Accounts and such calculations to the New GP as soon as is reasonably practicable after the same have been prepared.

Following the completion of such calculations:

(1)     a sum equal to the profits or losses for the Prior Period (as shown by the calculation for such period) shall be allocated as if the Prior Deed were still in full force and effect and without regard to Clause 12.1 (A) hereof; and

(2)     a sum equal to the profits or losses for the Future Period (as shown by the calculation for such period) shall be allocated amongst the Partners (including the Special Limited Partner) in accordance with the provisions of Clause 12.l(A).

(C)     The provisions of Clause 12.1(A)(4) shall cease to apply and the Remaining Profits shall be allocated to the Special Limited Partner during:

(1)     any Facility Trigger Period; or

(2)     any Note Repayment Period

To determine the allocations payable pursuant to this Clause 12.1(C) in any relevant financial year, the General Partner shall prepare Management Accounts (i) for each Facility Trigger Period, (ii) for each Note Repayment Period and (iii) for each period that is neither a Facility Trigger Period nor a Note Repayment Period (each one a “Remaining Period”) during the relevant financial year.

Following the preparation of these Management Accounts (which shall be prepared within 30 days of the end of the relevant financial year) the General Partner shall deduct from the profits shown by such Management Accounts an amount equal to the allocation of profits pursuant to Clauses 12.1(A)(1), (A)(2) and (A)(3) for the relevant financial year (such deduction to be applied as between each Facility Trigger Period, Note Repayment Period and Remaining Period pro rata to their respective durations) and shall calculate the Remaining Proms tor each Facility Trigger Period, each Note Repayment Period and each Remaining Period. The General Partner will, on request, provide copies of such Management Accounts and such calculations to the other parties to this Agreement and without prejudice to the foregoing will provide copies of such Management Accounts and such calculations to the New GP as soon as is reasonably practicable after the same have been prepared.

Following the completion of such calculations:

(a)     a sum equal to the Remaining Profits for any Facility Trigger Period and any Note Repayment Period shall be allocated to the Special Limited Partner in accordance with sub-clauses (1) and (2) of this Clause 12.1 (C); and

(b)     a sum equal to the Remaining Profits for any Remaining Period shall be allocated amongst the Partners in accordance with the provisions of Clause 12.1 (A)(4). …”

“13. Partners' Accounts and Distributions

13.1 Each Partner shall have, inter alia, a Capital Contribution Account and a Distribution Account which shall be operated in accordance with the provisions of Clauses 13.2 to 13.4. In addition, the General Partner shall have a Retention Account which the General Partner shall operate In accordance with the provisions of Clause 12.3.

13.2 The capital contribution of each Partner shall be credited to that Partner's Capital Contribution Account.

13.3 The profits (or losses) allocated to the Partners m respect of each financial year of the Partnership pursuant to Clause 12 shall be credited (or debited, as the case may be) to the Distribution Accounts of the Partners as to 70 per cent of the General Partner's good faith estimate of the profits (or losses) of the financial year within 30 days of the end of the relevant financial year and as to the balance within 30 days of the completion of the preparation of the accounts of the Partnership for the relevant financial year in accordance with Clause 17. Save as otherwise agreed with the General Partner, each Partner shall be permitted to withdraw amounts standing to the credit of its Distribution Account from the date that such amounts are so credited provided that in the case of the Special Limited Partner any such withdrawal shall only be made by way of a payment to the NewLP Bank Account (as defined in the Facility Agreement).

14.4

(A)    Subject in all respects to the General Partner being satisfied as to the level of profits anticipated in respect of any financial year, the General Partner shall have the discretion to allow Partners to make drawings (“Discretionary Drawings”) in advance of the end of a financial year in anticipation of their profit entitlement for such financial year provided that (i) in the case of any drawings in anticipation of profit entitlements under Clause 12.1(A)(4), all Partners shall be entitled to participate in such drawings and the aggregate amount that the General Partner shall decide may be drawn in anticipation of such profit entitlements shall be drawn as between the Partners in the Agreed Proportions, and (ii) no Discretionary Drawings shall be allowed during a Facility Trigger Period or a Note Repayment Period other than Discretionary Drawings on account of an allocation that the General Partner anticipates will be made pursuant to Clauses 12.(A)(1) or 12.1 (A)(2).

(B)     Notwithstanding the discretion referred to in Clause 13.4(A), in each financial year of the Partnership distributions shall be made at the end of each month to the Special Limited Partner In an amount equal to an amount (if any) sufficient for the New GP to pay interest payable under the Facility Agreement during the following month, such amount to be notified m writing by the Special Limited Partner to the General Partner not less than two Business Days prior to the end of the relevant month provided that no Advance Drawings shall be made pursuant to this Clause after the Facility Repayment Date.

(C)     …”

Fyled

“Background:

The Assignor wishes to assign to Fyled, and Fyled wishes to take an assignment from RBS of RBS’s Partnership Interest (as defined in clause 2 below) on the terms of this Deed with effect from the date hereof and in conjunction with the accession to the Limited Partnership Deed by Fyled (the “Effective Date”).

Issues

Issues 1 - Profit Allocation Issue

Is BCMCL liable to corporation tax on all of the profit allocations of BCM LP in respect of the 19% interest in BCM LP sold by WR, MP and Sugarquay in July 2007? In this regard was BCMC LP a partner of BCM LP and, if not, were all the partners of BCMC LP to be treated as partners of BCM LP?

“Since under English law a firm does not have separate legal personality, it cannot, as such, be a member of another firm.

Thus, where a firm purports to become a partner, this will, as a matter of law, constitute each of the members of that firm as a partner in his own right, and the correctness of this analysis is indirectly confirmed by the provisions of the Partnerships (Accounts) Regulations 2008.

However, there is no reason in principle why, internally, the firm should not be treated as if it were a single partner.

The position is otherwise in Scotland, where the firm is a separate legal person and its ability to enter into the partnership relation is well recognised.”

“Lord Lindley defined a sub-partnership as follows:

“A sub-partnership is as it were a partnership within a partnership; it presupposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called a sub-partnership, that is to say, it makes the parties to it partners inter se; but it in no way affects the other members of the principal firm.”

Issue 2 - Alternative Profit Allocation Issue

Did BCMCL’s entitlement to the profits of BCMC LP include those allocated to RBS/Fyled (less amounts retained by Fyled as fees for its involvement in the arrangements)? In this regard:

(1)     What were the “profit-sharing arrangements”, within the meaning of s.1262 of the CTA 2009, relevant to BCMC LP?

(2)     In particular, were they confined to the BCMC LP Deed, or did they encompass other contractual agreements and, if so, which other agreements?

“We have to take the facts as they are found for us in the Case. We know that Louis Dreyfus et Compagnie is a “Société en nom collectif.” What that is in French law is a matter of fact. Foreign law has to be proved as a matter of fact over here … Now here we are told that this “société” owes its existence not to the combination of the parties but to a written document and it is there and there only that you will find what is the nature of the embodiment of these persons”  

“Now it is to be remembered that no company which is registered or incorporated in a foreign country can bring over its law and be for all purposes a company over here. By the comity of nations we do recognise the incorporation of other legal entities in other countries but a company registered in a foreign country is of course a foreign company. It is only by that comity that we accept the conditions which are imposed by foreign law, and to take a simple illustration of that, it is well found in the case to which Sir Boyd Merriman [the Solicitor-General who appeared for the Revenue] called our attention this morning, that you may have a body to which recognition is given in the English Courts by reason of the status which it has reached in the foreign courts. You may, on the other hand, have some indicia from a foreign country which are not recognised over here, because they are merely matters of the lex fori, and in our law matters of procedure are governed by our own lex fori.”

Having referred to the case of the General Steam Navigation Company v Guillou 11 M&W 877, Lord Hanworth continued, at 576-577:

“Now that case is very interesting because it shows this, that all that is established is something which deals with the lex fori, and this Court being governed by its own lex fori will not be hampered by any restrictions of the lex fori of another country. On the other hand, if there has been a body established by foreign law, the courts will recognise the juristic status of that body, and thus the Court says that the principle of the liability of members of a foreign corporation to third parties is to be referred to the law under which that corporation was established, and if the law shows that it was established as a separate entity, then effect should be given to it, and it is otherwise with matters which are merely matters of the lex fori.

Now we have got here upon the facts, which I do not repeat, a clear finding that there was an entity apart from these partners constituted by French law and we have to recognise that entity so established and treat the body so set up as having had attributed to it the status which ought to be recognised over here.  It does not avail to say that we have no such entity or means of        establishing a separate entity over here and as we have not, therefore we must tear down the status of the foreign entity.  Not so, we must respect the foreign entity properly established because it is not a mere matter of the lex fori, it is a matter of the status which the entity brings over here with it. Now, this being the case, how can we it be said in respect of this trade, which I repeat again for the third time has been properly taxed to income tax, it can be dealt with as the individual profits or the individual trade of the tax partners when we are told in plain and clear words that the “société” does not owe its existence to the combination of the parties and that it is a legal person distinct from the individuals of which it is composed? Mr Stamp said: Are those profits being earned for these men, or for the “société”? It seems to me quite plain upon what has been found that they are being  earned for the “société” or the French entity, and not for these men, and that these men (I am quoting, I think, verbatim) “are not “entitled to”, and would not  know what was their interest in the “business” over here unless and until that declaration had been “made”,        according to the resolutions of which we have a  translation in the case. I think it is upon the facts impossible to say that these two persons, Charles        Dreyfus and Louis Dreyfus, are mere partners, and only clothed with an imaginary personality. Whether we could do this or not in England does not seem to me to matter. We have to recognise that it is not the business of        these persons, they are not the persons who are carrying on the trade, and there is not merely an imaginary, but a legally constituted entity which is carrying on the business. Mr Justice Rowlatt has put the matter quite plainly, I think, in his judgment, in which he puts it forward as part of the argument of Mr Latter. He says: “He argued further that it also follows that the Appellants incomes as individuals were not from a source in the United Kingdom but from one in Paris where the Society is situated”; and where, I would say, the  distribution is made after the totality of the profits of the ‘société’ have been taken into consideration; and he adds this: ‘It appears to me that section 20, proviso (ii), can only be applied to partnership profits as understood in this country and, at any rate, to this extent, that they must be profits of individual aggregated together by partnership agreement and trading in earning profits in such aggregate, the partnership name, if any, meaning merely all the individuals and so trading together.”

119.     Mr Gammie says of Dreyfus that this was not only the Court of Appeal recognising the distinct legal personality of the société by reference to French law but also that the profits were the profits of the société and not the profits of the appellants in that case.

121.     Peter Gibson LJ, who considered the nature of the interest in and profits derived from a silent partnership according to German law, said, at 765-766:

“A silent partnership, whilst being similar to an English partnership in not being a separate legal entity, differs from both English and Scottish partnerships in a number of respects. The judge considered the decisive point to be the absence of any proprietary right, legal or equitable, enjoyed by Plc in the shares of the subsidiaries or in the dividends accruing on those shares. That is certainly a strong point of distinction from an English partnership, though it is less obviously so in the case of a Scottish partnership. But even a Scottish partner has an (indirect) interest in the profits of the partnership as they accrue as well as in the assets of the partnership. In a real sense the profits and assets are the profits and assets of the partners, the firm, their collective alter ego, merely receiving those profits and holding those assets for the partners who are the firm. They are jointly and severally liable for the firm’s debts. In contrast, though a silent partner is indirectly interested in those profits, in that his entitlement to a share of the profits (or his obligation in respect of the losses) will be computed by reference to the profits of the owner at the end of the year, his interest is purely contractual. A clearer distinction is the point advanced by Mr Henderson [counsel for the Revenue] that, unlike in an English or Scottish partnership, in the silent partnership no business is carried on by Plc and GmbH in common with a view to profit. The business is that of GmbH as sole owner. Plc is not jointly liable with GmbH to creditors of GmbH for the debts and obligations of GmbH. The liabilities of the business are those of GmbH alone, though Plc can be called on by GmbH to bear its share of losses computed at the end of the year to the extent of its capital contribution. To a third party, Plc's role in the silent partnership is irrelevant and may not be known.

The position of Plc seems to me to be that of a purchaser who, for a consideration consisting of the contribution of a capital sum and an undertaking to contribute to losses of the owner of a business up to the amount of the contribution, purchases a right to income of a fluctuating amount calculated as a share of the annual profits of the business. Neither in English or Scottish law would that leave Plc a partner with GmbH. That in itself is not determinative of transparency, and I of course accept Mr Venables' submission that technical differences in the nature of rights should not cause cases which are in substance identical to receive different United Kingdom tax treatment. But I see insufficient justification present in the circumstances of the silent partnership for treating the share of the profits of the GmbH business received by Plc as the same as the profits of the subsidiaries or the dividends which were paid to GmbH alone as shareholder and not to Plc.”

122.      Memec was considered by the Supreme Court in Anson which concerned an individual who was a member of a United States limited liability company (“LLC”) who derived a share of the profits in the business carried on by the LLC and claimed double tax relief on the United States tax that had been paid in respect of those profits. The issue in that case being did he have an entitlement to the profits of the LLC as they arose, ie was the LLC effectively equivalent to a transparent partnership. If so his share of the profits was his partner’s share but if the profits were derived entirely by the LLC and taxed in the United States the share he received was effectively his dividend from the LLC which fell to be taxed separately and for which he would not qualify for relief.

123.     Lord Reed SCJ (with whom Lord Neuberger P, Lord Clarke, Lord Sumption and Lord Carnwath SCJJ agreed) said:

135.     As is clear from that Joint Report, dated 25 July 2019, the Cayman Island Law experts, Mr Goucke for the Cayman Appellants and Mr Said for HMRC, agree that under Cayman Islands law:

(1)     Exempted Limited Partnerships (“ELPs”) such as BCMC LP do not have their own separate legal personality;

(2)     a partnership can be a limited partner of a Cayman Islands ELP as a matter of Cayman lslands law, pursuant to section 4(4) of the 2007 ELP Law;

(3)     BCMC LP cannot own assets because an ELP has no separate legal personality;

(4)     BCMCL, as General Partner of BCMC LP, holds the assets on trust for the partnership, BCMC LP, in accordance with the terms of the applicable partnership agreement of the ELP, pursuant to s 6(2) of the 2007 ELP Law and later amended to be s 7(8) of the 2007 ELP Law;

(5)     BCMCL as General Partner carries on BCMC LP’s business;

(6)     section 7(1) of the 2007 ELP Law prohibits limited partners from taking part in the conduct of the business of an ELP;

(7)     it is the Cayman Partnership Deeds which set out the contractual rights of BCMCL and the limited partners in BCMC LP to share in the profits of BCMC LP;

(8)     Profits of BCMC LP fall to be allocated according to the terms of Clause 12 of the BCMC LP Deed;

(9)     the BCMC LP Deed governs the allocation of BCMC LP’s profit amongst its partners, but reference is required to the TRS, Financial Contract, Facility Agreement and Loan Notes (as the case may be) to properly understand a number of defined terms used in the profit allocation provisions in Clause 12;

(10)   other than for the limited purpose explained above (ie to properly understand defined terms from other agreements), reference is not required to further agreements beyond the BCMC LP Deed to ascertain the rights of the partners of BCMC LP to share in profits; and

(11)   if and to the extent BCMC LP became entitled to a profit allocation from BCM LP if those profits were available for allocation and distribution as before tax profits for a particular financial year, BCMCL and the other partners in BCMC LP would share in that profit, according to the allocation and distribution processes set out in Clauses 12 and 13 of the BCMC LP Deed.

Issue 3 - Interest Deductibility Issue

Are BCMCL’s interest costs on the RBS Loan Facility and the Loan Notes, entered into by BCMCL to acquire 19% partnership interest in BCM LP, allowable deductions under the CTA 2009 in calculating BCMCL’s chargeable profits for corporation tax purposes? If so, to what extent are they allowable?

“The Inland Revenue had gone to court to establish that annual interest, even some short interest, and all associated debt costs were capital and they continued to do so after 1965. And since most annual interest was, even though capital, effectively relieved against total income before 1965, the best way of maintaining the prohibition of capital rule while allowing relief was the way they did it.

In 1969, however, the prohibition of capital rule was abolished, but only for interest. It remained in place for other types of debt cost, including exchange losses, until the major financial transactions reforms of Finance Acts 1993 (exchange gains and losses), 1994 (‘new’ financial instruments, ie certain derivatives) and 1996 (so-called loan relationships, ie debt transactions). These finally put an end to the complex systems of relief and denial of relief that had applied both before and after the introduction of Corporation Tax.

And the world did not fall in.”

362 Loan to buy into partnership

(1) Subject to sections 363 to 365, interest is eligible for relief under section 353 if it is interest on a loan to an individual to defray money applied—

(a)      in purchasing a share in a partnership; or

(b)     in contributing money to a partnership by way of capital or premium, or in advancing money to a partnership, where the money contributed or advanced is used wholly for the purposes of the trade, profession or vocation carried on by the partnership ...

