The judgment of Mr Justice Mann in the Upper Tier Tribunal in Anson v Revenue and Customs Commissioners (FTC/39/2010) was published on 5 August 2011. This reversed the decision of First Tier Tribunal in Swift v Revenue and Customs Commissioners  UKFTT 88 (TC) in holding that the relevant Delaware LLC was not transparent for UK tax purposes, but opaque. Accordingly, Mr Anson’s share of the profits in the LLC did not qualify for a UK tax credit under the US-UK double tax treaty. The decision restores the position as understood by HM Revenue & Customs (“HMRC”), although a further appeal by the taxpayer is possible.
A summary of the facts and decision of the First Tier Tribunal can be found in our earlier memo of 18 March 2010 (Delaware LLCs – Entity Status for UK Tax Purposes).1
The Upper Tier Tribunal disagreed with the ruling of the First Tier Tribunal in holding that that the LLC was not akin to a Scottish limited partnership, and that its members did not have an interest in the LLC’s profits in any meaningful sense. Accordingly, US and UK taxes were not computed by reference to the same profits, and therefore the UK taxpayer should not get credit for the US tax against his UK tax liability.
Grounds for the decision
The principal basis for the decision is that the LLC members were not entitled under the governing LLC agreement to profits as they arose, but merely had a contractual entitlement to receive money from the LLC, as distinguished from a proprietary right in the underlying asset. The Tribunal held that the profits belonged to the LLC in law and substance, and that a contractual obligation to allocate profits to members’ capital accounts and distribute them did not mean that the profits belonged to the members.
Mr Justice Mann disagreed with the First Tier Tribunal’s interpretation of a Delaware LLC as analogous or akin to a Scottish Limited Partnership on the basis that, unlike partners in a Scottish Limited Partnership, members of a Delaware LLC do not have an interest in the LLC’s assets.
The Upper Tier Tribunal’s decision confirms HMRC’s consistently-held view of Delaware LLCs as tax-opaque bodies corporate for UK tax purposes, thus restoring the treatment of Delaware LLCs as previously understood by practitioners and HMRC, and as set out in published HMRC guidance.
Many groups who have planned their affairs on the basis that an LLC will be UK tax opaque will welcome this decision. However, it remains important to check the terms of the actual LLC agreement in question before coming to a view on a particular case. The taxpayer may still appeal to the Court of Appeal, and a further update will follow if and when this occurs.