Where a partnership's members include a company, the company's share of the partnership's profits is calculated as if the partnership's trade was carried on by a company, by virtue of Section 1259 of the Corporation Tax Act 2009. The Court of Appeal recently dismissed an appeal against a finding that, in such cases, deductions relating to the amortisation of intangible assets are disallowed under the 'related party' provisions in Part 8 of the Act.
Three companies had transferred their trades to a limited liability partnership (LLP). Corporation Tax deductions were claimed for amortisation of intangible assets that had been transferred. After HM Revenue and Customs refused the deductions on the basis that the companies and the LLP were related parties, they appealed to the First-tier Tribunal (FTT), claiming that the calculation of the notional company's profits required by Section 1259 did not refer to its ownership characteristics.
The FTT found that the notional company was a statutory fiction that represented the partnership carrying on the trade. The application of the related party rules was part of the calculation of profits, and the notional company should be treated as having the ownership characteristics of the partnership. Deductions for amortisation of intangible assets were therefore not available. After the Upper Tribunal rejected the companies' and the LLP's appeal against that decision, they made a further appeal to the Court of Appeal.
The Court observed that the companies' and the LLP's key contention appeared to be that Section 1259 should be read literally as requiring no assumptions to be made beyond the fact that the trade is carried on by a company that had no real-world characteristics beyond the bare minimum needed to enable a computation of profits to be made. The Court could see no principled basis for construing Section 1259 so narrowly, when the purpose of the exercise mandated by Section 1259 was to produce a computation of trading profits for Corporation Tax purposes to be taken as a proxy for the companies' shares of the actual profits of the LLP. For that purpose, Parliament must be taken to have intended that the real-world nature and circumstances of the LLP's trade should be replicated as far as possible in making the computation. On its true construction, Section 1259 required the notional company to have the ownership and control characteristics of the LLP.