(2) The conditions referred to in subsection (1) above are—

(a)     that, throughout the period from the application of the proceeds of the loan until the interest was paid, the individual has been a member of the partnership otherwise than—

(i)  as a limited partner in a limited partnership registered under the Limited Partnerships Act 1907, or

(ii) as a member of an investment LLP; and

(b)     that he shows that in that period he has not recovered any capital from the partnership, apart from any amount taken into account under section 363(1).

6.— The charge to corporation tax and exclusion of income tax and capital gains tax.

(1)  Corporation tax shall be charged on profits of companies, and the Corporation Tax Acts shall apply, for any financial year for which Parliament so determines, and where an Act charges corporation tax for any financial year the Corporation Tax Acts apply, without any express provision, for that year accordingly.

(2)  The provisions of the Income Tax Acts relating to the charge of income tax shall not apply to income of a company (not arising to it in a fiduciary or representative capacity) if—

(a)     the company is resident in the United Kingdom, or

(b)     the income is, in the case of a company not so resident, within the chargeable profits of the company as defined for the purposes of corporation tax by section 11(2).

(3)  A company shall not be chargeable to capital gains tax in respect of gains accruing to it so that it is chargeable in respect of them to corporation tax or would be so chargeable but for an exemption from corporation tax.

19 Chargeable profits

(1) This section applies if a non-UK resident company carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.

(2) The company’s chargeable profits are its profits that are—

(a)     of a type mentioned in subsection (3), and

(b)     attributable to the permanent establishment in accordance with sections 20 to 32.

(3) The types of profits referred to in subsection (2)(a) are—

(a)     trading income arising directly or indirectly through or from the establishment,

(b)     income from property or rights used by, or held by or for, the establishment, and

(c)     chargeable gains falling within section 10B of TCGA 1992 (non-resident company with United Kingdom permanent establishment)—

…

20 Profits attributable to permanent establishment: introduction

(1) Sections 21 to 32 apply for the purpose of determining the amount of profits of a non-UK resident company that are attributable to a permanent establishment of the company in the United Kingdom.

…

21 The separate enterprise principle

(1) The profits of the non-UK resident company that are attributable to the permanent establishment are those that the establishment would have made if it were a distinct and separate enterprise which—

(a)     engaged in the same or similar activities under the same or similar conditions, and

(b)     dealt wholly independently with the non-UK resident company.

1259 Calculation of firm’s profits and losses

(1) This section applies if a firm carries on a trade and any partner in the firm (“the partner”) is a company within the charge to corporation tax.

(2) For any accounting period of the firm, the amount of the profits of the trade (“the amount of the firm's profits”) is taken to be the amount determined, in relation to the partner, in accordance with subsection (3) or (4).

(3) If the partner is UK resident— …

(4) If the partner is non-UK resident—

(a)     determine what would be the amount of the profits of the trade chargeable to corporation tax for that period if a non-UK resident company carried on the trade, and

(b)     take that to be the amount of the firm’s profits. …

380 Partnerships involving companies

(1) This section applies if—

(a)     a trade or business is carried on by a firm,

(b)     any of the partners in the firm is a company (a “company partner”), and

(c)     a money debt is owed by or to the firm.

(2) In calculating the profits and losses of the trade or business for corporation tax purposes under section 1259 (calculation of firm’s profits or losses), no credits or debits may be brought into account under this Part—

(a)     in relation to the money debt, or

(b)     in relation to any loan relationship that would fall to be treated for the purposes of the calculation as arising from the money debt.

(3) Instead, each company partner must bring credits and debits into account under this Part in relation to the debt or relationship for each of its accounting periods in which the conditions in subsection (1) are met.

…

(1) For any accounting period of a firm a partner’s share of a profit or loss of a trade carried on by the firm is determined for corporation tax purposes in accordance with the firm’s profit-sharing arrangements during that period. This is subject to sections 1263 and 1264.

(2) If a firm pays charges on income, a partner’s share of the charges is determined for corporation tax purposes in accordance with the firm's profit-sharing arrangements during the accounting period of the firm in which the charges are paid.

(3) For the purposes of subsection (2) a charge on income which arises from a disposal such as is mentioned in section 587B(1) of ICTA (gifts of shares, securities and real property to charities etc) is taken to be paid when the disposal is made.

(4) In this section and sections 1263 and 1264 “profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.

“Before turning to the facts of the instant case, I ought, perhaps, to say a word about the position, both generally and in relation to income tax of partners in a firm. A partner working in the business or undertaking of the partnership is in a very different position from an employee. He has no contract of employment for he is, with his partners, an owner of the undertaking in which he is engaged and he is entitled, with his partners, to an undivided share in all the assets of the undertaking. In receiving any money or property out of the partnership funds or assets, he is to an extent receiving not only his own property but also the property of his co-partners. Every such receipt must, therefore, be brought into account in computing his share of the profits or assets. Equally, of course, any expenditure which he incurs out of his own pocket on behalf of the partnership in the proper performance of his duties as a partner will be brought into account against his co-partners in such computation. If, with the agreement of his partners, he pays himself a 'salary', this merely means that he receives an additional part of the profits before they fall to be divided between the partners in the appropriate proportions. But the ‘salary’ remains part of the profits.

“21. … In the case of amounts repaid to investors who are not limited partners it is accepted by HMRC that such expenditure is ‘money wholly and exclusively laid out or expended for the purposes of the trade’ within s 74(1)(a), ICTA. Why, counsel for LPLP ask rhetorically, should it be different in the case of limited partners?

22. The General Commissioners considered that they were not different. In para 10.2 of the case stated they said:

‘10.2.1 We are prepared to accept that the rebates paid to [Mr Heinz] and other partners are deductible expenses.

10.2.2 We consider that Mallalieu and Arthur Young are distinguishable as the non deductible items in those cases relate to a claim for tax allowances on personal expenses or reimbursement of personal expenses for employees. Here the fee rebates are of the same nature as those to non partners which were accepted by HMRC as deductible expenses of the business. Does it matter that there was no express contract by which the fees were rebated to partners? From the evidence put forward on behalf of LPLP, especially that of Suzanna Nutton we accept that fee rebates were the strong norm in the business and partners expected fee rebates. Furthermore we believe that if the fee rebates had not been given it would have been a significant sign that partners were not valued (especially but not merely if given to some but not others) and there was a significant danger that non rebated partners would have left. As such the rebates were part of partner care and we find that they were paid wholly and exclusively for the purposes of a trade.’

23. Lewison J disagreed. In his judgment he said (at [28]):

‘[28] I agree with [counsel for HMRC] that the commissioners asked themselves the wrong question. They concentrated on the reason why the rebates to partners were made; and treated that as the relevant purpose. But as Arthur Young shows the relevant purpose is the purpose of the individual partner in making the expenditure in the first place. The commissioners appear to have distinguished Arthur Young on the ground that it concerned reimbursement of personal expenses for employees. It did not. The House of Lords was at pains to stress that the reimbursement of expenditure incurred by a partner was quite different from the reimbursement of expenditure incurred by an employee. In my judgment the distinction drawn by the commissioners did not exist …’

He concluded (at [32]) that the purpose of the original outlay was a question of fact. As the General Commissioners had not asked themselves that question, if it arose, the matter would have to be remitted to the General Commissioners for them to make the relevant finding.

…

Issue 4 - Interest Deductibility Issue

Is the equity and debt structure of BCMCL’s UK PE in any way not representative of a structure that could have been achieved if the parties were operating on an arm’s length basis (ie is BCMCL’s UK PE ‘thinly capitalised’) such that the deduction claimed by BCMCL in respect of interest costs  on the RBS Loan Facility and the Loan Notes is to be restricted? If so, to what extent is the deduction restricted?  In this regard:

(1)     Are the conditions of s.147(1) of the TIOPA 2010 for the application of the transfer pricing provisions of Part 4 of TIOPA satisfied in relation to the RBS Loan Facility and the Loan Notes?

(2)     In particular:

(a)               Were the RBS Loan, the Sugarquay Loan, the MP Loan and the WR Loan arm’s length provisions?

(b)               Is it necessary that MP or WR be characterised as “enterprises”, for them to be within the scope of Part 4 of the TIOPA 2010 and, if so, is such characterisation merited based on the facts of the case?

1.—

(1) This Schedule applies where—

(a)     provision (‘the actual provision’) has been made or imposed as between any two persons (‘the affected persons’) by means of a transaction or series of transactions, and

(b)     at the time of the making or imposition of the actual provision—

(i) one of the affected persons was directly or indirectly participating in the management, control or capital of the other; or

(ii) the same person or persons was or were directly or indirectly participating in the management, control or capital of each of the affected persons.

(2) Subject to paragraphs 5A, 5B, 8, 10 and 13 below, if the actual provision—

(a)     differs from the provision (‘the arm's length provision’) which would have been made as between independent enterprises, and

(b)     confers a potential advantage in relation to United Kingdom taxation on one of the affected persons, or (whether or not the same advantage) on each of them,

the profits and losses of the potentially advantaged person or, as the case may be, of each of the potentially advantaged persons shall be computed for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision.

(3) For the purposes of this Schedule the cases in which provision made or imposed as between any two persons is to be taken to differ from the provision that would have been made as between independent enterprises shall include the case in which provision is made or imposed as between any two persons but no provision would have been made as between independent enterprises; and references in this Schedule to the arm’s length provision shall be construed accordingly.

2.—

(1) This Schedule shall be construed (subject to paragraphs 8 to 11 below) in such manner as best secures consistency between—

(a)     the effect given to paragraph 1 above; and

(b)     the effect which, in accordance with the transfer pricing guidelines, is to be given, in cases where double taxation arrangements incorporate the whole or any part of the OECD model, to so much of the arrangements as does so.

(2) In this paragraph ‘the OECD model’ means—

(a)     the rules which, at the passing of this Act, were contained in Article 9 of the Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development; or

(b)     any rules in the same or equivalent terms.

(3) In this paragraph ‘the transfer pricing guidelines’ means —

(a)     all the documents published by the Organisation for Economic Co-operation and Development, at any time before 1st May 1998, as part of their Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations; and

(b)     such documents published by that Organisation on or after that date as may for the purposes of this Schedule be designated, by an order made by the Treasury, as comprised in the transfer pricing guidelines.

…

4A.—

(1) A person (“P”) shall be treated for the purposes of paragraph 1(1)(b)(i) above (but subject to sub-paragraph (7) below) as indirectly participating in the management, control or capital of another (“A”) at the time of the making or imposition of the actual provision if—

(a)     the actual provision relates, to any extent, to financing arrangements for A;

(b)     A is a body corporate or partnership;

(c)     P and other persons acted together in relation to the financing arrangements; and

(d)     P would be taken to have control of A if, at any relevant time, there were attributed to P the rights and powers of each of the other persons mentioned in paragraph (c) above.

4B.—

(1) To the extent that it applies to provision relating to financing arrangements, this Schedule has effect as if in paragraph 1(1)(b) above the words “or within the period of six months beginning with the day on which the actual provision was made or imposed” were inserted immediately before sub-paragraph (i).

(2) In this paragraph “financing arrangements” has the same meaning as in paragraph 4A above.

…

“B. Statement of the arm’s length principle

i) Article 9 of the OECD Model Tax Convention

1.6 The authoritative statement of the arm’s length principle is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD Member countries and an increasing number of non-Member countries. Article 9 provides:

[Where] conditions are made or imposed between … two [associated] enterprises in the commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxes accordingly.

…

C. Guidance for applying the arm's length principle

i) Comparability analysis

a) Reason for examining comparability

1.15 Application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (eg price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. In determining the degree of comparability, including what adjustments are necessary to establish it, an understanding of how unrelated companies evaluate potential transactions is required. Independent enterprises, when evaluating the terms of a potential transaction, will compare the transaction to the other options realistically available to them, and they will only enter into the transaction if they see no alternative · that is clearly more attractive. For example, one enterprise is unlikely to accept a price offered for its product by an independent enterprise if it knows that other potential customers are willing to pay more under similar conditions. This point is relevant to the question of comparability, since independent enterprises would generally take into account any economically relevant differences between the options realistically available to them (such as differences in the level of risk or other comparability factors discussed below) when valuing those options. Therefore, when making the comparisons entailed by application of the arm’s length principle, tax administrations should also take these differences into account when establishing whether there is comparability between the situations being compared and what adjustments may be necessary to achieve comparability.

1.16 All methods that apply the arm’s length principle can be tied to the concept that independent enterprises consider the options available to them and in comparing one option to another they consider any differences between the options that would significantly affect their value. For instance, before purchasing a product at a given price, independent enterprises normally would be expected to consider whether they could buy the same product at a lower price from another party. Therefore, as discussed in Chapter II, the comparable uncontrolled price method compares a controlled transaction to similar uncontrolled transactions to provide a direct estimate of the price the parties would have agreed to had they resorted directly to a market alternative to the controlled transaction. However, the method becomes a less reliable substitute for arm’s length dealings if not all the characteristics of these uncontrolled transactions that significantly affect the price charged between independent enterprises are comparable. Similarly, the resale price and cost plus methods compare the gross profit margin earned in the controlled transaction to gross profit margins earned in similar uncontrolled transactions. The comparison provides an estimate of the gross profit margin one of the parties could have earned had it performed the same functions for independent enterprises and therefore provides an estimate of the payment that party would have demanded, and the other party would have been willing to pay, at arm's length for performing those functions. Other methods as discussed in Chapter III are based on comparisons of profit rates or margins between independent and associated enterprises as a means to estimate the profits that one or both of the associated enterprises could have earned had they dealt solely with independent enterprises, and therefore the payment those enterprises would have demanded at arm’s length to compensate them for using their resources in the controlled transaction. In all cases adjustments must be made to account for differences between the controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Therefore, in no event can unadjusted industry average returns themselves establish arm’s length conditions.

1.17 As noted above, in making these comparisons, material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties. These factors are discussed in more detail below.”

“1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties’ characterisation of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterise the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions and may have been structured by the taxpayer to avoid or minimise tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm’s length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm’s length.”

(1)     In relation to whether or not the provision in question was at arm’s length:

(a)Would the Loan Note holders (or any of them) lend to BCMCL?

(b)               If so, would they (or any of them) lend to BCMCL in the amount and on the terms set out in the Loan Note documentation?

(c)If not, in what amounts and on what terms would they (or any of them) lend to BCMCL?

(d)               Would BCMCL borrow at all from the Loan Note Holders or any of

them?

(e)If so, would BCMCL borrow in the amounts and on the terms set out in the Loan Note documentation?

(f)         If not in what amount and on what terms would BCMCL borrow from the Loan Note holders?

(2)     On the basis that the UK PE is a PE of BCMCL and, as such, is required to be treated as if it was a distinct and separate enterprise which:

(a)was engaged in the same or similar activities under the same or similar conditions, dealing wholly independently with BCMCL; and

(b)               had the same credit rating as BCMCL;

what equity and loan capital structure (or range of equity and loan capital structure) could the UK PE reasonably be expected to have in those circumstances specified at (a) and (b)?

(3)     On the basis of the assumptions in (2)(a) and (b) and an equity and loan capital structure that the UK PE  could reasonably be expected to have, and assuming that the transactions between the UK PE and BCMCL take place on such terms as would have been agreed between parties dealing at arm’s length:

(a)would the answers to questions (a) to (f) in paragraph (1) above differ in the case of the Loan Note holders (or any of them) and, if so, in what way and why?

(b)               what are the answers to questions (1) to ( 6) in paragraph (1) above in the case of RBS and its loan facility?

“… RBS was an independent party to these arrangements and it did lend to BCMCL. As a consequence, in the view of [Mr Stanton], any comparative, or hypothesised, transaction should be of a nature that includes RBS lending into BCMCL (and receiving the covenants that it did).”

The Joint Report also sets out the implications of the fundamental difference between the experts.

(1)     that the provision of various covenants (including those provided by the UK businesses), as included in the Deed of Subordination and Covenant, and reflected in the partnership deeds for BCM LP and BCMC LP, was essential in order for both RBS and the Loan Note Holders to lend to BCMCL on the basis (eg as to amount and terms) that they did;

(2)     That, in the actual transaction, with the provision of various covenants, as included in the Deed of Subordination and Covenant, the terms and conditions of the RBS Loan Facility were such that the risks being borne by RBS, together with the arrangement fees and interest returns being received by RBS (US$ LIBOR plus 2.5%), were fully consistent with the risks and rewards that would be sought by a major bank; and

(3)     that the source of repayment of the Loan Notes was the same as the source of repayment of the RBS Loan Facility and that “one of the key attractions” to both RBS and the Loan Note holders was that they were not just lending on the basis of the cash flows generated from the 19% of BCM LP 's remaining profits (after working capital, contingencies and performance payments), but both debt providers had access to the entirety of BCM LP 's remaining profits when the repayment of these debt facilities became due.

“A. The main vendor of the partnership interests to BCMCL was WR, and one of the primary reasons for WR selling his 13% partnership interest was that he “intended to retire from active participation in the business of BCM LP”. To this extent, MJS [Mr Stanton] does not see that a lock-in sits well with what WR or BCM LP would be seeking to achieve from these arrangements, in that, going forward, WR would make far less of a contribution to the ongoing success of BCM LP. Additionally, the Loan Notes did not function as a form of lock-in since they were freely transferable (subject to acceding to the terms of the Loan Notes).

