Partnership residence – a rallying cry!

An important decision of the First-tier Tribunal has been released in the case of Mark Higgins Rallying (a firm) v. Revenue & Customs [2011] UK FTT 340 (TC).

Mr Higgins was a successful motor rally driver and operated through a partnership between himself and Mr Dixon.  Mr Higgins was domiciled outside the UK and the partnership's income came from a mixture of UK and non-UK sources.  HMRC contended that Mr Higgins' share of the non-UK source profits for the partnership should be taxed on him as they arose, on the basis that the partnership was managed and controlled, at least partly, inside the UK.  The partnership, on the other hand, contended that it was managed and controlled wholly outside the UK and thus the remittance basis applied to Mr Higgins' share of the firm's non-UK source income.

Under section 111 ICTA 1988 (replaced for corporation tax purposes from 1 April 2009, with effect for accounting periods ending on or after that date, by section 1258, CTA 2009 and section 848, ITTOIA 2005 for income tax purposes) the partnership is treated as transparent rather than a separate and distinct entity from the partners.  As a result, the partnership's profits were computed as if the partnership was an individual resident in the UK and the partners' share in the profits determined according to their interests in the partnership.

Under what was section 112 ICTA 1988, if the trade or business of the partnership is carried on wholly or partly outside the UK and the control and management of the business is also situated outside the UK, then if any of the partners is non UK domiciled the remittance basis will apply to that partner.

Both Mr Higgins and Mr Dixon were domiciled in the Isle of Man.  Mr Dixon, a solicitor, was resident there since 1991.  He met Mr Higgins in 1990 whilst the latter was working as an insurance clerk in the Isle of Man.  Mr Dixon became Mr Higgins' mentor and provided encouragement and sponsorship.  In October 1991 they signed a partnership agreement.  The plan was to combine Mr Dixon's management and commercial experience with Mr Higgins' driving skills.  In 1993 Mr Higgins' family moved to Wales to take over a rally school.  Mr Higgins also followed his family to the UK.  This provoked a disagreement with Mr Dixon which was settled when they agreed that Mr Higgins would go to the UK and develop his teaching and demonstration work while continuing to pursue opportunities on the world rally scene.

Mr Dixon, with the benefit of his legal training, knew that for UK tax purposes the partners had to control and manage the partnership's trade from the Isle of Man or otherwise outside the UK. He prepared himself an Aide Memoir to Partnership Tax to guide himself on these matters. No records, however, were kept of any partners' meetings but in evidence the partners reconstructed a diary of partnership meetings from 1991 to 2006.

The evidence demonstrated that Mr Dixon was aware of the need to maintain control and management of the partnership outside the UK.  The Tribunal recorded that "Mr Higgins was rather perplexed at the rules that Mr Dixon lay down, but bowed to Mr Dixon's professional knowledge in these matters".  All the major contracts entered into by the partnership in the years in question were executed by the partnership outside the UK, with the single exception of one contract in 1998.  Both men exploited connections in the rally world to provide work for the partnership.

The Tribunal found that there was no support for HMRC's suggestion that the partnership was an artificial structure motivated by tax planning concerns.  In the Tribunal's view, when it was formed, the partnership was comprised of two Manx people carrying on business from the Isle of Man.  When Mr Higgins relocated to the UK in 1993, "Mr Dixon took careful note of how its future operations should be carried out, in view of the possible UK tax implications if the partnership should become profitable".  The Tribunal found that the high level decisions of the partnership were made outside of the UK because those were determined by the views of Mr Dixon, as the commercial brains of the partnership, with Mr Higgins being only too happy to defer to Mr Dixon in all business matters so that he could concentrate on driving rally cars.

The Tribunal also considered the appropriate test for determining the place where a partnership is controlled and managed and decided that that should be by reference to the existing case law test relating to the residence of companies ie where the high level decisions of the partnership were made rather than the place where day to day business operations were carried out.

This case demonstrates HMRC's aggressive attitude to any form of offshore tax structure and it is worth bearing in mind that structures involving non-domiciled individuals are closely scrutinised by  HMRC.

The key to the taxpayers' success in this case appears to have been careful preparation of the evidence necessary to establish the facts before the Tribunal and the fact that the partnership was fortunate enough to have a solicitor, Mr Dixon, who gave careful consideration to the partnership's tax position from its inception.  It is encouraging that, with proper preparation and presentation of evidence, cases such as this can succeed before the Tribunal.