HMRC has finally issued its response to the Supreme Court’s decision in Anson, 1 which ruled the particular Delaware LLC under consideration in that case to be tax transparent for UK income tax purposes.2 Given that the Supreme Court’s finding was contrary to HMRC’s prior and generally accepted practice, there had been hope that HMRC would subsequently provide a clear and practical response on the issue. However, what has now been released is guidance which is disappointing for its brevity and questionable as to its practical use.
The key sentences of the guidance are simply these:
“HMRC has after careful consideration concluded that the decision is specific to the facts found in the case. This means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business.”
HMRC’s intention is clearly to try to minimize the impact of the decision on its historic practice of generally treating US LLCs as opaque for UK tax purposes (which was always subject to a caveat that each LLC must be considered according to its own particular legal structure). The thought seems to be that the particular LLC in Anson can be seen as just one of the irregular exceptions to the general position HMRC had always maintained, so it can be business as usual for everyone else.
However, it is difficult to conclude with any confidence that the relevant aspects of the legal structure of the LLC in Anson can be distinguished from those of many typical forms of LLC used in business, and it is unhelpful that HMRC do not provide their reasoning here. As such, HMRC’s approach arguably turns a blind eye to the endorsement which the Supreme Court gave to the findings of fact relating to the LLC in Anson made at the First Tier Tribunal level, upon which the Supreme Court’s conclusions as to tax transparency were founded.
Nevertheless, as we now have HMRC guidance, the question is whether from a practical perspective it helps taxpayers otherwise facing legal uncertainty. In order for HMRC published guidance to be capable of being relied upon in particular circumstances it must be capable of giving a “legitimate expectation” that HMRC will act consistently with it. The case law suggests that this requires guidance to be clear, unambiguous and devoid of relevant qualification. Unfortunately, in many circumstances there seems likely to be significant doubt as to whether the guidance could be seen as reaching that standard.
For example, who needs to have “treated” an LLC as a company — is it HMRC or just the taxpayers concerned? What if an LLC is not in a “group structure”? What about new LLCs with no history of being treated in any particular manner? Why is the terminology used that of “company” status rather than that of “tax transparency,” as in previous guidance? Why is it thought helpful for HMRC to confirm that an LLC can carry on a trade or business, when it seems to have been accepted in the decision in Anson that the LLC in that case was itself carrying on a business, and that this was consistent with a finding that the particular LLC was transparent?
So where does all this leave us, practically speaking? For historic periods, it seems reasonable to conclude that taxpayers are entitled to rely on historic HMRC guidance. Going forward, the tax treatment of an existing LLC which is part of a corporate grouping and in respect of which UK tax filings have been made on the basis that it is tax opaque (and accepted on that basis by HMRC) may now be clearer. There is also a helpful additional statement in the guidance confirming HMRC’s previous practice on whether an LLC can be considered to have share capital, which is important in UK tax grouping questions. However, taxpayers concerned with the UK tax treatment of LLCs in other circumstances don’t appear to have much comfort at this point. Where certainty as to UK tax treatment is required, it remains preferable to use an entity other than an LLC going forward where practical.