B. MJS also does not see that an earn-out sits particularly well with WR, in that:

a. to the extent an earn-out structure is designed to reflect WR's ongoing contribution or involvement in the business, the reality was that WR was to have a much reduced involvement going forward, and

b. to the extent an earn-out mechanism is simply designed to reflect that a fixed price was not able to be agreed at the time of the sale, then again, the reality was that a fixed price was agreed at the time of the sale.

C. WR’s reducing involvement in BCM LP was also recognised in the RBS Loan Agreement, where a "Trigger Event" was defined to include the event of MP ceasing to be the chief executive officer of BCM LP, and not being replaced by an individual approved by the loan facility Agent. By contrast, there was no such requirement as regards WR ceasing to be employed by BCM LP, presumably because he was to have a much-reduced role going forward.

D. As regards MP, he had a 41.8% profit allocation interest in BCM LP prior to these arrangements being entered into, and a 38.8% profit allocation post the sale of 3% of his interests. In the view of MJS, MP's involvement in BCM LP did not, therefore, significantly alter as a result of these arrangements, and there would be no need to add in further earn-out or lock-in mechanisms for MP.

E. As regards Sugarquay, by mid-2007 it had informed MP and Andrew Dodd that they “should consider” ... [Sugarquay]. .. a “'financial investor” rather than a “business partner”. In the view of MJS, this too does not appear to sit well with a lock-in or earn-out mechanism.

F. It is also not clear to MJS whether PM’s [Mr Magg’s] alternate structure would serve the purpose of being able “... to mitigate the potential adverse regulatory consequences of using a UK Entity ...”, which was one of the objectives of the arrangements, nor is MJS clear as to the taxation consequences of PM's alternate structure.”

 “…the Loan Notes serve to reduce the risk taken on by RBS in two ways. First, they act as a buffer in that they are subordinate to RBS 's claim on the profits that accrue to the 19% stake in BCM LP held by BCMCL (through BCMC LP), albeit the value of this may be limited since RBS also has a preferential claim over the other limited partners (representing 81 per cent of the BCM LP partnership interests). Second, and more importantly, the Loan Notes incentivise the sellers to continue to act in the interests of BCM LP.”

He was also of the view that the Loan Note structure had the economic effect of a lock-in term for the sellers, linking the repayment to the sellers to the performance of BCM LP which they control. Mr Stanton did not accept that this was the case. He disagreed that the Loan Notes functioned as a lock-in mechanism. He considered the Loan Notes to be transferable and had no “upside payments” attached to them.

“... BCMCL appears to receive an asset over which it does not have control. It has no say over where the income generated by the partnership interests will flow, cannot sell the asset, and a condition is that BCM LP will be able to appoint limited partners to BCMC LP (who will have claim over the income it generates). Accordingly, it is not clear from the perspective of the Cayman business that an economic transaction has actually occurred.”

As a result Mr Maggs considered that the relationships between the UK and Cayman businesses means that ultimately the liability to RBS rests with the UK businesses, and that RBS has therefore entered into a transaction with the UK businesses.

“[W]e would have to have determine whether the same provision would have been made had the Appellant and DISL been independent.”

 11AA.— Determination of profits attributable to permanent establishment

(1)  This section provides for determining for the purposes of corporation tax the amount of the profits attributable to a permanent establishment in the United Kingdom of a company that is not resident in the United Kingdom (“the non-resident company”).

(2)  There shall be attributed to the permanent establishment the profits it would have made if it were a distinct and separate enterprise, engaged in the same or similar activities under the same or similar conditions, dealing wholly independently with the non-resident company.

(3)  In applying subsection (2)—

(a)     it shall be assumed that the permanent establishment has the same credit rating as the non-resident company, and

(b)     it shall also be assumed that the permanent establishment has such equity and loan capital as it could reasonably be expected to have in the circumstances specified in that subsection.

No deduction may be made in respect of costs in excess of those that would have been incurred on those assumptions.

(4)  There shall be allowed as deductions any allowable expenses incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the United Kingdom or elsewhere.

“Allowable expenses”  means expenses of a kind in respect of which a deduction would be allowed for corporation tax purposes if incurred by a company resident in the United Kingdom.

SCHEDULE A1

Part 1 Introduction

1 Introduction

(1) The provisions of this Schedule have effect for supplementing section 11AA as regards the determination of the profits attributable to a permanent establishment in the United Kingdom of a company that is not resident in the United Kingdom (“the non-resident company”).

(2) In this Schedule “the separate enterprise principle” means the principle in section 11AA(2) (read with subsection (3) of that section).

Part 2 General provisions

2. Transactions treated as taking place at arm’s length

In accordance with the separate enterprise principle, transactions between the permanent establishment and any other part of the non-resident company are treated as taking place on such terms as would have been agreed between parties dealing at arm’s length.

3. Application of general provision as to allowable deductions

(1) Section 11AA(4) (general provision as to allowable deductions) applies whether or not the expenses are incurred by, or reimbursed by, the permanent establishment.

(2) The amount of expenses to be taken into account under section 11AA(4) is the actual cost to the non-resident company.

4. Prohibition of deductions for payments in respect of intangible assets

(1) No deduction is allowed in respect of royalties paid, or other similar payments made, by the permanent establishment to any other part of the non-resident company in respect of the use of intangible assets held by the company.

(2) This does not prevent a deduction in respect of any contribution by the permanent establishment to the costs of creation of an intangible asset.

(3) In this paragraph “intangible asset” has the meaning it has for accounting purposes, and includes any intellectual property (as defined in paragraph 2(2) of Schedule 29 to the Finance Act 2002).

5. Prohibition of deductions for interest or other financing costs

(1) No deduction is allowed in respect of payments of interest or other financing costs by the permanent establishment to any other part of the non-resident company, except as provided by sub-paragraph (2).

(2) The restriction in sub-paragraph (1) above does not apply to interest or other costs of financing that are payable in respect of borrowing by the permanent establishment in the ordinary course of a financial business carried on by it.

(3) In sub-paragraph (2) “financial business” means any of the following—

(a)     banking, deposit-taking, money-lending or debt-factoring, or a business similar to any of those;

(b)     dealing in commodity or financial futures.

“B-5. Summary of the two-step analysis

47. The attribution of profits to a PE of an enterprise on an arm’s length basis will follow from the calculation of the profits (or losses) from all its activities, including transactions with other unrelated enterprises, transactions with related enterprises (with direct application of the Guidelines) and dealings with other parts of the enterprise (under step 2 of the authorised OECD approach). This analysis involves the following two steps:

Step One

A functional and factual analysis, leading to:

o   The attribution to the PE as appropriate of the rights and obligations arising out of transactions between the enterprise of which the PE is a part and separate enterprises;

o   The identification of significant people functions relevant to the attribution of economic ownership of assets, and the attribution of economic ownership of assets to the PE;

o   The identification of other functions of the PE;

o   The recognition and determination of the nature of those dealings between the PE and other parts of the same enterprise that can appropriately be recognised, having passed the threshold test; and

o   The attribution of capital based on the assets and risks attributed to the PE.

Step Two

The pricing on an arm’s length basis of recognised dealings through:

o   The determination of comparability between the dealings and uncontrolled transactions, established by applying the Guidelines’ comparability factors directly (characteristics of property or services, economic circumstances and business strategies) or by analogy (functional analysis, contractual terms) in light of the particular factual circumstances of the PE; and

o   Applying by analogy one of the Guidelines’ traditional transaction methods or, where such methods cannot be applied reliably, one of the transactional profit methods to arrive at an arm’s length compensation for the dealings between the PE and the rest of the enterprise, taking into account the functions performed by and the assets and risks attributed to the PE.

The pricing on an arm’s length basis of any transactions with associated enterprises attributed to the PE should follow the guidance in the Guidelines and is not discussed in this Report. The order of the listing of items within each of the steps above is not meant to be prescriptive, as the various items may be interrelated (eg risk is initially attributed to a PE as it performs the significant people functions relevant to the assumption of that risk but the recognition and characterisation of a subsequent dealing between the PE and another part of the enterprise that manages the risk may lead to a transfer of the risk and supporting capital to the other part of the enterprise).

48. It can be seen that the functional and factual analysis is primarily needed to hypothesise the PE as a functionally separate entity, to identify the significant people functions relevant to determining which part of the enterprise assumes and/or subsequently manages particular risks and economically owns particular assets, and to attribute to the PE as a hypothetically separate entity an appropriate amount of capital. This step of the analysis is likewise necessary to identify which part of the enterprise should be hypothesised to have undertaken the enterprise’s rights and obligations arising from transactions with other enterprises and what dealings should be hypothesised to exist between the PE and other parts of the enterprise. Secondly, it is important to identify the respective functions performed by both the PE and other parts of the enterprise with which it is hypothesised to have dealings in order to price those dealings under the second step of the authorised OECD approach.”  

(iv) Attributing rights and obligations to the PE

129. As indicated in Section B, the profits (or losses) of the PE will be based on all its activities, including transactions with other unrelated enterprises, transactions with related enterprises, and dealings with other parts of the enterprise to which it belongs. Accordingly, as part of the functional and factual analysis carried out in step one, it will be necessary to attribute to the PE those rights and obligations of the enterprise of which it is a part which arise out of that enterprise’s transactions with separate enterprises as are properly attributable to the PE. In effect, this involves identifying those of the enterprise’s transactions with separate enterprises which should be hypothesised to have been entered into by the PE. This should become clear as a result of analysing the PE’s functions in light of its assets used and risks assumed. The PE’s profits (or losses) attributable to its participation in these transactions can be computed directly in the case of transactions with unrelated enterprises, or through direct application of the Guidelines under Article 9 in the case of transactions with related enterprises, in either case taking into account the effect of the PE’s dealings with other parts of the same enterprise under step two of the authorised OECD approach.

(v)  Capital: Drawing up a “tax balance sheet” for the PE under the authorised OECD approach

(a) Attributing creditworthiness to the PE

130. It is an observable condition that PEs generally enjoy the same creditworthiness as the enterprise of which they are a part. Accordingly, under the authorised OECD approach, the “distinct and separate enterprise” hypothesis requires that an appropriate portion of the enterprise’s “free” capital be attributed to its PEs for tax purposes and that the PE be attributed the creditworthiness of the enterprise as a whole. It is worth re-emphasising that an attribution of “free” capital in excess of the amounts recorded in or allotted to the PE by the home country may have to be made for tax purposes, even though there may be no need to formally allot “free” capital to the PE for any other purpose.

…

(3) Thin capitalisation approach

163. Another approach would be to require that the PE has the same amount of “free” capital as would an independent enterprise carrying on the same or similar activities under the same or similar conditions in the host country of the PE by undertaking a comparability analysis of such independent enterprises. The functional and factual analysis would identify the assets and risks to be attributed to the PE and this would determine the amount of funding per se (i.e. without distinguishing between debt and “free” capital) that would be required by the PE. The next stage would be to determine the allocation of the funding into interest-bearing debt and “free” capital.

164. There are a number of factors relevant to the determination of an arm’s length amount of debt and “free” capital for PEs. These include:

·         The capital structure of the enterprise as a whole

·         The range of actual capital structures of independent host country enterprises carrying on the same or similar activities as the PE under the same or similar conditions (including the condition discussed in Section D-2(v) that generally the PE has the same creditworthiness as the enterprise as a whole).

165. Issues arise in seeking to apply a thin capitalisation approach to non-financial enterprises. For non-financial enterprises it will probably be necessary to focus on capital structure, such as debt-to-equity ratios, rather than on “free” capital in isolation. This would require a determination first of all the arm’s length amount of funding that should be attributed to the PE to support its functions, assets and risks. Then comparable debt-to-equity ratios in the host country could be used to determine which part of the arm’s length funding should be made up of “free” capital.

166. One concern with such an approach is what appears to be the wide range of debt-to-equity ratios observable at arm’s length and whether, given the diverse range, it is possible to apply a thin capitalisation approach outside the financial sector. However, the debt-to-equity ratio of a particular enterprise within the wide range is unlikely to be the result of random chance, but is rather likely to be the outcome of a number of factors. A critical issue is whether it is possible to take into account all the factors that underlie such different debt-to-equity ratios. Further consideration perhaps needs to be given as to why certain enterprises are highly geared and some are not. Differences in shareholders’ appetite for risk have already been identified as one contributing factor, but in the context of an adequately capitalised enterprise the authorised OECD approach significantly decreases the importance of that variable by making the creditworthiness/capital structure of the enterprise one of the internal conditions of the PE.

167. Other key variables, the “external” conditions - location of the borrowing PE, quality and nature of assets, cash flows, business sector, business strategies, capital acquisitions and disposals, market conditions in the host jurisdiction, etc. — could be identified and an effort made to quantify the effect of those variables on gearing, where possible by examination of the accounts of comparable independents or by researching the criteria used by independent bankers when lending to particular categories of borrowers. A functional and factual analysis of the assets, risks and activities of the PE would reveal the extent to which the key variables were present in its business, and it could be possible to attribute to the PE an appropriate amount of “free” capital for a business with these features.

168. The thin capitalisation approach has the advantage of avoiding some of the issues that arise in determining the amount of “free” capital to be attributed in situations where the enterprise as a whole is entirely debt-funded. However, a weakness of a thin capitalisation approach is that the aggregate amount of “free” capital it attributes to individual PEs may be greater than the amount of free capital in the enterprise as a whole.

(4) Safe harbour approach - Quasi thin capitalisation /regulatory minimum capital approach

169. Another possibility discussed in Part II for banks would be to require the PE to have at least the same amount of “free” capital required for regulatory purposes as would an independent banking enterprise operating in the host country (quasi thin capitalisation/regulatory minimum capital approach). This approach is not an authorised OECD approach as it ignores important internal conditions of the authorised OECD approach, e.g. that the PE generally has the same creditworthiness as the enterprise as a whole. However, it may be acceptable as a safe harbour as long as it does not result in the attribution of more profits to the PE than would be attributed by an authorised OECD approach.

170. In practice there are likely to be significant problems in finding sufficiently objective benchmarks outside the regulated financial sector to apply the quasi thin capitalisation/regulatory minimum capital approach. More generally, there may be limited scope for having fixed ratios based on sector benchmarks for particular industries outside the financial sector, but only as part of a safe harbour regime.

171. However, the main disadvantage of the quasi thin capitalisation/regulatory minimum capital approach is that it is unlikely to provide a solution for all taxpayers in all sectors, it relies on sector benchmarks which may not meet comparability standards, and the more refined and wide-ranging the approach becomes the more it resembles the thin capitalisation approach (and therefore loses the advantages of administrative simplicity).

…

(6) Attribution of capital to the PE of a thinly capitalised enterprise

174. Outside the regulated financial sector a difficulty arises that there is often no requirement for individual enterprises within the Group to have an arm’s length amount of “free” capital. The enterprise of which the PE is a part may for example be almost entirely debt-funded (so-called $2 companies, with $2 equity and $1m debt) so that even attributing all such an entity’s “free” capital to the PE is likely to leave the PE thinly capitalised. Accordingly a separate discussion of the problems connected with thinly capitalised enterprises now follows the main discussion of capital attribution approaches.

175. In circumstances where the capital structure of the enterprise to which the PE is a part does not provide an arm’s length result it is necessary to look outside the enterprise itself for suitable data. There are two possible solutions to arrive at a result consistent with Article 7:

A thin capitalisation approach

An approach which adjusts the “free” capital of the enterprise to an arm’s length amount before allocating that capital to the PE.

176. The thin capitalisation approach looks at the capital structures of comparable independent enterprises in comparable circumstances, etc. The objective under this approach is to determine an arm’s length amount of “free” capital. Consistent with the conclusion for PEs of non-thinly capitalised enterprises, the creditworthiness implied by that amount of “free” capital would be assumed to belong to the enterprise as a whole, with the consequence that internal dealings in respect of guarantee fees and creditworthiness differentials affecting intra-enterprise interest rates would not be recognised.

177. A second approach would be to first adjust the “free” capital of the enterprise of which the PE is a part to an arm’s length amount. The PE would subsequently be attributed an arm’s length amount of the adjusted “free” capital under Article 7 through a capital allocation approach.

178. In determining whether a particular capital attribution approach gives an arm’s length result for a PE of a thinly capitalised enterprise it may be necessary to consider why the enterprise as a whole is thinly capitalised.

179. In applying a thin capitalisation approach, if any commercial reasons for the enterprise being thinly capitalised had nothing to do with the business operations of the PE, then the attribution to the PE of more than the enterprise’s “free” capital may well be consistent with the arm’s length principle. If such commercial reasons did relate to the business operations of the PE, then this must be accounted for in seeking to benchmark the PE’s capitalisation against whatever uncontrolled comparables are selected. This would be either by selecting comparables that are similarly affected by such factors, by adjusting the comparables to account for any differences in such factors, or if the available comparables data cannot reliably be used because of such factors, using a different authorised OECD approach that would be more consistent with the arm’s length principle.”

