In an outcome which has surprised many and challenges longstanding HMRC practice, the UK's Supreme Court has ruled that a Delaware LLC was "transparent" for UK income tax purposes, so that a UK resident member was taxable on the profits of the LLC as they arose, and not on the distribution of those profits (Anson v HMRC  UKSC 44).
The Upper Tribunal and Court of Appeal had previously ruled that, because a member didn't have a proprietary right to any of the LLC's assets, the LLC's profits couldn't belong to the member and so were not taxable on them for UK purposes. The Supreme Court preferred the initial view of the First Tier Tribunal delivered back in 2010, however, that regardless of this the effect of the Delaware LLC Act and the LLC's Articles was that the profits belonged to the members, and were therefore taxable on them for UK purposes, as soon as they were made.
This was good news for the appellant taxpayer as it meant that he could claim relief for US tax he suffered on the LLC profits against his UK tax liability on those profits, as both jurisdictions were taxing the same source of profit. (HMRC had been arguing that relief was not available because the US taxed the profits whereas the UK taxed the distribution – a different source). However, it may be less welcome news for UK resident LLC members who have, to date, benefited from taking the position that they are not liable for UK tax on LLC profit until distributed, and that they are perhaps then entitled, if a corporation tax payer, to an exemption from UK tax on the distribution.
Affected taxpayers should await HMRC's response to the decision, which is now final and cannot be further appealed. Taxpayers who cannot benefit from increased access to double tax relief as a result, and who may be adversely affected, may wish to consider any material differences between the articles of their particular LLC and the LLC in Anson, as the analysis will always depend upon the specific facts. They may also wish to consider, depending upon any official HMRC comment made in this respect, whether they can rely, with respect to the historic position, upon HMRC's previous public statements that they consider most LLCs they have considered to date to be "opaque".
It is worth noting that the scope of the decision in Anson is deliberately narrow. It is restricted to a finding that the LLC’s profits belonged to the members as they arose for the purposes of determining the source of the profits taxed on UK resident members for income tax purposes. It does not follow that the LLC was “transparent” for all UK tax purposes, so in other contexts a separate independent analysis would need to be undertaken. The UK capital gains tax position for an LLC member may now be unclear, for example.