The First-tier Tribunal has released a significant decision in the case of Mark Higgins Rallying (a firm) v Revenue & Customs.(1)
Mr Higgins was a successful motor rally driver and operated through a partnership with Mr Dixon. Higgins was domiciled outside the United Kingdom and the partnership's income came from a mixture of UK and non-UK sources. Her Majesty's Revenue and Customs (HMRC) contended that Higgins's 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 United Kingdom. The partnership, on the other hand, contended that it was managed and controlled wholly outside the United Kingdom; thus, the remittance basis applied to Higgins's share of the firm's non-UK source income.
Under Section 111 of the Income and Corporation Taxes Act 1988,(2) the partnership was treated as transparent, rather than as a separate entity, distinct from the partners. As a result, the partnership's profits were computed as if the partnership were an individual resident in the United Kingdom; each partner's share in the profits was determined according to his interest in the partnership.
Under the relevant provision of the law, which was Section 112 of the act at the time, if the trade or business of a partnership is carried on wholly or partly outside the United Kingdom and the control and management of the business is also situated outside the United Kingdom, the remittance basis applies to any partner that is not domiciled in the United Kingdom.
Both Higgins and Dixon were domiciled in the Isle of Man. Dixon, a solicitor, had been resident there since 1991. He met Higgins in 1990 while the latter was working as an insurance clerk. Dixon became Higgins's mentor and provided encouragement and sponsorship. In October 1991 they signed a partnership agreement. The plan was to combine Dixon's management and commercial experience with Higgins's driving skills. In 1993 Higgins's family moved to Wales to take over a rally-driving school. Higgins followed his family to the United Kingdom. This provoked a disagreement with Dixon, which was settled when they agreed that Higgins would go to the United Kingdom and develop his teaching and demonstration work while continuing to pursue opportunities on the world rally scene.
Through his legal training, Dixon 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 United Kingdom. He prepared himself an aide memoire to partnership tax to guide himself on these matters. No records were kept of the partners' meetings, but in evidence, the partners reconstructed a diary of partnership meetings from 1991 to 2006. The evidence demonstrated that Dixon was aware of the need to maintain control and management of the partnership outside the United Kingdom. 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 United Kingdom, with the 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. It considered that the partnership, when formed, comprised two Manx people carrying on business from the Isle of Man. The tribunal noted that when Higgins relocated to the United Kingdom 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". It was found that the partnership's high-level decisions were made outside the United Kingdom because those were determined by the views of Dixon, as the commercial brains of the partnership, with Higgins being happy to defer to 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 this should be determined 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; it is worth bearing in mind that HMRC closely scrutinises structures involving non-domiciled individuals.
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 include a solicitor who carefully considered 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.
For further information on this topic please contact Daniel Hemming at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
(2) Replaced for corporation tax purposes from April 1 2009, with effect for accounting periods ending on or after that date, by Section 1258 of the Corporation Tax Act 2009 and Section 848 of the Income Tax (Trading and Other Income) Act 2005 for income tax purposes.