“(i) MJS [Mr Stanton] is of the view that, as an SPV, BCMCL's debt/equity ratio is consistent with the debt/equity structures of SPVs generally, which can encompass a very diverse range depending on the special purpose for which an SPV is formed.

(ii) MJS is also of the view that the debt funders (RBS and the Loan Note Holders) would lend to BCML, or an equivalent independent BCMCL UK Permanent Establishment, with the debt/equity structure that BCMCL had in place (as indeed they, the lenders, both did).

(iii) PM [Mr Maggs] does not believe RBS or the Loan Note Holders would lend to BCMCL, under either of the arm’s length hypotheses that he has considered, with the equity and debt structure that it had or with an alternative equity and debt structure save for the case of hypothesising that BCMCL is a more diversified business with substantial debt or equity financing beyond that required for the acquisition of the 19% partnership interests. In PM’s view, changing the proportions of debt and equity used to finance the acquisitions does not alter the fundamental risks to lenders that would result from a lack of control over the target hedge fund management business, and its ability to issue debt. PM also believes that hypothesising a more diversified business with additional assets would depart too far from the original transactions and the arm's length test.”

“(a) …BCMCL was a special purpose vehicle which, ultimately being owned by a charitable trust (BCCT), could not look to BCCT to provide any further share capital. As a special purpose vehicle, BCMCL was only permitted to undertake certain defined activities and could not undertake other activities. Given that these activities were expected to be time limited, debt would be an appropriate form of financing. In terms of amount, this would need to be as much as was necessary to undertake these defined activities, which was $365m, as supported by the underlying cash flows.

(b) That this amount of debt was greatly larger than BCMCL’s equity of $1 would be a consequence of BCMCL’s role as a special purpose vehicle and is consistent with, a) the aim of the transaction arrangements (to acquire and hold a 19% interest in BCM LP), b) the activities of special purpose vehicles generally (in fulfilling a special purpose), and c) the role of BCMCL specifically (within the overall Cayman structure).

(c) To the extent that the UK PE of BCMCL undertook the same activities as BCMCL, in my view the UK PE of BCMCL would be expected to have the same debt/equity levels as BCMCL.

(d) On the basis that the UK PE of BCMCL did have the same debt/equity levels as BCMCL, my comments in connection with Section 8 (“The Nature of the Lending Arrangements”), would apply equally as regards the Loan Note holders and the RBS Loan Facility.

(e) Based on my experience, special purpose vehicles have a huge range of debt/equity structures, depending on the purpose for which they were set up. More specifically, I have experience of many special purpose vehicles which have extremely high levels of debt relative to their equity base (and vice versa).”

Issue 5 - Interest Deductibility Issue

Are the RBS Loan Facility and the Loan Notes to be classified as “trading loan relationships” or “non-trading loan relationships” for the purposes of Part 5 of the CTA 2009? In relation to this, was BCMCL party to the RBS Loan Facility and the Loan Notes (i.e. to the Sugarquay Loan, the MP Loan and the WR Loan) for the purposes of a trade it carried on (a) at the time of the loans and (b) during each accounting period when the loan interest expense was incurred?

297 Trading credits and debits to be brought into account under Part 3

(1) This section applies so far as in any accounting period a company is a party to a loan relationship for the purposes of a trade it carries on. …

Issue 6 - Discovery

In relation to the Discovery Amendment:

(1)     Was the Discovery Amendment validly made under s.30B of the TMA 1970?

(2)     If so, were the adjustments made thereunder correct?

“Amendment to your Partnership Statement - year ended 5 April 2009

It appears to me that your Partnership Statement for the above year is inaccurate. At this stage HMRC does not have all the relevant facts and we will continue to work with BlueCrest Capital Management Cayman Ltd to arrive at the correct position. 

I am sending a copy of this letter to your advisers.

I am now amending the partnership return. I attach a statement that shows the amendment.”

30B.— Amendment of partnership statement where loss of tax discovered.

(1) Where 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)     that any profits which ought to have been included in the statement have not been so included, or

(b)     that an amount of profits so included is or has become insufficient, or

(c)     that any relief or allowance claimed by the representative partner is or has become excessive,

the officer or, as the case may be, the Board may, subject to subsections (3) and (4) below, by notice to that partner so amend the partnership return as to make good the omission or deficiency or eliminate the excess.

(2) Where a partnership return is amended under subsection (1) above, the officer shall by notice to each of the relevant partners amend–

(a)     the partner's return under section 8 or 8A of this Act, or

(b)     the partner's company tax return,

so as to give effect to the amendments of the partnership return.

(3) …

(4) No amendment shall be made under subsection (1) above unless one of the two conditions mentioned below is fulfilled.

(5) The first condition [not applicable in the present case] …

(6) 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 representative partner's partnership return; or

(b)     informed that partner that he had completed his enquiries into that return,

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.

(7) Subsections (6) and (7) of section 29 of this Act apply for the purposes of subsection (6) above as they apply for the purposes of subsection (5) of that section; and those subsections as so applied shall have effect as if—

(a)     any reference to the taxpayer were a reference to the representative partner;

(b)     any reference to the taxpayer's return under [section 8 or 8A]⁶ were a reference to the representative partner's [partnership return; and

(c)     sub-paragraph (ii) of paragraph (a) of subsection (7) were omitted.

(8) An objection to the making of an amendment under subsection (1) above on the ground that neither of the two conditions mentioned above is fulfilled shall not be made otherwise than on an appeal against the amendment.

(9) In this section—

‘profits’ —

(a)     in relation to income tax, means income,

(b)     in relation to capital gains tax, means chargeable gains, and

(c)     in relation to corporation tax, means profits as computed for the purposes of that tax;

‘relevant partner’ means a person who was a partner at any time during the period in respect of which the partnership statement was made.

(10) Any reference in this section to the representative partner includes, unless the context otherwise requires, a reference to any successor of his.

(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 or 8A 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, whether in pursuance of a notice under section 19A of this Act or otherwise; 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.

(7) In subsection (6) above—

(a)     any reference to the taxpayer's return under section 8 or 8A of this Act in respect of the relevant year of assessment includes—

(i) a reference to any return of his under that section for either of the two immediately preceding year of assessments; and

(ii) where the return in under section 8 and the taxpayer carries on a trade, profession or business in partnership, a reference to [any partnership return with respect to the partnership for the relevant year of assessment or either of those periods; and

(b)     any reference in paragraphs (b) to (d) to the taxpayer includes a reference to a person acting on his behalf.

“In these circumstances the question is whether on this information an officer of the Board could have been reasonably expected to be aware that the amount of the profits included in the partnership return was insufficient. Plainly it is necessary to assume an officer of reasonable knowledge and understanding. He would have been aware of the decision of the House of Lords in Arthur Young. He would see from the partnership return and statement that the income included management and performance fees and that some of them had been deducted from the income because they had been ‘rebated’. He would know from the letter from Mr Tai that at least some of those rebates had been made to limited partners in LPLP [Lansdowne Partners Limited Partnership]. And he would know from his general knowledge of Arthur Young and s 74(1)(a), ICTA that payments to partners are not usually deductible for tax purposes. But is that enough?”

Having discussed these matters, the Chancellor continued, at [56]:

“In the end, this part of the appeal boils down to a very short point. The question, to adopt the formulation used by Auld LJ, is whether the hypothetical inspector having before him those three documents and the note of the meeting held on 22 February 2006 would have been aware of 'an actual insufficiency' in the declared profit. I would answer that question in the affirmative. He could see from those documents:

 (1)     The income of LPLP consisted of management and performance fees.

 (2)     There had been deducted from that income what was described as 'rebates.'

 (3)     'Rebates' had been paid to limited partners.

 (4)     Arthur Young had established that all payments to partners should be included in gross income and were not, generally, deductible for tax purposes.

 (5)     There was no indication on the face of the accounts or in Mr Tai's letter to suggest any special treatment of 'rebates' paid to limited partners either by omission from the gross income or in their deduction therefrom.

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. For these reasons I would dismiss the appeal of HMRC.”

“69. 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.

“What is described below is a bespoke tax planning arrangement. The actual transaction, reflecting the entirety of the commercial arrangements between all parties, is more complex and we describe and illustrate only the elements relevant to tax advantages that might arise under the arrangements, to which the provisions of Part 7 FA 2004 might be applicable.

Proposed Transaction

·         “GP”, a company not resident in the UK, requires debt funding to fund investment in a UK trading partnership. GP will be the general partner of a non-UK limited partnership ('LP'). LP will be a limited partner in a UK trading limited partnership ('UK LP'),

·         Under the terms of the loan agreement with a bank, under which the debt funding is provided, there are certain "trigger events" which will result in part of the principal lent being repayable, in instalments, earlier than would otherwise have been the case.

·         The structure described effectively enables pre-tax income to be applied to fund repayment of the debt, should a trigger event occur. The use of this structure will also facilitate a more commercially acceptable trigger level for the group.

·         The transaction will result in more UK tax than would otherwise be the case if there is no trigger event.”

A diagrammatic representation of the transaction structure and detailed explanation of the tax impact (which is not reproduced here) was also included on the DOTAS Form which continued:

“The main commercial benefit of the arrangements is that it enables the trigger to be set at a more favourable level than might otherwise be the case. The possible reduction in tax, should there be a trigger event, might be seen as a main benefit of the arrangements.”

1.The total income of the partnership was its profit allocation from BlueCrest Capital Management LP (UTR …). Turnover in Box 3.29 represents the sterling value of the trading profit allocated by BlueCrest Capital Management LP.

The profit allocation from BlueCrest Capital Management LP is reflected in USD in the accounts and converted at the exchange rate of 1.8790.”

“The following sets out a summary of the Company's [ie BCMCL’s] involvement in a commercial restructuring which was disclosed under the scheme reference number above.

The Company went into partnership as general partner of BlueCrest Capital Management Cayman LP (BCMC LP) on 22 June 2007, with Mr Andrew Dodd of [address] as sole limited partner. This is documented in the initial LP agreement between BCMCL and Andrew Dodd dated 22 June 2007.

The Royal Bank of Scotland plc (RBS) became a limited partner in BCMC LP as documented in the LP Agreement dated 6 July 2007. RBS has subsequently assigned its limited partnership interest to Fyled … . This is documented in the Deed of Assignment and a new LP Deed both dated November 2008.

A number of individuals became limited partners in BCMCL pursuant to Deeds of Adherence of various dates.

The Company received $200,000,000 in loan funding from RBS on 6 July 2007 which is documented in the Facility Agreement dated 6 July 2007. The Company loaned a small portion of this cash to its parent company, BlueCrest Capital Management Cayman Holdings Limited (BCMCHL) (which, as an intercompany balance, was not formally documented). The majority of the cash, $192,000,000, was paid to [WR] to acquire c.10% of the capital and income sharing rights in BlueCrest Capital Management LP (BCM LP) from him. This is documented in the Deed of Assignment dated 6 July 2007.

The Company acquired a further c.9% of capital and income sharing rights in BCM LP through the issue of three interest bearing loan notes of $55,000,000 to [WR], [MP] and Sugarquay, with additional cash consideration of $2,000,000 each paid to Sugarquay and [MP]. This is also documented in the Deed of Assignment dated 6 July 2007. The loan notes are documented in the Loan Note Instrument dated 6 July 2007.

The Company contributed its interest in BCM LP to BCMC LP on 6 July 2007, which is documented in the Deed of Contribution dated 6 July 2007.

The effect of the above transactions was that the Company had a c.19% interest in the income and capital rights of BCM LP, held through BCMC LP. As noted above, further to the transfer of trade and assets from BCM LP to BCM LLP, the company now ultimately has rights over an interest in BCM LLP.”

Copies of the Deed of Subscription and the Contribution Deed, both dated 6 July 2007, were enclosed with that letter.

Summary of conclusions in Cayman Appeals

(1)     As only BCMCL was a partner in BCM  LP, and not BCMC LP or all the partners of BCMC LP, BCMCL is liable to corporation tax on all of the profit allocation of BCM LP in respect of the 19% interest in BCM LP sold by WR, MP and Sugarquay; and

(2)     If BCMCL had not been liable to corporation tax as set out at paragraph 248(1), above, BCMCL’s entitlement to profits would not have included those allocated to RBS/Fyled and the profit sharing arrangements were confined to the BCMC LP Deed.

(1)     BCMCL’s interest costs on the RBS Loan Facility and Loan Notes are not allowable deductions under the CTA 2009;

(2)     The equity and debt structure of BCMCL’s UK PE establishment was operating on an arm’s length basis with the result that the deduction claimed in respect of interest costs on the RBS Loan Facility and Loan Notes should not be restricted; and

(3)     The RBS Loan Facility and Loan Notes are to be classed as non-trading loan relationships as BCMCL was not party to the RBS Loan Facility or Loan Notes for the purposes of a trade it carried on either at the time of loans or subsequent accounting periods.

Pip appeals

Facts

AGREED FACTS

Introduction

(1)     This is the statement of facts as agreed between the parties.

(2)     The business in which the Appellants (all members of the BlueCrest group) were engaged is henceforth referred to as the “BlueCrest business”.

(1)     Andrew Dodd, who also gave evidence in the Cayman Appeals.

(2)     Robin Aitchison, who like Mr Dodd gave evidence in the Cayman Appeals.

(3)     Andrew Beverly who is director of Avon, a special purpose vehicle which was incorporated on 18 November 2008 for the purpose of becoming, from 27 November 2008, a corporate partner in BCM LP. Subsequently, from 1 December 2008 until 1 July 2014, it was a corporate partner in BCM LLP and, from 31 March 2010 to 12 August 2015, a corporate partner in BCM (UK) LLP.

(4)     Catherine Kerridge who began working for BCM LP and its general partner, BCML, as Head of Tax, between 2007 and 31 December 2017. She was a partner in BCM LP from November 2008 to April 2010. Since 1 December 2008 she has been a partner in BCM LLP and has been a partner in BCM (UK) LLP since 4 September 2016. On 31 March 2010 she was appointed to the Board of BCM LLP and as a member of its Executive Committee on 31 March 2010. Between 2010 and 2016 she held various directorships within the business of BCM LP (subsequently BCM LLP and then BCM (UK) LLP), acting as investment manager (or, in BCM (UK) LLP's case, sub-investment manager) of the funds it managed and continues to advise it on ongoing tax projects.

Further findings of fact

(1)     Discretionary profit allocations would be made to partners.

(2)     Following the establishment of BCMC LP in 2007, so-called “Special Limited Partner (SLP) Profits” would be allocated to BCMC LP to match the drawings that had been made to allow BCMCL, the general partner of BCMC LP, to pay interest under its loan facility with RBS of the funding for the purchase of the 19% interest in BCM LP (as described in the Cayman Appeals).

(3)     The remainder of the profits would be used to make non-discretionary profit allocations to individual partners in accordance with their respective “Agreed Proportions” of income, as set out in the letters of allocation between BCML, as general partner of BCM LP, and each of the partners, which were typically referred to by partners as “income points”.

The level of each partner's overall profit allocation was intended to reflect his or her contribution to BCM LP and profit allocations were drawn in cash. Partners would typically receive an advance drawing (known as a “discretionary drawing”) on account, and in anticipation, of the profit allocation which would typically be made around the time the Partnership’s audit had been completed.

“Q: Has this scheme been seen in the market before?

A: This is a bespoke piece of planning developed by Ernst & Young and has been used by a number of hedge funds since 2003/04. At least one implementation of the strategy has been considered by Her Majesty's Revenue & Customs (HMRC), who did not seek to challenge this.

…

Q: How much tax risk does this planning involve?

A: All tax planning carries the risk of HMRC challenge and the tax authorities' attitude to what is acceptable is subject to change. As a result, BlueCrest partners should be aware that there will always be a risk that planning may [be] challenged by HMRC, and that what the tax authorities find acceptable today may be challenged in the future.

However, this strategy is not in our view aggressive tax planning and on a scale of 1 to 10 we believe that a 6 is the appropriate score in respect of the risk of HMRC challenge. Putting the 6 rating in context, a 10 rating would cover schemes such as remuneration planning where HMRC has threatened to issue retrospective legislation to close down such schemes. In contrast, the strategy in question has a genuine commercial underpinning and has real capital at risk.

As regards the risk of a successful challenge by HMRC, we believe that this planning would warrant a score of 3 out of 10 and, as noted above, the UK tax authorities have seen this strategy implemented in the past and not sought to challenge this.”

“Clearly when the time came the fact that the scheme could be implemented in such a way that a modest amount of tax could be saved, the difference between the corporate rate of 28 and the then upper rate of 40, yes, clearly that would create a larger pool of money, and that was helpful, because we were asking partners to accept that monies that hitherto they would have taken the cash, admittedly there was a partner allocation process, but they'd taken the cash in the February after the year-end, we were now asking them to wait a considerable amount of time and accept that provisional awards of special capital might not go final and accept some risk.  Clearly it was the prospect of the pool of special capital being larger would help us in selling the proposal to the partners.”

