Bayonet Ventures: Loan by pension scheme was not an unauthorised payment

In Bayonet Ventures LLP & Anor v HMRC [2018] UKFTT 262 (TC), the First-tier Tribunal (FTT), has held that a loan made to a limited liability partnership (LLP) by a pension scheme in which one of the partners of the LLP was a member, was not an unauthorised payment (section 164, Finance Act 2004) and should not be treated as a loan to the partner (section 863, Income Tax (Trading and Other Income) Act 2005 (ITTOIA)) as section 863 only applies if the LLP is carrying on a 'trade, profession or business with a view to profit', which it was not.

Background

Up until 2012, Ronald Keith Howard (the second appellant) had operated as a sole trader. He set up Bayonet Ventures LLP (the first appellant) in around 2009 but did not transition his business into it immediately, and it was not until 2012 that the first appellant began to trade. In November 2009, the second appellant established the Bayonet Ventures Pension Scheme (BVPS). The first appellant was the principal employer and administrator, and the second appellant was a trustee and scheme member. In the same month, the scheme entered into a loan agreement with the first appellant, agreeing to lend it £66,000. The money was paid into the second appellant's bank account and the loan was not recorded in the first appellant's accounts for the relevant period. 

BVPS filed its pension scheme tax return for the tax year ended 2009/10. HMRC opened an enquiry into the return and on 13 June 2013 wrote to the scheme administrator, the first appellant, claiming that BVPS had "made an unauthorised member payment of £66,000". The letter went on to assert that by reason of section 863, ITTOIA "the loan to the LLP is treated as a loan to the partners of the LLP. One of the partners of the LLP is also a member of the pension scheme".  The letter went on to explain that HMRC considered the loan to be an “unauthorised member payment", within the meaning of section 164, Finance Act 2004. 

The letter confirmed that HMRC had made an assessment in respect of a Scheme Sanction Charge at 40% of £66,000, being £26,400 and  HMRC sent a Notice of Assessment to the second appellant. 

On 17 June 2013, HMRC wrote to the second appellant asserting that BVPS had made a loan of £66,000 to the first appellant on 27 November 2009. It asserted that that loan must be treated as made to the individual members of the LLP and said that it was of the view that the loan was an "unauthorised member payment" because it fell outside of section 164, Finance Act 2004. Accordingly, the second appellant had to pay an unauthorised payment charge under section 208, Finance Act 2004, in the sum of £26,400 and an unauthorised payment surcharge under section 209, Finance Act 2004, at the rate of 15%, being £9,900. The letter enclosed an assessment dated, 17 June 2013, against the second appellant, in the total sum of £36,300. 5%.  

The first appellant and second appellant appealed the assessments.

The appeals involved:

1. an appeal by the second appellant against the assessment of £26,400 made against him on the basis that HMRC had deemed him to be the scheme administrator when, as a matter of fact, he was not; 

2. an appeal by the first appellant against the scheme sanction charge which was levied on the basis that there had been an unauthorised member payment; and

3. an appeal by the first appellant against the surcharge on the allegedly unauthorised member payment. 

FTT decision

The appeals were allowed.

With regard to the unauthorised payment charge in the sum of £26,400, the FTT concluded that the assessment had to be discharged. HMRC had no statutory power to appoint the second appellant as, or deem him to be, a scheme administrator and it could not point to any  lawful basis on which it was entitled to do so.

In relation to the unauthorised member payment charge and surcharge, the FTT determined that pursuant to the loan agreement, the £66,000 had been loaned by the scheme to the first appellant. The first appellant was free to use the money as it pleased, and it was free to pay it to the second appellant, provided that such payment did not breach the terms of the loan agreement. Thus, the mere fact that the money passed from the scheme to the second appellant did not mean that the loan had been made to the second appellant. 

The FTT said that the identity of the parties to a loan is a matter of law, albeit informed by the factual matrix. The issue was whether section 863(1), ITTOIA, required HMRC to treat the loan as having been made to the second appellant. Under section 863(1), if an LLP carries on a trade, profession or business with a view to profit, its activities are to be treated for income tax purposes as being carried on "in partnership by its members", and not by the LLP as such. 

In the instant case, the question was whether section 863(1) applied even though the first appellant had not begun trading until after the loan had been made. HMRC argued that it did, on the basis that an LLP was to be treated as carrying on a business with a view to profit from the moment it comes into existence, regardless of when it actually begins trading. The FTT rejected that argument. In doing so, the FTT commented that there was no basis for departing from the literal rule of statutory construction. In particular, there was "nothing whatsoever surprising in Parliament applying certain statutory rules, for income tax purposes, only if a limited liability partnership is in fact carrying on a trade". If that gave rise to some perceived gap in the legislation, it was to be filled by Parliament and not by the inventiveness of judges. 

The first appellant had not been carrying on a trade, profession or business with a view to profit when the loan was made, and the mere fact of its having entered into a loan agreement and received a loan did not mean that it had. Furthermore, section 863(1) did not say that all the activities of an LLP were to be treated as being carried on by its members. It simply assimilated the position of partners in an LLP with that of partners in a non-LLP. In conclusion, there had been no unauthorised member payment. The assessments in respect of the unauthorised member payment and the surcharge therefore had to be discharged.

Comment

Although this case relates to a payment by a pension scheme, it could have wider ramifications in that it clarifies the meaning of the deeming provisions relating to LLPs and their members, in particular, the notion that the activities of an LLP are the activities of its members.      

This decision is yet another example of HMRC unsuccessfully inviting the FTT to depart from a literal interpretation of the statutory provisions under consideration (see our recent blog on Patel & Anor v HMRC [2018] UKFTT 0185 (TC), which can be viewed here). When a literal interpretation is unhelpful and does not suit HMRC, it tends to argue for a purposive interpretation. This decision demonstrates that the FTT and the courts will not always be amenable to such an approach. 

A copy of the decision can be viewed here.