“2 Adherence to Partnership

2.1 Covenant

The Further Limited Partner covenants with the Partners for the time being to observe and perform the terms and conditions of the LP Deed [ie the BCM LP Deed, see paragraph 94, above] on terms that the Further Limited Partner becomes a Further Limited Partner under the LP Deed with effect from the date hereof.

…

2.3 Entitlements

(A)    The Further Limited Partner shall be entitled, subject to the terms of the LP Deed, to a 0.00001 % interest in the capital profits or capital losses of the Partnership in accordance with clause 12 .4 of the LP Deed.

(B)    In addition, the Further Limited Partner may be entitled to an allocation of income profits in accordance with clause 12.1(A)(2) of the LP Deed, in the absolute discretion of the General Partner.

(C)    For the avoidance of doubt, the Further Limited Partner’s entitlement under clause 12.1(A)( 4) of the LP Deed will be zero.

2.4 Reallocation by the Further Limited Partner

On receipt by the Further Limited Partner of any Discretionary Drawings or income profits allocations, the Further Limited Partner agrees to consider, at the request of the General Partner, to contribute all or part of such amount to the Partnership as Special Capita1 (as defined in the LP Deed …, less UK corporation tax considered likely to be due on the aforementioned profit allocation and reasonable expenses.”

“1. BlueCrest Capital Management LP (the “Partnership”) (through its general partner BlueCrest Capital Management Limited (the “General Partner”) was proposing to implement an arrangement for the incentivisation and retention of its individual limited partners (the “Incentivisation Scheme”), a step plan for the implementation of which, prepared by Ernst & Young LLP, is attached.

2. In order to effect the Incentivisation Scheme, the Company [ie SCL] was to be admitted as a further limited partner of the Partnership pursuant to the terms of a deed of adherence, a draft copy of which was provided to the sole Director (the “Deed of Adherence”).

3, Broadly speaking, it was proposed that the Company would, on receipt of its allocation of income profits in the Partnership (by way of advance drawings) agree to consider the reinvestment of all or part of this income profit allocation into the Partnership at the request of the General Partner. Any amount paid to the Partnership by the Company in this way would be deemed to be a “Special Capital Contribution”, having the rights set out in the Partnership Deed.”

“3.2   Pursuant to the Assignment, [Avon] shall be entitled to:

(a)     receive any monies received by SCL on account of, or in relation to, the Special Capital Amount pursuant to clause 7.4(B), clause 18.5, clause 20.3, clause 20.4 or any other provision of the LLP Agreement; 

(b)     receive either (i) any assets forming part of the Special Capital Assets transferred to, or otherwise delivered to, SCL pursuant to clause 7.4(B), clause 18.5, clause 20.3, clause 20.4 or any other provision of the LLP Agreement or (ii) the proceeds of realisation of any assets forming part of the Special Capital Assets, as determined by the board of BCM LLP in accordance with the foregoing provisions of the LLP Agreement;

(c)     exercise the power to request a withdrawal of all or part of the special Capital Amount pursuant to clause 7.4(B) of the LLP Agreement; and

(d)     exercise the power to reallocate all or part of the Special Capital Amount pursuant to clause 7.4(C) of the LLP Agreement.

3.3    [Avon] hereby irrevocably authorises SCL to exercise (in its absolute discretion) the following powers on behalf of [Avon] and any such exercise by SCL of such powers shall be binding in all respects upon [Avon]:

(a)     the power to request a withdrawal of all or part of the Special Capital Amount pursuant to clause 7.4(B) of the LLP Agreement; and

(b)     the power to reallocate all or part of the Special Capital Amount (and accordingly the relevant part of the Special Capital Assets) pursuant to clause 7.4(C) of the LLP Agreement.

3.4    [Avon] confirms and acknowledges that it shall have no right to exercise any of the powers that it has authorised SCL to exercise in accordance with clause 3.3 or to require SCL to exercise the powers referred to in clause 3.3 In any way and hereby irrevocably waives all rights to raise any objections whatsoever as to how such rights are exercised by SCL.

“7.     Capital Contributions, other Contributions and Loans

…

7.4

(A)       Any of the Members may with the agreement of the Board make further contributions (which shall not be ordinary capital contributions and which shall not be treated as constituting part of the Maximum Amount) in cash or in specie (“Special Capital”) and the letters of allocation between the Partnership and each relevant Member shall be amended on an annual basis not less than one month prior to the end of each financial year of the Partnership to reflect all such further contributions made during the previous twelve months and not already recorded in an amended letter of allocation (or in the case of a Further Member a letter of allocation shall be entered into between such Further Member and the Partnership by way of an amendment to the Deed of Adherence executed by such Further Member to reflect any such further contributions). Any contributions of Special Capital that have been or are so, or are treated as, made to the Partnership pursuant to this Clause 7.4(A) have been or shall be credited (in the case of an in specie contribution, in the amount agreed between the relevant Member and the Board) to the relevant Member’s Special Capital Account and shall be subject to the provisions as to deemed transfer set out in this Clause 7.4. Certain of the Members at the date hereof have made further contributions in accordance with the foregoing as recorded in the letters of allocation between the Partnership and each such relevant Member entered into on the date hereof. The Special Capital contributed by certain of the Members at the date hereof has been invested in assets by the Partnership. Any further Special Capital contributed by a Member may, at the discretion of the Board, be invested by the Partnership in such assets (which may include shares or other interests in any of the BlueCrest Funds) as the Board, in its sole and absolute discretion, may determine (any assets in which Special Capital is invested at the date hereof or in which Special Capital is invested in the future being “Investment Assets”).

Subject as hereinafter provided, the monies standing to the credit of a Special Capital Account (and any Investment Assets acquired with any such monies) shall be held exclusively for the benefit of the relevant Member and only the relevant Member shall be entitled to such monies, any Investment Assets acquired with such monies and the proceeds of realisation of any such Investment Assets, and no other Member shall have any interest in such monies or such Investment Assets save as specifically provided for in this Agreement or as agreed in writing with the relevant Member.

Any income arising or derived from any monies standing to the credit of any Special Capital Account or from any Investment Assets in which such monies are invested and any income losses arising or derived from any monies in any Special Capital Account or from any Investment Assets in which such monies are invested shall be allocated to the Distribution Account of the Member who is entitled to the relevant part of such Special Capital (and the relevant part of any Investment Assets acquired with such Special Capital) as at the time that such income profits arise or income losses are incurred.

(B)       Any Member who for the time being has any Special Capital credited to his Special Capital Account may (by written notice to the Board) withdraw all or part of such Special Capital (on giving 3 months' notice or such other period of notice as shall be agreed with the Board) and on the expiry of any such notice the Board shall, in its absolute discretion, repay such Special Capital in cash or (if such Special Capital shall have been invested in Investment Assets) by the transfer of the relevant Investment Assets to the relevant Member in satisfaction of such repayment obligation or dispose of the relevant Investment Assets and transfer the proceeds of such disposal to the relevant Member in satisfaction of such repayment obligation. In the event that any Investment Assets (or the proceeds of the disposal of any Investment Assets) are transferred to any Member in accordance with the foregoing then the proportion of the Special Capital that the Member withdrew pursuant to the written notice to the Board shall be deemed to have been repaid by such transfer (regardless of whether or not the value transferred to the Member shall exceed or be less than the value of the Special Capital deemed to have been repaid) and the relevant Member's Special Capital Account shall be reduced by such amount.

(C)       Subject to the provisions below any Member who for the time being has Special Capital credited to his Special Capital Account may, in its sole and absolute discretion, decide (following, and only following, the receipt of a recommendation from the Board that such Member should consider a reallocation of such interest in such Special Capital) that all or part of the interest of such Member in any Special Capital (and accordingly in any Investment Asset acquired with such Special Capital) should be reallocated to any other Member or Members so that such other Member or Members will, following such reallocation, become beneficially entitled to the relevant part of such Special Capital (and the relevant part of any Investment Assets acquired with such Special Capital and any proceeds of the realisation of any such Investment Assets) and shall give notice of any such decision to the Board provided that no such reallocation shall be made by any such Member prior to the expiry of the period of six months following the date upon which the Special Capital was contributed to the Partnership and used (either directly or indirectly) to acquire the relevant Investment Assets unless the Board shall specifically consent to a period of less than six months in writing. On the making by any Member of any reallocation there shall be a deemed transfer of the relevant proportion of the Special Capital used to acquire the relevant Investment Assets and the amount of Special Capital deemed transferred shall be deducted from the Special Capital Account of the Member that contributed the same and shall be credited to the Special Capital Account of the Member to which such Special Capital has been reallocated.

To the extent that the Partnership believes that the arrangements described in the foregoing provisions would be likely, if Special Capital was reallocated to Members in accordance therewith, to constitute a collective investment scheme, the Partnership may require that, forthwith following any reallocation in accordance with the foregoing provisions, (a) the Member to whom any Special Capital (and any related Investment Asset) has been reallocated or (for the avoidance of doubt following such Member’s death his personal representatives) shall be required to withdraw such Special Capital in accordance with Clause 7.4(8), or (b) all such related Investment Assets shall be registered in a sub-account in the name of the Member to whom any Special Capital has been reallocated in such manner as shall ensure that the Partnership will not be categorised as a collective investment scheme.

…

10.    Allocations

10.1  The Board shall procure that accounts are drawn-up in accordance with the provisions of this Agreement and otherwise in accordance with the Accounting Principles in respect of each financial year of the Partnership.

Such accounts shall comprise a profit and loss account for the Partnership in respect of such financial year and a balance sheet for the Partnership as at the end of that financial year (together the “Partnership Accounts”) and the Board shall arrange for the Partnership Accounts in respect of each financial year to be audited in accordance with the requirements of the Act.

10.2 The Board shall following the end of each financial year by reference to the Partnership Accounts drawn-up in respect of that financial year determine the allocation of the profits and losses amongst the Members in accordance with the provisions of Clauses 10.3, 10.4 and 10.6.

In addition the Board shall have the discretion to make interim profit allocations to such of the Members as the Board shall determine (on account of their entitlement to receive allocations of profits following the end of each financial year of the Partnership in accordance with the provisions of Clauses 10.3 and 10.5) subject in all respects to the Board being satisfied as to the level of profits available in respect of any financial year. In determining the level of profits available, the Board shall consider, on a prudent basis, the profits available based on the accounts relating to the previous financial year, monthly managements accounts, any other profit allocations already made in respect of the relevant financial year and any current or forecast income, liabilities and expenditure of the Partnership and may also elect to draw up accounts for the Partnership for an interim period within a financial year of the Partnership in order to determine an interim allocation of profits or losses to such of the Members as the Board may determine.

10.3 Expenses of First Corporate Member and other allocations

(A)    Subject to the further provisions of this Clause 10.3 and to Clause 10.6, in respect of each financial year of the Partnership the profits of the Partnership (before tax) (and after the deduction of any sums payable to an Outgoing Member pursuant to the provisions of Clause 18.4 (other than for the avoidance of doubt any sums representing such Outgoing Member’s ordinary capital contribution or Special Capital)) shall, subject as provided in this Clause, be allocated amongst the Members as follows:

(1)     firstly, there shall be allocated:

(a)     to BCMSL such amount of profits as shall be required to cover any expenses of BCMSL incurred in connection with services made available to the Partnership which have not been paid or reimbursed under the Services Agreement or which have not been otherwise reimbursed by the Partnership; and then.

(b)     to BCMSL or SCL or such other Member or Members as the Board shall in its absolute discretion decide such amount of profits as shall in the good faith opinion of the Board be required to be retained in the Partnership (i) as working capital to meet anticipated, current or foreseen liabilities and expenditure of the Partnership, (ii) to cover other contingencies in accordance with general principles of prudent management and (iii) to satisfy any obligation imposed on the Partnership by the FSA or any other regulatory body to maintain a minimum level of financial resources;

(2)     secondly, there shall be allocated to each Member who has received Priority Distributions during the relevant financial year of the Partnership, such amount of profits as are equal to the Priority Distributions [ie distributions not in excess of £200,000 per Member unless otherwise notified BCMC] to made to such Individual Members during the relevant financial year of the Partnership and in the event that the profits in any financial year shall not be sufficient to meet these allocations in full then such profits shall be allocated on a pro rata basis as between the Priority Distributions made to the relevant Members;

(3)     thirdly, there shall be allocated to such of the Members (if any) as the Board shall in its absolute discretion determine (i) such amount of profits, in aggregate not exceeding the performance fees due and payable to the Partnership in the relevant financial year (“Performance Fees”), as the Board shall in its absolute discretion determine; and (ii) such amount of profits (in aggregate not exceeding 15 per cent of the amount of the Performance Fees as reduced by any allocations pursuant to (i) above) as the Board shall in its absolute discretion determine, in order to recognise management performance during the relevant financial year;

(4)     fourthly, there shall be allocated to BCMC such amount of profits (“BCMC Profits”) as is equal to the aggregate Advance Drawings made by BCMC during such financial year;

(5)     the remainder of the profits, which for the purposes of the operation of this sub-clause shall be increased by adding thereto an amount equal to any BCMC Profits in respect of the relevant financial year, shall then be allocated to the Members in the Agreed Income Proportions provided that the amount allocated to BCMC under this sub-clause (5) shall be reduced by an amount equal to any allocated BCMC Profits in respect of the relevant financial year.

…

11.            Members’ Accounts and Distributions

11.1          Each Member shall have, inter alia, an Ordinary Capital Account and a Distribution Account which shall be operated in accordance with the provisions of Clauses 11.2 to 11.5 and any Member who has, or who is deemed to have, contributed Special Capital (and any Member to whom any Special Capital is reallocated) shall have a Special Capital Account which shall be operated in accordance with the provisions of Clause 7.4 and Clause 11.2. In addition, BCMSL and any other Member to which profits are allocated in accordance with Clause 10.3(A)(1) shall have a Retention Account which shall be operated in accordance with the provisions of Clause 10.5

11.2          The ordinary capital contributions of each Member shall be credited to that Member's Ordinary Capital Account. Any contribution of Special Capital by a Member shall be credited to that Member's Special Capital Account and any reallocation of Special Capital pursuant to Clause 7.4 shall be credited to the Special Capital Account of the Member that receives such reallocation.

11.3          The profits (or losses) allocated or to be allocated to the Members in respect of each financial year of the Partnership pursuant to Clause 10.3, Clause 10.4 and Clause 10.6 shall be credited (or debited as the case may be) to the Distribution Accounts of the Members as to 70% of the Board's good faith estimate of the profits (or losses) of the financial year within 30 days of the end of the relevant financial year and as to the balance within 30 days of the completion of the preparation of the accounts of the Partnership for the relevant financial year in accordance with Clause 10. Any withdrawal by BCMC of any profits so allocated to BCMC shall only be made by way of a payment to the New LP Bank Account (as defined in the Facility Agreement).

Clause 11.4(A) deals with discretionary drawing that are allowed, 11.4(B) with advance drawings and 11.4(C) with further drawings. Clause 11.5 concerns “priority distributions”. The Deed continues:

11.6          Save as provided in Clause 10.10(8) and Clause 18.4, no Member shall have an obligation to pay back to the Partnership any of the profits credited to the Distribution Account of that Member.

11. 7         Each Member shall discharge on or before the due date for payment in each case all tax (whether in the United Kingdom or elsewhere) for which he or it is primarily liable in respect of his or its share of any profits of the Partnership and shall indemnify each other Member for itself (or, if that Member is itself a Partnership, as agent for the partner or partners in it) in respect of any loss, expense, cost or liability which that other Member (or, as the case may be, the relevant partner or partners in that other Member) may incur to the extent that the other Member (or, as the case may be, the relevant partner or partners in that other Member) would not have incurred that loss, expense, cost or liability but for a failure on the part of the first mentioned Member to comply with his or its obligations under this Clause 11. 7.

11.8          The Board may make arrangements for benefits (including but not limited to medical insurance, permanent health insurance and travel insurance) to be available for certain Members (and any such arrangements may be set out in the Members Handbook that sets out various terms that are applicable to each Member's membership of the Partnership).

“A number of members (partners) have asked for further clarification regarding ordinary capital following Sharlene’s recent email requesting documents to be signed and returned.

There are three types of capital a member may have in BlueCrest Capital Management LLP (“BCM LLP”):

-          Ordinary Capital

-          A Special Capital

-          B Special Capital

None of these relate in any way to a member’s capital ownership of the business.

‘A’ Special Capital is used for Partnership incentivisation Awards (the PIP) and hence you may have A Special Capital if you have received a final PIP award. ‘B’ Special Capital is only relevant to Geneva based members …

Ordinary Capital is something all members have to contribute in order to legally be a member. BlueCrest has determined that to satisfy its requirements Partners should have £5k of ordinary capital in BCM LLP. …”

(1)     On 10 May 2010 Avon increased the amount of a final award over the recommended amount, pointing out to BCM (UK) LLP that the recommended award was less than the indicative award and clarified that this was not for a good reason;

(2)     On 11 October 2011, Avon pointed out to BCM (UK) LLP that it was minded not to accept a recommendation to make an award to a person that was no longer a partner. BCM (UK) LLP agreed to withdraw the recommendation and no award was made; and

(3)     On 1 September 2011, Avon noticed inconsistencies in the proposed forfeiture conditions between the letter of recommendation to Avon and in the draft indicative award letter to the participant. These inconsistencies were resolved satisfactorily and an award was made.

(1)     Partners were incentivised to remain with the Partnership on an ongoing cycle and to continue to deliver returns for investors. If they were to leave, they would not receive a final award of special capital which had been provisionally awarded to them.

(2)     The Partnership was now protected to some extent against downside risk from an individual trader's negative P&L in the next year because it was now possible for potential awards of special capital to be adjusted or, indeed, not be made at all, with the special capital remaining in the Partnership instead.

(3)     The Partnership was similarly protected against netting costs since it was now possible to adjust downwards the potential award of special capital to one trader (who had made losses) in order to free up special capital which could be used to reward a second trader (who had made back those losses but in circumstances where no performances fees would be earned). Traders who had received provisional indications of awards, but who subsequently had a negative P&L, were no longer incentivised to take risky bets to try to make back the losses (with the back-up option of resigning and finding new employment if they incurred further losses) since the indicative provisional award set by reference to their good performance could be reduced, or not be made at all, in the light of partners' subsequent poor performance. They could not simply take a profit allocation based on their previous good performance, then walk away and keep it after subsequently causing losses to the Partnership.

Issue 1 - PIP Issue

Did the PIP arrangements form part of the “profit-sharing arrangements” of the Partnership, within the meaning of s 850 ITTOIA 2005 and/or s 1262 CTA 2009? In particular, did the individual partners who participated in the PIP thereby have rights to share in the profits of the Partnership and, if so, what is the correct amount of profits to be allocated to them in each year under appeal and/or did SCL and/or Avon have rights to share in the profits of the Partnership and, if so, what is the correct amount of profits to be allocated to them in each year under appeal?

848 Assessment of partnerships

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.

849 Calculation of firm's profits or losses

(1) If–

(a)     a firm carries on a trade, and

(b)     any partner in the firm is chargeable to income tax,

the profits or losses of the trade are calculated on the basis set out in subsection (2) or (3), as the case may require.

(2) For any period of account in which the partner is a UK resident individual, the profits or losses of the trade are calculated as if the firm were a UK resident individual.

(3) For any period of account in which the partner is non-UK resident, the profits or losses of the trade are calculated as if the firm were a non-UK resident individual.

850 Allocation of firm's profits or losses between partners

(1) 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 subsections (2) and (4).

(2) If for the period of account the calculation under section 849 in relation to the partner produces a profit, but there is at least one loss-making partner–

(a)     each loss-making partner's share is neither a profit nor a loss, and

(b)     each profit-making partner's share is given by the formula in subsection (3).

(3) The formula is–

FP × PP

   TP

where–

FP is the amount of the firm's profit calculated under section 849 in relation to the partner,

PP is the amount determined under subsection (1) to be the profit of the profit-making partner in question, and

TP is the total of the amounts determined under subsection (1) to be the profits of all the profit-making partners.

(4) If for the period of account the calculation under section 849 in relation to the partner produces a loss, but there is at least one profit-making partner–

(a)     each profit-making partner's share is neither a profit nor a loss, and

(b)     each loss-making partner's share is given by the formula in subsection (5).

(5) The formula is–

FL × PL

         TL

where–

FL is the amount of the firm's loss calculated under section 849 in relation to the partner,

PL is the amount determined under subsection (1) to be the loss of the loss-making partner in question, and

TL is the total of the amounts determined under subsection (1) to be the losses of all the loss-making partners.

(6) In this section–

“loss-making partner” means a partner whose share is determined under subsection (1) to be a loss,

“partner” , in relation to a firm, means any partner in the firm, whether or not chargeable to income tax,

“profit-making partner” means a partner whose share is determined under subsection (1) to be a profit, and

“profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.

851 Calculations etc. where firm has other income or losses

(1) This section applies if–

(a)     sections 849 and 850 apply in relation to the profits or losses of a trade carried on by a firm, and

(b)     the firm has other income or losses.

(2) Those sections also apply as if references to the profits or losses of the trade were references to the other income or losses.

852 Carrying on by partner of notional trade

(1) For each tax year in which a firm carries on a trade (the “actual trade”), each partner's share of the firm's trading profits or losses is treated, for the purposes of Chapter 15 of Part 2 (basis periods), as profits or losses of a trade carried on by the partner alone (the “notional trade”).

(2) A partner starts to carry on a notional trade at the later of–

(a)     when becoming a partner in the firm, and

(b)     when the firm starts to carry on the actual trade.

This is subject to subsection (3).

(3) If the partner carries on the actual trade alone before the firm starts to carry it on, the partner starts to carry on the notional trade when the partner starts to carry on the actual trade.

(4) A partner permanently ceases to carry on a notional trade at the earlier of–

(a)     when the partner ceases to be a partner in the firm, and

(b)     when the firm permanently ceases to carry on the actual trade.

This is subject to subsections (5) and (6).

(5) If the partner carries on the actual trade alone after the firm permanently ceases to carry it on, the partner permanently ceases to carry on the notional trade when the partner permanently ceases to carry on the actual trade.

(6) If–

(a)     the firm carries on the actual trade wholly or partly outside the United Kingdom, and

(b)     the partner becomes or ceases to be UK resident,

the partner is treated as permanently ceasing to carry on one notional trade when the change of residence occurs and starting to carry on another immediately afterwards.

(7) Subsection (6) does not prevent a loss made before the change of residence from being deducted under section 83 of ITA 2007 from profits arising after the change

…

863 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 (and not by the limited liability partnership as such),

(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.

850 Allocation of firm's profits or losses between partners

(1) 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.

(2) In this section and sections 850A and 850B“profit-sharing arrangements” means the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.

850A Profit-making period in which some partners have losses

(1) For any period of account, if–

(a)     the calculation under section 849 in relation to a partner (“A”) produces a profit, and

(b)     A's share determined under section 850 is a loss,

A's share of the profit of the trade is neither a profit nor a loss.

(2) For any period of account, if–

(a)     the calculation under section 849 in relation to A produces a profit,

(b)     A's share determined under section 850 is a profit, and

(c)     the comparable amount for at least one other partner is a loss,

A's share of the profit of the trade is the amount produced by the formula in subsection (3).

(3) The formula is …

850B Loss-making period in which some partners have profits

(1) For any period of account, if–

(a)     the calculation under section 849 in relation to a partner (“A”) produces a loss, and

(b)     A's share determined under section 850 is a profit, A's share of the loss of the trade is neither a profit nor a loss.

(2) For any period of account, if–

(a)     the calculation under section 849 in relation to A produces a loss,

(b)     A's share determined under section 850 is a loss, and

(c)     the comparable amount for at least one other partner is a profit, A's share of the loss of the trade is the amount produced by the formula in subsection (3).

(3) The formula is …

850C Excess profit allocation to non-individual partners

(1) Subsections (4) and (5) apply if—

(a)     for a period of account (“the relevant period of account”)—

(i)       the calculation under section 849 in relation to an individual partner (“A”) (see subsection (6)) produces a profit for the firm, and

(ii)      A's share of that profit determined under section 850 or 850A (“A's profit share”) is a profit or is neither a profit nor a loss,

(b)     a non-individual partner (“B”) (see subsection (6)) has a share of the profit for the firm mentioned in paragraph (a)(i) (“B's profit share”) which is a profit (see subsection (7)), and

(c)     condition X or Y is met.

(2) 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.

(3) 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.

(4) 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. But any increase by virtue of paragraph (b) is not to exceed the amount of the excess mentioned in subsection (3)(a) after deducting from that amount any increase by virtue of paragraph (a).

(5) If B is chargeable to income tax, in applying sections 850 to 850B in relation to B for the relevant period of account, such adjustments are to be made as are just and reasonable to take account of the increase in A's profit share under subsection (4). (This subsection does not apply for the purposes of subsection (7) or section 850D(7).)

(6) A partner in a firm is an “individual partner” if the partner is an individual and “non-individual partner” is to be read accordingly; but “non-individual partner” does not include the firm itself where it is treated as a partner under section 863I (allocation of profit to AIFM firm). …

850D Excess profit allocation: cases involving individuals who are not partners

(1) Subsections (4) and (5) apply if—

(a)     at a time during a period of account (“the relevant period of account”) in respect of a firm, an individual (“A”) personally performs services for the firm,

(b)     if A had been a partner in the firm throughout the relevant period of account, the calculation under section 849 in relation to A for the relevant period of account would have produced a profit for the firm,

(c)     a non-individual partner (“B”) in the firm (see subsection (6)) has a share of that profit (“B's profit share”) which is a profit (see subsection (7)),

(d)     it is reasonable to suppose that A would have been a partner in the firm at a time during the relevant period of account or any earlier period of account but for the provision contained in section 850C (see also subsections (8) to (10)), and

(e)     condition X or Y is met.

(2) Condition X is that it is reasonable to suppose that amounts representing A's deferred profit (see subsection (11)) are included in B's profit share.

(3) Condition Y is that—

(a)     B's profit share exceeds the appropriate notional profit (see subsection (12)),

(b)     A has the power to enjoy B's profit share (“A's power to enjoy”) (see subsection (13)), and

(c)     it is reasonable to suppose that the whole or any part of B's profit share is attributable to A's power to enjoy.

(4) A is to be treated on the following basis—

(a)     A is a partner in the firm throughout the relevant period of account (but not for the purposes of section 863I (allocation of profit to AIFM firm)),

(b)     A's share of the firm's profit for the relevant period of account is so much of the amount of B's profit share as, it is reasonable to suppose, is attributable to—

(i) A's deferred profit, or

(ii) A's power to enjoy,

as determined on a just and reasonable basis, and

(c)     A's share of the firm's profit is chargeable to income tax under the applicable provisions of the Income Tax Acts for the tax year in which the relevant period of account ends.

But A's share of the firm's profit by virtue of paragraph (b)(ii) is not to exceed the amount of the excess mentioned in subsection (3)(a) after deducting from that amount A's share of the firm's profit (if any) by virtue of paragraph (b)(i).

(5) If B is chargeable to income tax, in applying sections 850 to 850B in relation to B for the relevant period of account, such adjustments are to be made as are just and reasonable to take account of A's share of the firm's profit under subsection (4). (This subsection does not apply for the purposes of subsection (7) or section 850C(7).)

(6) “Non-individual partner” is to be read in accordance with section 850C(6).

(7) B's profit share is to be determined by applying section 850 and, if relevant, section 850A in relation to B for the relevant period of account (whether or not B is chargeable to income tax) on the assumption that the calculation under section 849 in relation to B produces the profit for the firm mentioned in subsection (1)(b).

(8) The requirement of subsection (1)(d) is to be assumed to be met if, at a time during the relevant period of account, A is a member of a partnership which is associated with the firm. …

850E Payments by B out of the excess part of B's profit share

(1) Subsection (2) applies in a case in which section 850C(4) or section 850D(4) applies if—

(a)     there is an agreement in place in relation to the excess part of B's profit share,

(b)     as a result of the agreement, B makes a payment to another person out of the excess part of B's profit share, and

(c)     the payment is not made under any arrangements the main purpose, or one of the main purposes, of which is the obtaining of a tax advantage for any person.

(2) For income tax purposes, the payment—

(a)     is not to be income of the recipient,

(b)     is not to be taken into account in calculating any profits or losses of B or otherwise deducted from any income of B, and

(c)     is not to be regarded as a distribution.

(3) In this section—

“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable),

“B's profit share” has the same meaning as in section 850C or 850D (as the case may be),

“the excess part of B's profit share” means so much of the amount of B's profit share as is represented by the amount of, as the case may be—

(a)     the increase under section 850C(4), or

(b)     A's share of the firm's profit under section 850D(4), and

“tax advantage” has the meaning given by section 1139 of CTA 2010.

“Of equal importance is the salutary warning which Lord Nicholls proceeded to give, at paras 36–39 [of BMBF], that the mere fact of entering into a composite transaction which includes elements devoid of any commercial purpose does not necessarily lead to the conclusion that the composite transaction will fail in its objective of escaping a charge to tax or, as the case may be, falling within an exemption from tax. Everything always depends, as Lord Nicholls said at para 39, on “the need for a close analysis of what, on a purposive construction, the statute actually requires”. Thus, in the BMBF case itself, the taxpayer was entitled to a capital allowance for the expenditure of £91m which it had incurred in the provision of a pipeline for the purposes of its finance leasing trade, even though the financing arrangements which the taxpayer had made for the purchase and leaseback of the pipeline were not only preordained and circular, but also resulted in “the bulk of the purchase price being irrevocably committed to paying the rent”: see para 42.”

Henderson LJ continued, at [62]:

“… everything always depends, as Lord Nicholls said at para 39, on “the need for a close analysis of what, on a purposive construction, the statute actually requires”.  

Mr Baldry also referred to [67] of Rossendale in which Henderson LJ said:

“Section 65 of the 1988 Act deals with interpretation of Part III, and section 65(1) states that: “The owner of a hereditament or land is the person entitled to possession of it” As Mr Mathew [leading tax counsel who appeared for Rossendale] rightly accepted in oral argument, this is clearly an exhaustive definition which leaves no room for other criteria by reference to which the owner of a hereditament may be identified for the purposes of Part III. Thus the second of the conditions which have to be fulfilled under section 45(1) must be read as meaning: “(b) on the day the ratepayer is the person entitled to possession of the whole of the hereditament.”

“But in policy terms the same general considerations that led to the conclusion that the Income Tax Act require wage and salary earners to pay the tax on their earnings, must apply equally to the earnings of the self-employed from their personal exertions. The character or quality of the income which arises is the same in either case. Future wages and future receipts for personal services do not arise without that work. Personal exertion income has been deliberately distinguished from income from property in our legislation and in the legislation of other countries because of that perception that they are quite different in character. If the income is the product of personal exertion that stamp requires that it be taxed accordingly, and that any disposition of a related property interest should take effect subject to that charge for tax. In such cases and whether the taxpayer is employed or self-employed, attaching the label of a property right to an assignment does not change the character off the income that is thereafter derived. The contract is merely the vehicle through which the earnings by personal effort are obtained.

Obviously there are cases when entitlement to professional or business income is not dependant on personal energy input; one partner may contribute labour, another capital. More often, while capital assets may play some part in the derivation of income, the element of personal exertion is clearly predominant. In some circumstances it may be necessary to analyse a particular income-earning activities in some detail; see Mannix and Harris, Australian Income Tax Law and Practice (11^th ed) para 6/46 and 23 Halsbury’s Laws of England (4^th ed) para 881. But common experience confirms that in general working professionals earn their incomes from their exertions and if they do not perform they may be fired by their partners. There is no justification in principle for differentiating between salary and wage earners and professionals whose income is the product of their personal exertion. In either case the person whose it personal exertion earns income derives the income. It would be wrong to impute an intention to Parliament that income spitting, with its inevitable undermining of the graduated rate structure should be widely available to professional and commercial taxpayers allowed tonight a salary and wage earners.”

“Income tax on emoluments or earnings is, principally but not exclusively, a tax on the payment of money by an employer to an employee as a reward for his or her work as an employee.”

Issues 2 and 3 - Profit Allocation Issues

summary of conclusions in PIP appeals

ip appeals

AGREED FACTS

Introduction

(1)     This is the statement of facts as agreed between the parties.

Partnership Appeals

(1)     Andrew Dodd, who also gave evidence in the Cayman Appeals and PIP Appeals.

(2)     MP, who, with WR, established the BlueCrest business in 2000 and is its chief executive officer.

(3)     Leda Braga, who is the founder and CEO of Systematica Investments GP Limited (“Systematica”). In 2015, she headed a “spin-off” of the systematic division within BlueCrest into Systematica which manages approximately US$ 7 billion worth of investments, including in Systematica Blue Trend Master Fund Limited and Systematica BlueMatrix Master Fund Limited, and has around 100 employees. In addition she has, until recently, served as an advisor to the board of the pension fund of the CERN in Geneva. She also sits on the advisory board of the London School of Economics Systemic Risk Centre.

(4)     Jonathan Ward, who is a portfolio manager with a hedge fund. In December 2007 he became a partner of BlueCrest and the prefix of “Principal” was added to his job title to reflect his promotion to the Partnership and share of an equity stake.

(5)     Simon Dannatt, who has since February 2018 been the Chief Operating Officer of ExodusPoint Capital Management UK LLP (“ExodusPoint”). Before joining ExodusPoint, Mr Dannatt had spent over 14 years with BlueCrest in a number of different roles. These included the development of tools for discretionary traders primarily focused on fixed income but also supporting those operating in equities and foreign exchange that the traders could use to improve their analysis, pricing and risk management capabilities. Around 2008 he transferred to the role of co­head for FX Volatility, working alongside the existing head of the team. This role involved overseeing the performance of portfolio managers and assessing risk on both an individual and aggregated basis. He also directed research and analytics for this team, which included designing and implementing systematic strategies and involved building relationships with internal teams and applying his understanding of BlueCrest’s trading strategies to ensure their efficient integration. From September 2009 (following the establishment of BCM LLP in 2008) Mr Dannatt became business manager for Marketing and Investor Relations where, working with the head of Marketing and Investor Relations, his role was to ensure that the appropriate resources, structure, systems and processes were in place for the Marketing and Investor Relations team to function effectively.

Further findings of fact

“Further to our letter to you of 2^nd June 2008, informing you that you had been recommended by BlueCrest Capital Management Limited, as general partner of BlueCrest Capital Management LP (“BCM LP”), to receive an award by way of a reallocation of special capital (the “Award”), we write to provide further details in respect of this Award.

As stated, the potential Award was subject to certain forfeiture provisions and we confirm the potential award has not been forfeited under these rules. In addition, we have received a further recommendation from the Board of BlueCrest Capital Management LLP (“BCM LLP”) (following the transfer to BCM LLP of the business of BCM LP) to make the Award to you (the “Further Recommendation”').

Having taken Into consideration the Further Recommendation, we are delighted to confirm that we made an unconditional award to you of special capital equal to a minimum of £296,400. This award will be satisfied (in order to reflect the transfer referred to above and the fact that the “incentivisation” pool is held within BCM LLP) by a reallocation to you of special capital In BCM LLP which will be credited to your special capital account in BCM LLP on 30^th January 2009. Such special capital shall be subject to the terms of the BCM LLP limited liability partnership agreement entered into on 01 December 2008 (the “LLP Agreement”). Please note that in accordance with the provisions of the LLP Agreement, you have the right to withdraw such special capital, subject to providing 3 months' prior notice to the Board of BCM LLP or such other period of notice as shall be agreed with the Board of BCM LLP and that the Board of BCM LLP may satisfy such withdrawal request in case or in specie.”

“Withdrawal of special capital

Please accept this letter as my request to withdraw the sum standing to the balance of my special capital account in BlueCrest Capital Management LLP.”

“…amount for investment for 2009 will be approximately £1.2m gross of tax provision. What % tax provision should I assume when determining the allocation, 28% or some lower number?”

Ms Kerridge responded by email later that day (17 February 2009):

“The £1.2m mentioned below [in Mr Dodd’s email] can be funded now. But you might want to think about putting in another £1.2m out of the proceeds of November award, due to you 1^st April. It seems to me you might want to shelter £2.4m in total as your overall profit for the year, even assuming no more drawings between Feb and Nov, will be £2.67m. eg Dec 1.51, Jan 1.16.”

Although in evidence Mr Dodd could not remember what he understood in 2009, he agreed that, “one can reasonably conclude”, that by using the word “shelter” in her email Ms Kerridge “was talking about shelter from tax” which was “of course a benefit of the scheme.”

“Hope you’re well. Definitely feel like I’m settling in to the group and very happy I made the move. When we discussed the terms for working at Bluecrest you mentioned when I joined I could see a copy of the accountants view on the tax scheme used for bonuses. Also have you got the final number/date for the payment of the deferred I lost when I left [previous employer].”

In evidence Mr Dodd confirmed that the “tax scheme” referred to in the email was indeed the PIP.

“So if we promised 500k net which we have paid out in special capital and there is some tax due on that through the settlement (if that were to happen!!) they are assuming that [BlueCrest] will pay that tax as the deferrals were promised net.”

Mr Dodd responded:

“Let’s see. Everyone knew there was some risk but I take your point. I gave some soft promises to some of them.”

In relation to this, Mr Dodd explained that it was known at the time the PIP was implemented that there might be some discussions with HMRC as to its operation and that he had been asked by the individual concerned who had accepted what Mr Dodd had told him about how the PIP worked but had nevertheless asked what the position would be if this was not correct.

“… the simple answer to that is, a trader that makes money, and I'm not being facetious when I say that, it is incredibly difficult in financial markets to make  money. It’s the most competitive environment there probably is. Everything that works very soon doesn’t work because people find out and they get onto it and everybody starts doing it and it’s gone, so the half-life of anything that works is extremely short. … It’s a really rapidly and continuously evolving space and you've got to be able to reinvent yourself continuously in real time and recognise that when what you’re doing doesn't work anymore and be very disciplined about that.”

“… when you buy a government bond, which is traded on the futures exchange, it's moving around so erratically, you can’t say you have any real knowledge, you have an inkling that it might go up or down based on, let’s be honest, your gut feel. I mean, it is wholly true to say that trading is a gut feel kind of business, by which I would say a lot of the analysis that happens, it’s the subconscious analysis. Subconsciously, you know, you look at a market and you think: I don’t know why, but I just don’t like this, and these are the strongest kind of signals that you get. Your subconscious, it’s not that your stomach is doing anything, your brain is doing it. You are subconsciously analysing the markets and the way it's moving. It’s an emotional thing. The markets are very emotional and you react and you either can read it or you can’t read it.

So when investors come to the fund, they have a collection of individuals who kind of gamble in all their own little spaces and they hope that the diversification over that group will produce a return, …”

“At the top level of the tree of characteristics, it’s the same. We're trying to find assets to buy and to sell, and we are trying to build a portfolio of assets that will serve clients with some return in a target timeframe, some investors have a long timeframe, some investors have a short timeframe, so you have target returns, and you're trying to achieve those returns while managing the risk.

…

And at the end of the day, systematic trading and discretionary trading do the same thing which is to try to establish a process to select those assets, buy and  sell, and achieve the returns the client demands.

So in systematic trading the difference is that in the discretionary world often a lot of the analysis is in the head of the trader. So he uses tools, we provide the trader with tools to help, but there’s a bit of reading the news, watching the political environment, and it’s all in the head of the trader to a certain extent.

The systematic traders tend to articulate their principles more clearly, and because we articulate our principles more clearly, it’s a little bit easier to apply those principles to a larger number of assets.”

“"BlueCrest is looking to hire two recent graduates to expand and support its systematic trading team The successful candidates will have a first or 2.1 degree in mathematics, physics or engineering and have graduated within the last 12 months. Programming experience would be advantageous however it is envisaged these will be development roles with the candidates to participate in external training as deemed necessary

The development of the roles will include some ‘hands on’ trading and analysis and will require the successful candidates to become FSA registered at an early stage. Upon registration, BlueCrest will then provide 75% sponsorship for the two candidates to participate in an MSc in statistics from Birkbeck, University of London, attending part-time evening classes and to commence in October this year.”  

(1)     implementing the direction of the particular fund together with Ms Braga, the head of Research, and other senior researchers. This, Mr Ward explained, was something that would follow from an annual meeting in which Ms Braga would set the agenda, eg whether the focus should be on increasing the capacity for assets that could be managed in a particular way, or should it be on new ideas so that the fund behaved differently to those of its the competitors;

(2)     working on the needs of the fund (eg putting new statistical models into the production system, highlighting points for development and advising on the resourcing and streamlining research projects). These would primarily have been determined by Ms Braga or potentially feedback from investors or a “team” decision if it were considered that a change in approach was required. It would then be for Mr Ward to implement any such change;

(3)     coordinating the work of the different teams (such as Research, Trading Implementation and Execution); and

(4)     implementing new processes.

(1)     working with the head of Marketing and Investor Relations to develop processes, controls and team structure;

(2)     assisting in the management and oversight of Marketing and Investor Relations and its sub-teams;

(3)     management of the Portfolio Specialist and Research Team;

(4)     liaising with portfolio managers to source and provide relevant information to the Sales Team and ultimately the funds’ investors;

(5)     producing content for marketing material (often utilising information sourced from internal teams); producing internal management information; and

(6)     supporting the Sales Team in conversations with investors (acting as product specialist for certain funds and strategies).

“… there were two principal drivers for that regulated CF1, earlier on where there was an interaction on the trading side, and so CF30 - and I believe these have changed numbers and names over the year, but CF30 is the customer facing function, and that’s relevant either as a trading role where you are interfacing with the market to execute trades and put trades into the market, or on the client side from a marketing role where you are dealing with clients and talking to them about investments, so both regulated activities in the UK financial services industry.”

Issue 1 - the Miscellaneous Income Issue

(1) Were sums received by the Appellants pursuant to the PIP income or capital for the purposes of the Income Tax Acts?

(2) If they were income, were they charged to tax under s.687(1) of the ITTOIA 2005?

5 Charge to tax on trade profits

Income tax is charged on the profits of a trade, profession or vocation.

…

687 Charge to tax on income not otherwise charged

(1) Income tax is charged under this Chapter on income from any source that is not charged to income tax under or as a result of any other provision of this Act or any other Act.

(2) Subsection (1) does not apply to annual payments.

(3) Subsection (1) does not apply to income that would be charged to income tax under or as a result of another provision but for an exemption.

(4) The definition of “income” in section 878(1) does not apply for the purposes of this section.

(5) For exemptions from the charge under this Chapter, see in particular–

section 768 (commercial occupation of woodlands), and

section 779 (gains on commodity and financial futures).

…

689 Person liable

The person liable for any tax charged under this Chapter is the person receiving or entitled to the income.

“The facts are that the company, which was in want of money at the time, asked the directors to give a personal guarantee to the company's bankers in consideration of an increase from 5000l. to 10,000l. in the company's overdraft. The directors, although unwilling to do this, ultimately consented. The transaction was not one in which the directors were interested as a matter of business, and one of them, who is a solicitor, declares that he never previously entered upon such a transaction and in all probability would never again do so. Therefore, although the circumstances are that they are men of affairs and that the company is engaged in business, in view of the facts found by the Special Commissioners and included in the case stated I must treat the case as if a person who was not connected with business at all received a commission from another person also not connected with business, in return for the favour of guaranteeing his account at a bank. In these circumstances are these commissions received as “annual profits or gains” under Case 6? Two kinds of emolument may be excluded from Case 6. First, anything in the nature of capital accretion is excluded as being outside the scope and meaning of these Acts confirmed by the usage of a century. For this reason, a casual profit made on an isolated purchase and sale, unless merged with similar transactions in the carrying on of a trade or business is not liable to tax. “Profits or gains” in Case 6 refer to the interest or fruit as opposed to the principal or root of the tree. The second class of cases to be excluded consists of gifts and receipts, whether the emolument is from a gift inter vivos, or by will, or from finding an article of value, or from winning a bet. All these cases must be ruled out because they are not profits or gains at all. Without giving an exhaustive definition, therefore, we may say that where an emolument accrues by virtue of service rendered whether by way of action or permission, such emoluments are included in “Profits or gains.” Assuming then that these commissions constitute “profits or gains,” the further question for consideration is whether they are “annual” profits or gains. The word “annual” may mean “annually recurring,” as applied to the seasons of the year, or “recurring over a long period of years”: or it may mean “lasting only for one year,” as we speak of certain flowers as annuals which must be sown afresh every year: or, as in the case of interest on a sum of money, it may mean “calculated with reference to a year.” In the present case the transaction did last for a year and was renewed for another year, although it did not so continue of its own accord, but by agreement between the parties. I do not think that any of those meanings are applicable to the word “annual” as used in Case 6. Now one is not entirely left without guidance, at any rate as a matter of practice. It has been recognized that if a furnished house is let even for a few weeks during the season in any one year, the letting will attract income tax under Case 6 on the profit so made: the principle of this has never been ruled upon by decision of the Courts, but it has been tacitly assumed that this is so by the Courts in Scotland, and I do not think it is now open to a Court of first instance, at any rate, to say that this practice is wrong. The letting in such a case is not recurring yearly, nor does it last for a year, nor is it calculated with reference to a year, but only with reference to the requirements of a few weeks. Similarly when a person is appointed for a few weeks to an office to perform some services not in the nature of a trade or business in consideration of a lump sum (as for instance a Judge's marshal) income tax is deducted. Nor does it afford a clear explanation of this to say that the servant is taxed in such cases as being the holder of an “office”; for the tax on an office is calculated on the annual amount of profits. The word “annual” here can only mean “calculated in any one year,” and “annual profits or gains” mean “profits or gains in any one year or in any year as the succession of years comes round.”

“The limitations of the words “profits and gains” were pointed out by Blackburn J. long ago in the case of Attorney-General v. Black, when he said that profits and gains in Case VI. must mean profits and gains ejusdem generis with the profits and gains specified in the preceding five Cases. And then there came the memorable and often quoted words of Lord Macnaghten in the London County Council case, when he begged to remind people “that income tax is a tax on income.” The only question, therefore, here was — Was there in any sense income?”

“The case is rather a peculiar one. It is proper to mention at the beginning that it comes before me as a case of assessment under Case VI of Schedule D. At a late stage, it was intimated on behalf of the Inland Revenue that they would also desire to seek to support the assessment as being one which was, or could be, validly made under Case II of Schedule D. It is not necessary that I should go into that, except to say that the learned Attorney-General, while intimating that he was prepared to rest, and did rest, his argument before me upon Case VI, said that he desired to keep open - I mention it only for that purpose - the possibility of an argument that Case II might be applied if he was driven out of Case VI. Having said that, I proceed to deal with it on Case VI, which was the matter before the Commissioners and which was the matter really argued before me.

…

“The one point now is whether this £39,000 is chargeable under Case VI. That Case is a “sweeping up” provision. It catches “annual profits or gains” which have not been caught by the other provisions. It is difficult to construe and we have to go by the decided cases.

In Ryall v. Hoare Rowlatt J. staked out the guide-lines: and there have been other cases following it. Some things are clear. “Annual” profits does not mean profits which are made year by year. It is satisfied by profits made in one year only. “Profits and gains” include remuneration for work done, services rendered or facilities provided. They do not include gratuitous payments which are given for nothing in return. Nor do they include profits in the nature of capital gains. So they do not include gains made on purchase and sale of an asset. Such gains (except for recent legislation) are only taxable if the transaction was an adventure in the nature of trade.

The crux of the present case is that Mr. Ricketts had no legal ground to be paid anything. All he had — to use the judge's words — was a moral claim or a nuisance value. Ravenseft paid him £39,000 in order that he should not feel aggrieved, and to get rid of any possible claim. If they had paid this sum over to him as a gratuitous payment, it would not have come within Case VI. But because it was “dressed up” as a contract — to use the judge's own words — he has held that it is caught by Case VI. I do not think that is right. Take the case where a man has a good legal claim which he agrees to forgo in return for a sum of money, such as a claim for personal injuries which is compromised by payment of a lump sum. That is not an annual profit or gain within Case VI. It is the sale of an asset — namely, his legal claim — for a price. Next, suppose that the man has a claim which he believes to be good but which is in fact unfounded — and he agrees to forgo it in return for a sum of money.

It might be a claim for personal injuries when he has no evidence of negligence. It is not strictly an “asset,” because it would not stand up in the courts. But the compromise is binding. The payment has the same quality as if the claim was well founded. It is not an annual profit or gain within Case VI. Finally, take a man who has a moral claim but knows that he has no legal claim. He tries it on so as to see if the defendants will pay him something. They agree to buy him out so as to save the cost of fighting it. It seems to me that the payment for tax purposes has the same quality as that in a compromise. It is not an annual profit or gain within Case VI.

The judge seems to have thought that, as the payment was made under a contract, that was enough to bring it within Case VI. I cannot agree with him. It must be a contract for services or facilities provided, or something of that kind.

The present case is rather like Leeming v. Jones. If the sum was taxable at all, it was taxable as part of the profits of Mr. Ricketts' trade or profession. Once that is negatived, it becomes simply a sum received in compromise of a disputed claim: whether legal or moral makes no difference.

I think that this case does not fall within Case VI. I would allow the appeal and restore the decision of the commissioners”

“It seems to me that the payment made by Ravenseft to Mr. Ricketts in those circumstances was either a gratuitous payment or a payment for the buying out of Mr. Ricketts' possible claim. The special commissioners came to the conclusion that it was a gratuitous payment. The judge thought otherwise, and I am in agreement with him on that point.

The judge expressed his conclusion in these words:

“I cannot see, therefore, how the payment can properly be described as a gratuitous payment. But equally I fail to see how it can be described as the purchase price of any asset owned by Ricketts. What he had was a moral claim or a nuisance value, whichever way you like to put it, and that cannot properly be described as an asset susceptible of being sold even though it may in fact yield money. In this case the money which Ricketts received from it was not a gratuitous payment but a payment under a contract in consideration of his consent to the deal between Ravenseft and the society and I can see no reason why it should not be taxed as a casual profit under Case VI.”

With the first part of that, as I have said, I agree. The second I cannot accept. It does not matter, as I think, whether Mr. Ricketts had any real or legally enforceable claim or not. It is perfectly plain, from the short passages I have read, that the parties were negotiating on the basis that he had a claim. Whether a moral claim, whether a commercial claim, or whether a claim under some sort of gentlemen's agreement matters not. They were proceeding on the basis that he had a claim, and that in those circumstances it was right and proper, and no doubt, in view of Mr. Ricketts' position and experience, expedient, that he should be persuaded to waive or give up any such rights as he thought he had or the other parties thought he had. It is perfectly true that the payment made to him was a payment made under a contract; but the only contract was the contract by Ravenseft to pay and by Mr. Ricketts to accept payment in return for the giving up of such rights as Mr. Ricketts might or might not have

…

In my judgment, without referring to any authorities, it is clear that this was not in any sort of form an annual receipt of a profit or gain. It was the buying out, as I have said, of Mr. Ricketts' claim.”

“In conclusion I may say that many people regret the practice of such newspapers in paying money to criminals or their wives — so as to get a sensational story to publish. There is nothing illegal in it, so far as I know. But on one point I am clear: if the criminals or their wives get money by relating their stories to newspapers, they ought to pay tax on their profits and gains. That is this very case. The wife is now in England. She is outside the jurisdiction of the Canadian courts. She received the money here and ought to pay tax here on the sums she received here.”

“… It is common ground between the parties that the position would be precisely the same if Mr. Howard had not died but had retired from his profession in the year 1943. His liability to tax would be the same as that of his executors. It is further agreed that, had Mr. Howard been still carrying on his profession at the time when the sums in dispute were received, they would have been properly included in the account of the profits, gains and emoluments of his profession under Case II and would not have fallen under any other Case. It was not suggested that the sums received in respect of any particular contract could be isolated: all of them would be aggregated with any other profits of his professional activity and the balance after deducting the expenses properly deductible would be chargeable under Case II: see Davies v. Braithwaite. But, it was said, and this is the short point of the case, Mr. Howard died before the sums were received, and in the hands of his executors, as they would have been in his hands if received by him after his retirement, they are no longer to be regarded as the profits and gains of his profession but assume a different character and fall under Case III or Case VI.

My Lords, if this contention had not found favour with the learned Master of the Rolls and Somervell LJ I should not have thought it arguable. The principle which is applicable here was stated with his usual clarity by Rowlatt J in Bennett v Ogston and I will cite his words: “When a trader or a follower of a profession or vocation dies or goes out of business … and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to income tax: they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts.” I am satisfied that this is a correct statement of the relevant principle of income tax law, though I have some doubt — it is not necessary to decide it — whether the learned judge correctly applied the principle in the case before him”

He continued, at 289 and 290:

“My Lords, it appears to me that the issue is confused by raising in general terms the question whether professional remuneration may in certain circumstances assume a different character for tax purposes when the taxpayer is dead or has retired. At least the case of Asher v. London Film Productions Ltd is no authority for such a proposition. In that case there was no question of the same sum assuming a different quality in changing conditions. I am content to assume that there may be such a case though I find it difficult to imagine. But here I cannot see how or where the change takes place. The source of these payments was the professional activity of Mr. Howard: it was never anything else. It is true that his remuneration took the form of annual payments which, if other conditions were satisfied, might fall within Case III. But other conditions were not satisfied, for ex hypothesi the source of the remuneration was the exercise of a profession falling within Case II.”

…

If I am right in thinking that the sums in question were not assessable under Case III because they were nothing else than remuneration professionally earned by Mr. Howard in his lifetime, this disposes also of the alternative claim under Case VI.”

“The principle which emerges [from Stainer’s Executors] is clear. Payments which are in historical fact (I adopt the language of the late Lord Asquith of Bishopstone in the same case) exclusively the fruit or aftermath of professional activities do not change their taxable character when the profession is discontinued.

But there was another aspect of Stainer's case which is relevant to the present case. Perhaps it is no more than a different way of stating the same point. It was urged that the contracts made by Leslie Howard were “income bearing assets” and that the payments made to his executors were the income of such assets. To this the same noble Lord gave an answer which I venture to quote, so completely does it dispose of a similar argument in the present case. “The contracts,” he said, “in the present case enjoy, in my view, no such independent vitality. The consideration for what Mr. Howard was to do — to act or manage — was not the grant of a contract or contracts but the payment of money under the terms of those contracts. Mr. Howard acted for money; he did not act for contracts. The contracts were mere incidental machinery regulating the measure of the services to be rendered by him on the one hand and, on the other, that of the payments to be made by his employers: they were not the source, but the instrument of payment, and his death, in my view, did nothing to divest them of this character.” My Lords, I do not see how in the face of this decision the appellant's argument can succeed without a degree of refinement which is to be avoided in the realm of fiscal law. In Stainer’s case it could not be denied that the taxpayer acquired under his contracts certain contractual rights nor that those rights could in a certain context be called property. So it was argued that the payments were the income and the contracts were the “income bearing assets.” I will again content myself with the description given to this argument by Jenkins LJ and ask how it is to be distinguished from the argument in the present case. When I do so, I find myself using again the same language that Lord Asquith used and I used in Stainer’s case. What else were these payments than the fruit of Peter Cheyney’s professional activities? How is it relevant that in order to reap his harvest he had to enter into contracts under which he acquired rights and incurred obligations as did the publishers with whom he contracted? And how is it relevant that it was a term of those contracts that there should be vested in the publishers a right created by the law to protect him in the exploitation of his work? It was by entering into such contracts that he was able to carry on his profession gainfully. It was because he did so that he was assessable to tax under Case II of Schedule D. I reject, therefore, the plea that the royalty payments could, whether during the carrying on of the profession or after its discontinuance, be regarded as “income from property constituting a substantive subject-matter of taxation under Schedule D” — I use the words of the appellant's formal case. … First and last and all the time the payments are professional earnings, whatever be the mechanism through which they are paid. Upon this part of the case I will offer a final consideration. In Stainer's case I said: “If in all the circumstances it was not possible to bring the sums into account in the years in which they were earned … the result is not to change the character of the payment but to exhibit that some professional earnings may escape the income tax net.” There, I believe, lies the root of the trouble. Prima facie there is no reason why a professional man should not be taxed on an earnings basis, but in the case of an author, whose earnings depend on the unpredictable popularity of his books in future years, an assessment in the earning year would be so arbitrary as to be patently unfair. But that I repeat, does not entitle the Crown to regard payments in future years as anything but what they essentially are.

…

It is not necessary, my Lords, to say anything about Case VI or Case V. The reasons for dismissing an appeal which relies on Case III are fatal to them also.”

“To my mind, if a person receives as part of his remuneration an asset which yields income, that income is not the fruit of his professional activity any more than it would be if that person had received his remuneration in money and had then used that money to buy that asset. From the moment when the asset comes into his hands, the source of any income which it yields is that asset and not his professional activities. There would be no question of the income falling under Case II during his life and then being taxable under some other Case after his death. The receipt by a professional man of income yielded by an asset which has been transferred to him is not a method of gaining professional income whether or not the asset came to him as professional remuneration. But for an author exploitation of his copyright is a method of gaining professional income. Therefore this matter is of no assistance to the appellant's case. I am of opinion that this appeal should be dismissed.”

“It is now common ground between the parties that this case depends on how these large dividends ought to have been treated 643in making up the respondent's profit and loss account under Schedule D, Case I. The Crown says that the method which was in fact followed was correct, and that the dividends were properly left out of that account. If that is right, then it is not now disputed that these dividends were investment income, that the respondent was an investment company, and that the special commissioners' direction was properly given. But the respondent now says that these dividends ought not to have been excluded from the profit and loss account and that therefore a properly framed account would have shown no loss. Counsel for the respondent agrees that if his contention is right the respondent ought not to have been repaid anything under section 341 but the respondent has not offered to repay the sum of £404,020.

So the question now in issue is the question how a dealer in stocks and shares ought to treat dividends accruing to him from shares which he has bought in the course of his trade. It was decided in Cenlon Finance Co. Ltd. v Ellwood that a capital dividend which is not paid under deduction of income tax must enter his profit and loss account and the respondent maintains that the same rule must apply to dividends paid under deduction of tax.”

He continued, at 644 and 645:

“It is now agreed by counsel for both parties that there never was such a practice as that to which Lord Simonds refers. At one time there was a somewhat similar practice with regard to claims based on losses, but as regards the ordinary profit and loss account to show the profits or gains chargeable under Schedule D, Case I, it was always the practice before the Cenlon case for a trader to leave out of the account those trading receipts which consisted of dividends received by him after deduction of tax. The respondent now says that the practice has always been wrong. In my opinion, it was right.

Neither view can be derived directly from any provisions of the Income Tax Act. If the words of the Act were applied literally the result would be double taxation of the same income, but it has been said again and again that the Act cannot be so read as to authorise that.”

…

If the appellants' view is right the proper procedure is much simpler. In the case I have supposed, the trader would simply leave the dividends out of his profit and loss account, which would then show a profit of £4,000, and he would pay £2,000 on that profit, so if there is a profit apart from the dividends it makes no difference which view is adopted. But it does make a difference if, apart from the dividends, the trader's operations show a loss. How great a difference that can be is shown by the present case.

Your Lordships must now choose between those two methods without any authoritative guidance. I have no hesitation in preferring the appellants' method, for a number of reasons. In the first place, it is in accord with long standing practice and it has never been challenged: the matter was only considered incidentally in the Cenlon case, and I do not think that it was the subject of any detailed argument. Secondly, it is much simpler and more direct. Thirdly, it avoids the fiction of having to regard the trader's trading receipts as including not only the net dividends which he actually receives but also the tax deducted by the company paying the dividends which the trader never did or could receive. And, fourthly, it appears to me to carry out more reasonably the principle that money once taxed cannot again be subjected to income tax. It appears to me more reasonable to say that dividends which have already borne tax shall not be brought into any further income tax calculation than to say, as the respondent does, that they can be brought in so as to swell the assessment of profits under Schedule D, Case I, but that then there shall be an abatement not authorised by the Act.”

“In my opinion, there is by now really no room for doubt that dividends, for income tax as well as surtax, are just as much a taxable subject as any other form of income, or for doubting that, for the purposes of income tax as distinct from surtax when they are distributed by a limited company out of a fund of profit that has been taxed in its hands, the proportionate shares of the taxed fund so distributed are not liable to taxation again in the hands of the recipients. The operation of transferring the residue of the taxed fund from the company's hands to the hands of the owners no more creates a fresh accrual of income than does the operation of a trustee paying over to his beneficiary the net amount of the trust income that has borne tax in his hands. Dividends which represent the distribution of a taxed fund are therefore “franked” income so far as concerns any further taxation at the standard rate, that is, the rate at which deduction has been made; while, for the purposes of administering reliefs against tax at standard rate and of assessing to surtax, it is proper to treat the net sum received as grossed up in the way that the statute (Income Tax Act, 1952, s. 184) requires. This account of the status of dividends in the tax system is in line with the analysis offered by Lord Phillimore in Bradbury v English Sewing Cotton Co. Ltd, where he points out that the Income Tax Act, 1842 , the basic instrument of our income tax code, treated a joint stock company as if it were “a large partnership, so that the payment of income tax by a company would discharge the quasi-partners.” In my opinion, this analysis is now accepted as being correct: and it remains essential to the application of the whole system even though the connection between any particular fund of profits and a dividend paid has now become in effect untraceable and the rule that the company recoups itself at the standard rate of tax that is current at the date of payment means that company and shareholder do not necessarily equate their respective positions as completely as the theory of the matter would require.

…

To my mind, to allow it to do so would be to recognise double taxation in its most obvious form: not the less so, as I see it, because on the one side dividends are taxed as an aliquot share of a fund of profit and on the other they would be brought in as “mere” contributors to establish the balance of the trading profit of the individual recipient. But double taxation in itself is not something which it is beyond the power of the legislature to provide for when constructing its tax scheme. It is rather that, given that a situation really involves double taxation (see Canadian Eagle Oil Co Ltd v The King it is so unlikely that there would have been an intention to penalise particular forms of income in this way that the law approaches the interpretation of the complicated structure of the code with a strong bias against achieving such a result. This, after all, is the general principle upon which rests the particular and well-accepted rule that a form of income which is made the subject of taxation under one of the five Schedules cannot be included, directly or indirectly, as a taxable subject under another Schedule, whatever general words or general theories might seem to require. I shall allude to this principle later, since it affords, I believe, the answer to the argument of the respondent.

…

In my opinion, there was no misconception and no delusion. Dividends that had borne tax or suffered deduction of tax — I see no difference in this context between the two ways of putting it — before receipt are, to use Lord Dunedin's phrase, “exhausted as a source of income,” and the general principle applied to the construction of the provisions of the Income Tax code prevents their being brought in again, directly or indirectly, as a subject of taxation in the form of another class of taxable income. It is neither here nor there that in the words of section 127 of the 1952 Act tax is to be charged under Cases I and II of Schedule D on “the full amount of the profits or gains.” That has no effect on the principle of computation. The rule of excluding income which has been assessed to tax “under its own title” from insertion as an item in an assessment under Case I of Schedule D was recognised and given effect to by this House in the well-known Salisbury House decision (rents from land) and again by the Court of Appeal in Thompson v Trust and Loan Co. of Canada (interest on Government bonds). The principle is clearly stated in the first case in the speeches of Viscount Dunedin and of Lord Atkin, and in the second case in the judgment of Lord Hanworth M.R. I regard the decision in Hughes v Bank of New Zealand Ltd as an enforcement of the same principle.”

“Our conclusion in relation to the fourth issue is that the partnership profits taxed under s 114 should not be brought into account again in the sole trade calculations, but that the dealing costs remain deductible. We accept that the FS Securities case had nothing to do with partnership profits, but we regard it as the case that governs the outcome in relation to point 4 in the present case because:

·         that case and the present case share the common feature that earlier taxpayers were seeking to avoid tax on income by selling shares or partnership shares to financial dealers in the expectation that the dealers would be able to shelter the tax on the relevant income, to the extent of the dealing costs of acquiring the income;

·         just as in the present case, the dealer's costs consisted not directly in buying dividends but in purchasing shares, with the loss resulting from the down-valuation of the shares following the receipt of the dividends, which somewhat mirrors the way in the present case in which the appellants' expenses were incurred in buying or contributing to the partnership, rather than in directly buying the receivables;

·         the FS Securities case contains numerous references, particularly in the House of Lords, to the offence of income being taxed twice;

·         those references repeatedly acknowledge that the objection to income being taxed twice did not derive from any express statutory provision but from a fundamental principle that was simply assumed to be so evident that it had to be respected, even though, as Lord Reid's excerpt quoted above acknowledges, the income would have been taxed twice if the statutory provisions had been construed literally; and

·         it is highly relevant that the tax that had initially been charged in the dividend stripping cases was the tax on the dividend paying company's profits that franked the dividends, whereas in the present case it is far more obvious in all seven cases, and particularly in the LAGP and Hong Kong cases that it is the same partnership profits that are being included in the sole trade calculations. The double taxation is in other words far more evident in the present cases than it had been in the dividend stripping cases.”

Sale of occupational income Issue

If they were capital, were the sums received by the Appellants pursuant to the PIP charged to income tax under Chapter 4 of Part 13 of the ITA 2007? In particular:

(1)     Was the main object, or one of the main objects, of the transactions or arrangements the avoidance or reduction of the Appellants’ liability to income tax?

(2)     In respect of each Appellant, were the transactions effected, or arrangements made, to exploit the earning capacity of that individual in an occupation? In this regard:

(a)               Was the relevant Appellant carrying out an “occupation” within the meaning of s.777(2) of the ITA 2007, ie was the Appellant undertaking activities of a kind undertaken in a profession or vocation?

(b)               If so, were the transactions effected, or arrangements made, to exploit that Appellant’s earning capacity in the occupation by putting another person in a position to enjoy:

(i)                 (i) all or part of the income or receipts derived from the individual's activities in the occupation; or

(ii)               (ii) anything derived directly or indirectly from such income or receipts?

773 Overview of Chapter

(1) This Chapter imposes a charge to income tax–

(a) on individuals to whom income is treated as arising under section 778 (income arising where capital amount other than derivative property or right obtained), and

(b) on individuals to whom income is treated as arising under section 779 (income arising where derivative property or right obtained).

(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.

774 Meaning of “occupation”

In this Chapter references to an occupation, in relation to an individual, are references to any activities of a kind undertaken in a profession or vocation, regardless of whether the individual–

(a) is carrying on a profession or vocation on the individual's own account, or

(b) is an employee or office-holder.

…

776 Charge to tax on sale of occupation income

(1) Income tax is charged on income treated as arising under–

(a) section 778 (income arising where capital amount other than derivative property or right obtained), or

(b) section 779 (income arising where derivative property or right obtained).

(2) Tax is charged under this section on the full amount of income treated as arising in the tax year.

(3) The person liable for any tax charged under this section is the individual to whom the income is treated as arising.

(4) This section is subject to section 784 (exemption for sales of going concerns).

777 Conditions for sections 778 and 779 to apply

(1) Sections 778 and 779 apply only if conditions A to C are met in respect of an individual.

(2) Condition A is that the individual carries on an occupation wholly or partly in the United Kingdom.

(3) Condition B is that transactions are effected or arrangements made to exploit the individual's earning capacity in the occupation by putting another person (see section 782) in a position to enjoy–

(a) all or part of the income or receipts derived from the individual's activities in the occupation, or

(b) anything derived directly or indirectly from such income or receipts.

(4) The reference in subsection (3) to income or receipts derived from the individual's activities includes a reference to payments for any description of copyright or licence or franchise or other right deriving its value from the individual's activities (including past activities).